A controversial reform
Renewable companies sending employees out to demonstrate, Twitter campaigns, protest advertisements, and repeated late-night negotiations at Angela Merkel’s chancellery – rarely has a rather technical energy policy reform caused such a storm. But Germany’s overhaul of the core law behind the country’s shift to renewables has touched a nerve.
The controversial reform will expose the renewable power sector to market forces, and at the same time set strict caps on its growth for the first time. In effect, it will slow down the rate of renewable expansion seen in 2014 and 2015. Environmentalists are alarmed. They say the changes will put Germany’s climate targets beyond reach, and sound a death knell for citizen-owned energy, so far a fundamental part of Germany’s shift to green power. The renewable sector, which employs hundreds of thousands of people in Germany, fears that “putting the breaks on the energy transition” will put many jobs at risk.
Rapid growth of renewables
On the rare spring and summer days when bright sunshine comes with strong winds, pushing renewable power production to a peak, Germany can almost cover its entire electricity demand with green power, at least for a few hours at a time. Over the year, the world’s fourth largest industrial nation now covers around a third of its total electricity needs with renewables.
This achievement has been possible thanks to Germany’s financial support system for green power, enshrined in the so-called Renewable Energy Act (EEG). This law is about to undergo the most profound changes since its inception a quarter of a century ago. With Germany’s energy transition – or Energiewende – so far largely limited to the power sector, the country is in effect revamping the cornerstone of the project.
What is the Renewable Energy Act?
Under the Renewable Energy Act, which has been imitated around the world, any renewable power investor – be it a household installing a solar array on the roof, a cooperative erecting a windmill, a farmer running a biogas installation, or an institutional investor operating an offshore wind park – could sell their green electricity at a guaranteed price above wholesale market price, fixed in advance for 20 years (for more details, see the factsheet Defining features of the Renewable Energy Act (EEG)).
These so-called “feed-in tariffs” for green energy spurred a huge wave of renewable energy projects in Germany by offering safe returns on investment. Growing demand meant the cost of renewable installations fell fast and the fixed tariffs offered lucrative returns. As a result, Germany now boasts more than 1.5 million renewable power facilities. The share of renewables in the country’s electricity generation rose from 3.6 percent in 1990, when the law was enacted, to 30 percent in 2015.
But critics point out that costs have also shot up. With more and more green power fed onto the grid at above-market prices, the bill has got bigger and bigger. The difference between the feed-in tariffs and the (mostly falling) market price is passed on to consumers in the form of a surcharge added to their power bills. In 2015, consumers paid more than 20 billion euros to green energy producers through these surcharges. On top of this, integrating all that fluctuating renewable power into the existing grid has become increasingly complicated, resulting in further costs. Household power prices have gone up, prompting calls to put a cap on development. In addition, the EU said it favoured the introduction of market-based mechanism for renewable support - But opinions differ on whether this was an important factor for the reform.
A new era for renewables
The government first decided to address these issues by reforming the Renewable Energy Act in 2014. Now, there’s a draft on the table spelling out how the new rules will work. To get a better grip on renewables development and keep costs under control, feed-in tariffs are to be replaced with a competitive auction system from the start of 2017. First, the government will announce how much new renewable capacity is to be built. Investors then offer a price at which they are prepared to sell electricity from their planned projects. Installations offerings the cheapest electricity win the auction – and are guaranteed that price for the following 20 years.
The basic idea behind this change is that the government will have the power to steer the sector’s growth and avoid overshooting the target range of 40-45 percent of power consumed in 2025 coming from renewables. The government also says the reforms ensure only the most economically efficient projects will be realised, thus lowering total costs. (For details of the reforms, see the factsheet EEG reform 2016 – switching to auctions for renewables.)
Energy minister Sigmar Gabriel calls the reform a “paradigm shift” and insists the pending changes reflect the fact that renewables in Germany have matured and can no longer claim the “fledgling status” that required feed-in tariffs to shelter them from market forces. The ministry says the reforms – which contain many other changes alongside the auction system and are dubbed EEG 3.0 – will future-proof the system, allowing the Energiewende’s focus to shift to other major challenges, such as decarbonising the transport and heating sectors.
