1 Aug 2014
| Peter Dinkloh

EEG 2.0 – A new legal framework for the German energy transition

Germany revamps renewables law as it adapts to future with green power

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Germany’s energy market is bracing for the most far-reaching legislative changes since green power incentives were introduced a quarter of a century ago. The controversial revamp of the renewable energy law aims to cut the costs of Germany’s ambitious transition to a low-carbon economy, exert greater control over the expansion of renewables and maintain exemptions that help large energy users deal with costs related to the so-called Energiewende, or energy transition.

Content

Germany still emits too much carbon

Consumers support green power with 24 billion euros in 2014, but public happy to pay

The end or a beginning of the renewables?

One of many steps to adapt the market to renewables


Some of the measures have a short track record and strike at the very heart of the 1990 law – guaranteed prices for renewable energy producers, now the model for legislation in 97 countries worldwide,
the so-called “feed-in tariffs”. Energy experts stress that this is just one of many steps to adjust the evolving energy market as the country pursues its low-carbon goal. Further reforms are expected in the next two years, which will affect power plants, the building of power lines and emissions trading.

While other countries are also tackling climate change by boosting renewables, Europe’s largest economy is braving a triple dare: cutting emissions by burning less fossil fuel, ramping up renewables and phasing out nuclear power - all at the same time. German industry is keeping close tabs on the process, as the European Union threatened to force Germany to abandon its subsidies for heavy users. Such power price subsidies have been a hotly contested element of the Energiewende.

The transition itself has widespread popular support, but not everyone agrees on how to go about implementing it. One sticking point, legally-enshrined price guarantees for green power, have created a huge wave of renewable energy projects since the law was introduced in 1990, offering safe and sometimes lucrative returns for investors. When the seven-month-old ruling coalition of conservative Christian Democrats and centre-left Social Democrats decided to gradually replace these with an auction-based system by 2017, the reform did not garner much favour with green power producers. The renewable-energy industry, small electricity producers and environmentalists fear it will stifle investment and the growth of renewables. The government, large industrial companies and utilities claim this new competitive element will help lower electricity prices.

The planned change also means green energy producers will have more exposure to competition and to a much more detailed planning process. Previously, anyone with a permit to build a green power facility could do so – without having to bid against competitors. Utilities were obliged to connect the facility to the grid so that its access to the market was guaranteed. Indeed, these policies, together with price guarantees, have pushed green energy production from record to record in recent years.

The coalition is also using financial incentives – and disincentives - to exert greater control over the number of new green power facilities being built, after the renewable energy market saw large volumes of capacity additions in the past. While the capacity of green power facilities doubled between 1988 and 2000, it has expanded more than sixfold since the introduction of the current version of the renewable energy law in 2000. Renewables have thus reached almost the same capacity as conventional power plants. The law has been modified more than four times since then to adjust subsidies to the falling costs of new green power facilities, mostly windmills or solar panels. The new law caps the amount of renewable energy that qualifies for state-guaranteed income – so-called capacity limits, which sharply reduce guaranteed returns once a targeted number of installations have been built. More may be built, but the remuneration falls drastically, implementing a sort of “financial cap”.

Germany still emits too much carbon

But despite an abundance of green power, the country as it is at risk of missing its climate targets unless it intensifies efforts to lower carbon dioxide emissions. According to a commission of experts convened by the Economy and Energy Ministry, “the target of reducing greenhouse gas emissions by 40 percent by 2020 will be clearly missed.” The Environment Ministry predicts it will fail to do so by one-fifth. Germany was an early advocate of climate targets, first setting emissions hurdles in 1995, well before renewable energy goals were established in 2000.

The nuclear phase-out also has a long history: After more than three decades of fierce public opposition to nuclear power, a ruling coalition of Social Democrats and Greens decided in 2000 to phase out nuclear plants by around 2021. A decade later, the new government of Liberal Democrats and Conservatives partially rolled that back, extending the lifespan of nuclear plants. But this short-lived move ended in one of the most sweeping turnarounds ever in German politics. The government reinstated the original plan almost entirely after the nuclear power station accident in Fukushima / Japan. It set it a deadline for the last nuclear power plant to go offline in 2022.

