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ECEGA's Insights

ECEGA's Insights

The German Energiwende in peril?

Last Friday (08/07/16), the German Bundestag adopted the new Renewable Energy Law (EEG 2016), a legislation bound to be controversial. EEG 2016 overhauls the very tenets of the much-loved and envied Renewable Energy Sources Act (EEG) of 2000, the quintessentially German legislation that sparked the revolutionary Energiewende, or energy transition and made Germany the renewable powerhouse it is today.

The new Renewable Energy Act, to become effective as of 1st of January, 2017 spells the end of the subsidised carbon-free electricity by eliminating the generous feed-in-tariffs for wind and solar arrays and introducing competitive bids for the construction of new capacity. For solar power, only small photovoltaic projects of a capacity below 750KW will still be eligible for tariffs, but arrays above this threshold will be auctioned at carefully calibrated state tenders. For consumption exceeding 20MWh, the consumers would have to pay a tax of 2 euro cents/KWh in addition to the regular 2 euro cents renewable surcharge. For wind, the new act introduces an annual limit of new onshore capacity of 2,8GW; for offshore it envisions 15GW of added capacity by 2030. For biomass, the target has been increased to 150MW annually for a 3-year period, and 200MW/annum afterwards. 

ECEGA’s Analysis The Energiewende has effectively been a grassroots, citizen-led revolution. Citizens from Munich to Hamburg turned overnight into savvy investors, instituting cooperatives and building multi-million euro solar and wind arrays. Today, these citizen-led cooperatives total close to 1,000 and own roughly half of the German vast renewable energy capacity. But the German citizens embraced the transition because of its solid economics: their investments were underwritten by generous state subsidy, thereof bringing safe yields on equity unknown in any traditional savings accounts. Helping the environment was just a happy additional bonus, making the finance dividents that much more cherished. Notwithstanding, as Adam Smith lucidly put it two and a half centuries ago, There is no free lunch. The guaranteed 9 euro cents/KWh for solar and 20 euro cents/KWh for wind over 20-year period brought high dividends to investors but also made Germany the country with the highest energy bills in Europe (40 percent higher than the EU average) with the renewable energy surcharge that generated the attractive returns on RES equity included directly within households' electricity bills.

The high yeild on investment expectedly unleashed a genuine renewables golden rush. The rapid expansion of intermittent, decentralised power put a strain on the aging electricity grid unable to cope with the high demand for RES integration. But also, to avoid blackouts, the intermittance had to be balanced by a stable backloading source. In the absence of nuclear, the obvious choice was coal; the result - a paradox, the German paradox of increasing renewable energy in parallel to growing CO2 emissions.

The aggressive state-driven renewable energy expansion also exposed Germany to state aid and anti-competition pressures. Just last week, Greenpeace made public a TTIP leak showing that the consumer-funded RES subsidies and preferential RES access to the grid would be singled as illegal under the TTIP remit; hardly a novelty - the pressure against the system has been steadily escalating for years. Thus, the EEG2016 will actually recalibrate the veritable RES frenzy by setting annual limits for new RES capacity. This will allow the grid to adapt without actually halting the generation and consumption of renewable energy.

The important caveat is that the state-prescribed thresholds for newly added capacity are gross thresholds, i.e. replacing wind turbines at the end of their life-cycle will be considered as a newly added capacity, not a replaced generation; thus, given that most wind turbines in Germany were installed at the beginning of the century (the average lifetime and eligibility for feed-in-tariffs is 20 years), their replacement is imminent. This might lead to a net reduction of power generated by wind sources in the decade to come. Howbeit, our view is that this is not necessarily an unsavory development: the rapid expansion of RES has led to huge spare capacity, which in the absence of effective storage options or interconnections with neighbours has been effectively lost. Thus, consumers paid for generation never to be utilised, a situation much identical to the ridiculed Common Agricultural Policy (CAP) milk quotas of the 1980s which led to the destruction of tons of milk produced without a market incentive but just to benefit from the generous CAP subsidies. Waste economics is never a trend to endorse. The new system would scale back the RES production where demand is absent and make RES power generation more agile and market-responsive. Eliminating the subsidy scheme will also test the maturity of RES energy, and it is implausable to think it will not sustain the pressures.

The pitfall in the EEG 2016 is that as of 1st of January, 2017 the average citizen will find it less attractive, but also considerably harder to invest in RES generation, given the eliminated subsidies, the high upfront costs of auction participation and the competition of large-scale, much moire agile stakeholders (with the exemption of small photovoltaic arrays that is). Squeezing away the citizen-led initiatives might put a considerable rift in the expansion of RES and imperil to an extent the country’s target of 80% of power generated by renewable energy by 2050. Thus, a review of the law in 2020 should allow for sufficient time to adapt the system if the trajectory is not following the desired pathway of 40-45 percent of RES in power generation by 2025.

Overall, our opinion is that the new law will not eliminate the strides made by the Energiewende, rather it will make a necessary leap into an Energiewende 2.0 which would be much more market-responsive and sustainable in the long run. Renewable energy is here to stay, in Germany and beyond but its maturation must be coupled by a strong economic sense, because controlled economies have shown time and again not to sustain the test of time. And the energy transition should.

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