George Zachman: Greece may have its day in the sun for solar energy

At first glance, monetising an abundant natural resource to strengthen national accounts sounds like a good idea, particular given that electricity in central and northern Europe is becoming more scarce and expensive, owing to Germany's decision earlier this year to phase out nuclear power. But has Mr Schuble really found a magic bullet to hold down German electricity prices while restoring economic growth to Greece? Yes and no.

First, the bad news: electricity currently produced in photovoltaic installations is far from price competitive with conventional technologies. Grid parity - meaning the cost of electricity produced by a rooftop solar panel being equal to that of electricity from the wall socket - will only be reached in the middle of this decade.

Even then, solar power will still be more expensive than conventionally produced electricity, because grid parity excludes transmission and distribution costs, which typically account for about half of the final electricity price. Moreover, even if solar power were competitive, exporting it to Germany would not make economic sense: the required transmission lines do not exist, and the power losses incurred in transporting electricity over long distances is a disincentive to building them.

Indeed, electricity prices in Germany are not systematically higher than in Greece, which nowadays is an electricity importer. As a result, Greek solar electricity would, above all else, merely replace more expensive conventional generation in Greece.

Even the reduced need for fuel imports (a quarter of Greece's electricity is produced from oil and gas) would not have a large impact on the Greek current account. Solar panels are unlikely to be produced domestically, so will have to be imported.

Solar electricity production does not promise high returns. It is very capital-intensive, and only a relatively small number of jobs would be created. Even if Greece were able to produce surplus solar electricity, exports would yield little revenue. As soon as solar electricity becomes competitive in Greece, other countries with similar levels of sunshine, such as Spain, Italy, Portugal, Bulgaria, will enter the market. This will quickly drive electricity prices towards production cost, as solar-generating capacity in Europe approaches electricity demand.

But, while Greece cannot reasonably hope that large-scale photovoltaic systems will turn it into the Saudi Arabia of solar electricity, Mr Schuble is right to point out that producing it in Greece makes more sense than producing it in Germany.German support for solar power is aimed at lowering the cost of solar panels, which is the main justification for paying a high feed-in price (currently about 174 per MWh, compared to current electricity prices of roughly 48 per MWh).

Of course, whether the cost is lowered does not depend on where the deployment takes place: using German money to support solar deployment in sunny Greece would be more efficient than using it to support deployment in gloomier Germany. A photovoltaic system installed in Greece would be able to cover a higher share of its cost, thus requiring fewer subsidies.

The best way to support solar energy technology development would be to implement a European "green certificate system". Every European electricity supplier would have to guarantee a certain share of the electricity it sells comes from renewable energy sources. Suppliers' targets could be differentiated, reflecting countries' varying potential for deploying or developing renewables.

Countries able to deploy more renewables (for example, Greece) could then sell the certificates to countries that need more of them (say, Germany). This would make German support for renewables cheaper and generate income in Greece, without compromising on European renewables deployment. But no one should expect to strike solar gold.

l Georg Zachmann is a research fellow at Bruegel, the Brussels-based European think-tank of international economics.