Closing the country’s remaining nine nuclear power plants is a complex project, followed attentively by the nuclear-weary public. Other parts of the Energiewende, such as improvements in energy efficiency and battery-powered cars have yet to be tackled with the same determination as electricity production. So far, the focus remains on renewables. Opinion polls consistently show strong support for the project has been barely dented by rising electricity prices for households and parts of the business community.

Consumers support green power with 24 billion euros in 2014, but public happy to pay

Germans will pay some 24 billion euros in 2014 through the renewable energy legislation, according to an estimate from the four transmission grid operators. The money – mostly from commercial electricity consumers followed by households – flows to green energy producers, many of which are households themselves, demonstrating how green power is wresting market share from large utilities.

Besides stemming the burden for households, the government has said another reason for changing the law was to appease European Union complaints about industry exemptions, with the European Commission, the EU’s executive arm, opening formal proceedings to study the German subsidies. Some industries pay only a fraction of the so-called EEG-surcharge, a top-up on electricity prices to fund the feed-in tariffs for renewables. In addition, the government said it wants to better integrate renewables into the existing power market. This means that a larger number of green power producers will have to sell their power directly on the power market and cannot rely on just handing it over to their local grid operator.

The renewables’ levy on the power price has risen from 0.4 cents in 2003 to 6.2 cents per kilowatt hour this year, making up about a fifth of the current average power price for consumers. Despite much media coverage, most consumers are little fazed by their electricity bill, as the share of their total power bill – including all levies – of their overall spending has remained stable at around 2 percent since 1990.

A majority, however, opposes the surcharge exemption for large, power-consuming industrial companies such as BASF and ThyssenKrupp. Nonetheless the German government reached an agreement with the Commission in September 2014, which left the overall subsidy package stable at 5 billion euros. Industry association BDI called the agreement “positive, after saying that at least 900,000 jobs would be threatened should the exemptions end. That would represent more than 2 percent of the German workforce.

The renewable energy industry has also grown into a big business, investing some 16 billion euros in new facilities in 2013 thanks to the electricity surcharge. The industry, which includes wind farm makers and companies that maintain them, employs 262,000 people (0.6 percent of Germany’s overall workforce) and generated revenue of 23 billion euros, around 1 percent of German gross domestic product (GDP) last year. Support for solar energy made Germany the largest market for solar panels worldwide, sparking a global boom and a rapid fall in production costs. China’s solar panels are now cheaper than those made in Germany, triggering a decline of the German solar industry, accusations of price dumping, and ultimately, EU import duties on Chinese panels.

The end or a beginning of the renewables?

Opinions vary widely about the mechanisms and parameters of the new legislation. “The amendment is the beginning of the end of the renewable energy act,” said Hans-Josef Fell, a former lawmaker for the Green Party and one of the authors of the original act. “We are taking an important step for our future energy supply with the reform of the renewable energy legislation,” Chancellor Merkel said.

The hot issue is the bidding process. The government posts a tender to build a given capacity using, for example, solar panels or windmills. The investor offering to sell electricity at the lowest price wins the project. The government expects this to lower prices and says the new regime helps comply with EU competition regulation. It is noteworthy, however, that the European Union, although cited by the government as an instigator, was not directly demanding the change. The EU has been asking member states to introduce tenders, but gives them leeway to use other methods too. In a letter to the German government in December 2013, the Commission actually said it approved of the previous German system of feed-in tariffs. Felix Matthes, responsible for energy at the think tank Öko-Institut, says the law is guided by abstract principles rather than experience, which might “set us up for a less than optimal development in the future.

Most notably, the changes may herald a new era for small private investors who own some 43 percent of the renewables generation capacity: Households with solar panels and farmers with windmills on their properties may have to compete with utilities and funds for the right to build renewable power plants from 2017 onwards. Experience from countries such as China or Britain has shown that investors sometimes make unrealistically low offers and are unable to complete the project.

Economic logic and all experiences from other countries show: In tenders the largest bidders have an advantage,” economist Lars Holstenkamp from Leuphana University said in a study financed by the environmental group Friends of the Earth Germany. Accordingly, the 800 municipal utilities and the large power providers favour tenders. These are mostly publicly owned infrastructure providers, a trademark of the German energy market. But the government has pledged to ensure the diversity of players. Using tests with solar installations, it will determine how tenders will work in the future and enshrine it in a successor to the current renewable energy act.

