The Reform of the German Renewable Energy Act in 2014

Kirsten Verclas

ORISE Science and Technology Policy Fellow

Kirsten Verclas is an ORISE Science and Technology Policy Fellow. Previously, she was a Program Manager in the International Department of the National Association of Regulatory Utility Commissioners (NARUC) working on regulatory partnerships in Africa under a NARUC-U.S. Agency for International Development (USAID) Cooperative Agreement. Before coming to NARUC, Ms. Verclas was a Senior Program Manager at the American Institute for Contemporary German Studies (AICGS) at Johns Hopkins University, where she managed the Institute’s grant projects. She initially joined AICGS as Executive Assistant in 2003 and started working in the Institute’s Research Program in 2008. Ms. Verclas has written extensively on energy and climate as well as security policy in the transatlantic context. She holds a BA in International Relations with a Minor in Economics from Franklin and Marshall College and an MA in International Relations with a concentration in Security Studies from The Elliott School at The George Washington University. She also earned an MS in Energy Policy and Climate from Johns Hopkins University in August 2013.

She is a 2017-2018 participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement,” sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).

 Introduction

On 11 July 2014 the Bundesrat (the upper house of the German parliament) passed a reform of Germany’s renewable energy law. The reform subsequently went into effect on 1 August 2014.[1] The original law, the Erneuerbare-Energien-Gesetz (Renewable Energy Act or EEG), was first adopted in 2000. Coupled with Germany’s decision in 2011 to phase out nuclear energy,[2] the EEG was and continues to be the cornerstone of the country’s Energiewende (energy transition). The Energiewende, one of the most ambitious overhauls of energy policy and power generation in German history, aims at increasing renewable energy generation by 80 percent by 2050, decreasing greenhouse gas emissions by 80 percent (compared to 1990 levels) in the process, and reducing energy consumption by 50 percent (compared to 2008).[3] As a result of the feed-in tariff for wind, solar, hydro, geothermal, and biomass included in the original EEG, renewable energy has increased drastically in Germany, reaching up to 29 percent of net electricity consumption.[4] Germany has been a pioneer in advancing policies to support renewable energy. Yet, as renewable energy technologies have become more prevalent, it became clear that the initial EEG was not without problems, leading the German government to initiate and pass a reform of the EEG in 2014. To be clear, there is no alternative to increasing renewable energy if Germany wants to reduce greenhouse gas emissions, become more energy independent, and provide for a stable economy in the long run. The reform continues Germany’s goal of reaching a renewable energy generation of 80 percent by 2050. Yet, the reform has received mixed reviews and does not address several major issues—not the least of which is who is financing the costs of the energy transition and what impact an increase of renewable energy will have on utilities and their business model.

Why the Reform was Initiated….

The initial EEG became a victim of its own success. The law initially provided for a feed-in tariff between 6.9 and 9.10 cent/kWh for wind, 48.1 cent/kWh (after 2002) for solar, 7.67 cent/kWh for hydro, between 8.70 and 10.23 cent/kWh for biomass, and 7.16 and 8.95 cent/kWh for geothermal generation. These feed-in tariffs were financed by a levy on utility bills. Yet, as the power wholesale prices continued to decrease over time, the feed-in tariff continued to stay more or less the same. Thus, the levy on consumers’ utility bills had to rise to cover the difference. Even though the feed-in tariffs were adjusted during several smaller reforms between 2004 and 2012, feed-in tariffs for renewable energy generation are usually locked into 15 to 20 year contracts; thus even though the feed-in tariff is reduced, older renewable energy generation is locked into the higher rates, which have to be paid for.

Additionally, the EEG allowed high energy-intensive companies in Germany to file for exemptions, decreasing the number of customers the power prices were spread over. The rising power prices prompted the German government to undertake the EEG reform. The reform “sets ‘corridors’ for new renewables development. If the market delivers more, rates will be cut, if less, then rates will be increased. The new annual targets are 2.5 GW for solar, 2.5 GW for onshore wind, and 100 MW for biopower.”[5] In fact, the reform of the EEG goes an additional step further and aims at setting the feed-in tariff through a tendering system in 2017. This tendering system is not yet defined, which makes another reform or amendment to the current reform to outline the tendering process likely.

….and the Opportunities that were Missed.

