Germany Embarks on Major Energy Reforms

Germany is currently pushing through long-awaited reform of its seminal renewable energy laws, introducing measures intended to better control the so-called Energiewende without stopping it. The legislation now in the Bundestag will significantly modify the 2000-enacted Renewable Energy Resources Act (in German 'EEG'), which has been responsible for Germany’s unprecedented boom in renewably generated electricity – the single-most impressive aspect of Germany’s heralded Energiewende.

Windpark Schneebergerhof - source: Wikipedia
The reforms, designed by the new centre-right government, are being debated at a time when green power generation is peaking. In the first quarter of 2014, for example, renewables generated 27% of all electricity in Germany. Whereas clean power constituted 35.7 billion kWh in the first three months of last year, this year generation topped 40.2 billion kWh. At noon on May 11 – a cloudless, windy day across Germany -- 75% of Germany’s electricity stemmed from renewables.

Yet exactly this kind of unpredictable, open-ended surge in volume, says Germany’s economics minister Sigmar Gabriel, who is responsible for energy policy, is the problem today in Germany. Germany’s EEG must be reformed because it’s been too successful, he says, with generation racing ahead of grid expansion, consumer prices rising too quickly, the power market becoming dysfunctional, industry struggling with global competiveness, and Germany’s EU neighbours complaining about unwanted transit flows. The EEG’s reform was thus one of the incoming government’s highest priorities, which Gabriel has put at the top of its agenda and intended to put into law by August of this year.

The reforms fall into five main categories. The first is a scaling down of the feed-in-tariff rates, which will be phased out entirely by 2017 and replaced with a competitive-tendering-based system. According to the economics ministry, Germany pays 24 billion euros a year through the EEG to subsidize renewable energy. In the name of cutting costs, the average incentive per kilowatt hour will drop from the present 17 cent per kWh to 12 cent per kWh for new installations built after 2014. Next year, installations that generate more than 500 kW will not be eligible for any remuneration (this drops to 250 kW in 2016 and then 100 kW in 2017.) According to the ministry, only the most cost-effective kinds of renewable energies will be supported, above all solar PV and onshore wind.

Secondly, caps will be put on the different renewable energy sectors, prescribing quantities over which EEG-mandated compensation will no longer apply. This is meant to limit the over-stimulation (Überförderung) of clean-energy production and make it more predictable for planning purposes, above all for grid expansion. For example, solar PV and onshore wind will receive EEG-defined incentives for up to 2,500 MW of power a year. The cap is 100 MW for bio-energy and for offshore wind it is 6.5 GW until 2020 and 15 GW until 2030.

Once the sector hits these levels, the surcharge sinks dramatically or falls away completely. (This is already the case with PV solar, though in the future the cap will be lower than it currently is.) Wind farms, for example, can continue to generate and sell power above the cap, but they will then no longer qualify for subsidies. Gabriel’s ministry insists that these caps will not inhibit Germany’s intention to meet its 2025 and 2035 goals of 45% and 60% respectively of renewable power generation.

The third pillar – the gradual introduction of direct selling-- is aimed at facilitating the market integration of renewables. No longer will the grid operators be compelled by law to buy and then sell renewable energy on the exchanges in Leipzig and Paris. Rather, the producers themselves—first the larger producers and then over time smaller ones – will have to organize the marketing of their product themselves, usually done through commercial marketing companies.

The fourth element is an evaluation of the energy intensive industries that qualify for EEG exemptions. Currently around 2,000 businesses in Germany are mostly exempt from the EEG surcharge, which makes their power among the cheapest in Europe, while German consumers pay the most. There will be a thorough-going assessment of exemptions to insure that they go only to companies that truly require them.

Lastly, own-consumption generation (producers who use the power they produce rather than marketing it) must also pay at least part of the EEG surcharge, too. In the past, own-use generation was exempt from EEG surcharges.

In Germany, the responses to Gabriel’s reforms have ranged from enthusiastic (RWE’s director Peter Terium) to scathing (Friends of the Earth Germany). Most observers are simply struggling to understand just what they portend for investors, regulators, grid operators, the hydrocarbon industry, and the entire renewable energy sector. In general, the reforms definitely point to a slowing of green-power generation -- but there is no consensus on how much it will be slowed. Another point of general agreement is that the reforms favour large producers over smaller ones (small-scale producers currently account for over half of renewable energy production in Germany.) Also, even though many experts see the feed-in-tariff as dated, the introduction of competitive tendering as of 2017 is by no means the obvious or only alternative. Lastly, while Gabriel’s Social Democrats ran on a platform to make industry pay more of its share of energy transformation, it looks as if the exemptions are being expanded not curtailed.

“The good news is that the Energiewende is still on track, although at reduced speed,” says Tobias Kurth of Energy Brainpool, a Berlin-based consulting firm. Kurth is particularly critical of the direct selling measures that he claims will have only minimal impact on dysfunctions in the energy market, which is their intention, while they will hurt small and medium-sized producers. “It means higher risk and thus higher financing costs. The players in the market are going to have to have more capital to start with, which will change their profile.” The measures imply gradually moving from the flexible market premium model to a model based on a fixed market premium, he says.

Kurth is also critical of the taxing scheme proposed for own-consumption generation. While small producers and businesses will have to pay 50% of the EEG, industrial companies will only pay 15%, even if they’re producing from fossil fuels. The effect is to circuitously subsidize fossil fuels.

As for Germany’s political spectrum, the presence of both of Germany’s biggest parties, the Christian Democrats and the Social Democrats, in the government imply that critique in the Bundestag is muted and that the reforms should go through without major changes.

The Greens, in opposition, are clearly against the reforms, which they claim is an “attack on the Energiewende” that will not lower prices or ease the burden on consumers, but will benefit industry and fossil fuel suppliers including the coal industry. “The government pretends that the new laws won’t obstruct the Energiewende. But the opposite is the case,” says the Greens parliamentary group on its website. It claims that the caps mean that Germany will only increase renewable energy production enough to replace the nuclear capacity that will go off line in 2022.

In the end, though, there’s not that much the Greens can do about it.