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Germany's Renewable Energy Experiment: A Made-to-Order Catastrophe
ELECTR-6063; No of Pages 15
German Experience with Promotion of Renewable Energy In Germany, a system of subsidies has supported and encouraged the rapid expansion of renewable energy production. On the whole, these well-intentioned laws have proved to be an extraordinarily wasteful means of supporting improvements in environmental quality and reducing greenhouse gas emissions. Mathew Morey and Laurence Kirsch Mathew Morey is a Senior Consultant with Christensen Associates Energy Consulting. He specializes in renewable energy policy and pricing, transmission congestion management and pricing systems, market monitoring, market design, and incentive regulation. Laurence Kirsch is a Senior Consultant with Christensen Associates Energy Consulting. He specializes in economic analyses for the electric utility industry, including studies of wholesale markets, power pool operations, electric power system cost structures, reliability costs, market power, renewable portfolio standards, and greenhouse gas limitations.
June 2014,
Vol. 27, Issue 5
O
ut of concern for the effects of global climate change, the German people and their government have enthusiastically embraced renewable energy (RE) and have aggressively promoted it through the use of financial incentives embedded in retail electricity rates in the form of surcharges called feed-in tariffs. The relevant German policies, going back more than a decade, pay renewable resources abovemarket prices for their electricity, thereby encouraging investment in sources such as wind and solar power.
German energy policy has been enormously successful in increasing electricity production from renewable resources, but the costs to the German economy and to its citizens to achieve the environmental goal of significant reductions in emissions of GHGs seem to vastly exceed the benefits. Many of the costs associated with implementation of this wellintentioned policy were likely not imagined at the time of the policy’s creation. Nothing on this scale had ever been attempted before. Furthermore, it was simply not possible to know the future paths of the German,
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European, and world economy, and of worldwide energy prices. ermany has conducted a bold experiment to rapidly deploy renewable resources through a program of subsidizing RE rather than through reliance on the market forces that would have otherwise determined the growth of that sector and the degree of its penetration in electricity supply. That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S., in which states and the federal government are considering how best to address the challenges of mitigating the long-term effects of greenhouse gas (GHG) emissions. The first section of this report briefly summarizes the history of the German legislation in support of RE. Section II provides a history of the German electricity sector, including its prices. Section III presents information on the environmental, cost, price, and job impacts of German energy policy. The last section offers some concluding thoughts.
G
I. Historical Promotion of Renewable Energy Germany has a long history of promoting RE alternatives to conventional electricity technologies. In the late 1980s, Germany adopted several measures to create markets for RE generation technologies. In particular, Germany adopted a 2
wind program and a solar roof program, and created a legal basis for utilities to pay higher costs for RE than were competitive in the marketplace. In 1990, the German government enacted the Feed-In Law, which made use of feed-in tariffs to promote investment in renewable energy sources. Feedin tariffs (FITs), which are also called renewable tariffs or renewable energy payments, are a
That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S. retail electricity ratemaking mechanism by which utilities are more or less guaranteed recovery of their expenditures on thirdparty RE generation. The economic incentive for investment in RE is provided by high above-market governmentmandated prices for RE. FITs are the mechanism by which retail electricity consumers are forced to pay the above-market subsidies. They require consumers to reimburse electricity companies for the latters’ mandated abovemarket payments to owners of RE resources. The Feed-In Law required electric utilities to
connect RE generators to the grid and to buy the electricity at rates of 65 percent to 90 percent of the average tariff for final customers. RE generators were not required to negotiate contracts. In 2000, the German government adopted the Renewable Energy Sources Act (RESA),1 the declared purpose of which was to double RE production by 2010. RESA repealed the Feed-In Law of 1990 but maintained reliance on FITs to encourage the development of RE. In many respects, the law improved the incentives for RE generators in terms of rates and, most important of all, improved the long-term security of economic support for RE by guaranteeing RE generators would receive the subsidized rate set in year one for 20 years. Other elements of the law were designed to achieve a ‘‘grid parity’’ future for RE by annually reducing the FIT rate for new generation. RESA was revised in 2004 and again in 2009 to keep up with rapid changes in the RE economics. he German government is now attempting to address the growing economic problems created by the RESA subsidies for wind and solar renewables. On Jan. 21, 2014, Germany’s new energy minister, Sigmar Gabriel,2 indicated that the rapidly rising costs of RE resources risked losing public support and jeopardizing the competitiveness of the German industrial base. Gabriel said that annual consumer costs
T
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for renewables of about $32.5 billion were pushing the limits of what the German economy could handle. Proposed revisions to the Energy Transition Policy (Energiewende) would curb some of the subsidies paid to producers of electricity generated by solar and wind, cutting them by about one-third by 2015, while setting limits to improve control of the expansion of onshore wind and solar farms.
Table 1: German Feed-in Tariffs for On-shore Wind and Solar under RESA, 2010– 2013, Cents per kWha Technology Type
2010
On-shore wind Initial fee (first 5 years)
2011
2012
2013
12.09
12.56
11.48
11.38
Base fee (after 5 years)
6.59
6.85
6.26
6.35
Repowering Transmission system supporting
0.93 0.65
0.97 0.68
0.64 0.62
0.65 0.62
Small
51.92
40.01
31.40
22.52
Medium Large
49.39 46.73
38.05 36.00
29.86 28.25
21.35 19.05
Very large Own consumption (30 kW)
38.96 30.19
30.02 22.80
23.56 21.05
15.58 21.67
Free standing (10 MW)
37.79
30.73
24.11
15.58
Solar Rooftopb
II. German FIT Structure a
The RE legislation promises that RE plants will have access to the grid, and provides a subsidized rate, guaranteed for 20 years, this is determined by the technology and the vintage (year of investment) of the resource. The long-term rate guarantee ensures price certainty for investors. For RE plants coming into service, the FIT rate is reduced each year according to a predefined schedule. The reductions are technologyspecific so that they are aligned with the expected declines in each technology’s fixed and variable costs, and so that they encourage technology innovation and costefficiency. Table 1 illustrates the pattern followed by the FITs for on-shore wind and solar for the years 2010 to 2013. In each successive year, the FITs are reduced for the next vintage of plants. The table also highlights the significantly higher rates paid to solar than on-shore June 2014,
Vol. 27, Issue 5
Lang, M. and M. Mutschler, German Energy Blog, for years 2010 through 2013, http://www.germanenergyblog.de/. Feed-in tariffs have been converted from Euros to dollars using the average Euro-dollar exchange rate for each year. b For years 2010–2012, small was up to 30 kW, medium was 30 kW up to 100 kW, large was 100 kW up to 1 MW, and very large was >1 MW. For 2013, small was up to 10 kW, medium was 10 kW up to 40 kW, large was 40 kW up to 1 MW, and very large was 1 MW up to 10 MW.
wind, which in 2013 were about twice what wind received.3
III. Renewable Energy Penetration Table 2 summarizes German electricity production from 1990 to 2012 by RE type. The totals of electricity generated (GWh) by RE sources and all sources are presented in the right-side columns, along with the percentage shares of RE generated electricity. key implication of Table 2 is that RE generated electricity has grown significantly since the 2000 passage of RESA, reaching a share in 2012 that is roughly three times what it was in 2000. In correlation with the introduction of the generous
A
incentives from 2000 onward, wind (on- and off-shore) and PV solar are two principal sources of this rapid growth. The combined generation from these RE sources was 1.7 percent in 2000 and reached 12.5 percent by 2012. The third RE source is biomass, which increased from 0.8 percent in 2000 to 6.9 percent in 2012. In contrast, hydro declined from a share of 4.3 percent in 2000 to 3.6 percent in 2012. Figure 1 highlights the striking gap between on-shore wind’s contribution to RE electricity production and that of PV solar. The difference is not so surprising when one considers the fact that Germany has regions quite favorable to wind installations (in the east) but the country is not one of Europe’s sunnier climes.
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Table 2: German Renewable Energy Electricity Production (GWh) and Shares (%): 1990–2012a Year
RE Share (%)
GWh
Hydro
On-shore Wind
Off-shore Wind
Biomass
PV Solar
Geoth
Total RE Generated
Total Electricity Generated
1990 1991
15,580 15,402
71 100
1,434 1,471
1 2
– –
17,086 16,975
551,148 547,568
3.1 3.1
1992
18,091
275
1,558
3
–
19,927
538,573
3.7
1993 1994
18,526 19,501
600 909
1,636 1,875
6 8
– –
20,768 22,293
532,508 530,786
3.9 4.2
1995 1996
20,747 18,340
1,500 2,032
2,013 2,102
11 16
– –
24,271 22,490
539,356 548,537
4.5 4.1
1997
18,453
2,966
2,277
26
–
23,722
551,674
4.3
1998 1999
18,452 20,686
4,489 5,528
3,260 3,589
32 42
– –
26,233 29,845
558,149 552,685
4.7 5.4
2000 2001
24,867 23,241
9,513 10,509
4,737 5,207
64 76
– –
39,181 39,033
576,191 582,582
6.8 6.7
2002
23,662
15,786
6,038
162
–
45,648
585,231
7.8
2003 2004
17,722 19,910
18,713 25,509
8,247 10,077
313 556
– 0
44,995 56,052
599,933 609,263
7.5 9.2
2005 2006
19,576 20,042
27,229 30,710
14,025 18,685
1,282 2,220
0 0
62,112 71,657
614,972 617,736
10.1 11.6
2007
21,169
39,713
24,281
3,075
0
88,238
617,052
14.3
2008 2009
20,446 19,036
40,574 38,602
38
27,531 30,341
4,420 6,583
18 19
92,989 94,619
615,819 576,944
15.1 16.4
2010 2011
20,958 17,674
37,619 48,315
174 568
33,866 37,603
11,729 19,340
28 19
104,374 123,519
610,373 602,531
17.1 20.5
2012
21,200
45,325
675
40,850
28,000
25
136,075
594,216
22.9
a
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) based on information supplied by the Working Group on Renewable Energy-Statistics (AGEEStat), http://m.germany.info/contentblob/4125002/Daten/3903529/BMURESourcesFigures2012DD.pdf.
