SUSTAINABLE ENERGY IN GERMANY

Sustainable Energy in Germany Frameworks, policies, and measures

Background report to PM 2014:05

1

SUSTAINABLE ENERGY IN GERMANY

Dnr: 2013/164 Swedish Agency For Growth Policy Analysis Studentplan 3, SE-831 40 Östersund, Sweden Telephone: +46 (0)10 447 44 00 Fax: +46 (0)10 447 44 01 E-mail: [email protected] www.growthanalysis.se For further information, please contact Martin Flack Telephone: +46 10 447 44 77 E-mail: [email protected] This report has been prepared by Sweco Strategy AB on behalf of Growth Analysis.

2

SUSTAINABLE ENERGY IN GERMANY

Table of Contents Abbreviations ...................................................................................................................... 5 Summary .............................................................................................................................. 6 1 Introduction ................................................................................................................. 9 2 Historical overview ................................................................................................... 10 3 Medium and long-term energy strategies .............................................................. 12 3.1 3.2 3.3 3.4

Current energy mix ..........................................................................................................13 Targets ............................................................................................................................15 The role of different technologies in the energy mix of the future ....................................16 Projections ......................................................................................................................18

4

The political economy of German energy policy .................................................. 20

5

Challenges................................................................................................................. 30

6

Possible development pathways ............................................................................ 36

4.1 4.2

5.1 5.2

6.1 6.2 6.3

7 8 9

German energy, innovation and industrial policy combined ............................................20 Policy instruments ...........................................................................................................24 4.2.1 Policies aimed at phasing out fossil fuel...............................................................24 4.2.2 Policies aimed at fostering RE technology ...........................................................24 4.2.3 Policies aimed at increasing energy efficiency .....................................................27 4.2.4 Policies aimed at promoting sustainable transport ...............................................28 Cost of the EEG surcharge .............................................................................................30 Market .............................................................................................................................33 5.2.1 Storage and intermittency ....................................................................................34 5.2.2 Grid ......................................................................................................................35 The Energiewende is currently secure ............................................................................36 Reforms are to be expected ............................................................................................37 6.2.1 Cost reforms ........................................................................................................37 6.2.2 Reform of the electricity market ...........................................................................38 Deployment will continue.................................................................................................38

Areas for future research ......................................................................................... 40 Annex 1 ...................................................................................................................... 41 Bibliography .............................................................................................................. 42

3

SUSTAINABLE ENERGY IN GERMANY

Abbreviations RE – Renewable energy RES-E – Renewable energy sources for electricity FiT – Feed in Tariff TSO – Transmission System Operators

5

SUSTAINABLE ENERGY IN GERMANY

Summary Germany plans to reduce its greenhouse gas [GHG] emissions by 80-95 per cent by 2050. To realise this, former governments have initiated an ambitious energy transition plan called the Energiewende which has developed since the 1980s as a reaction against nuclear power, environmental destruction and climate change. It has enjoyed firm public support since its initiation. The Energiewende is based on five principles: a) expansion of the renewable energy base, b) an increase in energy efficiency, c) development of grid infrastructure, and d) development of flexible electricity supply and demand, whilst, e) keeping costs to a minimum. Of the current electricity mix, a total of 45 per cent is produced by coal while a further 22 per cent comes from renewable energy sources for electricity [RES-E]. The remaining electricity derives from a mixture of nuclear, natural gas and other energy sources. The large share of renewable energy sources is due to rapid deployment during the last 13 years, owing to expansive policies aimed at incentivising such deployment. There are a range of targets in place aimed at reducing the country’s GHG emissions within the fields of energy efficiency, energy use and energy generation. An example is the target that RES-E should constitute 80 per cent of total consumption by 2050, with wind power and solar PV being especially prioritised. Simultaneously, nuclear power plants are to be decommissioned by 2022. Fossil fuel has thus become the de facto bridging technology. Natural gas is the politically preferred energy source, however a collapsed Emission Trading Scheme [ETS] and reduced coal prices due to the shale gas revolution in the USA has made natural gas less preferable in comparison to coal. Thus Germany is attempting to reach a sustainable future nearly solely reliant on RES-E. However, it is uncertain if the short-term targets will be met, as offshore wind projects are currently behind schedule, although solar PV has deployed above targets. The outcome thereby depends largely on future policy decisions. Germany has an integrated energy, innovation and industrial policy, which have created a beneficial breeding ground for the environmental industry. In employment it has grown from 66 000 in 1998 to 377 600 in 2012, and the industry is projecting it will grow to 500 000 in 2020. The majority of current industry employees are fairly evenly distributed between solar PV, wind power and bioenergy sectors. Using a slightly broader terminology, Roland Berger and the German Federal Environment Ministry argue the environmental and renewables sector is larger than the chemical industry in employment figures, and they expect it to become larger than the automobile industry by 2017. By 2020, it is expected to constitute a full 14 per cent of German industry. The industry’s growth has in turn been fuelled by a number of small investors and cooperatives: there are currently 1.3 million owners of RES-E generators, and the number of cooperatives has increased exponentially from 144 in 2008 to 586 in 2012. This has created multiple stakeholders amongst the populace, industry and politicians who are interested in retaining the Energiewende. There are multiple policy tools in place aimed at fostering renewable energy.

6

SUSTAINABLE ENERGY IN GERMANY

A feed in tariff [FiT] scheme provides subsidies towards RES-E deployment. It incentivises amongst other things a fast deployment of small-scale RES-E installations and its aim of making RES-E technologies competitive is being reached as seen by the falling levels of subsidies provided to investors. Moreover, Transmission System Operators [TSO] are obliged to produce grid development plans. The Energy Heat Act also obliges new construction to integrate renewable heat production. The renewable energy sector also receives a substantial share of an €3.5 billion R&D program, which saw the program budget increase by 75 per cent post-Fukushima. Finally, financial support is also provided from the state investment bank KfW which provides lending to RES-E investors with the aim to reduce risk. Recently, a further €100 billion of lending was promised by KfW. As for energy efficiency, financial support is provided to SMEs and households. Discussions are ongoing as to whether new regulations should be introduced forcing buildings constructed to be climate neutral by 2020. There is also an aim to have 1 million electric vehicles in the country’s transport fleet by 2020. €2 billion of R&D funds have also been provided, along with tax exemptions and dedicated parking spots. Lastly, subsidies provided to the coal industry are to be phased out. There are several challenges facing Germany’s energy transition. The first challenge concerns the EEG surcharge which has increased substantially over the past few years. By 2013 it constituted 18 per cent of the retail electricity price. Of the EEG surcharge in 2013 (5.27 cent/KWh), less than half goes to supporting RES-E deployment (2.39 c/KWh), with industry privileges and falling wholesale prices contributing substantially (2.02 cent/KWh). Between 2013 and 2014 the surcharge will increase to 6.26 cent/KWh. Of this increase, only 0.15 cent is due to increased RES-E generation. Instead, industry privileges and a fall in the wholesale price of electricity have caused a rise of 0.71 cent. Since 2011, the number of firms which have been exempted from paying the surcharge has increased from 600 to 1700 in 2013 and is expected to rise to 2300 in 2014. The EU has initiated an investigation whether the exemption constitutes unfair state aid. Falling wholesale prices of electricity are caused by the increase of RES-E with low marginal costs of production. Due to its low marginal cost of production, the supply curve is shifted to the right, which in turn cause spot prices to be lowered. This in turn increases the difference between spot prices and the FiT rate, artificially increasing the EEG surcharge. Consequently, costs associated with industry exemptions are transferred to consumers and non-exempted industry whilst industry which purchases electricity at wholesale prices gain further due to lowered costs. This leads us to the second challenge which is how to reform the electricity market. As the current market is based on the marginal cost of production and RES-E has next to zero marginal costs, the market fails to provide adequate price signals to investors, ultimately discouraging investments. Consequently, institutional reform is needed and pricing mechanisms based on provided capacity rather than produced energy are being discussed. Storage and intermittency is another challenge. Grid de-stabilisation due to the intermittency of RES-E is an issue. However, a recent research project by Fraunhofer in collaboration with other actors has developed in a pilot project a grid which can cope with 100 per cent renewables. This grid is however dependent on storage capacity. The lack of storage has led to fears of supply over the medium term; the coalition negotiations have agreed that the strategic reserve currently in place will be developed in the short term and that a capacity market is to be introduced in the medium term.

