European policy consultants
Rural development and renewable energy

Germany's renewable energy policy

Perhaps no other legislation has been copied worldwide as much as Germany's Renewable Energy Act (EEG), which is widely regarded as a success story.

The law specifies that renewables have priority on the grid and that investors in renewables must receive sufficient compensation to provide a return on their investment irrespective of electricity prices on the power exchange.

The resulting high level of investment security and the lack of red tape are often cited as the main reasons why the EEG has brought down the cost of renewables so much.

While feed-in tariffs themselves have been widely copied outside of Germany, including in UK, the central aspect of grid access is occasionally overlooked. As the report points out, "projects that would be profitable thanks to feed-in tariffs may then remain stuck in limbo for lack of a grid connection".

The feed-in tariffs can be explained as follow:
(i) take the cost of a particular system, divide that figure by the number of kilowatt-hours the system can reasonably be expected to generate over its service life (generally 20 years), and you get the cost of that system per kilowatt-hour.
(ii) tack on whatever return on investment (ROI) you want to provide, and you have your feed-in tariff. In Germany, the target ROI is generally reported at around five to seven percent.

This approach allows distinctions to be made not only between technologies (such as solar, wind, and biomass), but also between system sizes. A giant ground-mounted photovoltaic array on a brownfield site will produce electricity that is cheaper than power from a large number of distributed solar rooftops on homes. By offering different feed-in tariffs for different system sizes, you ensure the economic viability of the various applications, thereby preventing windfall profits for large projects.

The EEG sets very ambitious targets: Germany plans to get at least 35 percent of its power from renewables by 2020, at least 50 percent by 2030, and at least 80 percent by 2050. This legal requirement to switch power generation almost entirely to renewable sources is one of the main pillars of Germany’s energy transition.

Critics of feed-in tariffs charge that the policy does not promote the least expensive type of renewable energy.

This outcome is not, however, unintended; it is what makes feed-in tariffs successful to begin with.

By comparison with FITs, quota systems (such as Renewables Obligations in the UK and Renewable Energy Credits in the US) generally require utilities to generate or purchase a certain amount of their electricity from renewables (say, ten percent by 2020). The utility then looks for the cheapest source of renewable power, which is almost always wind power – and it is almost always large wind farms, not community projects with just a few turbines.

Critics of feed-in tariffs have charged that the policy “picks winners,” but in fact quota systems always pick wind, whereas feed-in tariffs support all of the specified types of energy equally.

The report finds that the criticism is based on a misunderstanding. Up to now, conventional power sources have generally competed with each other. For instance, power companies leave their least expensive power plants online as much as possible and only switch to more expensive generators as demand increases. But if renewable power always has priority, then it does not compete with conventional power on price anyway. In addition, in quota systems, financing institutions add risk surcharges. Thus, financing costs are higher than in a feed-in tariff scheme, which provides long-term reliability for investors.

Germany has the cheapest solar power in the world not because it has so much sunlight, but because of investment certainty and market maturity due to its feed-in tariff policy. Solar is so much cheaper in Germany than it is in sunny parts of the US, for instance, that the largest, most cost-efficient utility-scale solar power plants there still produce considerably more expensive power than small to midsize arrays in Germany.

Up until 2008, when the bottleneck in the supply of solar silicon finally worked itself out, critics of feed-in tariffs charged that Germany had been paying too much for photovoltaics with its feed-in tariffs, thereby keeping the cost up for the rest of the world. But since prices began to plummet in 2008, that argument is rarely heard.

Changes in German feed-in tariffs for PV did not bring about these lower prices; on the contrary, German politicians have been rushing to reduce solar feed-in tariffs to keep up with falling prices.

Solar can get cheaper even if feed-in tariffs remain unchanged because there is still a competitive market. If you want to install a solar roof, you will pick one of the least expensive offers on the market.

In Germany, the feed-in tariffs for newly installed systems decrease from year to year. The “degression rate” – stepped, scheduled tariff reductions – depends on the maturity of the different technologies. Hydropower tariffs go down one percent per year, wind 1.5 percent, and biomass two percent. For photovoltaics, the degression rate depends on the market volume in the preceding year.

The cost of these feed-in tariffs is passed on to power consumers. By 2012, this surcharge had raised the retail price by around 3.6 cents per kilowatt-hour – equivalent to roughly ten euros per month for the average German household;

A lot of countries are struggling to fulfill their climate commitments, but Germany is on track to meet its climate targets. Even after eight nuclear power plants were taken offline in the spring of 2011, Germany reduced its greenhouse gas emissions by 2% from the previous year. This outcome is remarkable given the GDP growth and continued net electricity exports to European neighbours. Power supply was stable at a record level.

The decommissioned nuclear capacity was replaced with more renewables, conventional back-up power plants, and greater efficiency. Renewables reduce Germany’s GHG emissions by around 130 million tons annually. Overall, Germany will overshoot its Kyoto target of a 21% reduction for 2012. By the end of 2011, Germany had reduced its GHG emissions by 27% and is now moving towards reaching its 2020 target of 40% reductions (relative to 1990).

The report, "Arguments for a Renewable Future" (2012) is available at energytransition.de