50%
IV. Renewable Energy and Electricity Prices
45%
Share of RE GWh (%)
40% 35%
A. Electricity price composition
30% 25% 20% 15% 10% 5% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0%
On- shore Wind Share
PV Solar Share
Figure 1: On-shore Wind and PV Solar Shares of RE Production, 1990–20124
4
Figure 2 summarizes the breakdown between net electricity prices (generation, transmission and distribution, metering, sales and marketing) and government taxes, levies and fees (including the RESA
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45.0 40.0 2.7 0.3 0.4 0.2
35.0 30.0 2.8 0.4 1.4 2.5
25.0 20.0 15.0
2.0 2.6
0.8 1.9 2.4
10.0 14.4 5.0
1.2 0.1 0.2 1.7 1.8
1.4 0.2 1.6 1.8
1.6 0.2 0.3 1.7 2.1
12.4 8.0
7.7
9.2
2.3 0.4 0.5 2.0 2.7
11.6
2.5 0.3 0.6 2.2
2.6 0.4 0.9 2.2
3.1
3.2
2.6 0.4 1.1 2.2
3.0 0.3 1.7 2.6
2.9 0.3 1.8 2.5
5.1
5.2
2.9 0.0 2.7 0.2 2.7 2.4
4.9
2.6 0.2 0.0 4.6
2.5 2.3 5.6
5.3
7.5 2.4 5.2
5.0
4.5
3.4
13.5 14.0 14.7
16.7
19.1 19.7
17.0
19.2 18.2 19.6
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 G,T,& D
VAT
Concession Chg
EEG Chg
CHP Chg
Strom-NEV Chg
Off-Shore Chg
Elec Tax
Figure 2: Composition of German Residential Electricity Prices, 1998 to 2013, ¢ per kWh5
surcharge). Since 2011, government taxes, levies and fees have amounted to about 50 percent of the nominal price per kWh paid by residential households in Germany. Figure 3 summarizes the composition of German residential electricity prices in 2013 and divides the total electricity price into costs associated with generation and delivery of electricity and taxes
and surcharges imposed by the government. Hence, in 2013, just under half of residential electricity bills7 went to pay Tax and Other Charges plus the RESA surcharge to subsidize RE, the Combined Heat & Power surcharge, and the Off-shore Liability charge (shown as the ‘‘RE + EE Charge’’ in the figure). Just over half of the residential electricity bill is composed of charges for generation (‘‘Energy
Distribuon Charge, 6.0
16% 29%
Transmission Charge, 9.7 Energy Charge, 4.0
25% RE + EE Charge, 7.5
20% 10%
Tax + Other Charges, 11.2
Figure 3: Composition of German Residential Electricity Price in 2013 (38.5¢ per kWh)6
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Charge’’), transmission, and distribution services. For the purpose of comparison, Figure 4 summarizes the average composition of residential electricity prices for a sample of 16 U.S. utilities in 2013.9 These utilities report separate line items for RE, EE, and related charges on residential bills. These utilities are not necessarily representative of the U.S., as their average per kWh rate of 16.1¢ per kWh is about 4¢ per kWh higher than the U.S. average price of 12.2¢ per kWh as reported by the Energy Information Administration for 2013. The RE and EE surcharges accounts for only 0.3¢ per kWh of the difference. The rest is due to many of the sample utilities being located in the Northeastern U.S. and California, where residential rates are above the national average.
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2% 6% 25%
Distribuon Charge, 4.0 Transmission Charge, 1.0 Energy Charge, 9.8
6%
RE + EE Charge, 0.3 Tax & Other Charges, 1.0
61%
Figure 4: Residential Electricity Price Composition for a Sample of U.S. Utilities that Include Surcharges for RE and EE on Bills (16.1¢ per kWh)8
T
he average RE plus EE surcharge observed in Figure 4 contributes about 2 percent to the residential bill in contrast to the RESA surcharges in Germany that comprise nearly 20 percent of the residential price of electricity. This suggests that Germany’s enthusiastic embrace of RE may be adding 10 times as much to the German residential rates as experienced in the United States. However, the key difference between the countries’ shares of RE subsidies in residential rates is that the share of RE in overall electricity production is much higher in Germany than in the United States. Were the U.S. to follow in Germany’s footsteps and increase RE’s penetration levels to that achieved in Germany, the price impacts likely would be much more similar. nother view of the rate impact of RE in the U.S. can be attained by examining the residential rate premiums set in
A
6
utility ‘‘green pricing’’ programs. Such programs offer customers an option to pay a premium for ‘‘green’’ energy produced (in most instances) by a range of RE technologies (e.g., biodiesel, biomass, geothermal, hydro, land fill gas, solar, and wind). The average residential premium for buying ‘‘green energy’’ in 2013 was 1.7¢ per kWh, based on a sample of 193 utilities that have established ‘‘green pricing’’ programs.10 Adding that average premium to the EIA U.S. 2013
1%
average residential rate increases it to about 13.9¢ per kWh, in which case RE and EE would comprise about 12.4 percent of the average residential bill. Figure 5 summarizes the composition of the industrial electricity price in Germany in 2012. The electricity tax (Stromsteuer), also referred to as the Eco-tax, is an indirect excise tax placed on consumption of electricity, introduced in 1999 as part of the law intended to encourage reduction in electricity consumption and to reduce GHG emissions.12 The Concession fee (konzessionsabgabe) is a license fee paid to municipalities and varies with the local government. For industrial customers, the maximum amount is 0.14¢ per kWh. Under the Combined Heat & Power Act (CHP), the levy is between 0.24¢ and 0.34¢ per kWh. It is instructive to note that the German industrial electricity price in 2012 was nearly equal to the residential rate in the U.S. in 2013.
8%
10%
Generaon, 6.2
41%
Network & Sales, 4.5 Eco-tax, 1.5
10%
EEG, 1.5 CHP, 0.2 Concession Fee, 1.2
30%
Figure 5: Composition of German Industrial Electricity Price in 2012, (15¢ per kWh) (VAT excluded)11
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Table 3: Total RESA Costs and Cost Shares for the Most Important RE Technologiesa 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total RESA costs in $US B
2.11
2.95
4.49
5.48
7.05
10.4
13.27
15.06
17.51
23.37
24.57
31.24
Wind power (%) Biomass (%)
64.5 10.4
65.1 12.5
63.7 14.1
54.3 17.7
47.1 23.0
44.5 27.4
39.5 29.9
31.5 34.3
25.2 32.2
16.7 17.9
11.0 19.4
15.7 17.8
Photovoltaics (%)
3.7
5.9
7.8
15.1
20.3
20.2
24.6
29.3
38.6
39.9
38.7
35.1
a
M. Frondel, C.M. Schmidt, C. Vance, Germany’s solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung (RWI), Table 2, p. 8. Original source, for 2002 to 2009: BDEW 2001–2010. For 2010: U¨BN (2011). For 2011 to 2013, estimates are based on information obtained from Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Renewable Energy Sources In Figures: National and International Development, Electricity Quantities and Payment Under Renewable Energy Sources Act (EEG), table at p. 35, and Development of EEG Differential Costs from 2001 to 2013, table at p. 37.
V. Renewable Energy Shares of RESA Costs Table 3 summarizes the total RESA costs over the period 2002 to 2013 in billions of U.S. dollars. Over this period, RESA costs rose 14-fold. The table also shows the shares of that cost associated with wind, biomass, and PV solar. The shares do not sum to 100 percent because the table does not include all categories of RE that receive remuneration based on the RESA. olar has been the favored technology from the standpoint of subsidies provided through the FIT. Solar electricity provided 18.5 percent of the total electricity produced in 2012 by subsidized REs, but received approximately 38.7 percent of the total $24.57 billion in RESA-related payments made by German electricity consumers. In contrast, on-shore wind installations contributed 35.6 percent of the electricity produced by subsidized RE in 2012, but received 11.0 percent of the RESA-related payments in that year. The reason for the significant difference between the shares of PV and on-shore wind production
S
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and the shares of RESA-related revenue is the generous subsidy flowing to solar electricity. For example, PV installed in 2006 could receive up to 65¢ per kWh, which was nearly 10 times higher than the wholesale market price for electricity and almost six times the FIT rate for wind, which was about 11¢ per kWh. This pronounced difference was well out of proportion to the contributions each made to total electricity production, a reflection of solar’s relatively lower technical efficiency and Germany’s unfavorable geographic location.
VI. Economic Impacts of German Energy Policy A. Retail electricity price impacts In Germany, the costs of German and European Union energy policies designed to reduce GHG emissions and to promote RESA have been allocated primarily to residential and smaller commercial customers. There are two
mechanisms that have shifted this cost burden away from industrial customers. First, the European Union Energy Trading System (EU ETS)13 and the European Union’s corresponding state aid guidelines allow the member states to compensate energyintensive industries for the carbon costs priced into the wholesale electricity market.14 The corresponding ruling for Germany, which has been in force since Jan. 2013, allows for the compensation of a sizeable proportion of the carbon cost mark-up on the wholesale market.15 The ruling stipulates that, in 2013, a company can be reimbursed for 85 percent of the reference cost mark-up for 760 g of CO2 per kWh, based on sectorspecific electricity consumption values. With a real carbon cost mark-up on approximately 900 g of CO2 per kWh in the Continental European market, this amounts to compensation of approximately 70 percent of the carbon costs effectively priced into the wholesale electricity market. With a medium carbon price of $6.03/ MWh for the first half of 2013,
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compensation amounts to about $4.22 per MWh,16 which can be subtracted from an electricity price of approximately $50 per MWh, implying an effective cost of procuring electricity via the wholesale market of less than $46 per MWh.17 econd, energy-intensive companies can be largely exempted from paying network access fees if they meet certain criteria.18 Pursuant to the German Electricity Network Charges Ordinance (StromNEV), companies can negotiate individual network access fees and can have themselves entirely exempted from network access fees if use exceeds 7,000 hours and 10 GWh from a single consumption point on the grid, and the ratio of electricity cost to gross value creation exceeds 15 percent.19 Most energy-intensive industrial consumers qualify under these criteria. This treatment of industrial customers results in a revenue shortfall for distribution utilities. Utilities recover this shortfall by spreading the costs to all electricity consumers. In 2013, industrial customers’ share of this cost spreading amounted to $0.33 per MWh, which was negligible relative to what they saved due to their exemption from paying network access fees. n addition, individual network access fees may be arranged if a company’s peak load does not coincide with the utility’s coincident peak load. In such instances, industrial
S
I
8
customers may be awarded discounts of up to 80 percent of the network access fees. In the case of steel companies, for example, the discounts are at least 30 percent to 40 percent of the network access fees. While the exemption from transmission access fees is on its face different from treatment of specific industries under the EU
Commission’s guidelines to mitigate the cost impacts of the EU ETS, it in effect achieves the same result of partially insulating industrial electricity consumers from the effects of RESA surcharges, which the German government could not do directly without violating EU Commission rules in effect prior to 2013. B. The cost of subsidizing renewable energy in Germany20 The four major German utilities and the Federal Network Agency and grid authority raised the surcharge that customers pay on
their utility bills to fund RE in 2013 from 4.62¢ per kWh in 2012 (yielding $26.2 billion) to 6.98¢ per kWh21 (yielding about $38.5 billion). In Oct. 2013, they announced a further increase to 8.0¢ per kWh for 2014, taking the annual surcharge on consumers to about $45.4 billion. This surcharge covers the increasing share of electricity produced from renewables and the utilities’ obligations to pay renewables at rates that greatly exceed wholesale market prices. For example, utilities are forced to pay 23.8¢ per kWh for PV solar that they can sell in the wholesale spot market for only 5.9¢ per kWh or less. Consequently, the 2013 RESA FITs will cost electricity consumers about $38.5 billion, compared to projected revenues from the sale of RE electricity in the wholesale spot market of about $3.4 billion. The subsidy flowing from consumers to RE in 2013 is thus about $35 billion. The RESA surcharge is due primarily to the excess of payments to RE through the FITs relative to the wholesale market value of the electricity RE produces. The enormity of this subsidy and its perverse economic impact has compelled the government to cap the surcharge through the end of 2014 and limit annual increases to 2.5 percent. The government also plans to tighten industry exemptions and possibly cut FITs for wind and biomass plants, calling into question investment security for those technologies.