There is much agreement that a profound shift is on the horizon for Germany’s energy transition. The Süddeutsche Zeitung called the reform a “new era for renewables.” But opinions vary widely on how the reformed legislation will affect Germany’s closely watched move towards a nuclear-free and low-carbon future energy supply. Above all, three issues are at stake: Will it lower the costs of the energy transition? Does the reform endanger Germany’s climate targets? And will it kill off citizens’ participation in the Energiewende?
Will the reform lower costs?
The government says it is necessary to limit renewable development to allow lagging grid development to keep pace with rising green power generation, and that auctions will ensure only the cheapest projects are realised.
Graichen of Agora Energiewende says the revised law will broadly achieve these targets. “The reforms are the next logical step for renewables. You can’t stick to feed-in tariffs agreed by the Bundestag if renewables are the largest player in the power market.”
The government began trial auctions for large-scale photovoltaic arrays in 2015. It says high participation and falling prices at each round prove their success (for more details, see the article Auctions to set the price for wind and solar - the debate). But critics warn that the system does not guarantee how many winning projects will be realised.
The new auctions are to cover more than 80 percent of new renewable energy capacity – only small to medium photovoltaic arrays (with a capacity of up to 750 kilowatts - an installation covering roughly three football (soccer) pitches) will remain exempt from the process. The government says it wants to focus funding on wind and solar, because these technologies contribute most to attaining expansion targets from EEG 2014, whereas hydropower, biomass and geothermal do not offer much potential for growth.
Proponents of the strict limit on renewable development inherent in the auction system argue that the power grid is already stretched to its limits and cannot absorb more wind energy without expensive upgrades. The leader of the conservative CDU parliamentary group, Volker Kauder, called for a general adaptation of renewable development to grid extensions in order to lower costs. He also said new installations should no longer receive compensation if they have to be switched off at times of grid overload.
But energy policy expert Claudia Kemfert at the German Institute for Economic Research (DIW) says the reforms will be a double failure. She argues that auctions will not lower costs, and will fall short of meeting growth corridors. “Auctions reduce planning security and increase financial risks for investors. The corresponding risk premium increases the cost of the Energiewende. Additionally, growth corridors will be missed, if companies win an auction but postpone construction for whatever reason.”
Volker Breisig, partner utilities and regulation at pwc advisory, told the Clean Energy Wire it also remained uncertain whether enough investors will participate at the demanding wind tenders. “Especially the rising complexity and an increase in risk could slow development […] My feeling is that auctions will lower costs, but we have no idea yet how high the risk premium will be," says Breisig, who advises past and new energy suppliers and energy users.
Kemfert, in contrast to most other experts, also says that the success of the Energiewende does not depend on grid extensions. “Our studies and models show that grid extension does no harm, but it’s not strictly necessary […] decentralised, intelligent grids with demand management, and – in the medium term – storage, would be much more important.”
Kemfert argues that an oversupply of “yesterday’s coal power” rather than tomorrow’s renewables is the reason grid extensions are needed. A recent Greenpeace study came to similar conclusions – that power from conventional power plants is blocking the grid, not renewable power. Greenpeace energy expert Austrup says the government aim to synchronise the renewable rollout with grid extensions is “nonsense and only an excuse to put a break on renewables.” He adds: “Even at peak renewable production, nuclear power stations continue to run on full steam. The real aim should be to get rid of inflexible power stations.”
Graichen says that on a regional basis, these criticisms may be justified because many fossil and nuclear power plants are too inflexible to stop generation at times of peak renewable production.
Advocates of faster renewable development also argue breaks on the green power rollout will do little to reduce costs. In a study for the environment ministry of the German state of Baden-Württemberg, the Institute for Applied Ecology calculated that limiting renewable development will only have a marginal impact on power prices for consumers. This is because the bulk of the cost is for early renewables installations, which still receive high feed-in tariffs set up to 20 years ago. In contrast, new installations are paid a much lower rate and therefore have a smaller impact on costs.
