EU: don’t punish Germany for being best of class in renewable energy

The European Union wants to investigate whether the reductions on renewable energy contributions that Germany awards to its large industrial power consumers are in breach of competition rules. According to Handelsblatt, proceedings could start as early as the 18th of December. Worst case, the EU could indeed decide that these tax reductions are unpermitted aid for the German industry. But for many German companies, the amount of renewable energy contribution that they have to pay exceeds their EBITDA. Having to pay the full amount would most probably mean the end of steel, non-ferrous metals or paper production in Germany. And I dare not even think of what would happen if companies were obliged to pay back reductions received in the past years. In recent years, the excellent performance of the German industry has been the main economic power factor in Europe. Therefore, I believe (or hope?) that the EU is pragmatic enough not to take any rash decisions that cause the shutdown of German energy intensive industry. It looks like German and European politicians are working towards a compromise. However, inside Germany, politicians are also tabling proposals to curtail reductions on renewable energy contribution. Therefore, I would like to shed some light on this issue from our daily practice of supporting industrial consumers in buying energy in different European countries, including Germany.

The European Union has ambitious targets for the development of renewable energy, such as having 20% of its electricity produced from renewable sources by 2020. But the different Member States have developed their renewable policies at different paces. Germany has been a very enthusiastic renewable energy adept. Way back in 2000, Germany developed a policy of supporting green electricity by obliging its grid companies to buy power produced from renewable sources at legally set feed-in tariffs, the so-called ‘Erneuerbare Energien Gesetz’ or EEG. To spur the development of the renewable technologies, tariffs were set at high levels. Under the first EEG law, some solar panels received more than 500 euro per MWh in feed-in tariffs. Now, there are a lot of critical remarks that can be made about Germany’s green power policy. But one thing cannot be said, and that is, that it would be ineffective. Looking at BP’s data on power production, we can clearly see that Germany has outpaced the rest of Europe and the world in developing green electricity. 48% of Europe’s solar power capacity has been installed in (not particularly shiny) Germany. Runner-up in Europe and globally is Italy, with half as much solar capacity as the Germans. And even on a worldwide scale, 33% of all MW’s of installed panels is to be found in Germany.

Solar

Germany is also European champion in the development of wind energy, although its dominance in this sector is less outspoken. 30% of Europe’s windmill capacity is planted in German soil. On a worldwide scale, Germany has 11% (keep in mind that Germany has a little bit more than 1% of the world’s population), with only much larger countries such as the US and China having a larger windmill capacity installed.

Wind

Germany is also Europe’s champion in consumption of biomass, another renewable energy that has been heavily subsidized by the EEG laws. It consumes 9,4% of the world’s biofuels.

This rapid move towards more renewable energy production has been dubbed the ‘Energiewende’ in Germany. This word got a particular significance when Germany decided to revamp its nuclear phase-out policy in the wake of the Fukushima disaster. The country seems to be succeeding in replacing low-carbon emitting nuclear power stations by low-carbon renewable energy. It is now producing more than 25% of its power from renewable sources.

The Energiewende is also a policy of industrial reconversion. With their combination of excellent engineering skills and the economies of scales of the rapid expansion of internal demand, German companies specialized in renewable energy have made a sizeable contribution in the development of affordable solar, wind and other technology. Unfortunately for German consumers, these affordable panels or windmills are now ever more often produced in countries with lower labor costs such as China. But if you want to point out any piece of legislation that has contributed to lowering the cost of producing (and installing) renewable technologies, the EEG is a likely candidate.

All these developments haven’t come at zero cost. The grid companies pay the feed-in tariffs to the developers of renewable power projects in Germany. They resell that renewable power to the grid based on wholesale market prices. Because the feed-in tariffs are higher than these wholesale prices, the grid companies are making losses. They are compensated for these losses by funds collected by making end consumers pay a renewable energy contribution (EEG-Umlage). As the renewable power production has grown much more rapidly than anyone could suspect, this contribution has risen unexpectedly high: 62,4 euro per MWh as of the 1st of January 2014. This has caused the end consumer’s cost of electricity to rise above most other European countries (with Italy being the only exception). The graph below shows the power price in euro per MWh of a client of ours consuming 20 GWh of electricity in sites in four countries. It clearly shows that German power costs are much higher. A detailed analysis of the power bills shows that the high EEG costs are the main contributor to this problem.