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C. GHG reductions and costs In 2012, RE resources supported by the RESA produced 136.1 billion kWh of electricity, which was about 23 percent of the electricity generated to serve enduse customers. This electricity avoided an estimated 81 million tons of CO2 equivalent. Because the total RESA cost for RE was about $26.2 billion for energy that would have only received about $5.2 billion in the wholesale spot market, RESA cost German end use consumers about $21.0 billion. ermany’s cost of subsidizing REs to lower GHGs was about $259 per ton of CO2 reduction (i.e., $21.0 billion divided by 81 million tons) in 2012. The Certified Emission Credits traded on the Intercontinental Exchange in 2012 averaged about $3.26 per ton. This means that REs were paid $21.0 billion above wholesale spot market value for environmental benefits that have a market value of only $0.3 billion or, equivalently, could have been provided by emissionreducing alternatives that would have cost only $0.3 billion. Thus, German electricity consumers overpaid about $20.8 billion for the 81 million ton reduction in CO2. A recent report from the MIT Center for Energy and Environmental Research compares the implicit carbon price embodied in Germany’s RESA incentive schemes
with the price of European Union Allowances (i.e., emission credits).22 The comparison takes into account all the relevant costs and cost savings associated with the use of RE, but does not consider transmission and distribution costs nor benefits such as energy security, innovation, jobs, and non-CO2 emissions. The report uses the
G
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CO2 abatement estimates for the years 2006 to 2010 provided by Weigt et al.23 To avoid problems of the front-end loaded costs of the RE schemes, remunerations to RE were levelized for each investmentyear cohort over an assumed 25-year life.24 The results of this analysis are summarized in Table 4. With respect to wind and solar, the report’s conclusions are: CO2 abatement costs of wind are relatively low, averaging $60 per ton during the 2006–2010 period, and CO2 abatement costs of solar are very high, averaging $683 per ton during the 2006–2010 period.
D. Impact on conventional generation In Germany, more electricity was produced from brown coal (i.e., lignite) in 2013 than at any point since German unification in 1990.25 Germany is the biggest producer of brown coal in the world. Lignite-fueled power plants are responsible for about 21 percent of Germany’s electricity production. Supporters say burning lignite produces fewer harmful emissions than burning hard (i.e., anthracite) coal. However, since 2009, electricity production from brown coal has risen by 11.3 percent, from 146 billion kWh to 162 billion kWh, and production from hard coal (responsible for 16 percent of total German production in 2013) has increased by an even greater amount, 14.9 percent. At the same time, electricity production from natural gas has declined by 18.5 percent. The increased coal-fired production is partly the result of the increased share of REproduced electricity and the low capacity factors of wind and solar PV that require backup from conventional power plants. In addition to brown coal, hard coal is experiencing a renaissance in Germany as a result of the confluence of the depressive effects that RE production has on wholesale spot market prices, the high natural gas prices that put combustion turbines out of the market, and the nearly record-low worldwide prices for hard coal that make power plants fueled by
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Table 4: Estimates of CO2 Abatement Costs in Germany for On-Shore Wind and Solar PV, 2006–2010a Wind
2006
2007
2008
2009
2010
3,361
3,925
4,481
4,574
4,611
4,191
Additional start-up cost
(8)
(19)
(7)
3
5
(5)
Additional balancing cost Fuel cost saving
77 (1,512)
108 (2,163)
119 (2,813)
107 (1,849)
101 (1,794)
102 (2,026)
Carbon cost saving Capacity saving
(478) (133)
(42) (160)
(644) (191)
(560) (202)
(533) (210)
(452) (179)
Net cost (mm $)
1,306
1,649
944
2,073
2,181
1,631
CO2 emission reduction (mm tons)
28
36
47
42
36
38
Abatement cost ($/ton)
59
63
30
69
81
60
Economic impacts (mm $) Levelized remuneration
Average
2006
2007
2008
2009
2010
Average
Levelized remuneration
1,213
1,852
2,784
4,018
5,974
3,168
Additional start-up cost Fuel cost saving
(3) (134)
(4) (170)
(1) (312)
(14) (326)
(553)
(4) (299)
Carbon cost saving Net cost (mm $)
(35) 1,041
(1) 1,676
(119) 2,352
(91) 3,587
(150) 5,270
(79) 2,785
CO2 emission reduction (mm tons)
3
3
6
7
9
5
Abatement cost ($/ton)
521
838
588
717
753
683
Solar Economic impacts (mm $)
a
C. Marcantonini, The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany and Italy, CPRU Workshop on Renewable Costs, Florence, Italy, May 24, 2013, p. 21. All values converted from Euros in the original to US dollars.
hard coal significantly more profitable.26 n Nov. 2013, Steag GmbH started the first new coal-fired generator to go into operation in Germany since 2005. It marks the start of Germany’s biggest newbuild program for hard coal stations since market liberalization in 1998. Ten new hard-coal power stations totaling 7,985 MW are scheduled to start producing electricity within the next two years.27 eter Terium, the head of the German power company RWE, is reported to have said that
I
P
10
nuclear energy might be phased out even earlier than the government has planned under the Energy Transition Policy, given that it is no longer profitable. ‘‘It would not be responsible to allow a reactor to continue to run when it is losing money every day,’’ Mr. Terium said.28 E. Investment in renewable energy technologies Germany’s energy policy aimed at encouraging aggressive investment in RE resources, solar
PV and wind in particular, has been successful in terms of increasing the numbers of RE facilities and the quantity of energy produced by renewable resources, but has accomplished this at a cost that is huge relative to the energy and environmental values provided by those resources. Figure 6 compares the total capacity in MW of PV solar resources in Germany to capacity elsewhere in the world in 2011. Germany has nearly twice the capacity of the second-leading country (Italy). As explained above, this success in numbers of
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Figure 6: Total Photovoltaic Capacities in Selected Countries in 2011 (MW)29
MW has come at the cost of a vast waste of resources. F. Job creation RE promotion is frequently justified by the associated impacts on job creation. In Germany, gross employment generated by economic activities connected with RE in 2012 totaled 377,800. Of these jobs, 73 percent (275,794) are connected with installation and use of electricity generation
facilities, 21 percent (79,338) can be attributed to heat generation facilities, and the remaining 6 percent to production of biofuels for transport.30 he number of jobs that has been ascribed to the impact of the RESA in 2012 totaled 268,000. Of those, 117,900 were in wind energy, 87,800 were in PV, and 59,400 were in biomass. The number of people working in hydropower amounted to 1,700 and a further 1,200 jobs were in
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geothermal energy. As Figure 7 illustrates, the number of jobs generated by RESA in 2004 was 98,000 out of a total of 160,500 (61 percent) RE-related jobs. By 2012, RE industry jobs attributable to RESA reached 268,000 out of a total of 377,800 (71 percent), down one percentage point from the high reached in 2011. These estimates suggest a rosy outlook for gross employment growth. On the contrary, they hide the overall welfare effects that will arise from offsetting economic impacts, the most important of these being job losses associated with the reduction in demand for relatively cheaper conventional energy generation. In addition, there is the indirect effect on consumers and commerce in upstream markets that must support the subsidies for RE. Higher electricity prices raise businesses’ costs and consumers’ overall cost of living, thus placing a significant drag on economic
Figure 7: Employment Levels in the German RE Industry and Generated by RESA, 2004 to 201231
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activity. Consumers’ overall net loss of purchasing power due to higher electricity prices in 2013 was approximately $21.0 billion ($26.2 billion retail electricity cost minus $5.2 billion wholesale electricity value), with environmental benefits equal to a scant 2 percent of that loss. Investment in productive capacity by many industrial customers may be inhibited or constrained by their higher electricity costs and by their loss of sales due to consumers’ reduced purchasing power. Hence, the burden that RE subsidies impose on residential, commercial, and industrial consumers diverts a flow of funds away from alternative, more beneficial, investments. Overall, RESA’s drag on consumption and investment expenditures leads to negative employment effects and raises serious doubts about whether its overall employment effects are in fact positive. hether favorable conditions on the international market prevail for the RE industry in Germany is highly questionable, particularly given negligible or even negative net exports in recent years. According to a 2013 government report, ‘‘[e]xport of installations, components, biomass and biofuels for transport accounted for a total of 98,800 jobs or 26 percent of employment’’ in the RE sector in Germany.32 The latest report from the German government indicates that the solar PV industry in
W
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Germany is suffering mightily from the influx of less expensive imports. Unable to keep up with competition from Chinese producers, big solar producers such as Conergy, Solon, and QCells have all registered for insolvency over the past few years. With their demise came job losses. Figures from the Federal Office for Statistics, as reported by
wind turbines, which at times can overload the grid and threaten grid stability. The grid is particularly vulnerable during public holidays when electricity consumption is significantly reduced but when wind production can nevertheless be significant, at times producing up to four times more than demand. Consequently, system operators must intervene to maintain network stability. ccording to a report issued by the German grid operator (Bundesnetzagentur), the German transmission system experienced severe stability problems in 2011 and 2012 that required operator interventions to maintain system security. Acknowledging that the significant penetration of RE sources contributed to this instability, the report states:
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the Frankfurter Allgemeine Zeitung (FAZ), revealed a huge drop. Solar energy jobs in Germany fell from 10,200 at the beginning of 2012 to below 5,000 in 2014. The number of working hours available to those who remain employed in the sector is 625,000 compared with 1,400,000 hours at the beginning of 2012. In an attempt to control the decline, the EU imposed a tax on imported PV panels last summer.33 G. Grid stability and industrial production34 The eastern part of Germany is home to over one third of its
The situation in the electricity grid in the winter of 2011/2012 was severely strained. . . . If more electricity from renewable sources is sold than can be transported by the network, this results in added strain on the network via corresponding price signals, as the conventional plants are demoted in the merit order and the additional exports from Germany appear on the single market [the wholesale spot market]. In the opinion of the Bundesnetzagentur, the existing legal framework has scope for measures from the transmission system operators to limit sales to volumes that can actually be transported. Nevertheless, normative clarification would seem to be advised. . . There are no
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effective technical measures that could act as a substitute for grid expansion.35
A
long the same lines, Jochen Homann, president of Bundesnetzagentur, recently said that Germany’s power system is ‘‘showing signs of declining security of supply’’ as renewable generation capacity strains the grid. Because of these strains, Bundesnetzagentur curtailed renewable energy production an astonishingly high 82 percent of all hours (7,200 hours) in 2012, up from an already high 21 percent of all hours (1,800 hours) in 2011.36
VII. Conclusions Germany has used various systems of subsidies to dramatically expand RE generation in Germany. This has come at a very high price, however: German electricity prices are substantially higher than they would otherwise be; Germany’s international
H. Energy security37 Increased energy security resulting from decreased reliance on fuel imports has frequently been offered as an argument to support RE promotion. However, this argument works on the presumption that sun and wind are sufficiently abundant, which in Germany they are most definitely not. Consequently, backup fossil-fired generation (coal plants in particular) must remain in place to ensure grid reliability. Maintenance of backup systems is costly (e.g., maintenance costs were $741 million in 2006).38 Increased energy security afforded by reliance on RE sources is offset by reliance on other fuel sources for backup energy, which includes natural gas (which is almost entirely imported), and now increased reliance on new coalfired generation. June 2014,
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economic competitiveness has been compromised; the job benefits are dubious; and environmental improvements have come at enormous cost relative to how equivalent benefits might have been achieved by alternate means. The German experience thus stands as a warning to other jurisdictions. Environmental protection can certainly be achieved by other means at substantially lower cost. The German experiment with subsidizing RE provides valuable lessons for the rest of the world, including the United States. First, government promotion of RE through subsidies financed by retail electricity consumers
distorts both consumption and investment decisions relative to what would take place if RE were left to succeed or fail on its merits in a competitive wholesale electricity marketplace. The German experience demonstrates that it is difficult to anticipate correctly the reaction of investors and consumers and of RE supply and demand to such subsidies and retail price distortions. Consequently, the government finds itself constantly tinkering with rules, regulations and price subsidies in an attempt to control electric sector consumption, investment, and financial impacts. Second, governments do not do well at picking electric generation technology winners and losers. The physics of the electricity grid and the operation of electricity markets automatically make all generation technologies interrelated, operationally and financially. Without a technological breakthrough in energy storage in the immediate future, the intermittency of wind and solar resources, especially at the penetration levels achieved in Germany, requires a continued investment in conventional generating technology to both back up the RE with ancillary services as well as to ‘‘fill the energy gap’’ when RE does not produce. hird, the rate impacts and operational difficulties experienced in Germany offer a valuable lesson for the U.S. of the risks and unintended
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consequences that can result from inefficient promotion of RE expansion. RE expansion requires long-range planning and strategic collaboration among stakeholders that will enable RE resources to provide the full value to power system operations.& Endnotes:
Electricity prices for residential consumers, from 2007 onwards – biannual, obtained at: http:// epp.eurostat.ec.europa.eu/portal/ page/portal/product_details/ dataset?p_product_code=NRG_ PC_204 7. 19.5% equals 7.5¢ divided by 38.5¢. 8. The figure presents the unweighted average electricity price across 16 U.S. utilities, for a residential household consuming 500 kWh per month. The 16 sample utilities are: Ameren –
1. This is also known as the Act on Granting Priority to Renewable Energy Sources, or ErneuerbareEnergien-Gesetz (EEG). 2. Gabriel is chairman of the Social Democratic Party, which formed a coalition government in Dec. 2013 with Merkel’s Christian Democrats.
