Legal & Regulatory

Germany Reforms Renewable Energy Laws

A significant reform of Germany’s aggressive renewable energy laws passed its final hurdle on July 11, setting the country on a more market-based path toward future growth.

The bill was developed and approved by Chancellor Angela Merkel’s coalition government of Social Democrats and Christian Democrats. Because they are the two largest parties, the legislation was passed by the main house of the German parliament, the Bundestag, with a 78% approval. The other house, the Bundesrat, concurred with the bill on Friday, meaning the law will take effect August 1.

The need for reform was driven by a combination of factors, including the rising cost of the surcharge used to fund renewables, pressure from the European Union (EU) about international competition, and the increasing growth and maturity of wind and solar power.

“The revision will mainly aim to significantly slow the ongoing rise in costs, to distribute the costs more fairly, to control the expansion of renewables so that people can plan, and to push ahead with the market integration of renewables,” said Tobias Dünow, spokesperson for Merkel’s Federal Ministry of Economics and Technology (BMWi)

Surcharge and Costs

The Erneuerbare-Energien-Gesetz (EEG) is the renewable energy law in question. Inspired in part by America’s Public Utility Regulatory Policy Act of 1978 (PURPA), the EEG was first adopted in 2000. Like PURPA, it requires utilities to accept power from independent producers.

But where PURPA directed states to set a price based on the “avoided cost” of power from other sources, the EEG has the energy agency set the price for each renewable technology, based on its cost. Renewable producers are paid through a system of “feed-in tariffs” (FITs), which decline as the technologies mature.

The above-market costs are funded through a surcharge paid on utility bills by most, but not all customers. This was a key focus of the EEG reform, dubbed EEG 2.0 by some.

The surcharge rose dramatically due to an explosion of solar panel deployment from 2010 to 2012. As solar panel prices fell through the floor, the price-setting bureaucrats in Berlin did their best to keep pace. A homeowner with a small rooftop solar system could sign a contract in 2009 for 43 cents per kWh (¢/kWh), and for only 13.7 cents this past January.

Despite cuts to the tariff, Germany—with a peak power demand of about 75 GW—installed over 20 GW of solar in only three years. By the end of 2013, 1.4 million distributed solar systems provided 35.7 GW of capacity, more than any other source, according to the Fraunhofer Institute.

As a result, the EEG surcharge rose to €0.062/kWh, with about half—€10 billion per year—going to cover this solar power. Since that power is locked in to 20-year contracts, little can be done to reduce their costs.

Residential consumers are especially hit by the rising surcharge, as 2,100 industrial consumers were exempted as “electricity-cost intensive and trade intensive,” according to the BMWi. These industrial customers use 25% of Germany’s power but only pay 2% of the surcharge. Their exemption, worth about €5 billion per year, according to the think tank Agora Energiewende, is picked up by other customers.

This caught the attention of the European Commission, as Brussels considered the exemption an unfair subsidy to German industry.

The Commission demanded a number of changes, including tightened exemptions for industrial customers, applying the surcharge to customers who generate their own power, and using it to support imported renewables. While most of these have been in the works for months, there was a last-minute exchange of memos that led to some additional changes.

Still, EU Energy Commissioner Günther Oettinger, also from Germany, told German radio that the problems “will not be solvable within this week.” With the legislature adjourning on July 11, the Commission will have to react to whatever is passed, which may lead to further revisions.

Dusseldorf energy lawyer Matthias Lang, author of the German Energy blog, agreed. “We will surely see a 2.1 version of the EEG soon.”

“A core element of the reform is that energy policy needs constant update,” Lang added. “We learned that from the FIT. If it is successful, it changes the market, and the law needs to change accordingly.”

Dealing with Costs

To lower the high surcharge, the reform will spread the cost to more customers by reducing the number of exempt industrial customers and apply it to customers that generate their own power.

Both measures have caused a predictable outcry. Duktus Pipe Systems, a small manufacturer in Wetzlar, complained that losing their exemption will cost €5,000 per employee, causing “a huge disadvantage for Duktus in tough international competition.”

For others, there are still too many exemptions. “Ninety percent of the industry can be exempted from the EEG surcharge,” said Oliver Krischer, the cochair of the Green Party in the Bundestag. “This means that households and small companies have to pay for the industry exemptions.”