7

SUSTAINABLE ENERGY IN GERMANY

The final challenge is the need to build and renovate the electricity grid, which is both costly and faces public opposition. The Energiewende is currently secure as its largest opponent, the FDP, was voted out of Parliament. Moreover, other opponents are being co-opted. As such, the debate has shifted from whether or not the Energiewende should occur, to how it should be managed. Reforms to curtail costs and to reform the electricity market are however to be expected. Finally, the deployment of wind power and solar PV will continue due to them being increasingly cost competitive. Indeed, by installing solar PV for home use, consumers can reduce their electricity bill substantially over time. There are two areas of exceptional interest for future research. These are capacity markets and their alternatives, and the need of a reform of the electricity market. There is currently an ongoing debate in Germany concerning these areas of research and much could be learned from them.

8

SUSTAINABLE ENERGY IN GERMANY

1

Introduction

During the last two decades, Germany, the fourth largest economy in the world, has embarked on one of the most ambitious energy transition programs ever seen, aiming at transforming its conventional energy system to one based on renewable energy, affecting its electricity, heat and transport sectors. The origins of this transformation can be found in the German nation’s environmental awareness concerning the dangers of climate change and nuclear power and is illustrated in the decision to cut emissions of Greenhouse gases [GHG] by 80-95 per cent by 2050 as compared to 1990. Not surprisingly the energy transition program (Energiewende) is highly politically charged, as seen by the ideological battle between those who favour its design which uses technology-specific policy instruments, and those who rather support technology-neutral policy instruments. Moreover, low electricity demand growth caused by the economic crisis, and the rapid deployment of renewable energy sources for electricity [RES-E], is displacing conventional electricity providers, affecting their profitability and sparking fears over future energy supply. As similar phase-out strategies have been abandoned or radically altered in other countries due to rising costs and a shift in government, there is value in analysing the Energiewende as there are multiple lessons to be learned from Germany’s pioneering experience. The purpose of this report is to analyse British energy policy in order to provide a country comparison when developing new strategies and tools to promote a sustainable energy system in Sweden. The analysis will focus on three topics:

•

Germany’s energy priorities including future vision,

•

Main challenges and crossroads, and

•

Principles/discourses used for influencing the energy system in its desirable direction.

To address these three topics, the report will be structured as follows: First, a historical development of German energy policy is provided in order to put the current debate into context. Second, the country’s mid- and long-term energy strategies are shortly explained. In this report, mid-term refers to a 10-year perspective, whilst long term refers to a 20-year perspective. Third, the political economy of Germany’s energy strategy is described which includes a description of current policy instruments and the debate around these. Fourth, perceived challenges and crossroads are described, followed by a final discussion on alternative future development pathways. As stated above, this topic is politically charged and economic stakes are high, and great care has been taken to provide a balanced view. The scope of the report is mainly on the electricity sector, but particular aspects of the heat and transport sector will also be mentioned. The analysis is based on information gathered between the dates of 10.10.2013 – 25.11.2013.

9

SUSTAINABLE ENERGY IN GERMANY

2

Historical overview

To provide some context to the current debate, a historical overview is provided below. It aims to illustrate how the transition program came to be, and which political forces have supported and opposed it. The overview ranges from the 1970s until the post-election uncertainty of September 2013. In the 1970s, environmental and anti-nuclear popular movements developed in Germany. During this period, the Government consisting of the Christian Democratic Union [CDU] and the Free Democratic Party [FDP] were critical to RES-E. However, its popularity grew, and Feed in Tariff [FiT] proposal was introduced in the run-up to the federal elections of 1990, which was accepted due to its popularity amongst the population. The FiT, called the Stromeinspeisungsgesetz, opened up the electricity market for new, smaller producers, and banned utility companies from investing in RES-E. The FiT also created a nursing market that allowed for the development of a German renewable energy industry. Subsequently, the strategy received resistance from utilities, the EU and the government. The Social Democratic Party [SPD] and the Green Party won the federal elections of 1998 with a mandate to expand German RES-E policy and to phase out nuclear power. Consequently, the Renewable Energy Act [EEG] was passed, aiming to create a regulatory environment providing stability to investors, promote industrial development and open up the RES-E sector for utilities to invest in. During this period the CDU and FDP both opposed the act, calling for market integration measures. In 2005, the CDU and SPD formed a new coalition in which the CDU supported the EEG, partly due to the EEG receiving large popular support. Indeed, at this time 71 per cent of CDU voters supported the EEG. 1 However, in 2009 the CDU and FDP formed a coalition, which attempted to shift the emphasis of the German energy strategy by delaying the phase-out program of nuclear power arguing it was a bridging technology until RES-E became “affordable”. Special criticism was targeted towards solar PV and biogas technology. There was also to be a shift in focus from decentralised RES-E production to large scale, capital intensive projects such as offshore wind farms, a stance which shifted investor emphasis from individuals and small actors to the conventional power producers. However, these plans were thrown into disarray by the Fukushima disaster, which forced the government to make a policy U-turn. Subsequently, all nuclear power stations were to be closed by 2022, and a paradigm shift towards RES-E technology was promised. 2 During the coalition’s period in power, the deployment of RE technology accelerated partly due to falling prices in PV modules and economies of scale. Due to the rapid deployment, the cost of the FiT increased, which gave rise to the argument that the FiT caused undue economic stress on consumers and threatened the competitive advantage of Germany’s industrial base. 1

Support for the EEG was even evident from the formerly so negative FDP leadership in 2009, after a motion of support at the party convention was approved by the membership. 2 Importantly, during this period, several states which had previously been sceptical to the Energiewende implemented energy transition plans2 that were more ambitious than the plans presented by the federal states. They have since then continued to push for a more ambitious federal agenda, and have blocked attempts at changing the regulatory framework.

10

SUSTAINABLE ENERGY IN GERMANY

The Government tried to stem the rising costs by proposing to reduce Solar PVs FiT substantially. This proposal was however rejected by state government representatives in parliament, although a compromise was later made. The FDP was outraged by this compromise, and demanded the ending of several fundamental EEG principles. In March 2013, new proposals to reform the EEG made by the federal government was rejected, forcing a reform of the EEG to be postponed until after the September 2013 elections. The election resulted in the FDP failing to enter parliament for the first time in its 60 year history, making the CDU loose its long-term ally. Without a clear majority, the CDU has entered long going discussions with the SPD about forming a new coalition, including how to reform the Energiewende. However, before making predictions concerning how the Energiewende is likely to be reformed, Germany’s energy strategy will first be analysed in more detail.

11

SUSTAINABLE ENERGY IN GERMANY

3

Medium and long-term energy strategies

An analysis of Germany’s medium and long-term energy strategies allows for illuminating issues such as how Germany aims to have its future energy system constituted, what priorities the federal government makes, and what role different energy technologies will play in the future. As such, it also constitutes the base for the analysis. The current chapter starts off with a brief description of the Energiewende. Secondly, it states Germany’s current energy mix. As a third step, Germany’s energy targets are described, along with a description of how different technologies are prioritised. Finally, the chapter describes projections of the energy mix in a German energy system of the future. As mentioned in the previous chapter, Germany’s medium and long-term energy strategy is encompassed in its Energiewende strategy. The Energiewende is based on five principles: a) expansion of the renewable energy base, b) an increase in energy efficiency, c) development of grid infrastructure, and d) development of flexible electricity supply and demand, whilst, e) keeping costs at a minimum. These principles at interplay are illustrated in Figure 1 below. As such, the Energiewende is an attempt to create a holistic energy strategy, aiming to address different sorts of bottlenecks. However, as it is a pioneering strategy, it does experience some unforeseen bottlenecks and unintended consequences.