12. The Eco-tax was part of a legislative package that taxed industrial electricity consumption as a means of financing central government contributions to local government pensions.
4. Based on data in Table 2.
6. The household consumption assumed in this example is 450 kWh per month. Shares will be somewhat different for households consuming different monthly amounts. The figure is based on data obtained from European Commission, Eurostat,
14
10. U.S. Department of Energy, Energy Efficiency and Renewable Energy, Green Pricing, Utility Programs by State, obtained at http:// apps3.eere.energy.gov/greenpower/ markets/pricing.shtml?page=1, based on a study by the National Renewable Energy Laboratory. 11. Based on 2012 data obtained from N. G. B. Morgantini, C. Camporeale, and A. Purpura, A comparison of taxes and other system charges on electricity prices in Europe, 12th IAEE European Energy Conference, Sept. 2012.
3. Solar contributes a much smaller share of the total kilowatt-hours produced by REs (21 percent in 2013) each year than does on-shore wind (33 percent in 2013).
5. BDEW Bundesverband der Energie- und Wasserwirtschaft e.V., Energie-Info: Erneuerbare Energien und das EEG: Zahlen, Fakten, Grafiken, Jan. 31, 2013, Figure 21, p. 41. G, T, & D = Generation, Transmission & Distribution; VAT = value added tax; Concession Chg = concession fee paid to local authorities; EEG Chg = RESA surcharge; CHP Chg = surcharge for combined heat & power facilities; Strom-NEV Chg = transmission grid access fee; Off-Shore Chg = off-shore liability surcharge that compensates off-shore wind developers for delays in interconnecting to the grid or for disruptions in transmission service; and Elec Tax = German government electricity tax. Total price may differ slightly from total shown in EX-1 due to rounding.
apples-to-apples comparison with residential electricity prices and the EEG surcharge in Germany, it would be necessary to conduct a comprehensive analysis of U.S. utilitylevel expenditures on RE energy and capacity relative to wholesale market prices, utility avoided costs, transmission costs, and ancillary service costs. Such a study is beyond the scope of this report.
Illinois (IL), Baltimore Gas & Electric (MD), Commonwealth Edison (IL), Connecticut Light & Power (CT), Consumers Power (MI), Dominion Virginia Power (VA), Empire District Electric Company (MO and KS), National Grid (MA), NSTAR Electric and Gas (MA), NV Energy (NV), Pennsylvania Electric (PA), PEPCO (MD and DC), Public Service Electric & Gas (NJ), Public Service New Hampshire (NH), Sacramento Municipal Utility District (CA), and Weststar Energy (KS). In the figure, the Distribution Charge includes Customer and Distribution Charges. Taxes & Other Charges include state and local taxes, stranded cost recovery charges for states that enacted retail competition and various other charges that could not be classified in the other categories. 9. To accurately determine the share that RE and EE resources hold in U.S. residential rates and to permit an
13. The EU ETS is described in detail in the Appendix. 14. Communication from the Commission, Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012 (OJ EU C 158, 5 June 2012, p. 4) says, ‘‘The European Commission has adopted a framework under which Member states may compensate some electrointensive users, such as steel and aluminium producers, for part of the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme (ETS) as from 2013. The rules ensure that national support measures are designed in a way that preserves the EU objective of decarbonising the European economy and maintains a level playing field among competitors in the internal market. The sectors deemed eligible for compensation include producers of aluminium,
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copper, fertilisers, steel, paper, cotton, chemicals and some plastics. . . . They aim to mitigate the impact of indirect CO2 costs for the most vulnerable industries, thereby preventing carbon leakage which would undermine the effectiveness of the EU ETS. At the same time, the rules have been designed to preserve the price signals created by the EU ETS in order to promote a cost-effective decarbonisation of the economy. They are also designed to minimise competition distortions in the internal market by avoiding subsidy races within the EU at a time of economic uncertainty and budgetary discipline. . . . The rules allow subsidies of up to 85% of the increase faced by the most efficient companies in each sector from 2013 to 2015, a cap that will gradually fall to 75% in 2019–2020.’’ 15. German Federal Ministry of Economics and Technology (BMWi), Directive on state aid for companies in sectors/subsectors in relation to which the assumption is made that there is a considerable risk of ‘carbon leakage’ due to the costs relating to EU ETS certificates being priced into electricity prices (state aid for indirect carbon costs), Jan. 30, 2013 (German Federal Gazette, BAnz AT 07.02.2013 B1). 16. $4.22 = $6.03 0.70. 17. Compensation of carbon costs priced in to the wholesale electricity market was not permissible prior to 2013. 18. The exemption afforded large industrial electricity users was intended to ensure that they remained competitive on the international level. 19. Electricity Network Charges Ordinance (StromNEV) dated Jul. 25, 2005 (Federal Law Gazette BGBl. I, p. 2,225), as amended by Article 4 of the Act dated Jul. 28, 2011 (BGBl. I, p. 1,690). 20. Estimates of RE remuneration and wholesale market revenues reported in this section are based on World Nuclear Association, Energy Subsidies
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and External Costs, obtained at http:// www.world-nuclear.org/info/ Economic-Aspects/Energy-Subsidiesand-External-Costs/ 21. Note that the difference between the 6.98¢ per kWh surcharge here and the 7.5¢ per kWh surcharge found in Figure 3 is the addition of the CHP levy and Off-Shore Liability charge. 22. C. Marcantonini, and A.D. Ellerman, The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany, Center for Energy and Environmental Research, Massachusetts Institute of Technology, Feb. 1, 2013. 23. H. Weigt, E. Delarue, and D. Ellerman, Co2 Abatement From REs Injections In The German Electricity Sector: Does A CO2 Price Help?, European University Institute Working Papers, RSCAS 2012/18, Robert Schuman Centre For Advanced Studies, Climate Policy Research Unit. 24. Inflation was assumed to be 2 percent per annum and capacity factors were assumed to be 18 percent. 25. AG Energiebilanzen, E.V., Bruttostromerzeugung in Deutschland von 1990 bis 2013 nach Energietra¨gern, obtained at http://www.agenergiebilanzen.de/
german-energy-official-sounds-awarning.html?_r=0 29. M. Frondel, C. M. Schmidt, C. Vance, Germany’s solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: RheinischWestfa¨lisches Institut fu¨r Wirtschaftsforschung (RWI), Fig. 1, p. 5. 30. Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Short- and longterm impacts of the expansion of renewable energy on the German labour market: annual report on gross employment; Gross employment from renewable energy in Germany in 2012 – a first estimate, Mar. 2013. 31. Id., Fig. 3, p. 8. 32. Id. 33. The Local: Germany’s News in English, ‘‘Solar energy jobs halve in two years,’’ http://www.thelocal.de/ 20140128/germany-solar-energy-jobshalved-in-past-two-years 34. This section is partly based on Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, Oct. 2009, p. 24. 35. Bundesnetzagentur, Report on the State of the Grid-based Energy Supply in Winter 2011/2012, May 3, 2012.
26. Natural gas prices in Europe are pegged to oil prices in long-term contracts and with oil prices at or near $100 per barrel, natural gas has become a relatively expensive fuel for electricity production.
36. ‘‘Germany’s Retail Tariffs Now Decoupled from Wholesale Rates,’’ The Electricity Journal, Nov. 2013, 26(9): 7–8.
27. Mengewein, J., ‘‘Steag Starts CoalFired Power Plant in Germany,’’ Bloomberg News, Nov. 15, 2013, at http://www.bloomberg.com/news/ 2013-11-15/steag-starts-germany-sfirst-coal-fired-power-plant-in-8years.html
37. A portion of this section is based on information obtained from Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, Oct. 2009, p. 24.
28. Eddy, M., ‘‘German Energy Official Sounds a Warning,’’, The New York Times, Jan. 21, 2014, http:// www.nytimes.com/2014/01/22/ business/energy-environment/
38. G. Erdmann, Indirekte Kosten der EEG-Fo¨rderung: Kurz-Studie im Auftrag der WirtschaftsVereinigung Metalle (WVM), Technische Universita¨t Berlin, Aug. 2008, p. 32.