Equalizing the Financing of Renewable Energy

The reform attempts to lower the costs for all consumers by reducing the exemptions for companies to pay the EEG levy and thus spreading the costs across more payers. Industry advocates have criticized this as a disadvantage for German companies’ competitiveness; other experts fear that too many companies are still exempt from the levy. They also argue that the reform of the EEG does not adequately address the costs for previously-installed renewable energy sources, as long-term power purchase agreements have locked in high feed-in tariffs for the next two decades.  Even prior to the reform, the former German environmental minister Klaus Töpfer and other experts argued for the creation of an Altschuldenfonds (a fund to pay for pre-existing debts) in 2013. This Altschuldenfonds (financed with public funds) would be used to pay costs associated with financing and incentivizing renewable energy. This would allow those costs to be removed from the utility bills of consumers, who would then benefit from the reduction of energy wholesale prices and be relived from increased costs, preventing erosion of the popular support of the Energiewende. While the Altschuldenfonds will of course also have to be financed by the public (through overall taxes), a creation of such fund would spread the costs of financing renewable energy more evenly. The companies that so far had been exempt from paying the EEG assessment would contribute to the costs through their overall tax rate without increasing their energy costs, making this a fairer process overall. Separating the costs of renewable energy from consumers’ utilities bills would also provide a transparent assessment of the actual costs, as some experts have alleged that companies have marked up prices in the wake of the renewable energy feed-in tariffs. Experts have also expressed concern that the “corridors” will threaten continued renewable energy growth, while the government has argued that these limits are necessary to control prices. An Altschuldenfonds could become a tool to decrease costs should the concern of reduced renewable energy growth become reality.

Utilities vs. Distributed Generation

One of the most interesting aspects of Germany’s Energiewende is not only that it is supported by a large percentage of the population (89 percent think that it is important or very important),[7] but also that German citizens and communities are actively involved in it. Solar panels are no longer the exception but the norm on German roofs. This increased distributed generation, however, has put the role utilities play in the future into question. German utilities have not readily embraced renewable energy and are posting record losses—for example, RWE, the third-largest electric marketer in Europe, lost €2.8 billion in 2013.[8] While utilities have blamed support for renewable energy on their economic woes, they themselves have failed to come up with a new business model that takes the changed energy policy and landscape into account. While distributed generation will continue to grow, the question of who pays for the grid (that is still needed as a back-up system) in a fair way when more and more consumers are generating some or all of their own electricity themselves is still unanswered. As the EEG reform did not provide enough policy guidance on this, further reforms will be necessary to spur a changed business model for utilities.

Incentivize Energy Storage

One reform that would also be important is to place a larger emphasis on electricity storage. Increasing energy storage for variable renewable energy will become a key issue in Germany in the future. Yet, pumped storage, for example—one storage method that is currently available on a larger scale in Germany—has actually suffered from the initial EEG, which did not include it in the feed-in tariff and which even assessed providers of pumped storage with the renewable energy levy, treating them as an end-user. During a subsequent reform, pumped storage was exempted from the EEG levy; however, they were not put on equal footing in terms of the feed-in tariff. Pumped storage is not lucrative at the moment, as renewable energy has decreased the days that pumped storage is necessary to the winter and cloudy days (solar energy can provide peak power during sunny days) and computers have made coal-fired power plants more sophisticated in their response time.[9] The reform of the EEG falls short of incentivizing any kind of storage—be it pumped storage or potential new technologies that can provide efficient electricity storage, which will be needed to balance intermittent renewable energy.

Conclusion

To be clear, there is no alternative to increasing renewable energy if Germany wants to reduce greenhouse gas emissions, become more energy independent, and provide for a stable economy in the long run. Yet, as a pioneer in developing renewable energy policies and a regulatory framework, it is inevitable that Germany will make mistakes along the way. While it is too early to tell if the reform of the EEG was a mistake, the reform missed opportunities in adapting the support for renewable energy. Learning from mis-steps and rectifying them when possible and necessary—in Germany and worldwide—is an important step forward as Germany continues to adjust its renewable policies and more reforms become necessary.

 Kirsten Verclas is an International Program Officer at the National Association of Regulatory Utility Commissioners (NARUC) in Washington, DC, and an AGI Non-Resident Fellow.  The views expressed are the author’s alone, and do not represent the views of NARUC.