Figure 1 Energiewende (Schafhausen 2013)

12

SUSTAINABLE ENERGY IN GERMANY

3.1

Current energy mix

Currently, two-thirds of German Primary Energy balance is heat and transport, whilst a third is electricity. Below follows a description of renewable energy’s contribution to the country’s energy consumption and production. Concerning transportation and heat, in 2012 biofuels constituted 5.7 per cent of fuel consumption whilst remaining fuel came from diesel and petrol. See figure 2 below for more details. Meanwhile, 10.4 per cent of total heat consumed was from renewable sources. However, it is in the electricity sector where renewables have had the largest impact. As of 2012, lignite produced 25.6 per cent of gross electricity generation; hard coal a further 19.1 per cent, nuclear energy 16 per cent, natural gas 11.3 per cent, other sources 6 per cent and renewables 22 per cent. Out of total electricity generation, wind power produced 7.3 per cent, biomass a further 5.8 per cent, solar PV 4.6 per cent and hydropower 3.3 per cent. Thus, RES-E constitutes a significant share of total electricity production. This is however a recent phenomenon as installed capacity has increased exponentially over the last decade. Indeed, solar PV has increased from 64 MWp of installed capacity in 2001 to 25 039 MWp in 2011. This increase can be attributed to the EEG and the subsequent FiT introduced in the year 2000. Figure 4 and 5 illustrate the increase in generation and installed capacity.

Figure 2 Biofuels and fossil fuel consumption in Germany in 2012 for transportation and heat (Renewable Energies Agency 2013)

13

SUSTAINABLE ENERGY IN GERMANY

Figure 3 Gross electricity generation in Germany in 2012 (Federal Ministry of Economics and Technology, 2013

Figure 4 Development of renewable-based electricity generation in Germany 1990-2011, in GWh (Lauber & Buschmann, forthcoming)

14

SUSTAINABLE ENERGY IN GERMANY

Figure 5 Installed Solar PV supply and capacity (Lauber, 2013)

3.2

Targets

In 2010, the Federal Government published the Energy concept, which sets targets for the Energiewende in the fields of energy efficiency, total energy production and electricity generation:

Energy efficiency: • Primary energy consumption is to fall by 20 per cent by 2020 and by 50 per cent by 2050 compared to 2008.

•

Energy productivity is to rise by 2.1 per cent per year compared to final energy consumption.

•

Electricity consumption is to fall by 10 per cent by 2020 and by 25 per cent by 2050, compared to 2008.

•

Compared to 2008, heat demand in buildings is to be reduced by 20 per cent by 2020, while primary energy demand is to fall by 80 per cent by 2050.

Energy: • Renewable energies are to achieve an 18 per cent share of gross final energy

consumption by 2020, a 30 per cent share by 2030, 45 per cent by 2040 and 60 per cent by 2050.

15

SUSTAINABLE ENERGY IN GERMANY

Electricity: • By 2020 renewables are to have a share of at least 35 per cent in gross electricity

consumption, a 50 per cent share by 2030, 65 per cent by 2040 and 80 per cent by 2050.

Separately, in the National Electromobility Development Plan, the government aims to have 1 million electric vehicles in the country’s transport fleet by 2020. Although the federal government decides upon targets, it does so in conjunction with state governments. Indeed, federal, state and municipal level government have powers to set policy in their jurisdictions. For example, there is both a Federal Ministry of the Environment and state-level Ministries of Environment. The latter can set independent targets and have the power to, for example, regulate grid operators and set tax reliefs. Thus state governments have considerable autonomy to shape their own policy. Moreover, local governments can also play an important role and have the power to set independent targets. Finally, multiple stakeholders, such as state governments, are invited to partake in shaping federal-level policies.

3.3

The role of different technologies in the energy mix of the future

There is considerable public resistance towards nuclear power and Carbon Capture and Storage [CCS] technology applied to coal and natural gas plants. Indeed, the former will be decommissioned by 2022. In the Energy Concept, CCS is seen as a technology that ought to be explored. There is however substantial public opposition to the technology, which combined with political uncertainty led to several CCS pilot plants being cancelled. In July 2012 a regulatory framework was introduced, its clauses placing substantial hinders for expansion. 3 Utility firms, such as RWE, see it as an important technology for the future and there are new pilot plants being developed, but it´s future is uncertain due to public opposition. With the decision to decommission its nuclear power before complete substitutes have been developed, conventional fossil fuels has become the de facto bridging technology. In the long term however, Germany aims to decommission most of its fossil fuel capacity with the rate depending on deployment rates of RE technology and on the ability to provide grid stability and backup using RES-E. Especially natural gas using modern, flexible turbines is the preferred bridging technology and has the support of the CDU, SPD and the Greens. The natural gas sector is however currently experiencing a crisis of profitability, as: 1) the shale gas revolution in the United States is causing global coal prices to fall, thus making natural gas less economically attractive, 2) the price of carbon credits in the Emissions Trading Scheme is extremely low, making coal more profitable and

3

For more information see IEA 2012

16

SUSTAINABLE ENERGY IN GERMANY

3) RES-E generation is reducing demand for natural gas to provide electricity at peak hours, as RES-E is lower down the merit order, thus reducing its profitability 4. Consequently, coal power is becoming increasingly profitable. However, the use of coal is a highly contentious topic due to its high Co2 emissions, a situation made more complicated by Germany’s large domestic supply of coal and its strong domestic coal lobby. Both the CDU and SPD see modern coal power plants as desirable technologies, although SPD is only in favour of black coal whilst the CDU is also in favour of brown coal/lignite, not least because both parties are strong in coal-dominated regions. The Green Party and Die Linke (the left party) are highly negative towards coal, with the greens wanting to face out it out by 2030. The energy mix scenarios state that brown and black coal should constitute a declining portion of the energy mix, playing a marginal role by 2040. It is however questionable how this technology is compatible with the country’s target of reducing its GHG emissions. Concerning shale gas, Germany’s estimated reserves are small: 8 trillion cubic feet compared to 187 trillion cubic feet in Poland (both figures are highly uncertain), although there is further undefined potential. Shale gas has long been supported by the FDP whilst the CDU environment minister, Peter Altmeier, is an opponent of the technology. The former coalition failed to agree on a bill to regulate shale gas, with the opposition and members of the CDU coalition calling for even stricter environmental conditions. The technology faces public opposition, and North Rhine-Westphalia, which is the most promising region for shale gas extraction has suspended fracking due to safety concerns. Thus, having lost its strongest supporter in the last election, the FDP, the future of shale gas looks uncertain. Moreover, even if the technology did get a go-ahead, it would take up to a decade before it could be commercially extracted. Instead, RE technologies are deemed vital technologies to develop. Of these, wind power, both on and offshore, is seen as arguably the most vital technology in the future energy mix. A report written for the German Environment Ministry containing systems-analysis examinations of the transformation of the German electricity, heat, and fuel generation clearly illustrates the emphasis given towards renewables. In the report, Scenario A is the middle variant of three main scenarios concerning energy demand and expansion of renewables. In model A, wind power will generate a full 82.8 GW out of a total RES-E generation of 179 GW by 2050. This would lead to great challenges regarding electricity market models and storage. Wind power draws substantial support from the greens and the SPD, the latter being politically strong in the northern part of Germany where the majority of the wind sources and industry is found. Indeed, the wind industry has a relatively strong influence on state government, partly due to successful lobbying. Discussions are on-going concerning reducing the offshore wind targets as they are considered too expensive although the final outcome is not certain as state governments might block such attempts. Solar PV is another vital technology in the future energy mix after wind power. Indeed, the energy scenario models PV to generate 67.2 GW by 2050. The sector has strong support both in southern and eastern states, where a large part of the sectors industrial base is placed. 4

Merit order is set in ascending order of their short-run marginal costs of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line

17

SUSTAINABLE ENERGY IN GERMANY

Biomass was long seen as a vital technology, however environmental concerns has put the expansion of first generation technologies on hold, with focus instead being put on second generation technologies. Finally, geothermal energy is expected to expand after 2030. Figure 6 illustrates Germany’s future energy mix in Scenario A, as described above.

Figure 6 Structure of gross electricity generation in Scenario 2011 A (Nitsch et al. 2012)

3.4

Projections

Under the National Renewable Action Plan published in 2010, Germany modelled reaching a target of sourcing 38.6 per cent of its total electricity consumption from RES-E by 2020. This would require that RES-E generation was increased from 122 TWh in 2011 to 216 TWh by 2020. Deutsche Bank, using German government sources, found that in order to reach a slightly lower NREAP target of generation 195 TWh RES-E by 2020, the following generation levels seen in table 1 would need to be reached. In other words, a continued rapid deployment of especially wind and solar PV would be necessary in order for the targets to be met. Table 1 Type

2011 (in TWh)

2020 (in TWh)

Wind power

46,5

104,5

Solar PV

19

41

Biomass

37

49,5

18

SUSTAINABLE ENERGY IN GERMANY

Since 2011, deployment of onshore wind has continued slowly but steadily, whilst solar PV has beaten expectations soundly as seen in figure five below. However, the offshore wind targets are behind schedule and are facing mounting costs, partly due to the inability of the grid operators to finance the connections of the offshore wind parks [OWP]. Thus, it is unlikely the OWP targets are met. However, figure 7 below illustrates how the deployment of solar PV has beaten expectations and this increased deployment has managed to compensate for the reduced deployment of OWP. The momentum would seemingly need to continue in order for the targets to be met. Thus, although it is not possible to state with certainty, it seems as though the 2020 targets are not unattainable, with the outcome depending largely on future policy decisions.