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German Experience with Promotion of Renewable Energy In Germany, a system of subsidies has supported and encouraged the rapid expansion of renewable energy production. On the whole, these well-intentioned laws have proved to be an extraordinarily wasteful means of supporting improvements in environmental quality and reducing greenhouse gas emissions. Mathew Morey and Laurence Kirsch Mathew Morey is a Senior Consultant with Christensen Associates Energy Consulting. He specializes in renewable energy policy and pricing, transmission congestion management and pricing systems, market monitoring, market design, and incentive regulation. Laurence Kirsch is a Senior Consultant with Christensen Associates Energy Consulting. He specializes in economic analyses for the electric utility industry, including studies of wholesale markets, power pool operations, electric power system cost structures, reliability costs, market power, renewable portfolio standards, and greenhouse gas limitations.
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O
ut of concern for the effects of global climate change, the German people and their government have enthusiastically embraced renewable energy (RE) and have aggressively promoted it through the use of financial incentives embedded in retail electricity rates in the form of surcharges called feed-in tariffs. The relevant German policies, going back more than a decade, pay renewable resources abovemarket prices for their electricity, thereby encouraging investment in sources such as wind and solar power.
German energy policy has been enormously successful in increasing electricity production from renewable resources, but the costs to the German economy and to its citizens to achieve the environmental goal of significant reductions in emissions of GHGs seem to vastly exceed the benefits. Many of the costs associated with implementation of this wellintentioned policy were likely not imagined at the time of the policy’s creation. Nothing on this scale had ever been attempted before. Furthermore, it was simply not possible to know the future paths of the German,
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European, and world economy, and of worldwide energy prices. ermany has conducted a bold experiment to rapidly deploy renewable resources through a program of subsidizing RE rather than through reliance on the market forces that would have otherwise determined the growth of that sector and the degree of its penetration in electricity supply. That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S., in which states and the federal government are considering how best to address the challenges of mitigating the long-term effects of greenhouse gas (GHG) emissions. The first section of this report briefly summarizes the history of the German legislation in support of RE. Section II provides a history of the German electricity sector, including its prices. Section III presents information on the environmental, cost, price, and job impacts of German energy policy. The last section offers some concluding thoughts.
G
I. Historical Promotion of Renewable Energy Germany has a long history of promoting RE alternatives to conventional electricity technologies. In the late 1980s, Germany adopted several measures to create markets for RE generation technologies. In particular, Germany adopted a 2
wind program and a solar roof program, and created a legal basis for utilities to pay higher costs for RE than were competitive in the marketplace. In 1990, the German government enacted the Feed-In Law, which made use of feed-in tariffs to promote investment in renewable energy sources. Feedin tariffs (FITs), which are also called renewable tariffs or renewable energy payments, are a
That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S. retail electricity ratemaking mechanism by which utilities are more or less guaranteed recovery of their expenditures on thirdparty RE generation. The economic incentive for investment in RE is provided by high above-market governmentmandated prices for RE. FITs are the mechanism by which retail electricity consumers are forced to pay the above-market subsidies. They require consumers to reimburse electricity companies for the latters’ mandated abovemarket payments to owners of RE resources. The Feed-In Law required electric utilities to
connect RE generators to the grid and to buy the electricity at rates of 65 percent to 90 percent of the average tariff for final customers. RE generators were not required to negotiate contracts. In 2000, the German government adopted the Renewable Energy Sources Act (RESA),1 the declared purpose of which was to double RE production by 2010. RESA repealed the Feed-In Law of 1990 but maintained reliance on FITs to encourage the development of RE. In many respects, the law improved the incentives for RE generators in terms of rates and, most important of all, improved the long-term security of economic support for RE by guaranteeing RE generators would receive the subsidized rate set in year one for 20 years. Other elements of the law were designed to achieve a ‘‘grid parity’’ future for RE by annually reducing the FIT rate for new generation. RESA was revised in 2004 and again in 2009 to keep up with rapid changes in the RE economics. he German government is now attempting to address the growing economic problems created by the RESA subsidies for wind and solar renewables. On Jan. 21, 2014, Germany’s new energy minister, Sigmar Gabriel,2 indicated that the rapidly rising costs of RE resources risked losing public support and jeopardizing the competitiveness of the German industrial base. Gabriel said that annual consumer costs
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for renewables of about $32.5 billion were pushing the limits of what the German economy could handle. Proposed revisions to the Energy Transition Policy (Energiewende) would curb some of the subsidies paid to producers of electricity generated by solar and wind, cutting them by about one-third by 2015, while setting limits to improve control of the expansion of onshore wind and solar farms.
Table 1: German Feed-in Tariffs for On-shore Wind and Solar under RESA, 2010– 2013, Cents per kWha Technology Type
2010
On-shore wind Initial fee (first 5 years)
2011
2012
2013
12.09
12.56
11.48
11.38
Base fee (after 5 years)
6.59
6.85
6.26
6.35
Repowering Transmission system supporting
0.93 0.65
0.97 0.68
0.64 0.62
0.65 0.62
Small
51.92
40.01
31.40
22.52
Medium Large
49.39 46.73
38.05 36.00
29.86 28.25
21.35 19.05
Very large Own consumption (30 kW)
38.96 30.19
30.02 22.80
23.56 21.05
15.58 21.67
Free standing (10 MW)
37.79
30.73
24.11
15.58
Solar Rooftopb
II. German FIT Structure a
The RE legislation promises that RE plants will have access to the grid, and provides a subsidized rate, guaranteed for 20 years, this is determined by the technology and the vintage (year of investment) of the resource. The long-term rate guarantee ensures price certainty for investors. For RE plants coming into service, the FIT rate is reduced each year according to a predefined schedule. The reductions are technologyspecific so that they are aligned with the expected declines in each technology’s fixed and variable costs, and so that they encourage technology innovation and costefficiency. Table 1 illustrates the pattern followed by the FITs for on-shore wind and solar for the years 2010 to 2013. In each successive year, the FITs are reduced for the next vintage of plants. The table also highlights the significantly higher rates paid to solar than on-shore June 2014,
Vol. 27, Issue 5
Lang, M. and M. Mutschler, German Energy Blog, for years 2010 through 2013, http://www.germanenergyblog.de/. Feed-in tariffs have been converted from Euros to dollars using the average Euro-dollar exchange rate for each year. b For years 2010–2012, small was up to 30 kW, medium was 30 kW up to 100 kW, large was 100 kW up to 1 MW, and very large was >1 MW. For 2013, small was up to 10 kW, medium was 10 kW up to 40 kW, large was 40 kW up to 1 MW, and very large was 1 MW up to 10 MW.
wind, which in 2013 were about twice what wind received.3
III. Renewable Energy Penetration Table 2 summarizes German electricity production from 1990 to 2012 by RE type. The totals of electricity generated (GWh) by RE sources and all sources are presented in the right-side columns, along with the percentage shares of RE generated electricity. key implication of Table 2 is that RE generated electricity has grown significantly since the 2000 passage of RESA, reaching a share in 2012 that is roughly three times what it was in 2000. In correlation with the introduction of the generous
A
incentives from 2000 onward, wind (on- and off-shore) and PV solar are two principal sources of this rapid growth. The combined generation from these RE sources was 1.7 percent in 2000 and reached 12.5 percent by 2012. The third RE source is biomass, which increased from 0.8 percent in 2000 to 6.9 percent in 2012. In contrast, hydro declined from a share of 4.3 percent in 2000 to 3.6 percent in 2012. Figure 1 highlights the striking gap between on-shore wind’s contribution to RE electricity production and that of PV solar. The difference is not so surprising when one considers the fact that Germany has regions quite favorable to wind installations (in the east) but the country is not one of Europe’s sunnier climes.
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Table 2: German Renewable Energy Electricity Production (GWh) and Shares (%): 1990–2012a Year
RE Share (%)
GWh
Hydro
On-shore Wind
Off-shore Wind
Biomass
PV Solar
Geoth
Total RE Generated
Total Electricity Generated
1990 1991
15,580 15,402
71 100
1,434 1,471
1 2
– –
17,086 16,975
551,148 547,568
3.1 3.1
1992
18,091
275
1,558
3
–
19,927
538,573
3.7
1993 1994
18,526 19,501
600 909
1,636 1,875
6 8
– –
20,768 22,293
532,508 530,786
3.9 4.2
1995 1996
20,747 18,340
1,500 2,032
2,013 2,102
11 16
– –
24,271 22,490
539,356 548,537
4.5 4.1
1997
18,453
2,966
2,277
26
–
23,722
551,674
4.3
1998 1999
18,452 20,686
4,489 5,528
3,260 3,589
32 42
– –
26,233 29,845
558,149 552,685
4.7 5.4
2000 2001
24,867 23,241
9,513 10,509
4,737 5,207
64 76
– –
39,181 39,033
576,191 582,582
6.8 6.7
2002
23,662
15,786
6,038
162
–
45,648
585,231
7.8
2003 2004
17,722 19,910
18,713 25,509
8,247 10,077
313 556
– 0
44,995 56,052
599,933 609,263
7.5 9.2
2005 2006
19,576 20,042
27,229 30,710
14,025 18,685
1,282 2,220
0 0
62,112 71,657
614,972 617,736
10.1 11.6
2007
21,169
39,713
24,281
3,075
0
88,238
617,052
14.3
2008 2009
20,446 19,036
40,574 38,602
38
27,531 30,341
4,420 6,583
18 19
92,989 94,619
615,819 576,944
15.1 16.4
2010 2011
20,958 17,674
37,619 48,315
174 568
33,866 37,603
11,729 19,340
28 19
104,374 123,519
610,373 602,531
17.1 20.5
2012
21,200
45,325
675
40,850
28,000
25
136,075
594,216
22.9
a
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) based on information supplied by the Working Group on Renewable Energy-Statistics (AGEEStat), http://m.germany.info/contentblob/4125002/Daten/3903529/BMURESourcesFigures2012DD.pdf.