Likewise applying the surcharge to customers who generate their own power, was especially controversial for the solar industry. The solar lobby group BSW and the Federation of German Consumer Organizations have announced plans to challenge the surcharge in court, if adopted.

Other reforms seek to limit future increases by more closely managing future growth.

The new law 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.

Now that solar prices have come down, some think the corridors are misguided. “Additional measures to throttle the expansion of PV through further amendments to the EEG will not affect a decrease in the total remuneration,” pointed out the Fraunhofer Institute. “Such a measure would, however, cause a slowdown in the construction of very inexpensive systems.”

The law also reduces the offshore wind goal to 6.5 GW by 2020, down from the current target of 10 GW. Offshore wind has run into development delays, largely due to high costs. Current FIT rates for offshore wind are now twice that of large solar systems. Offshore wind hasn’t been helped by ocean conservation laws that restrict development within 40 kilometers from shore, or the large number of sunken warships and unexploded bombs on the seabed, a legacy of two world wars.

FIT Phaseout, More Competitive Mechanisms

Perhaps the most fundamental reform is the plan to phase out the feed-in tariff as the primary mechanism for setting prices and procuring renewables. The law calls for a pilot program to test a “tendering” approach for ground-mounted solar. The federal network agency, Bundesnetzagentur, or BNetzA, will develop a competitive procurement system.

The process could be similar to California’s Renewable Auction Mechanism (RAM). The RAM is “a simplified market-based procurement mechanism” for renewable distributed generation (DG) projects between 3 and 20 MW, with periodic auctions run by the three investor-owned utilities in California. Utilities have signed contracts for 974 MW of renewables, predominantly solar, in four auctions over the last three years, with a fifth auction currently in the works.

However it is done, competitive procurement will be phased in by 2017, starting with larger projects. Developers will be encouraged, and then required, to market their power directly to power retailers or sell through the daily power exchange, rather than to their local distribution utility.

While it seems like a landmark change, it is in fact an evolution of current practices. Most onshore wind farms have already switched to direct marketing, receiving a fixed “marketing bonus” to ensure their revenues are equal to the FIT.

The new law will push all but the smallest producers to use the marketing bonus and direct marketing. The FIT will be used as a target price for determining the value of the marketing bonus, with the price set by tendering rather than by a government official.

Because of this, renewable producers will not be fully exposed to the market. They will be protected by policy supports.

“It looks much more market than it really is,” comments Lang. “But it is the nucleus for change and how it will work in the future.”

Impact on Utilities

What is less clear is how the EEG 2.0 reforms will affect German utilities, which have posted record losses in recent years. The reforms may make the market more predictable for planning, but they maintain the goal of 80% renewable power by 2050. And the fact remains that utilities have been slow to get into solar and onshore wind, and are steadily losing market share.

RWE, the third-largest electric marketer in Europe, has blamed a “crisis in conventional power generation” for losing €2.8 billion in 2013. The decline in power demand from the economic recession, plus the rapid growth of renewables, has led to a glut in capacity across the continent.

But Thomas Birr, head of Group Strategy & Corporate Development at RWE, sees a core role for utilities going forward.

“The decentralized energy world needs an ‘integrated energy manager,’” he told POWER in an interview. “In other words, someone to coordinate the many activities of the individual market players, someone to look after networking the various individual initiatives involved in the transformation of the energy system at a technical and economic level—to bring them all together as a single, integrated unit. We are taking care of this.”

The fate of RWE and other utilities may rest on the next item on the policy agenda, whether to add a capacity market to Germany’s energy-only wholesale market. Many conventional generators are getting pushed out by wind and solar, yet they are needed to maintain reliability. Merkel’s coalition government has announced this will be taken up after the EEG reform, and it is releasing a set of studies this month that will define the debate over the next year.

“I’m optimistic that [utilities] can adapt quickly,” said Lang. “People underestimate how much change they’ve gone through. They’ve taken a lot of hits but they are much different now because of the pressure.”

“They have to deal with the laws of physics, which you cannot change. The laws of politics are different, and they sometimes try to defy the laws of physics.”

“They’ve had a political problem with credibility, and politicians ignored their concerns. Will politics give them sufficient time to evolve a new business model? Sometimes I’m skeptical.”

Bentham Paulos is a freelance writer specializing in energy issues.

Image courtesy: Turelio/Wikimedia

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