Figure 7 PV development in Germany 2009-2013. MW end of month under EEG and NREAP targets (Chabot 2013)

19

SUSTAINABLE ENERGY IN GERMANY

4

The political economy of German energy policy

This chapter analyses Germany’s energy policy using a political economy framework, in order to improve understanding of the Energiewende, its policy instruments, the debate surrounding it and ultimately its economic, political and technical sustainability. Subsequently, this chapter:

•

Puts Germany’s energy policy in an industrial policy context,

•

Describes specific current and future policy instruments.

4.1

German energy, innovation and industrial policy combined

Germany has a long tradition of cooperation between the government and the relevant socio-economic interest groups of employers’ associations and trade unions. Decisionmaking is therefore aimed at forging a consensus regarding both problem formulation and how these problems are solved. 5 This form of socio-economic management has arguably influenced the shape and legitimacy of German energy policy. Germany’s history of socio-economic management at least partly explains why its energy policy has been developed in conjunction with an industrial and innovation policy. Indeed, Germany has an integrated energy, innovation and industrial policy where a protected environment has been created for German RES-E industry to develop within, including ambitious R&D programs. Consequently, the initial goals of this integrated policy has been to develop an RES-E industrial base, spur innovation across a wide section of technologies, promote citizen ownership of energy production and bring down costs of RES-E technology, making it competitive with conventional sources of energy. Germany has undoubtedly made some progress towards reaching many of these goals. It managed to create protected markets, allowing for the development of a domestic RES-E industry. Employment in the renewable energy sector rose from 66 000 in 1998 to 377 600 in 2012, and the industry is estimating it will grow to 500 000 by 2020. Moreover, employment is fairly evenly distributed across the solar PV, wind power and biomass sectors. This growth has made the environmental and renewable energy [RE] industry an important player, in employment figures it became larger than the chemical industry in 2009 and is expected to become larger than the automotive industry by 2017, according to Roland Berger and the Federal Environment Ministry. The expansion of the industry has grown largely due to high demand from small investors. Citizen ownership has grown in particular; in 2013 there were 1.3 million RES-E generators. This seems to be a trend which is increasing exponentially as the number of energy cooperatives have increased from 144 in 2008 to 586 in 2012. It is important to take this information into consideration when assessing possible changes in German energy policy as it clearly illustrates

5 Germany’s financial sector is also a strong cooperating actor and the country has a bank-based financial system (Jacobsson & Jacobsson 2012). The origins of this way of socio-economic management can be traced back to the 19th century and the German economist Friedrich List who propagated for active state participation in shaping “space” for new industries to develop within. It also draws from Schumpeter and the notion of creating an enabling environment for creative destruction to occur within (Schumpeter 1943).

20

SUSTAINABLE ENERGY IN GERMANY

1) the development of multiple stakeholders that have an interest in sustaining the Energiewende, including a substantial number of households, and 2) the RES-E sectors economic importance, both in terms of employment but also size as a share of total industry. Arguably, the existence of these stakeholders constrains attempts at reforming German energy policy, not least due to the country’s form of governance structure. Consequently, the following chapter is to describe current policy instruments. Figures 8-12 on the following two pages illustrate the facts mentioned above.

Figure 8 Employment trends in the German renewable energy sector (Renewables Energies Agency 2013)

21

SUSTAINABLE ENERGY IN GERMANY

Figure 9 Number of jobs according to sector 2012 (Renewables Energies Agency 2013)

Figure 10 Prognosis of turnover of major industries in Germany (Ouw 2013)

22

SUSTAINABLE ENERGY IN GERMANY

Figure 11 Ownership distribution of installed RE capacity for electricity production 2010 (Renewables Energies Agency 2013)

Figure 12 Energy Cooperatives in Germany (Renewable Energies Agency 2013)

23

SUSTAINABLE ENERGY IN GERMANY

4.2

Policy instruments

A broad set-up of policies exists, with currently 166 measures in place to spur on the Energiewende. Below follows a selection of those deemed most important, separated into those aiming to phase out fossil fuel, foster RE technology, incentivising energy efficiency and increasing sustainable transport.

4.2.1

Policies aimed at phasing out fossil fuel

Concerning fossil fuel, natural gas is seen as a bridging technology. During the last decade, gas supply routes have been improved and the domestic gas grid is under development. Concerning the Energiewende, oil is not subject to policies. However, it has been decided that the ample subsidies provided to domestic coal production will be phased out and that hard coal mines should be decommissioned by 2018. These subsidies are substantial: Germany is the fourth largest subsidizer of fossil fuels and in 2011 provided €1.9 billion to the hard coal sector alone. The EU Large Combustion Plant Directive will force the closure of much coal capacity. Simultaneously, several coal fire power plants, both brown and hard coal, are under construction, some of which were planned in the early 2000s when many actors didn’t believe that RES-E could replace the decommissioned nuclear power. Thus, on face value it seems as though coal will remain a cornerstone in the German energy mix as the new coal fire plants have a technical lifespan until 2050. It remains an open question whether coal will remain economically competitive during this period due to the rapidly increasing cost-competitiveness of renewables. Moreover, if the external costs of carbon emissions are more effectively internalized under the ETS or a similar mechanism, coal will rapidly become uneconomical.

4.2.2

Policies aimed at fostering RE technology

Setting obligations for actors: There are multiple policy tools aimed at setting clear obligations for actors on how they need to proceed in order to realise the Energiewende. One example is the obligation of Transmission System Operators [TSO] set by the Federal Grid Agency to produce a grid development plan ranging over 10 years. Another example is the renewable Energy Heat Act, which amongst other things obliges the integration of heat production from renewable sources in new construction. Alternatively, CHP can be used as a substitute.

R&D: Currently, the Sixth Energy Research Programme is in operation. Between 2011 and 2014, €3.5 billion are available to support research into development and deployment of renewables, energy efficiency, storage technology, grid technology and the integration of renewables into the grid. This represents a 75 per cent budget increase compared with the 2006–09 period, which can be largely attributed to the perceived need post Fukushima to increase support to the RE sector.

Supply- and demand policies for RES-E: Germany has several supply- and demand inducing policy tools, aimed at creating a protected space, a market, for RES-E technologies which are not yet able to compete against conventional power sources. By providing a protected space, the aim is for

24

SUSTAINABLE ENERGY IN GERMANY

economics of scale and innovation to increase the competitiveness of technologies over time. The design of these policies is a highly controversial topic as it is of ideological importance and relates back to different views on what role the state should have in supporting industries. The first and most important tool is the technology-specific FiT, incentivising both supply and demand for RES-E. For each RE technology, the owner of such an installation is provided with a guaranteed price over a 20 year period which covers installation costs and allows for a small profit. The price differs depending on location and size of installations. Importantly, the FiT given to each technology is reduced at set intervals to incentivise cost reductions. Figure 13 below illustrates how the FiT provided to new solar PV has reduced over time.

Figure 13 Remuneration for PV power according to the date on which the plant was commissioned in line with the EEG, average remuneration for PV power for existing installations (Wirth 2013)

When selling electricity to the grid, RES-E gets priority dispatch and grid operators are obliged to purchase the electricity from these sources. Another important factor is that the cost of the FiT is borne by the consumer via a surcharge on the electricity bill, and not by the taxpayers (even though the two groups naturally have large overlaps). The design of the FiT also allows for different technologies to be deployed simultaneously. Moreover, potential windfall profits are reduced. Deutsche Bank has identified three development phases of the FiT: 2000–2008: Focus was on stimulating rapid deployment and regression rates (reduction of FiT) were modest. 2009–2011: Rapid decline in solar PV module prices led to a more active regression rate.