50%
IV. Renewable Energy and Electricity Prices
45%
Share of RE GWh (%)
40% 35%
A. Electricity price composition
30% 25% 20% 15% 10% 5% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0%
On- shore Wind Share
PV Solar Share
Figure 1: On-shore Wind and PV Solar Shares of RE Production, 1990–20124
4
Figure 2 summarizes the breakdown between net electricity prices (generation, transmission and distribution, metering, sales and marketing) and government taxes, levies and fees (including the RESA
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45.0 40.0 2.7 0.3 0.4 0.2
35.0 30.0 2.8 0.4 1.4 2.5
25.0 20.0 15.0
2.0 2.6
0.8 1.9 2.4
10.0 14.4 5.0
1.2 0.1 0.2 1.7 1.8
1.4 0.2 1.6 1.8
1.6 0.2 0.3 1.7 2.1
12.4 8.0
7.7
9.2
2.3 0.4 0.5 2.0 2.7
11.6
2.5 0.3 0.6 2.2
2.6 0.4 0.9 2.2
3.1
3.2
2.6 0.4 1.1 2.2
3.0 0.3 1.7 2.6
2.9 0.3 1.8 2.5
5.1
5.2
2.9 0.0 2.7 0.2 2.7 2.4
4.9
2.6 0.2 0.0 4.6
2.5 2.3 5.6
5.3
7.5 2.4 5.2
5.0
4.5
3.4
13.5 14.0 14.7
16.7
19.1 19.7
17.0
19.2 18.2 19.6
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 G,T,& D
VAT
Concession Chg
EEG Chg
CHP Chg
Strom-NEV Chg
Off-Shore Chg
Elec Tax
Figure 2: Composition of German Residential Electricity Prices, 1998 to 2013, ¢ per kWh5
surcharge). Since 2011, government taxes, levies and fees have amounted to about 50 percent of the nominal price per kWh paid by residential households in Germany. Figure 3 summarizes the composition of German residential electricity prices in 2013 and divides the total electricity price into costs associated with generation and delivery of electricity and taxes
and surcharges imposed by the government. Hence, in 2013, just under half of residential electricity bills7 went to pay Tax and Other Charges plus the RESA surcharge to subsidize RE, the Combined Heat & Power surcharge, and the Off-shore Liability charge (shown as the ‘‘RE + EE Charge’’ in the figure). Just over half of the residential electricity bill is composed of charges for generation (‘‘Energy
Distribuon Charge, 6.0
16% 29%
Transmission Charge, 9.7 Energy Charge, 4.0
25% RE + EE Charge, 7.5
20% 10%
Tax + Other Charges, 11.2
Figure 3: Composition of German Residential Electricity Price in 2013 (38.5¢ per kWh)6
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Charge’’), transmission, and distribution services. For the purpose of comparison, Figure 4 summarizes the average composition of residential electricity prices for a sample of 16 U.S. utilities in 2013.9 These utilities report separate line items for RE, EE, and related charges on residential bills. These utilities are not necessarily representative of the U.S., as their average per kWh rate of 16.1¢ per kWh is about 4¢ per kWh higher than the U.S. average price of 12.2¢ per kWh as reported by the Energy Information Administration for 2013. The RE and EE surcharges accounts for only 0.3¢ per kWh of the difference. The rest is due to many of the sample utilities being located in the Northeastern U.S. and California, where residential rates are above the national average.
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2% 6% 25%
Distribuon Charge, 4.0 Transmission Charge, 1.0 Energy Charge, 9.8
6%
RE + EE Charge, 0.3 Tax & Other Charges, 1.0
61%
Figure 4: Residential Electricity Price Composition for a Sample of U.S. Utilities that Include Surcharges for RE and EE on Bills (16.1¢ per kWh)8
T
he average RE plus EE surcharge observed in Figure 4 contributes about 2 percent to the residential bill in contrast to the RESA surcharges in Germany that comprise nearly 20 percent of the residential price of electricity. This suggests that Germany’s enthusiastic embrace of RE may be adding 10 times as much to the German residential rates as experienced in the United States. However, the key difference between the countries’ shares of RE subsidies in residential rates is that the share of RE in overall electricity production is much higher in Germany than in the United States. Were the U.S. to follow in Germany’s footsteps and increase RE’s penetration levels to that achieved in Germany, the price impacts likely would be much more similar. nother view of the rate impact of RE in the U.S. can be attained by examining the residential rate premiums set in
A
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utility ‘‘green pricing’’ programs. Such programs offer customers an option to pay a premium for ‘‘green’’ energy produced (in most instances) by a range of RE technologies (e.g., biodiesel, biomass, geothermal, hydro, land fill gas, solar, and wind). The average residential premium for buying ‘‘green energy’’ in 2013 was 1.7¢ per kWh, based on a sample of 193 utilities that have established ‘‘green pricing’’ programs.10 Adding that average premium to the EIA U.S. 2013
1%
average residential rate increases it to about 13.9¢ per kWh, in which case RE and EE would comprise about 12.4 percent of the average residential bill. Figure 5 summarizes the composition of the industrial electricity price in Germany in 2012. The electricity tax (Stromsteuer), also referred to as the Eco-tax, is an indirect excise tax placed on consumption of electricity, introduced in 1999 as part of the law intended to encourage reduction in electricity consumption and to reduce GHG emissions.12 The Concession fee (konzessionsabgabe) is a license fee paid to municipalities and varies with the local government. For industrial customers, the maximum amount is 0.14¢ per kWh. Under the Combined Heat & Power Act (CHP), the levy is between 0.24¢ and 0.34¢ per kWh. It is instructive to note that the German industrial electricity price in 2012 was nearly equal to the residential rate in the U.S. in 2013.
8%
10%
Generaon, 6.2
41%
Network & Sales, 4.5 Eco-tax, 1.5
10%
EEG, 1.5 CHP, 0.2 Concession Fee, 1.2
30%
Figure 5: Composition of German Industrial Electricity Price in 2012, (15¢ per kWh) (VAT excluded)11
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Table 3: Total RESA Costs and Cost Shares for the Most Important RE Technologiesa 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total RESA costs in $US B
2.11
2.95
4.49
5.48
7.05
10.4
13.27
15.06
17.51
23.37
24.57
31.24
Wind power (%) Biomass (%)
64.5 10.4
65.1 12.5
63.7 14.1
54.3 17.7
47.1 23.0
44.5 27.4
39.5 29.9
31.5 34.3
25.2 32.2
16.7 17.9
11.0 19.4
15.7 17.8
Photovoltaics (%)
3.7
5.9
7.8
15.1
20.3
20.2
24.6
29.3
38.6
39.9
38.7
35.1
a
M. Frondel, C.M. Schmidt, C. Vance, Germany’s solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung (RWI), Table 2, p. 8. Original source, for 2002 to 2009: BDEW 2001–2010. For 2010: U¨BN (2011). For 2011 to 2013, estimates are based on information obtained from Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Renewable Energy Sources In Figures: National and International Development, Electricity Quantities and Payment Under Renewable Energy Sources Act (EEG), table at p. 35, and Development of EEG Differential Costs from 2001 to 2013, table at p. 37.
V. Renewable Energy Shares of RESA Costs Table 3 summarizes the total RESA costs over the period 2002 to 2013 in billions of U.S. dollars. Over this period, RESA costs rose 14-fold. The table also shows the shares of that cost associated with wind, biomass, and PV solar. The shares do not sum to 100 percent because the table does not include all categories of RE that receive remuneration based on the RESA. olar has been the favored technology from the standpoint of subsidies provided through the FIT. Solar electricity provided 18.5 percent of the total electricity produced in 2012 by subsidized REs, but received approximately 38.7 percent of the total $24.57 billion in RESA-related payments made by German electricity consumers. In contrast, on-shore wind installations contributed 35.6 percent of the electricity produced by subsidized RE in 2012, but received 11.0 percent of the RESA-related payments in that year. The reason for the significant difference between the shares of PV and on-shore wind production
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and the shares of RESA-related revenue is the generous subsidy flowing to solar electricity. For example, PV installed in 2006 could receive up to 65¢ per kWh, which was nearly 10 times higher than the wholesale market price for electricity and almost six times the FIT rate for wind, which was about 11¢ per kWh. This pronounced difference was well out of proportion to the contributions each made to total electricity production, a reflection of solar’s relatively lower technical efficiency and Germany’s unfavorable geographic location.
VI. Economic Impacts of German Energy Policy A. Retail electricity price impacts In Germany, the costs of German and European Union energy policies designed to reduce GHG emissions and to promote RESA have been allocated primarily to residential and smaller commercial customers. There are two
mechanisms that have shifted this cost burden away from industrial customers. First, the European Union Energy Trading System (EU ETS)13 and the European Union’s corresponding state aid guidelines allow the member states to compensate energyintensive industries for the carbon costs priced into the wholesale electricity market.14 The corresponding ruling for Germany, which has been in force since Jan. 2013, allows for the compensation of a sizeable proportion of the carbon cost mark-up on the wholesale market.15 The ruling stipulates that, in 2013, a company can be reimbursed for 85 percent of the reference cost mark-up for 760 g of CO2 per kWh, based on sectorspecific electricity consumption values. With a real carbon cost mark-up on approximately 900 g of CO2 per kWh in the Continental European market, this amounts to compensation of approximately 70 percent of the carbon costs effectively priced into the wholesale electricity market. With a medium carbon price of $6.03/ MWh for the first half of 2013,
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compensation amounts to about $4.22 per MWh,16 which can be subtracted from an electricity price of approximately $50 per MWh, implying an effective cost of procuring electricity via the wholesale market of less than $46 per MWh.17 econd, energy-intensive companies can be largely exempted from paying network access fees if they meet certain criteria.18 Pursuant to the German Electricity Network Charges Ordinance (StromNEV), companies can negotiate individual network access fees and can have themselves entirely exempted from network access fees if use exceeds 7,000 hours and 10 GWh from a single consumption point on the grid, and the ratio of electricity cost to gross value creation exceeds 15 percent.19 Most energy-intensive industrial consumers qualify under these criteria. This treatment of industrial customers results in a revenue shortfall for distribution utilities. Utilities recover this shortfall by spreading the costs to all electricity consumers. In 2013, industrial customers’ share of this cost spreading amounted to $0.33 per MWh, which was negligible relative to what they saved due to their exemption from paying network access fees. n addition, individual network access fees may be arranged if a company’s peak load does not coincide with the utility’s coincident peak load. In such instances, industrial
S
I
8
customers may be awarded discounts of up to 80 percent of the network access fees. In the case of steel companies, for example, the discounts are at least 30 percent to 40 percent of the network access fees. While the exemption from transmission access fees is on its face different from treatment of specific industries under the EU
Commission’s guidelines to mitigate the cost impacts of the EU ETS, it in effect achieves the same result of partially insulating industrial electricity consumers from the effects of RESA surcharges, which the German government could not do directly without violating EU Commission rules in effect prior to 2013. B. The cost of subsidizing renewable energy in Germany20 The four major German utilities and the Federal Network Agency and grid authority raised the surcharge that customers pay on
their utility bills to fund RE in 2013 from 4.62¢ per kWh in 2012 (yielding $26.2 billion) to 6.98¢ per kWh21 (yielding about $38.5 billion). In Oct. 2013, they announced a further increase to 8.0¢ per kWh for 2014, taking the annual surcharge on consumers to about $45.4 billion. This surcharge covers the increasing share of electricity produced from renewables and the utilities’ obligations to pay renewables at rates that greatly exceed wholesale market prices. For example, utilities are forced to pay 23.8¢ per kWh for PV solar that they can sell in the wholesale spot market for only 5.9¢ per kWh or less. Consequently, the 2013 RESA FITs will cost electricity consumers about $38.5 billion, compared to projected revenues from the sale of RE electricity in the wholesale spot market of about $3.4 billion. The subsidy flowing from consumers to RE in 2013 is thus about $35 billion. The RESA surcharge is due primarily to the excess of payments to RE through the FITs relative to the wholesale market value of the electricity RE produces. The enormity of this subsidy and its perverse economic impact has compelled the government to cap the surcharge through the end of 2014 and limit annual increases to 2.5 percent. The government also plans to tighten industry exemptions and possibly cut FITs for wind and biomass plants, calling into question investment security for those technologies.