According to Agora Energiewende, the renewable surcharge will likely peak in 2023 and decline thereafter. “The main reason for the foreseeable decline in the EEG surcharge is that from 2023 on, expensive facilities built in the early years of the EEG will lose their claim to a subsidy, while new facilities are already producing power very cost-effectively and will continue to become even cheaper,” according to Patrick Graichen.
Climate targets in danger?
The reform sets out growth corridors for renewables, which were first agreed in 2014. New wind capacity has been installed so rapidly in the last few years, it looked increasingly likely that Germany would overshoot its target of 40-45 percent of total power consumption coming from renewables by 2025. The aim is to increase that share to 55-60 percent by 2035 and to at least 80 percent by 2050.
To achieve these targets, the reform stipulates “deployment corridors” for different renewable technologies. Each year, 2.5 gigawatts (GW) of photovoltaic capacity is to be installed, of which 600 megawatts (MW) will be auctioned. Onshore wind installations will be set at 2.8 GW per year from 2017 to 2019 and at 2.9 GW from 2020 on - equivalent to around 1,000 new wind turbines per year. The country’s total offshore wind capacity is to reach 6.5 GW by 2020 and 15 GW by 2030, by auctioning 730 MW per year. Biomass capacity is to be expanded by 150 megawatts (MW) annually over the next three years and by 200 MW in the following three years.
Environmental organisations and renewable proponents say this rate of growth is far too low to achieve Germany’s climate targets.
“To reduce renewables to 45 percent in 2025 means expanding the fossil [fuel] share to 55 percent, with the aim of mitigating the impact on large utilities,” Greenpeace energy expert Austrup told the Clean Energy Wire. “What is more important, securing the survival of large companies, or international climate protection?”
A study by the University of Applied Sciences Berlin (HTW) concludes that Germany needs to step up renewable development four- to five times to reach the Paris climate targets, which require the total decarbonisation of the energy sector by 2040. With electricity demand set to rise due to the pending electrification of the transport and heating sectors, the new deployment targets mean Germany will fall well short of its renewable targets, according to the study. Its author, Volker Quaschning, professor of regenerative energy systems at HTW, says onshore wind power must grow by 6.3 GW net each year, rather than the planed 2.8 GW; solar PV would have to grow by 15 GW instead of 2.5 GW.
Kemfert agrees. “Electric mobility only makes sense when you use renewable energy. This is exactly why we should push renewable development instead of slowing it down.”
The government is aware that electrifying transport and heating might push up power demand significantly in the future. But state secretary for energy Rainer Baake said at a conference earlier this year the renewable target corridors could imply much more green electricity than some critics assume, because they specify percentages, rather than absolute volumes. He also said that the auction system would allow steering up renewable capacities in that direction if necessary. “If the demand for electricity rises, we will get the necessary majority for higher auction volumes,” Baake said. “But it doesn’t make sense to generate more electricity now, without a corresponding demand.”
Patrick Graichen of Agora Energiewende says that in the long term, deployment corridors set out in the reform proposal are too low. “The renewable targets for 2025 will surely be achieved with the deployment corridors. The reform aims to prevent a significant overshooting. But the amounts will not be sufficient by a long shot to reach the longer-term renewable targets.”
Still, energy minister Gabriel argues that containing costs is crucial to securing the Energiewende’s real environmental impact. He says Germany’s share in global emissions is so small that the Energiewende can’t prevent global warming by itself, but only by being adopted around the world. Therefore, Germany must prove it can manage the transition to renewables without too much damage to its industry. “Otherwise, no other country will follow our lead,” Gabriel said at a conference in spring 2016.
German industry association BDI echoed the feelings of many traditional manufacturers worried about rising power costs when it said the reforms were “steps long overdue […] Up until now, renewable energies in Germany were driven forward regardless of costs, supply security and grid development.”