25

SUSTAINABLE ENERGY IN GERMANY

2012–present: Wind, solar PV and biomass is becoming increasingly competitive and are nearing grid parity. There is a perceived need to further integrate technologies into the electricity market. Indeed, the cost-competitiveness of solar PV modules has increased rapidly as shown in figure 14 below. It illustrates the end-cost of small-scale rooftop systems (€/kW) for the average German end-costumer.

Figure 14 Average end-customer cost of small-scale rooftop systems (€/kW) (Hummer et. al. 2013)

The second supply and demand inducing policy tool is called market premium for electricity. Simplified, it is a variant of the FiT that aims to integrate RES-E more into the electricity market. Under the scheme which is currently in operation, owners of RES-E plants are entitled to claim a market premium for electricity they sell directly to the market, rather than claim the FiT. The premium is calculated each month and covers the difference between the average price of the energy exchange and the EEG subsidy. Moreover, a management premium is provided. In the current phase of the Energiewende, the market premium is considered more attractive by some as payments are related to the electricity price, causing incentives to produce electricity at periods of high demand and install new generation in areas with higher market prices. The coalition negotiations currently underway are debating whether or not to fully replace the FiT with the market premium alternative. A supply inducing policy tool is the provision of cheap capital for RES-E investments. The German State Investment Bank KfW (Kreditanstalt für Wiederaufbau) is an important funder for renewable energy projects, such as offshore wind plants [OWP]. During the first six months of 2012, the bank lent around €12 billion to environmental projects. In the summer of 2012, it promised a further €100 billion to renewable energy and energy efficiency projects. Ulrich Schroeder, the KfW CEO has stated the need to improve conditions for investments in OWP and consequently, the German state is actively trying to reduce financing risk and costs of renewable energy projects.

26

SUSTAINABLE ENERGY IN GERMANY

There are also supply and demand inducing policy tools for renewable heat generation such as the Market Incentive Program which provides investment grants and interest reduced loans and promotes the use of renewable energies in the heating market. Moreover, the Cogeneration Act provides subsidies and bonuses up to €750 million for cogeneration projects.

4.2.3

Policies aimed at increasing energy efficiency

Energy efficiency is seen as vital for reaching the Energy Concept targets. Indeed, meeting the energy efficiency targets will require large investments and if these are not realized, a greater reliance on fossil fuel in the long run is forecasted. Importantly, the financial crisis has had an adverse impact on investments and there is a need to design an environment that provides certainty and stability for investors. As such, Germany is implementing a wide variety of energy efficiency policies. Apart from regulatory measures, which often derive from the EU, financial energy efficiency measures dominate both in the residential, industrial and service sector. Whilst most measures have been funded by the state budget, there are ongoing discussions over the introduction of tax deductions for energy-efficiency building renovations. In 2009 the German state established the Federal Agency for Energy Efficiency whose aim is to achieve Germany’s energy efficiency targets. Its founding mission was to help the implementation of EU directives. Currently, the organization is a small sub organisation of the Federal Ministry of Economics and Technology. As such, it is a public institution, separating it from the German Energy Agency which is a public-private partnership. As the latter is not a public institution, it is not possible for the Energy Agency to officially implement law.

Setting obligations for actors: There are currently ongoing discussions to implement a number of new policies such as the setting of more stringent building standards which by 2020 will force new buildings to be climate neutral. There are also discussions to develop a renovation roadmap for existing buildings.

R&D: A part of the Sixth Energy Research Programme is focused towards funding research into energy efficiency measures.

Financial support: There are numerous economic policy tools currently in operation. Below follows a short description of three. The first is a special energy efficiency fund which initiates efficiency measures at multiple levels such as in municipalities, in industry, SMEs and towards consumers. Its funds are to be increased to €300m in 2015 but because it is to be funded by revenues from the ETS, its funding is unstable. The second measure is a special fund for energy efficiency in SMEs set up by the KfW and the Federal Ministry for Economics and Technology. The fund provides advice on energy savings and also provides a grant of up to 80 per cent for independent energy advice.

27

SUSTAINABLE ENERGY IN GERMANY

The third measure is the weatherproofing support program which aims to financially support the insulation of buildings. It has had its annual support increased to €1.5 billion from 2012 to 2014.

4.2.4

Policies aimed at promoting sustainable transport

Germany has some of the most successful car manufacturers in the world. In order to ensure their success in the electric mobility market, the German government has introduced a number of ambitious industrial policy instruments in the National Platform for Electric Mobility. To stimulate a market, it has announced a target of 1 million electric vehicles on the road by 2020. These include:

•

Almost €2 billion in R&D funding until 2013

•

Providing following advantages for users of electric cars: a 10-year tax exemption, dedicated parking spots with charging stations and the option to use bus lanes.

Moreover, the Economic Development Agency of Germany [GTAI], which is part of the federal government, claims there are aims to:

•

Let the public sector use innovative procurement management

•

Building battery production and recycling facilities in the country

•

Develop new business models

•

Support standardization on international level to support exports.

Figure 15 below shows how the National Platform for Electric Mobility uses a holistic approach at identifying the need for different policy instruments.

Figure 15 (MacDougall 2013)

28

SUSTAINABLE ENERGY IN GERMANY

However, it is very unlikely the target set of selling 1 million electric vehicles will be met if current sale levels are to continue. The policies mentioned above will with all likelihood raise sales, but perhaps not at the pace needed to reach the target. The policy instruments described above can be clearly linked to the integrated energy, innovation and industrial perspective prevalent in the country. Indeed, the policies illustrate the holistic solutions currently being offered to realise the Energy Concept targets, develop the domestic industrial base and address the challenges currently facing the Energiewende. These challenges will now be analysed in chapter five.

29

SUSTAINABLE ENERGY IN GERMANY

5

Challenges

The challenges facing the Energiewende are an extraordinarily politicised topic. For example, the phase out of nuclear power led to predictions of higher electricity prices, increased electricity imports and blackouts, which were not realised. There are however several challenges facing Germany’s energy strategy, both on the technological side and in the political arena. Based on interviews with energy experts in Germany and on literature reviews, this chapter identifies and discusses four of the most important challenges. These are:

•

The cost/price of the EEG surcharge and the distribution of these costs

•

The possible need for a market reform

•

Storage and intermittency issues

•

Grid-related issues

5.1

Cost of the EEG surcharge

The cost of the EEG surcharge is by far the most politicized challenge. The EEG-related costs for end-consumers have steadily increased during the last decade. By 2013, the surcharge had increased to 5.28 cent/kWh and is expected to rise to 6.24 cent/kWh in 2014. As of 2013, the EEG surcharge represented 18 per cent of the retail electricity cost. In total, this causes the EEG surcharge to cost customers €20.4 billion in 2013. Not surprisingly, this trend has led to a debate concerning how to stabilize and also reduce costs, not least as it is putting pressure on certain industries and households (although this is also caused by rising fossil fuel prices). Figure 16 below illustrates how the EEG surcharge and the CHP act has contributed to an increasing share of the electricity price in Germany. An important feature of this development is that, although the relative increase of the EEG cost-component has been very rapid, the largest increase in absolute cost derives from the generation, transportation and distribution component.

30

SUSTAINABLE ENERGY IN GERMANY

Figure 16 Cost components for one kilowatt-hour of electricity for household consumers (BMU 2012)

Thus it is interesting to analyse the composition of the EEG surcharge. Figure 17 shows the composition of the EEG surcharge in 2012, 2013 and 2014. Importantly, it illustrates the EEG surcharge does not only constitute of financial support to RES-E installations, but also of costs induced by industry privilege, a fall in the market price of electricity, liquidity reserve, equalization of the negative balance from the previous year and market premium. Indeed, pure financial support costs of renewable energy constitute less than half of the EEG surcharge. Moreover, it illustrates that the pure costs of supporting renewable energy have risen only slightly between 2012 and 2013 and will slow down further in 2014. Instead, a large share of the increase of the surcharge can be explained by the other factors mentioned above. Due to the need to focus, liquidity reserve, equalization of the negative balance from the previous year and market premium will not be discussed. Instead, industry privileges and fall in the market price of electricity will be discussed shortly.