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C. GHG reductions and costs In 2012, RE resources supported by the RESA produced 136.1 billion kWh of electricity, which was about 23 percent of the electricity generated to serve enduse customers. This electricity avoided an estimated 81 million tons of CO2 equivalent. Because the total RESA cost for RE was about $26.2 billion for energy that would have only received about $5.2 billion in the wholesale spot market, RESA cost German end use consumers about $21.0 billion. ermany’s cost of subsidizing REs to lower GHGs was about $259 per ton of CO2 reduction (i.e., $21.0 billion divided by 81 million tons) in 2012. The Certified Emission Credits traded on the Intercontinental Exchange in 2012 averaged about $3.26 per ton. This means that REs were paid $21.0 billion above wholesale spot market value for environmental benefits that have a market value of only $0.3 billion or, equivalently, could have been provided by emissionreducing alternatives that would have cost only $0.3 billion. Thus, German electricity consumers overpaid about $20.8 billion for the 81 million ton reduction in CO2. A recent report from the MIT Center for Energy and Environmental Research compares the implicit carbon price embodied in Germany’s RESA incentive schemes
with the price of European Union Allowances (i.e., emission credits).22 The comparison takes into account all the relevant costs and cost savings associated with the use of RE, but does not consider transmission and distribution costs nor benefits such as energy security, innovation, jobs, and non-CO2 emissions. The report uses the
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CO2 abatement estimates for the years 2006 to 2010 provided by Weigt et al.23 To avoid problems of the front-end loaded costs of the RE schemes, remunerations to RE were levelized for each investmentyear cohort over an assumed 25-year life.24 The results of this analysis are summarized in Table 4. With respect to wind and solar, the report’s conclusions are: CO2 abatement costs of wind are relatively low, averaging $60 per ton during the 2006–2010 period, and CO2 abatement costs of solar are very high, averaging $683 per ton during the 2006–2010 period.
D. Impact on conventional generation In Germany, more electricity was produced from brown coal (i.e., lignite) in 2013 than at any point since German unification in 1990.25 Germany is the biggest producer of brown coal in the world. Lignite-fueled power plants are responsible for about 21 percent of Germany’s electricity production. Supporters say burning lignite produces fewer harmful emissions than burning hard (i.e., anthracite) coal. However, since 2009, electricity production from brown coal has risen by 11.3 percent, from 146 billion kWh to 162 billion kWh, and production from hard coal (responsible for 16 percent of total German production in 2013) has increased by an even greater amount, 14.9 percent. At the same time, electricity production from natural gas has declined by 18.5 percent. The increased coal-fired production is partly the result of the increased share of REproduced electricity and the low capacity factors of wind and solar PV that require backup from conventional power plants. In addition to brown coal, hard coal is experiencing a renaissance in Germany as a result of the confluence of the depressive effects that RE production has on wholesale spot market prices, the high natural gas prices that put combustion turbines out of the market, and the nearly record-low worldwide prices for hard coal that make power plants fueled by
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Table 4: Estimates of CO2 Abatement Costs in Germany for On-Shore Wind and Solar PV, 2006–2010a Wind
2006
2007
2008
2009
2010
3,361
3,925
4,481
4,574
4,611
4,191
Additional start-up cost
(8)
(19)
(7)
3
5
(5)
Additional balancing cost Fuel cost saving
77 (1,512)
108 (2,163)
119 (2,813)
107 (1,849)
101 (1,794)
102 (2,026)
Carbon cost saving Capacity saving
(478) (133)
(42) (160)
(644) (191)
(560) (202)
(533) (210)
(452) (179)
Net cost (mm $)
1,306
1,649
944
2,073
2,181
1,631
CO2 emission reduction (mm tons)
28
36
47
42
36
38
Abatement cost ($/ton)
59
63
30
69
81
60
Economic impacts (mm $) Levelized remuneration
Average
2006
2007
2008
2009
2010
Average
Levelized remuneration
1,213
1,852
2,784
4,018
5,974
3,168
Additional start-up cost Fuel cost saving
(3) (134)
(4) (170)
(1) (312)
(14) (326)
(553)
(4) (299)
Carbon cost saving Net cost (mm $)
(35) 1,041
(1) 1,676
(119) 2,352
(91) 3,587
(150) 5,270
(79) 2,785
CO2 emission reduction (mm tons)
3
3
6
7
9
5
Abatement cost ($/ton)
521
838
588
717
753
683
Solar Economic impacts (mm $)
a
C. Marcantonini, The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany and Italy, CPRU Workshop on Renewable Costs, Florence, Italy, May 24, 2013, p. 21. All values converted from Euros in the original to US dollars.
hard coal significantly more profitable.26 n Nov. 2013, Steag GmbH started the first new coal-fired generator to go into operation in Germany since 2005. It marks the start of Germany’s biggest newbuild program for hard coal stations since market liberalization in 1998. Ten new hard-coal power stations totaling 7,985 MW are scheduled to start producing electricity within the next two years.27 eter Terium, the head of the German power company RWE, is reported to have said that
I
P
10
nuclear energy might be phased out even earlier than the government has planned under the Energy Transition Policy, given that it is no longer profitable. ‘‘It would not be responsible to allow a reactor to continue to run when it is losing money every day,’’ Mr. Terium said.28 E. Investment in renewable energy technologies Germany’s energy policy aimed at encouraging aggressive investment in RE resources, solar
PV and wind in particular, has been successful in terms of increasing the numbers of RE facilities and the quantity of energy produced by renewable resources, but has accomplished this at a cost that is huge relative to the energy and environmental values provided by those resources. Figure 6 compares the total capacity in MW of PV solar resources in Germany to capacity elsewhere in the world in 2011. Germany has nearly twice the capacity of the second-leading country (Italy). As explained above, this success in numbers of
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Figure 6: Total Photovoltaic Capacities in Selected Countries in 2011 (MW)29
MW has come at the cost of a vast waste of resources. F. Job creation RE promotion is frequently justified by the associated impacts on job creation. In Germany, gross employment generated by economic activities connected with RE in 2012 totaled 377,800. Of these jobs, 73 percent (275,794) are connected with installation and use of electricity generation
facilities, 21 percent (79,338) can be attributed to heat generation facilities, and the remaining 6 percent to production of biofuels for transport.30 he number of jobs that has been ascribed to the impact of the RESA in 2012 totaled 268,000. Of those, 117,900 were in wind energy, 87,800 were in PV, and 59,400 were in biomass. The number of people working in hydropower amounted to 1,700 and a further 1,200 jobs were in
T
geothermal energy. As Figure 7 illustrates, the number of jobs generated by RESA in 2004 was 98,000 out of a total of 160,500 (61 percent) RE-related jobs. By 2012, RE industry jobs attributable to RESA reached 268,000 out of a total of 377,800 (71 percent), down one percentage point from the high reached in 2011. These estimates suggest a rosy outlook for gross employment growth. On the contrary, they hide the overall welfare effects that will arise from offsetting economic impacts, the most important of these being job losses associated with the reduction in demand for relatively cheaper conventional energy generation. In addition, there is the indirect effect on consumers and commerce in upstream markets that must support the subsidies for RE. Higher electricity prices raise businesses’ costs and consumers’ overall cost of living, thus placing a significant drag on economic
Figure 7: Employment Levels in the German RE Industry and Generated by RESA, 2004 to 201231
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activity. Consumers’ overall net loss of purchasing power due to higher electricity prices in 2013 was approximately $21.0 billion ($26.2 billion retail electricity cost minus $5.2 billion wholesale electricity value), with environmental benefits equal to a scant 2 percent of that loss. Investment in productive capacity by many industrial customers may be inhibited or constrained by their higher electricity costs and by their loss of sales due to consumers’ reduced purchasing power. Hence, the burden that RE subsidies impose on residential, commercial, and industrial consumers diverts a flow of funds away from alternative, more beneficial, investments. Overall, RESA’s drag on consumption and investment expenditures leads to negative employment effects and raises serious doubts about whether its overall employment effects are in fact positive. hether favorable conditions on the international market prevail for the RE industry in Germany is highly questionable, particularly given negligible or even negative net exports in recent years. According to a 2013 government report, ‘‘[e]xport of installations, components, biomass and biofuels for transport accounted for a total of 98,800 jobs or 26 percent of employment’’ in the RE sector in Germany.32 The latest report from the German government indicates that the solar PV industry in
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Germany is suffering mightily from the influx of less expensive imports. Unable to keep up with competition from Chinese producers, big solar producers such as Conergy, Solon, and QCells have all registered for insolvency over the past few years. With their demise came job losses. Figures from the Federal Office for Statistics, as reported by
wind turbines, which at times can overload the grid and threaten grid stability. The grid is particularly vulnerable during public holidays when electricity consumption is significantly reduced but when wind production can nevertheless be significant, at times producing up to four times more than demand. Consequently, system operators must intervene to maintain network stability. ccording to a report issued by the German grid operator (Bundesnetzagentur), the German transmission system experienced severe stability problems in 2011 and 2012 that required operator interventions to maintain system security. Acknowledging that the significant penetration of RE sources contributed to this instability, the report states:
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the Frankfurter Allgemeine Zeitung (FAZ), revealed a huge drop. Solar energy jobs in Germany fell from 10,200 at the beginning of 2012 to below 5,000 in 2014. The number of working hours available to those who remain employed in the sector is 625,000 compared with 1,400,000 hours at the beginning of 2012. In an attempt to control the decline, the EU imposed a tax on imported PV panels last summer.33 G. Grid stability and industrial production34 The eastern part of Germany is home to over one third of its
The situation in the electricity grid in the winter of 2011/2012 was severely strained. . . . If more electricity from renewable sources is sold than can be transported by the network, this results in added strain on the network via corresponding price signals, as the conventional plants are demoted in the merit order and the additional exports from Germany appear on the single market [the wholesale spot market]. In the opinion of the Bundesnetzagentur, the existing legal framework has scope for measures from the transmission system operators to limit sales to volumes that can actually be transported. Nevertheless, normative clarification would seem to be advised. . . There are no
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effective technical measures that could act as a substitute for grid expansion.35
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long the same lines, Jochen Homann, president of Bundesnetzagentur, recently said that Germany’s power system is ‘‘showing signs of declining security of supply’’ as renewable generation capacity strains the grid. Because of these strains, Bundesnetzagentur curtailed renewable energy production an astonishingly high 82 percent of all hours (7,200 hours) in 2012, up from an already high 21 percent of all hours (1,800 hours) in 2011.36
VII. Conclusions Germany has used various systems of subsidies to dramatically expand RE generation in Germany. This has come at a very high price, however: German electricity prices are substantially higher than they would otherwise be; Germany’s international
H. Energy security37 Increased energy security resulting from decreased reliance on fuel imports has frequently been offered as an argument to support RE promotion. However, this argument works on the presumption that sun and wind are sufficiently abundant, which in Germany they are most definitely not. Consequently, backup fossil-fired generation (coal plants in particular) must remain in place to ensure grid reliability. Maintenance of backup systems is costly (e.g., maintenance costs were $741 million in 2006).38 Increased energy security afforded by reliance on RE sources is offset by reliance on other fuel sources for backup energy, which includes natural gas (which is almost entirely imported), and now increased reliance on new coalfired generation. June 2014,
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economic competitiveness has been compromised; the job benefits are dubious; and environmental improvements have come at enormous cost relative to how equivalent benefits might have been achieved by alternate means. The German experience thus stands as a warning to other jurisdictions. Environmental protection can certainly be achieved by other means at substantially lower cost. The German experiment with subsidizing RE provides valuable lessons for the rest of the world, including the United States. First, government promotion of RE through subsidies financed by retail electricity consumers
distorts both consumption and investment decisions relative to what would take place if RE were left to succeed or fail on its merits in a competitive wholesale electricity marketplace. The German experience demonstrates that it is difficult to anticipate correctly the reaction of investors and consumers and of RE supply and demand to such subsidies and retail price distortions. Consequently, the government finds itself constantly tinkering with rules, regulations and price subsidies in an attempt to control electric sector consumption, investment, and financial impacts. Second, governments do not do well at picking electric generation technology winners and losers. The physics of the electricity grid and the operation of electricity markets automatically make all generation technologies interrelated, operationally and financially. Without a technological breakthrough in energy storage in the immediate future, the intermittency of wind and solar resources, especially at the penetration levels achieved in Germany, requires a continued investment in conventional generating technology to both back up the RE with ancillary services as well as to ‘‘fill the energy gap’’ when RE does not produce. hird, the rate impacts and operational difficulties experienced in Germany offer a valuable lesson for the U.S. of the risks and unintended
T
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consequences that can result from inefficient promotion of RE expansion. RE expansion requires long-range planning and strategic collaboration among stakeholders that will enable RE resources to provide the full value to power system operations.& Endnotes:
Electricity prices for residential consumers, from 2007 onwards – biannual, obtained at: http:// epp.eurostat.ec.europa.eu/portal/ page/portal/product_details/ dataset?p_product_code=NRG_ PC_204 7. 19.5% equals 7.5¢ divided by 38.5¢. 8. The figure presents the unweighted average electricity price across 16 U.S. utilities, for a residential household consuming 500 kWh per month. The 16 sample utilities are: Ameren –
1. This is also known as the Act on Granting Priority to Renewable Energy Sources, or ErneuerbareEnergien-Gesetz (EEG). 2. Gabriel is chairman of the Social Democratic Party, which formed a coalition government in Dec. 2013 with Merkel’s Christian Democrats.