Comparison

The German government has been aware of that problem and has chosen to implement a policy to protect its large energy-intensive consumers, the so-called Härtefallregelung. Large energy-intensive consumers can get heavy rebates on their EEG bill. It is precisely this policy which is now under scrutiny by the EU. However, viewing Härtefall as an unauthorized subsidy for that energy-intensive industry would be outrageous. The reduction is granted to protect the German companies against costs that are higher than in almost any other European country. To just name one thing, the 2014 cost of EEG on itself, is higher than the all-in (regulated) price of electricity in France. If anything, than the Härtefall is leveling out the non-competitiveness of Germany’s energy prices. Anyone that says that it is creating a competitive advantage has clearly never seen electricity bills from large consumers in different countries.

That German companies pay more for (green) electricity is a consequence of a lack harmonization in the European Union of energy and tax policies. If the response of the European Union to that would be a demand for harmonization of the corrective measures, than there is clearly something very wrong with our Europe. How can you claim tax exemption harmonization if there is no tax harmonization?

In this framework, I clearly understand the demand of Peter Altmaier for support and respect for Germany and its attempt to continue its Energiewende without jeopardizing its economic strength. The German minister for the Environment uttered this demand in a German television studio as he was preparing for a trip to Brussels where he discussed this topic with EU officials. Germany has made and continues to make an important contribution to the development of renewable energy, both in terms of capacities installed and of lowering the technology cost. Punishing Germany for that by a ruling on EEG exemptions that puts its large industries in financial difficulties would be a grave error. It wouldn’t be good for European politics, as it would lay bare the deficiencies in European policymaking. It wouldn’t be good for the economy as it would jeopardize the health of Europe’s industrial powerhouse. And it wouldn’t be good for the environment as other governments might be less willing to develop renewable energy if they see they can’t protect their industry from its cost-increasing effects. The discussion regarding the high cost for end consumers of the Energiewende is already leading to reductions of the subsidies granted to new renewable energy projects. Some politicians even call for a (temporary?) stop of further development of green power in Germany.

The exemption from EEG contributions is not just challenged by the European Union. It is also the subject of a vivid social and political discussion inside Germany. This discussion makes clear what the whole EEG exemption ultimately is: a question of how the cost of developing renewable energy is distributed across the different social actors within Germany. As the energy intensive industries are exempted, other actors such as smaller industrial consumers, the service or commercial sector and households, have a larger bill to pay. Handelsblatt, for example, has announced that due to rising EEG costs, 273 utilities across Germany want to increase the cost of power for 8,3 German families by an average 3,4% or 39 euro per family per year. Such cost increases for households could be reduced if the exemption for the large energy-intensive industry was watered down. Germany is now rapidly heading towards a new, more leftish, government, which seems keen on reducing the amount of exemption received. I can only call here for cool-headed politics that realizes the importance of having a competitive heavy industry in Germany (and Europe).

All these remarks don’t mean that I don’t see any failings in Germany’s renewable energy policy and the exemption regulation. There has clearly been over-subsidizing, and scaling back subsidies is a good idea. Germany should indeed ask itself at what tempo it wants to continue its Energiewende. I also want to repeat my criticism that the rules for getting exemption from the EEG-Umlage are too harsh. I’m thinking here specifically about the rule that says that power costs should amount to 14% of the added value of a company. A company that reaches only 13,9% gets no reduction, just a little bit more cost and you enjoy almost full exemption. It would be good to create a more balanced, layered system with different categories that make sure that a larger number of companies enjoys (smaller) reductions. And maybe Germany should consider whether the high stranded costs of subsidies granted in the last ten years cannot be spread out more in time by swapping them for a long term loan granted to the grid companies. Although I understand that spreading costs in time is an ethically sensitive issue, generations to come will enjoy the fruits of Germany’s efforts to build up its renewable energy production apparatus and affordable solar and wind power technologies.

3 thoughts on “EU: don’t punish Germany for being best of class in renewable energy

  1. In fact, those parts of industry that are exempt from the EEG profit from the fact that the large amount of renewable energies suppresses the electricity spot market. For example, this causes great trouble for a dutch aluminium factory, because it cannot compete with the german aluminium factory that gets to pay much lower electricity prices. This makes clear that electricity for these large consumers is often actually cheaper than in neigbouring ocuntries, not more expensive. That means that the contribution of these companies could easily be increased somewhat.

  2. It was most likely unforeseen when the EEG concept was developed that the wholesale price of energy would fall to such levels. As a result, German energy intensive industry benefits on both sides – from the EEG exemption and the lower prices on the market. No suprise then that the EU is looking at it suspiciously. Meanwhile, those industrials not exempt and households alike are faced with total costs amongst the highest in Europe. I agree with your suggestion that a review is required to spread the burden more fairly. The all or nothing model is clearly flawed.

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