31

SUSTAINABLE ENERGY IN GERMANY

Figure 17 Composition of the EEG surcharge between 2012 and 2014 (BEE 2013)

Industry privilege: The last government coalition allowed the number of firms exempted from paying the surcharge to increase from around 600 in 2011 to 1700 in 2013, a number which is expected to increase to 2300 in 2014. Currently large consumers of electricity only pay the full surcharge on 10 per cent of electricity consumed, paying a reduced surcharge on the remaining 90 per cent. Moreover, if the industry is energy intensive (100 GWh per annum and electricity bills constitute more than 20 per cent of costs) it gets to pay the lower surcharge on all electricity consumed. By 2012, energy-intensive industries used 18 per cent of electricity generated. Arguably, industry privilege also constitutes a support cost. Importantly though, the cost has been redistributed from industry onto the consumer by being included in the EEG surcharge.

Fall in the market (wholesale) price of electricity due to the merit order effect: In a merit order system, electricity generators are operated according to their marginal cost of operation. RES-E technologies, especially wind and solar, have extremely low marginal costs of operation, mostly because they do not require any added fuel. As the amount of renewable electricity generators providing the grid with electricity increases, generators with more expensive cost of operation, such as gas plants, are outcompeted. The increase of RES-E with low marginal cost of operation, causes the spot price of electricity to fall. Importantly, other factors have also influenced the fall in spot prices, such as decreased demand combined with overinvestment in capacity, which are interlinked to the expansion of RES-E. Since 2008 wholesale electricity prices have fallen from €80 to €38 per MWh in 2013. Figure 18 shows how fast it has fallen since mid-2012. This in turn causes the difference between the spot prices and the FiT to increase, thus increasing the surcharge cost.

32

SUSTAINABLE ENERGY IN GERMANY

Figure 18 Wholesale power market price (Schafhausen 2013)

Effects on households and business: Households and non-exempted industry have not benefited from the fall in the price of wholesale prices for two reasons. First, they purchase electricity from the retail market, which partly due to a lack of competition has not benefited from the price fall in the wholesale market. Second, the cost of industry exemptions are added to the electricity retail price, which in turn increases the surcharge paid by households and non-exempted industry. Indeed, according to a report by the association of Energy and Water industries [BDEW], households pay 35 per cent of the surcharge cost whilst only using one quarter of electricity consumed. Simultaneously, industry that is exempted from paying the surcharge benefits from lower wholesale electricity prices as it often buys directly from the wholesale electricity market. The EU has initiated an investigation whether the exemption constitutes unfair state aid. Despite this fact, German industry has argued consistently for a prolonged period of time that its competitiveness is under threat due to rising electricity costs (an argument which is true for SMEs). This can be seen as a positioning of the industry in an attempt to minimize a future policy tightening of those companies that are exempted from the EEG surcharge.

5.2

Market

Prior to RES-E, electricity prices spiked during peak hours of consumption which was highly profitable for utility companies. However, due to the rapid deployment of solar PV which produces most electricity during the peak consumption hours of midday at lower marginal costs, the price hike effect has eroded. Indeed, in 2008 €14 per MWh differed between peak and base load prices, a figure which had fallen to €3 during the first six months of 2013. This, together with a collapsed European Carbon Trading Scheme (which should if functioning properly lead to more expensive coal), has led to lost competitiveness of gas-fired power stations which have a higher marginal cost but are also flexible, thus being able to operate when renewables cannot. If the cost of RES-E technology continues

33

SUSTAINABLE ENERGY IN GERMANY

to fall (which is very likely) also coal fire stations will be threatened. Thus, utilities face an existential threat from renewables. Consequently, the institutional design of the market, designed for a period of inflexible power generation, does not fit with the requirements of a system with flexible power generation. As wholesale prices are artificially low, there are inadequate price signals for the building of new generation capacity of the type needed for the future namely flexible gas-fired power stations. Moreover, as stated above, the institutional design is leading to current gas-fired power stations being closed down; partly in of coal-fired power stations (although an overall reduction in capacity is occurring). As such, there is a need for institutional reform to provide improved guidance to the market.

5.2.1

Storage and intermittency

Germany currently has one of the most reliable grids in Europe. However, due to the intermittent nature of electricity generation from RES-E sources, there is fear that the grid will be destabilized, causing unreliable electricity supply and huge damage to the German economy. A key challenge is therefore to successfully increase flexibility of supply and demand while ensuring security of supply during times of low RES-E generation. Different types of storage capacity, along with more grid interconnections with other European countries are seen as possible solutions. German scientists have been able to design a model for a stable grid relying solely on renewables and storage capacity. However, this system is dependent on energy storage to operate. There is currently research being made both by private and public actors in the fields of battery development, hydrogen storage, fuel cells in conjunction with smart grids as well as energy storage in electric vehicles. Examples of such projects can be found in annex 1. Reserve margins are estimated to be satisfactory until 2015. There is currently a system in operation called the strategic reserve which secures capacity throughout the cold months. However, discussions are ongoing over the need to reform this model as to ensure future supply. Two proposals for market reform have been discussed that ensure supply when there are intermittency issues with renewables. This debate should also be seen in the context of a discussion ongoing on the EU level concerning whether a European wide capacity market should be introduced. The proposals discussed are a reformed strategic reserve and capacity market. The German Environmental Agency supports the idea of a strategic reserve in which spare capacity is bought via an auction. The current strategic reserve is similar to this scheme apart from that capacity is not bought via an action. Such a solution could exclude capacity from the market and as such has faced criticism that it would merely constitute a subsidy to the fossil fuel sector without contributing to the Energiewende. In the capacity market solution, tenders are placed that stretches over a number of years and are based on estimated power demand. Those who are awarded a contract are obliged to provide the grid with electricity in times of need and are paid for installed capacity. The ongoing coalition negotiations are discussing these matters and it seems as though a strategic reserve market will be set up in the short term with the aim of introducing a capacity market in the medium term.

34

SUSTAINABLE ENERGY IN GERMANY

5.2.2

Grid

Simplified, there is an excess of power generated in the north which needs to be directed south to industrial areas. With the continued expansion of RES-E generation in the north this need will only increase. Currently, transmission infrastructure is congested. As such, expanding the transmission and distribution networks is seen as one of the most important challenges to overcome. In the Electricity Grid Development Plan 2012 developed by the four TSOs, 2800 km of new power lines need to be constructed and another 2900 km reinforced. This will cost between €20-30 billion during the next 10 years. Moreover, a further €27.5 to 42.5 billion will need to be invested in the distribution network during the same time period. However, the expansion is facing public opposition, a lack of coordination between different stakeholders (such as state governments) and a lack of access to affordable funding. As such, it constitutes a great challenge. A number of institutional reforms have been enacted in an attempt to overcome this challenge.

35

SUSTAINABLE ENERGY IN GERMANY

6

Possible development pathways

Based on the material presented in previous chapters, three key observations emerge:

1

The Energiewende is currently secure

2

Reforms are to be expected and are necessary for continued support

3

Deployment of RES-E will continue

6.1

The Energiewende is currently secure

It is likely that the Energiewende is secure from major revisions. This section outlines the argument behind this conclusion. There has been an on-going debate concerning how appropriate the Energiewende is. Simplified, this debate can be separated into two main issues: 1) concerning the ambition and scale of the transformation and 2) whether a FiT or a quota system should be used as a market creation instrument. Similar differences can also be found in other European countries. In the first debate, there are, simplified, two sides, those who support stretch and transform policies and those who support fit and conform policies. The Greens, Die Linke, and certain factions of the SPD, along with a majority of the population, and certain companies, both in the RES-E sector but also in others, support stretch and transform policies, meaning a more ambitious environmental agenda and a strive towards socioeconomic transformation. In other words they support altering norms, beliefs and regulations to better fit the energy transformation, including gaining influence over institutions. Those who support Fit and conform policies however would rather see the energy transformation occur within current institutions, in other words policies should be conformed to current market structures etc. Certain factions of the CDU and the SPD have supported this stance, along with the FDP and certain industrial and utility associations. The second, interrelated debate has occurred between those who support the FiT and those who support a quota system, like the Swedish green certificates. Simplified, the debate has concerned whether or not universalism should rule within market creating policies. In other words, the debate has concerned whether market creating policies should be technology neutral such as in green certificates, or whether they should be technology-specific, such as in the FiT. In the debate, technology-specific market creating policies have been gaining support, as it has become increasingly realised that technology-neutral policies implicitly choose the cheapest technology at the expense of others. Thus it is argued that its design insufficiently spurs innovation. The FDP and utilities were for a long time the firmest supporters of the introduction of a quota system in Germany, along with a faction of the CDU. Over time, the debate has shifted away from whether the Energiewende should occur to how it should be managed and controlled. This shift has happened for two main reasons: a) the FDP failed to enter parliament, in turn forcing the CDU to enter coalition discussions with the SPD, which is interested in retaining the Energiewende, and b) there is a broad consensus amongst the German population that the Energiewende is necessary. This fact is