12. The Eco-tax was part of a legislative package that taxed industrial electricity consumption as a means of financing central government contributions to local government pensions.
4. Based on data in Table 2.
6. The household consumption assumed in this example is 450 kWh per month. Shares will be somewhat different for households consuming different monthly amounts. The figure is based on data obtained from European Commission, Eurostat,
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10. U.S. Department of Energy, Energy Efficiency and Renewable Energy, Green Pricing, Utility Programs by State, obtained at http:// apps3.eere.energy.gov/greenpower/ markets/pricing.shtml?page=1, based on a study by the National Renewable Energy Laboratory. 11. Based on 2012 data obtained from N. G. B. Morgantini, C. Camporeale, and A. Purpura, A comparison of taxes and other system charges on electricity prices in Europe, 12th IAEE European Energy Conference, Sept. 2012.
3. Solar contributes a much smaller share of the total kilowatt-hours produced by REs (21 percent in 2013) each year than does on-shore wind (33 percent in 2013).
5. BDEW Bundesverband der Energie- und Wasserwirtschaft e.V., Energie-Info: Erneuerbare Energien und das EEG: Zahlen, Fakten, Grafiken, Jan. 31, 2013, Figure 21, p. 41. G, T, & D = Generation, Transmission & Distribution; VAT = value added tax; Concession Chg = concession fee paid to local authorities; EEG Chg = RESA surcharge; CHP Chg = surcharge for combined heat & power facilities; Strom-NEV Chg = transmission grid access fee; Off-Shore Chg = off-shore liability surcharge that compensates off-shore wind developers for delays in interconnecting to the grid or for disruptions in transmission service; and Elec Tax = German government electricity tax. Total price may differ slightly from total shown in EX-1 due to rounding.
apples-to-apples comparison with residential electricity prices and the EEG surcharge in Germany, it would be necessary to conduct a comprehensive analysis of U.S. utilitylevel expenditures on RE energy and capacity relative to wholesale market prices, utility avoided costs, transmission costs, and ancillary service costs. Such a study is beyond the scope of this report.
Illinois (IL), Baltimore Gas & Electric (MD), Commonwealth Edison (IL), Connecticut Light & Power (CT), Consumers Power (MI), Dominion Virginia Power (VA), Empire District Electric Company (MO and KS), National Grid (MA), NSTAR Electric and Gas (MA), NV Energy (NV), Pennsylvania Electric (PA), PEPCO (MD and DC), Public Service Electric & Gas (NJ), Public Service New Hampshire (NH), Sacramento Municipal Utility District (CA), and Weststar Energy (KS). In the figure, the Distribution Charge includes Customer and Distribution Charges. Taxes & Other Charges include state and local taxes, stranded cost recovery charges for states that enacted retail competition and various other charges that could not be classified in the other categories. 9. To accurately determine the share that RE and EE resources hold in U.S. residential rates and to permit an
13. The EU ETS is described in detail in the Appendix. 14. Communication from the Commission, Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012 (OJ EU C 158, 5 June 2012, p. 4) says, ‘‘The European Commission has adopted a framework under which Member states may compensate some electrointensive users, such as steel and aluminium producers, for part of the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme (ETS) as from 2013. The rules ensure that national support measures are designed in a way that preserves the EU objective of decarbonising the European economy and maintains a level playing field among competitors in the internal market. The sectors deemed eligible for compensation include producers of aluminium,
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copper, fertilisers, steel, paper, cotton, chemicals and some plastics. . . . They aim to mitigate the impact of indirect CO2 costs for the most vulnerable industries, thereby preventing carbon leakage which would undermine the effectiveness of the EU ETS. At the same time, the rules have been designed to preserve the price signals created by the EU ETS in order to promote a cost-effective decarbonisation of the economy. They are also designed to minimise competition distortions in the internal market by avoiding subsidy races within the EU at a time of economic uncertainty and budgetary discipline. . . . The rules allow subsidies of up to 85% of the increase faced by the most efficient companies in each sector from 2013 to 2015, a cap that will gradually fall to 75% in 2019–2020.’’ 15. German Federal Ministry of Economics and Technology (BMWi), Directive on state aid for companies in sectors/subsectors in relation to which the assumption is made that there is a considerable risk of ‘carbon leakage’ due to the costs relating to EU ETS certificates being priced into electricity prices (state aid for indirect carbon costs), Jan. 30, 2013 (German Federal Gazette, BAnz AT 07.02.2013 B1). 16. $4.22 = $6.03 0.70. 17. Compensation of carbon costs priced in to the wholesale electricity market was not permissible prior to 2013. 18. The exemption afforded large industrial electricity users was intended to ensure that they remained competitive on the international level. 19. Electricity Network Charges Ordinance (StromNEV) dated Jul. 25, 2005 (Federal Law Gazette BGBl. I, p. 2,225), as amended by Article 4 of the Act dated Jul. 28, 2011 (BGBl. I, p. 1,690). 20. Estimates of RE remuneration and wholesale market revenues reported in this section are based on World Nuclear Association, Energy Subsidies
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and External Costs, obtained at http:// www.world-nuclear.org/info/ Economic-Aspects/Energy-Subsidiesand-External-Costs/ 21. Note that the difference between the 6.98¢ per kWh surcharge here and the 7.5¢ per kWh surcharge found in Figure 3 is the addition of the CHP levy and Off-Shore Liability charge. 22. C. Marcantonini, and A.D. Ellerman, The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany, Center for Energy and Environmental Research, Massachusetts Institute of Technology, Feb. 1, 2013. 23. H. Weigt, E. Delarue, and D. Ellerman, Co2 Abatement From REs Injections In The German Electricity Sector: Does A CO2 Price Help?, European University Institute Working Papers, RSCAS 2012/18, Robert Schuman Centre For Advanced Studies, Climate Policy Research Unit. 24. Inflation was assumed to be 2 percent per annum and capacity factors were assumed to be 18 percent. 25. AG Energiebilanzen, E.V., Bruttostromerzeugung in Deutschland von 1990 bis 2013 nach Energietra¨gern, obtained at http://www.agenergiebilanzen.de/
german-energy-official-sounds-awarning.html?_r=0 29. M. Frondel, C. M. Schmidt, C. Vance, Germany’s solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: RheinischWestfa¨lisches Institut fu¨r Wirtschaftsforschung (RWI), Fig. 1, p. 5. 30. Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Short- and longterm impacts of the expansion of renewable energy on the German labour market: annual report on gross employment; Gross employment from renewable energy in Germany in 2012 – a first estimate, Mar. 2013. 31. Id., Fig. 3, p. 8. 32. Id. 33. The Local: Germany’s News in English, ‘‘Solar energy jobs halve in two years,’’ http://www.thelocal.de/ 20140128/germany-solar-energy-jobshalved-in-past-two-years 34. This section is partly based on Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, Oct. 2009, p. 24. 35. Bundesnetzagentur, Report on the State of the Grid-based Energy Supply in Winter 2011/2012, May 3, 2012.
26. Natural gas prices in Europe are pegged to oil prices in long-term contracts and with oil prices at or near $100 per barrel, natural gas has become a relatively expensive fuel for electricity production.
36. ‘‘Germany’s Retail Tariffs Now Decoupled from Wholesale Rates,’’ The Electricity Journal, Nov. 2013, 26(9): 7–8.
27. Mengewein, J., ‘‘Steag Starts CoalFired Power Plant in Germany,’’ Bloomberg News, Nov. 15, 2013, at http://www.bloomberg.com/news/ 2013-11-15/steag-starts-germany-sfirst-coal-fired-power-plant-in-8years.html
37. A portion of this section is based on information obtained from Rheinisch-Westfa¨lisches Institut fu¨r Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, Oct. 2009, p. 24.
28. Eddy, M., ‘‘German Energy Official Sounds a Warning,’’, The New York Times, Jan. 21, 2014, http:// www.nytimes.com/2014/01/22/ business/energy-environment/
38. G. Erdmann, Indirekte Kosten der EEG-Fo¨rderung: Kurz-Studie im Auftrag der WirtschaftsVereinigung Metalle (WVM), Technische Universita¨t Berlin, Aug. 2008, p. 32.
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