Another contested novelty are so-called growth corridors, or limits on the number of new green energy installations. For the two largest renewable energy sources by capacity, solar and wind onshore – wind farms on land as opposed to at sea – the annual limit for new construction has been set at 2.5 gigawatts each. That is slightly below what was built last year and equals the capacity needed for Berlin, a city with 3 million inhabitants. Replacing existing wind facilities does not count towards the target.

That part is particularly sensitive for Germany’s 16 federal states, which approved of the new law but only after initially opposing those parts that would hit the dominating renewable energy in their respective regions, be it wind power on the rough North Sea coast or biomass in the south. “Everything damaging the expansion of wind power makes the renewable energy law more costly,” said the state premier of Schleswig Holstein, Thorsten Albig, for example. In neighbouring Denmark, onshore wind power is becoming the cheapest form to produce power, according to the Danish Energy Agency.

Researchers from arrhenius Institute for Energy and Climate Policy in Hamburg say the caps are fine in the short term and allow the country to reach its target of 35 percent renewable power generation in the year 2020. However, they argue that the plans fail to take into account Germany’s ambition to replace current fossil fuel usage with green power. For example, the government aims to raise the number of electric vehicles from 12,000 now to a total of 6 million by 2030. By 2050, that would require twice the power produced today, and accordingly more green power to keep its share stable, according to researchers from Fraunhofer Institute.

Renewables producers fear the caps on new installations will deter investors who worry that the caps will be exhausted before their facilities qualify for the basic feed-in tariffs. Investors put up 818 megawatts of solar facilities in the first five months of 2014, 45 percent less than in the same period last year – a year in which new construction already halved – after a limit on the number of new installations and falling rates for solar power. That makes it likely the country will miss the target of at least 2.5 gigawatts of capacity this year, the solar industry said.

The government and think tanks such as the Rheinisch-Westfälisches Institut für Wirtschaftsforschung argue that the caps allow for more new facilities than were added in past years and therefore will not deter investors. German industry voiced content that the “hazard scenario” created by the current rate of renewable energy expansion is being curbed, while its own power facilities remain largely exempt from contributing to the energy transition. “The reform is a sound footing for many energy-intensive companies,” the BDI Association of German Industry said in a statement.

While the effects of the new law remain to be seen, it is undisputed among the general public and acknowledged by the government that Germany needs additional efforts, such as saving more energy, to reach its emissions targets. Some acute issues need tackling. While it may remain profitable to build renewable energy installations, incentives against cutting carbon emissions were not strong enough: Prices for allowances to emit carbon dioxide have dropped and cheap gas in the United States is pushing an additional supply of hard coal on the market, reducing coal prices to their lowest in four years and incentivising utilities to sell more power from brown- and hard coal-fired power stations. For three of the last four years, greenhouse-gas emissions from the Germany have been rising, even with the massive build-up in renewables, reaching their highest level in five years in 2013. The Federal Environment Agency calls the situation worrying and says Germany would need to push the EU towards a stricter greenhouse gases target, as it is the 28-nation bloc that dispenses emissions allowances. But German heavy industry does not want a European agreement, saying only a global agreement makes sense for climate protection.

The issue looks set to stay on the agenda as the European Union prepares its next green energy push ahead of the 2015 global climate conference in Paris when countries hope to hammer out a follow-up agreement to the Kyoto Protocol. Chancellor Merkel’s notable absence at the United Nations climate summit in September, held to prepare for the Paris conference, has raised concerns among environmentalists about her commitment to the issue.

One of many steps to adapt the market to renewables

The fact that Germany will not meet its own emissions targets does not help that image. According to scientists advising the government on energy,“ given the few years remaining until 2020, it will only be possible to stop the target from being missed if additional energy and climate policy measures are implemented as promptly as possible.” Energy Minister Gabriel’s plan covers the next three years. But in addition to the EU measures, this year’s plan mainly envisions studies and focusing on the power market and facilities.

That means Germany has got its work cut out. Structural changes to achieve the energy transition are far from over. Green power is driving conventional power plants out of the market, even though they may be needed for now to kick in when the sun is not shining and the wind is not blowing. The debate about how otherwise unprofitable plants can be kept on stand-by without earning money from selling power has just begun. Discussions continue about the location of new power plants or the need for new power lines to connect plants with consumers. The question of how to synchronise these needs with those of neighbouring countries, with Poland complaining of excess power from Germany flooding its market, all against the backdrop of an evolving system, adds another dose of complexity to the agenda.

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