36

SUSTAINABLE ENERGY IN GERMANY

probably influenced by the number of stakeholders in the Energiewende, such as state governments, cooperatives and RES-E industry. Also on the second order issues – the details of the Energiewende - opposing actors are starting to conform. For example, the German Association of Energy and Water Industries [BDEW], previously a strong supporter of a quota system, rejected a proposal prior to the election from the German Monopolies Commission that called for the implementation of a quota system based on the Swedish model. Instead, the BDEW called for reforms to be made within current policies. This shift can be mirrored in how utilities seem to be starting to shift their business models. Indeed, in a confidential meeting, the head of RWE, one of Germany’s largest utilities, argued that by 2018, only 20 per cent of profits would be made by conventional power plants. Moreover, future investments would be made exclusively in RES-E, with no more investments made in coal plants. Prior to the election, political parties made it clear that the Energiewende needed to be reformed. Currently, the SPD and CDU are in coalition negotiations attempting to decide on the details in this process, for example over issues such as cost, future targets (SPD are calling for 75 per cent renewables by 2030 whilst CDU is calling for 50 per cent) and electricity market reforms. The SPD chief negotiator is of the coal faction within the Party and there is currently an attempt to secure the future of coal in the German energy mix. It is unclear to what degree this will be possible.

6.2

Reforms are to be expected

Assessing the debate surrounding both the coalition negotiations and the underlying needs, three areas in need of reform stand out.

6.2.1

Cost reforms

It is evident that the surcharge costs need to be reduced. There are several ways of doing this (apart from reforming the electricity market, see chapter five).

•

First, the number of firms exempted from paying the surcharge could be reduced.

•

Second, SPD is calling for a reduction in the electricity tax.

•

Third, an increasing number of people will probably change electricity provider.

The cost of the Energiewende and how this cost is distributed is vital for its continued popular support. In opinion polls, support is usually around 80 per cent although in 2012, one survey found that less than half of the interviewees supported it. However, yet again more than half supported it when the question was rephrased so they could answer yes if the costs were fairly distributed. This shows the importance of costs being fairly distributed for the policy to retain legitimacy. Moreover, if costs are not curtailed, popular support could wane. Currently electricity costs constitute 3 per cent of German household consumption, whilst other energy costs represent 4 per cent. Bloomberg New Energy Finance found that when total energy expenditure increased to between 8-10 per cent of household expenditure, costs became unacceptably high. Thus, costs could still increase but if legitimacy is to be retained, cost increases will need to be curtailed in the medium term.

37

SUSTAINABLE ENERGY IN GERMANY

6.2.2

Reform of the electricity market

It is likely that the electricity market will be reformed in the future, albeit not in the immediate timeframe. A reform will need to constitute a shift in the institutional setup in order to create an electricity market that is geared towards flexible power generation. It will need to do this for two reasons. First, to ensure the profitability of RES-E investments a reform will necessary need to reform how electricity is priced, because if RES-E is priced purely on operational costs, as it is now, investments will not be recuperated. This is because the market price is based on conventional power stations that have significant marginal costs, whilst RES-E plants have significant capital costs but next to zero marginal costs. Second, as described in chapter five, the inability of the market to provide guidance is also affecting new investments. To ensure grid stability, a reform is needed. One alternative would be to implement capacity markets. Another would be to provide separate selection mechanisms for different technologies.

6.3

Deployment will continue

Evidence supports the position that deployment of RES-E technology will continue, especially wind and solar PV. This is due to two factors. First, the increasing competitiveness of these technologies compared to conventional power will make them increasingly attractive for actors who wish to sell electricity to the grid. Second, the use of RES-E technology for home use will increase substantially, even without subsidies. This is due to the cost of electricity produced by solar PV already being cheaper than the retail electricity price. This is seen in figure 19 which illustrates UBS projections on the increasing gap between the retail electricity price and electricity produced by self-owned solar PV. Indeed, as seen by Figure 20, the increased deployment of solar PV for own use is expected to decrease electricity demand from utilities by up to 6 per cent by 2020, whilst not leading to an increase in the surcharge cost.

Figure 19 Unsubsidised solar already cheaper than grid electricity (example: southern Germany, €₵/kWh) (Hummer et. al. 2013)

38

SUSTAINABLE ENERGY IN GERMANY

Figure 20 Up to 9 per cent expected decline in power demand from utilities by 2020 due to unsubsidised solar (Hummer et. al. 2013)

39

SUSTAINABLE ENERGY IN GERMANY

7

Areas for future research

There are two areas of exceptional interest for future research. These are:

•

Capacity markets and alternative solutions

•

Electricity market institutions and business model innovation

Capacity markets are seen as a part-solution to securing base load power. There are however different kinds of capacity markets and there are alternative solutions. Consequently, it would be of interest to assess the alternatives, and using models analyse the different alternatives strengths and weaknesses. Capacity markets are however not a panacea. Indeed, it could be of interest to investigate whether and at what stage, a reform of the electricity market is needed. Moreover, the analysis could include a discussion concerning what should be reformed, such as changing how electricity is priced. There is currently an ongoing debate in Germany concerning these areas of research and much could be learned from them.

40

SUSTAINABLE ENERGY IN GERMANY

8

Annex 1

41

SUSTAINABLE ENERGY IN GERMANY

9

Bibliography

BBC (2011) Germany stages anti-nuclear marches after fukushima, Published 26.03.2011 [http://www.bbc.co.uk/news/world-europe-12872339] Accessed 12.11.2013 BBC (2013) Fossil fuel subsidies ‘reckless use of public funds’ Published 07.11.2013 [http://www.bbc.co.uk/news/science-environment-24833153] Accessed 09.12.2013 Bundesverband Erneurbare Energie [BEE] (2013) THE EEG SURCHARGE FOR 2014. Published October 2013 Bhatti, J. (2013) The Cost of Green: Germany Tussles Over the Bill for Its Energy Revolution, Time. Published 28.05.2013 [http://world.time.com/2013/05/28/the-cost-ofgreen-germany-tussles-over-the-bill-for-its-energy-revolution/] Accessed 11.11.2013 BMU (2012): Erneuerbare Energie in Zahlen. Nationale und internationale Entwicklungen. Available at: http://www.erneuerbare-energien.de/fileadmin/eeimport/files/pdfs/allgemein/application/pdf/broschuere_ee_zahlen_bf.pdf, accessed 23 September 2013, p. 43) Bundesverband der Energie- und Wasserwirtschaft [BDEW] (2013) Position paper Proposals for a fundamental reform of the German Renewable Energy Sources Act¸ Berlin. Published 18.09.2013 Bozsoki, I. (2013) Electricity Promotion in Germany, Renewable energy policy database and support – an initiative of the European Commission. Updated 18.11.2013 [http://www.res-legal.eu/search-by-country/germany/tools-list/c/germany/s/rese/t/promotion/sum/136/lpid/135/] Accessed 20.11.2013 Chabot, B. (2013) Some Conclusions From the Recent Evolution of the German Solar PV Market and PV FITs, BCCONSULT Chambers, M. (2013) German green surcharge seen rising by up to 7 pct in 2015-sources, Reuters. Published 14.11.2013 [http://www.reuters.com/article/2013/11/14/germanyenergy-surcharge-idUSB4N0I700020131114] Accessed 20.11.2013 Encyclopaedia Britannica (2013) Political Economy [http://global.britannica.com/EBchecked/topic/467600/political-economy] Accessed 18.11.2013 Energy Research Knowledge Center [ERKC] Germany, Last updated 14.11.2013 [http://setis.ec.europa.eu/energy-research/country/germany] Accessed 14.11.2013 Ethics Commission for a Safe Energy Supply (2011) Germany’s energy transition – A collective project for the future, Published 30.05.2011, Berlin Federal Ministry of Economics and Technology [BMWi], Federal Ministry for the Environment, Nature conservation and Nuclear Safety [BMU] (2010) Energy Concept for an Environmentally Sound, Reliable and Affordable Energy Supply, Published 28.09.2010 Federal Ministry of Economics and Technology [BMWi] (2013) National Reform Program, March 2013

