Potential of the energy transition for investors in Germany – Noerr Insight No 3: Photo­voltaics

In our briefing German energy transition: Potential for investors we gave a detailed overview of the opportunities and risks of the energy transition in Germany for domestic and foreign investors. After looking in detail at the opportunities and challenges in the offshore wind and onshore wind sectors, we take a closer look at photovoltaics in part 3.

1. Current situation and challenges

From an investor’s point of view, the development of solar farms in Germany must be assessed in a different light as the wind sectors: photovoltaic systems are relatively easy and quick to install compared to wind turbines, less space is required, and solar panels can now be purchased relatively cheaply on the global market.

While this energy source has been less important and lower in demand among investors in Germany in the past, the trend has now reversed. The development of solar farms, whether ground-mounted, roof-mounted or C&I solar systems, is booming and continues to be subsidised. In addition, park operators decide as to whether sell the energy with subsidied  market premiums or enter into long-term power purchase agreements (PPAs) always depends on the electricity prices. In addition, there were previously challenges due to lengthy, cumbersome permit procedures and limited availability of land, which also caused planning projects to fail.

This is why the German government is planning to expand the volumes of power generation through the Solar Package 1, and is providing further incentives for building owners and tenants to install and utilise large-volume rooftop and C&I solar panels. Under procedural law, approval requirements shall be reduced, replaced by legal presumptions or eliminated entirely.

Apart from the legal changes, the rapidly increasing demand for labour for the energy transition must also be taken into account. This is particularly evident in the solar industry. According to studies by the Bertelsmann Foundation, the demand for employees rose over 50% between 2019 and 2022. While 52,000 online job advertisements were posted in the whole of 2022, 36,000 job advertisements for the photovoltaic sector had already been posted in the first half of 2023. Based on the expansion targets up to 2035, Berlin University of Applied Sciences estimates that 250,000 skilled workers will be needed. Demand has also risen in the wind power sector, but not as significantly as for solar power. However, according to the German Solar Industry Association, the shortage of skilled labour is still manageable.

2. Regulatory environment

The latest amendments to the German Renewable Energy Act in 2023 (Erneuerbare-Energien-Gesetz 2023), and in particular the value decision in section 2 of the Act, also affect solar installations. The law provides for expansion to 215 GW in 2030 and 400 GW in 2040. At the end of 2023, however, only cumulative generation capacity of approx. 84 GW was in place. The annual expansion, which was approx. 14.6 GW in 2023, is thus to be increased to 22 GW. The tendering volume will also be increased. Solar installations in the first segment with a capacity of 5,850 MW are to be installed in 2023, 8,100 MW in 2024, and the figure is set to rise to 9,900 MW in 2029.

The German Renewable Energy Act 2023 also introduced additional categories of photovoltaics, such as agricultural PV, floating PV, car park PV and moorland PV. These enable multiple uses of the available space.

Similarly to onshore wind, there will still be tendering procedures for rooftop solar systems with the option of obtaining subsidies to offset the additional costs incurred. The tender volume is expected to be 2,300 MW in 2025 to 2029. The German Renewable Energy Act 2023 also recently increased the feed-in tariff for these photovoltaic systems. The six-monthly degression, which was suspended, has been reinstated since 1 February 2024.

For new installations (up to 25 kWp) that were commissioned on or after 14 September 2022, the technical restriction limiting the feed-in to the public grid to a maximum of 70% of the nominal solar power has been abolished.

3. Outlook

In contrast to the subscription for onshore wind, the bidding rounds for solar installations were always significantly oversubscribed in both the first and second segments. For solar installations in the first segment, a total volume of 5,237 MW was awarded with a bid volume of 13,007 MW. For solar installations in the second segment, a volume of approx. 597 MW was awarded in 2023, resulting in an expansion of 14 GW.

In May 2023, the German government presented its photovoltaics strategy, which provides for a variety of measures to promote the expansion of solar power. The strategy focuses on accelerating planning and approval procedures to make the required space available. Rooftop solar systems are also set to receive higher subsidies. After implementation had stalled temporarily, the majority of Solar Package 1 came into force on 16 May 2024. It contains measures for further expanding ground-mounted systems, facilitating rooftop and balcony solar panels and simplifying tenant electricity and communal building supplies. Among other things, solar installations with an installed capacity of more than 100 KW (and less than 200 KW) will no longer have to be marketed directly in future. Instead, surplus quantities can be passed on to the grid operators without remuneration, but also without direct marketing costs, which should benefit in particular system operators with high energy consumption of their own, and was previously only possible for systems under 100 KW. Along with Solar Package 1, the Bundestag also passed a resolution calling on the federal government to propose effective measures to make the expansion of renewables more cost-effective in the upcoming Solar Package 2.

Another important consideration in solar energy generation is the increasing obligation to install solar panels on roofs. The coalition agreement sets a goal that mandates the use of rooftops for solar energy generation in new commercial buildings and establishes it as the general rule for new private buildings. This plan has already made varying degrees of progress in the federal states. There are various forms of this obligation, with the requirement to utilise solar power on roofs so far mostly only applying to new buildings; for existing buildings, which make up the majority of buildings, state regulations only partially mandate it in cases of major roof renovations. These trends have already reached the industry, with rooftop solar panels becoming more prevalent not only in new privately owned buildings, but also in the C&I sector. Various rooftop solar panel developers have established themselves in the market (in some cases offering complete solutions, such as integrating geothermal heat pumps and wall boxes for home EV charging with solar panel installations).

In the future, issues relating to the CSDDD directive and the EU’s Forced Labour Regulation will play a particularly important role for investors in the solar industry. These regulations require comprehensive reporting on supply chains and enforce a ban on products manufactured using forced labour within the EU market (detailed information can be found here). While the CSDDD directive still needs to be transposed into national law, with the coalition’s position currently unclear, the Forced Labour Regulation implements the corresponding ban directly. As around 90% of solar panels are now produced outside the European Union, investors will have to scrutinise supply chains closely in future.