The end of citizens’ energy cooperatives?
A third question is over citizens’ participation in the Energiewende. It’s estimated that in 2012, nearly half of Germany’s renewable energy capacity was owned by citizens through private installations and energy cooperatives (for more details, read the dossier The people’s Energiewende). The economics and energy ministry says “ensuring a high level of diversity”, including small cooperatives, is one of three core objectives of the auction process, the others being the ability to plan the energy transition and to keep costs down by introducing competition. But critics say the new rules give corporate projects an unfair advantage over cooperative ones.
“We expect the new rules will spell the end of new cooperative projects,” Andreas Wieg, head of the National Office for Energy Cooperatives told Clean Energy Wire. “Auctions are problematic for typical citizen cooperatives, because they involve very high upfront costs of 50,000 to 100,000 euros. If they don’t win the auction, that money is lost.”
Wieg says cooperatives typically only plan to realise a single project and cannot therefore split the risk of loosing an auction - in contrast to large commercial project developers who can participate with several projects at once.
In the wake of such criticism, the ministry published an additional concept on how to facilitate the participation of citizen cooperatives in wind energy auctions, by exempting them from certain regulatory requirements. But Kemfert calls the concept a “desperate attempt” to remedy the situation: “Citizen’s energy cooperatives are the big losers of this reform.”
After he tabled the proposal, Baake told a citizens’ energy audience it was his ministry’s firm intention to preserve the variety of actors that is a “trademark of the German energy transition”. He said the successful participation of cooperatives in pilot solar tenders was proof that citizens’ energy projects can compete successfully at auctions.
But Wieg says the winning bids by cooperatives were older projects planned under the old EEG rules that weren’t finished on time.
Greenpeace’s Austrup says the new rules will change the character of the energy transition, by dramatically reducing the number of players: “The Energiewende turns into a project of large companies. Crowding out local initiatives spells trouble for the acceptance of the energy transition.”
Many representatives of the renewable industry say the reform is a thinly veiled attempt to secure the survival of large utilities mainly focused on conventional power stations – namely E.ON, RWE, EnBW and Vattenfall. Chancellor Angela Merkel stressed at a utility conference in June 2016 that the Energiewende must not push utilities over the brink, saying “we have to make sure the basic providers of energy do not collapse under the burdens caused by the Energiewende.”
Breisig from pwc advisory says the complexity of the tender system will generally favour large companies. "It is definitely a professionalization of renewable development.”
In opinion polls, a large majority of Germans say they are in favour of the energy transition (for more details, see the factsheet Polls reveal citizens’ support for Energiewende). But many experts say citizen participation is crucial to maintaining public support for renewables and overcoming local opposition to specific renewable projects such as wind farms.
“Direct citizen participation is the only way to solve the problem of acceptance, or the not-in-my-backyard mentality,” insists Wieg. “Even if energy cooperatives have only contributed a fraction of total renewable capacity, they represent 160,000 people. To gather the motivation for future challenges of the energy transition – such as efficiency, smart grids, a transition in mobility, among others – we need to have a large section of the populace on board.”
Large commercial investors on the other hand have applauded the transition to auctions. E.ON spokesperson Markus Nitschke told the Clean Energy Wire. “We broadly agree with the intention of the energy and economics ministry to move towards greater competition.” Danish offshore wind power company Dong Energy has also welcomed the reform plans, arguing that auctions would help reduce prices and increase competition.
One possibility to secure a role for cooperatives in the future might be participation in large commercial projects. E.ON’s Nitschke told the Clean Energy Wire: “It has become our standard procedure to offer local residents involvement in onshore wind projects. It’s a question of acceptance.”
Wieg welcomes E.ON’s approach, but says citizens must be able to do more than just invest their money. “Is it just about a little financial stake, or are they really allowed to play along? A true feeling of local ownership is crucial. Depending on the specific realisation, the impact on acceptance and motivation is very different.”
Breisig says the reforms will force investors of many types into alliances: "This will be something entirely new."
The reform of the Renewable Energy Act