German consumers of power were presented with a pricey green energy bill this week. The add-on to their power bills for supporting the investment in green power, the so-called “Erneuerbare Energie Gesetz (EEG) Entgelt”, has been raised to 52,77 EUR/MWh for 2013, compared to 35,92 EUR/MWh in 2012. With current Cal 13 baseload electricity prices around 47 euro per MWh, this means that base load consumers of electricity are likely to pay more for support of green electricity next year than for the commodity, the product electricity itself. It also means that such consumers will pay more than twice the price of their competitors in France with its regulated electricity tariffs. Who said that greening our electricity production wouldn’t be a costly affair? If one thing, it can be argued that this rise doesn’t come unexpected. Everyone knows that the cost of greenery in the German electricity has grown out of control. And if Germany made one policy mistake, it was that it realized this too late to really do something about it. The EEG was a ticking time bomb, but nobody seems to have heard it soon enough.
The EEG is a classical example of a feed-in tariff subsidy scheme. Producers of renewable electricity in Germany can sell their production at a fixed tariff to grid operators. To jump-start the development of green power, these tariffs were originally set at high levels, up to 574 EUR/MWh for small-scale solar power, for example. The grid operators buy the green power and sell it into the markets. They are than compensated for the losses that they suffer on these transactions. Since 2009, this compensation is based on the difference between overall EEG costs (leveled out for the whole of Germany), and the average year ahead wholesale power price. The compensation is paid by the end-consumers through the EEG-Umlage that they pay on their power bills. Every year the German authorities takes a decision on the exact amount, which has now reached the staggering level of 52,77.
There are three factors that drive the cost of EEG. The first one is the overall amount of green electricity production, the second one the level of the year ahead market. The higher the first and/or the lower the second, the more EEG taxes are to be paid by the end-consumers. Thirdly, EEG costs are also driven up by lower energy demand.
- As far as the overall cost of EEG is concerned, it has grown rapidly due to the unprecedented success of EEG in terms of rapid development of renewable energy production in Germany. I have never thought about the country as being very sunny. Still, it has the highest percentage of solar power production in Europe. Last summer, the Germans proudly announced that they had produced more than 50% of their power demand with solar panels. And if you ever drove through the country, you will have noticed how many windmills have been built. Germany also produces a lot of electricity in biomass plants. The development of renewable energy is praised worldwide as a raving success. Even President Obama is a fan! The overall positive attitude of the German public to ecology is undoubtedly a contributor to this success. But there is also a firm financial reason for it. As the number of windmills and solar panels multiplied, the cost of producing them dropped rapidly. So rapid that policymakers couldn’t lower the EEG Umlagen fast enough to compensate for the lower need for financial aid. This has at some moments created very interesting windows of opportunity for investors, producers of renewable technology or middlemen in the windmill and solar panel industry. The German government has considerably lowered the amounts paid to renewable technologies, but not fast enough to overcome the extra cost of new renewable capacities that continue to be built. The CSU, a conservative party from Bavaria, estimates that the overall cost of EEG will not start falling before 2026.
- EEG cost could stop from growing, if the market price of electricity would rise above the levels of the subsidies. Not only would the grid companies no longer have to be compensated at that moment, renewable energy producers would also sell their electricity to the market instead of to the grid operators at EEG tariff. However, costs of electricity have dropped significantly in the wake of the financial crisis of 2008. And despite a short spike after Fukushima and the decision to shut down eight nuclear power plants, the German power price hasn’t risen much recently. Rather to the contrary, this week the Cal 13 reached a historical low. To credit renewables, we have to point out that they are an important factor contributing to lower power prices. In 2011, European power production rose by 3,9%, whereas demand fell by 2,1%. This over-capacity explains why power prices are currently at historically low levels. 70% of that new production capacity was renewable, a lot of it built in Germany. This offers some consolation to German power consumers. The higher cost for EEG is partly compensated by a lower commodity price. Partly, and far from the full 52,77 EUR.
- In its calculation of the EEG-Umlage for 2013, the German environmental ministry is calculating a more than 2% reduction in power consumption, i.e. a continuation of the downtrend that we saw in 2011. Reducing power demand obviously is a good thing for the environment. But paradoxically, it is driving up end-consumer costs for environmentally friendly electricity. Windmills and solar panels produce the same amount of MWh’s, regardless of evolutions in demand. If demand falls, this cost is to be divided over a smaller number of demand MWh’s.
Germany was an early adopter of renewable power technology. They jump-started wind and solar technology, buying much of it at the high initial prices. Now that the costs have come down, other countries will be able to build up their renewable power shares at much lower costs. From this perspective, you can consider that the Germans are paying the bill for the industrial development of the renewable power technologies for the rest of the world. Thanks to the rapid development in Germany, the production cost of windmills and solar panels became cheaper. The Germans pay the development costs of renewable energy. This story becomes extra painful, if you consider that German solar power factories are currently in serious trouble because of Chinese competition, stealing away some of the jobs that the renewable power sector was supposed to bring to Germany.
The high bills for green electricity obviously constitute a competitive problem for the German industry. Fortunately there is the Härtefallregelung, which reduces the EEG-bill for large, energy-intensive consumers. However, this rebate arrangement is very hard. Either you meet the criteria and you enjoy the full rebate, or you don’t meet them and you have to pay the full bill. German policymakers are now discussing the Härtefallregelung. From the left side, it is hinted that too many companies enjoy Härtefall, rather than not enough. I can tell you that many of our clients cannot enjoy and are experiencing heavy competitive pressure due to high EEG costs. Frau Merkel’s suggestion to grant the rebate only to companies that have to confront international competition, seems reasonable. But most of all, it would be good if German policymakers produced a more layered rebate approach, such as we see in Belgium or the Netherlands, allowing more companies to enjoy some relief, rather than just a few that enjoy the full relief. It would also be a good idea to allow companies with multiple sites across Germany to enjoy the Härtefallregelung on a company-wide and not on a site-by-site basis.
The EEG developments teach us two lessons:
- There is no free lunch, becoming the world’s first renewable powered country has a price tag.
- You cannot make a policy without unwanted consequences collateral damage.
Germany’s attempts in the next months to clean up the green energy mess will be interesting to watch, especially for other countries that are building up high green energy bills.