42

SUSTAINABLE ENERGY IN GERMANY

Federal Ministry for the Environment, Nature Conservation and Nuclear Safety [BMU] (n.d.) The Energy Concept and its accelerated implementation [http://www.bmu.de/en/topics/climate-energy/transformation-of-the-energysystem/resolutions-and-measures/] Accessed 06.11.2013 Fulton, M., Capalino, R., Auer.J (2012) The German Feed-in Tariff: Recent Policy Changes, Deutsche Bank Climate Change Advisors. Published September 2012 Flauger, J. (2013) RWE-Chef Terium plant radikalen Strategieschwenk, Handelsblatt Published 29.10.2013 [http://www.handelsblatt.com/unternehmen/industrie/Energiewenderwe-chef-terium-plant-radikalen-strategieschwenk/9001882.html] Accessed 21.11.2013 Froggatt, A., Mitchell, C. Managi,S. (2012) Briefing Paper - Reset or Restart? The Impact of Fukushima on the Japanese and German Energy Sectors, Chatham House Hummer, P., Lekander, P., Gandolfini, A., Hunt, S., Cossio, I. (2013) The unsubsidised solar revolution UBS Investment Research European Utilities. Published 15.01.2013 International Energy Agency [IEA] (2012) CARBON CAPTURE AND STORAGE. Legal and Regulatory Review Edition 3, July 2012 International Energy Agency (2013) Energy Policies of IEA Countries - Germany --2013 Review Executive summary and key recommendations, ISBN 978-92-64-19075-7 Jacobsson, R., Jacobsson, S. (2012) The emerging funding gap for the European Energy Sector—Will the financial sector deliver? Environmental Innovation and Societal Transitions 5 pp. 49– 59 Kaup, F., Selbmann, K. The seesaw of Germany’s biofuel policy – Tracing the evolvement to its current state, Energy Policy, 62, pp. 513 Lauber, V. (2012) ‘Wind Power Policy in Germany and the UK: Different Choices Leading to Divergent Outcomes’ in Szarka, J., Cowell, R., Ellis, G., Strachan, P., Warren, C. (eds) Learning from Windpower. Governance, Societal and Policy Perspectives on Sustainable Energy, Palgrave MacMillan, New York, pp. 38-60 Lauber, V., Buschmann, M. (2013) Germany: Challenges of a Full Transition to Renewable Energy in Renewable Energy (RE) Governance eds. Michalena, E., Hills, J., Springer-Verlag London. Lauber, V., Jacobsson, S. (Forthcoming) The politics and economics of constructing, contesting and restricting socio-political space for renewables – the case of the German Renewable Energy Act, Presented at the conference constructing and contesting spaces, Eindhoven, November 2013 MacKerron, G. (2011) Renewable Energy and Innovation Policies: European experience. Director of Science and Research Policy Unit [SPRU], University of Sussex. Paper presented to International Workshop on Innovation policies and structural change in a context of growth and crisis, Rio de Janeiro September 2011. Mihm, A. (2013) Regeln für Fracking werden nicht verschärft, Frankfurter Allgemeine Zeitung. Published 04.06.2013 [http://www.faz.net/aktuell/politik/energiepolitik/umstrittene-foerdermethode-regeln-fuerfracking-werden-nicht-verschaerft-12208518.html] Accessed 06.11.2013 Nicola, S. (2012a) Germany Urged to Ban Shale Gas Fracking Near Water Reservoirs, Bloomberg. Published 06.09.2013 [http://www.bloomberg.com/news/2012-09-

43

SUSTAINABLE ENERGY IN GERMANY

06/germany-urged-to-ban-shale-gas-fracking-near-water-reservoirs.html] Accessed 06.11.2013 Nicola, S. (2012b) German Lawmakers Reject Ban on Shale-Gas Fracking in Parliament, Bloomberg. Published 13.12.2012 [http://www.bloomberg.com/news/2012-12-13/germanlawmakers-reject-ban-on-shale-gas-fracking-in-parliament.html] Accessed 06.11.2013 Nicola, S. (2013) German Grid Seen Stable Even With Renewables-Only Supply, Bloomberg. Published 30.10.2013 [http://www.bloomberg.com/news/2013-10-30/germangrid-seen-stable-even-with-renewables-only-supply.html] Accessed 20.11.2013 Nitsch, J., Pregger,T., Scholz, Y., Naegler, T., Heide, D., de Tena, D., Trieb, F., Nienhaus, K., Gerhardt, N., Trost, T., von Oehsen, A., Schwinn, R., Pape, C., Hahn, H., Wickert, M., Sterner, M., Wenzel, B. (2012) Long-term scenarios and strategies for the deployment of renewable energies in Germany in view of European and global developments. Summary of the final report, Deutsches Zentrum für Luft- und Raumfahrt [DLR], Stuttgart Institut für Technische Thermodynamik, Abt. Systemanalyse und Technikbewertung ,Fraunhofer Institut für Windenergie und Energiesystemtechnik [IWES], Ingenieurbüro für neue Energien ([FNE]. Published 31.03.2012 Ouw, M. (2013) From Generation to Integration - Renewable Energies in Germany: Status Quo and Outlook, Germany Trade and Invest. Power Point presentation Pop, V. (2013) Germany eyes rules for controversial gas extraction, EUobserver. Published 28.02.2013 [http://euobserver.com/environment/119238] Accessed 06.11.2013 Rauwald, C. (2013) BMW Joins VW in Backing Germany’s Electric-Vehicle Goal, Bloomberg. Published 28.10.2013 [http://www.bloomberg.com/news/2013-10-28/bmwjoins-vw-in-backing-germany-s-electric-vehicle-goal.html] Accessed: 14.11.2013 Renewables Energies Agency (2013) [www.renewables-in-germany.com] Accessed 22.11.2013 Reuters (2012) Germany's KfW to lend 100 bln euros for switch to renewables, Published 08.08.2012 [http://in.reuters.com/article/2012/08/08/germany-energy-kfwidINL6E8J8DJI20120808] Accessed 19.11.2013 RWE (n.d.) CO2 storage, [http://www.rwe.com/web/cms/en/2800/rwe/innovation/projectstechnologies/power-generation/fossil-fired-power-plants/co2-storage/] Accessed 13.11.2013 Schafhausen, F. (2013) The German “Energiewende” – Climate Change, Renewables, Energy Efficiency, Power Point presentation held at Schloss Leopoldskron, Salzburg, by the Deputy Director General “Energy Transition” Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, Berlin Schlomann, B., Eichhammer, W., Fritzen, P., Reuter, M., Schrader, T. (2012) Energy Efficiency Policies and Measures in Germany. ODYSSEE- MURE 2010. Monitoring of EU and national energy efficiency targets, Fraunhofer. November 2012 Schumpeter, J. (1943): Capitalism, Socialism and Democracy, New York: Harper. Siaroff, A. (1999) Corporatism in 24 industrial democracies: Meaning and measurement European Journal of Political Research 36, pp. 175–205

44

SUSTAINABLE ENERGY IN GERMANY

Spiegel Online (2013) Risky Investments. Berlin Wants To Cap Renewables Subsidies, Published 01.29.2013 [http://www.spiegel.de/international/germany/german-environmentministry-plans-to-cap-subsidies-for-renewables-a-880301.html] Accessed 11.11.2013 The Economist (2013a) Unconventional gas in Europe – Frack to the future, Published 02.02.2013 [http://www.economist.com/news/business/21571171-extracting-europesshale-gas-and-oil-will-be-slow-and-difficult-business-frack-future] Accessed 06.11.2013 The Economist (2013b) How to lose half a trillion. Europe’s electricity providers face an existential threat, Published 12.10.2013 [http://www.economist.com/news/briefing/21587782-europes-electricity-providers-faceexistential-threat-how-lose-half-trillion-euros] Accessed 08.11.2013 Wirth, H. (2013) Recent facts about photovoltaics in Germany, Fraunhofer ISE. Version as of 12.09.2013

Interviewees Senior advisor to the German Federal Environment Ministry Michael Mehling – director of the Ecological Institute Volkmar Lauber – Professor at Zalsburg University Barbara Schlomann – Coordinator of Business Unit Energy and Climate Policy at Fraunhofer ISI

45