One of the pillars of the German Energiewende and a defining feature of the Renewable Energy Act (Erneuerbare Energien Gesetz, or EEG) is the set feed-in payment that producers of renewable power receive per kilowatt-hour (KWh). The payment is prescribed by law and guaranteed for 20 years. It is – with some exceptions – paid for by all electricity consumers in Germany. Feed-in tariffs have become a widely used policy tool to integrate a product like solar or wind power into the market. Without such a mechanism, renewables would have had a hard time competing with other sources, such as coal, which in the current regulatory framework produced power more cheaply. Currently, 20 European countries use feed-in tariffs. They were introduced in Germany in 1990, and are credited with the rapid growth of renewables. Only the United States introduced a law earlier (in 1978) that forced utilities to buy green power under certain conditions. While often used to promote renewables, in the United Kingdom feed-in tariffs are planned to ensure support for a new nuclear power station at Hinkley Point whose high generation costs would otherwise make it uncompetitive. In the German renewable energy law, feed-in tariffs for renewables are fixed for a 20-year period to give investors security. However, the law includes a “degression mechanism”, meaning that the remuneration for new installations drops at a rate determined in the legislation. This process also provides an extra incentive for the renewables industry to produce technology more inexpensively. Because guaranteed feed-in tariffs make renewables a rather safe investment, many small producers have entered the market, and more than 40 per cent of green power facilities are operated by households and farmers. Under changes forthcoming in the law, Germany plans to phase out feed-in tariffs and switch to a bidding system by 2017 for an increasing segment of the market, although existing and small (less than 100 kilowatt capacity) installations will not be affected. Since 2012, operators of renewable power stations can choose to sell electricity directly on the exchange and secure a market premium payment (the difference between the normal feed-in tariff and the average electricity price at the exchange). In 2013, over 80 per cent of onshore wind facilities, 40 per cent of biomass plants and 11 per cent of photovoltaics installations used the direct marketing option.
Priority grid access for renewables
The second important ingredient for Germany’s energy transition is grid priority for renewables. The Renewable Energy Act stipulates that electricity from wind, solar and biomass gets access to the grid ahead of conventional power. The law also provides that in times of excess supply, conventional power plants must ramp down production. Grid operators must not disconnect wind turbines and solar arrays, unless the stability of the power network is threatened. Additionally, grid operators are obliged to connect new renewable power facilities to the relevant power grid and if necessary even expand the network to accommodate biomass units, photovoltaics and wind turbines. If they do not comply with their obligation, renewable producers are entitled to compensation, paid by grid operators.
The EEG-surcharge (EEG Apportionment)
The EEG-surcharge is the mechanism that finances the feed-in tariffs. It is the difference between the wholesale market price for power on the electricity exchange and the higher fixed remuneration rate for renewable energies. It is estimated for the following year, based on historic and current data. It is paid by all consumers of electricity with the exception of energy intensive industries (in order to avoid damage to international competitiveness) and operators of renewable and small conventional power plants that use electricity they generate themselves. The EEG-surcharge has increased from 2.05 euro cents per kilowatt-hour in 2010 to 6.24 cents per kilowatt-hour in 2014. In 2013 the EEG-surcharge made up 18 per cent of the total retail price for electricity consumers. The rise has been caused by a range of factors:
As the installed renewables capacity has increased from about 4.7 gigawatt in 1990 to 84 gigawatt in 2013, payments to the producers of renewable power have risen.
The number of industrial companies, which are classified as power-intensive and therefore are exempt from paying the full EEG-surcharge has increased (from 297 companies in 2005 to 2098 in 2014). These exemptions amounted to 4 billion euros in 2013, leaving a larger part of the bill to non-privileged consumers.
Large amounts of renewable power have entered the market and lowered prices on the electricity exchange. Moreover, a fall in prices for coal and carbon certificates has caused electricity prices to decrease even further. As a result, the difference between lowered wholesale prices and the set remuneration for renewables has increased – and, with it, the EEG-surcharge.