GERMAN EXPERIENCE WITH PROMOTION OF RENEWABLE ENERGY prepared for National Rural Electric Cooperative Association prepared by Mathew J. Morey Laurence D. Kirsch Christensen Associates Energy Consulting LLC March 28, 2014 Questions regarding this report should be directed to: David L. Mohre Executive Director, Energy & Power Division National Rural Electric Cooperative Association 4301 Wilson Blvd. Arlington, Va. 22203 [email protected] 703‐907‐5812 office Christensen Associates Energy Consulting, LLC
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German Experience with Promotion of Renewable Energy TableofContents
Executive Summary ..........................................................................................................................ii 1. Legislative History .................................................................................................................... 1 a. Pre‐1990 Treatment of Renewable Energy .................................................................. 1 b. Feed‐In Law of 1990 ...................................................................................................... 2 c. The Renewable Energy Sources Act .............................................................................. 3 d. Recent Developments in RE Legislation ........................................................................ 4 e. FIT Structure .................................................................................................................. 6 2. German Electricity Sector History ........................................................................................... 7 a. Electricity Demand by Sector ...................................................................................... 10 b. Electricity Prices .......................................................................................................... 10 1. Prices by Customer Class ................................................................................................ 10 2. Electricity Price Composition ......................................................................................... 11 3. Renewable Energy Shares of RESA Costs ....................................................................... 15 3. Economic Impacts of German Energy Policy ......................................................................... 16 a. Retail Electricity Prices – Allocation of Costs for CREs and RESA ............................... 16 b. The Cost of Subsidizing Renewable Energy in Germany ............................................. 18 c. GHG Reductions and Costs ......................................................................................... 18 d. Impact on Conventional Generation .......................................................................... 20 e. Investment in Renewable Energy Technologies ......................................................... 21 f. Job Creation ................................................................................................................ 22 g. Grid Stability and Industrial Production ..................................................................... 24 h. Energy Security ........................................................................................................... 25 4. Conclusions ............................................................................................................................ 26 Appendix A: European Union Emissions Trading System ............................................................. 27 Christensen Associates Energy Consulting LLC i 3/28/2014 German Experience with Promotion of Renewable Energy ExecutiveSummary
In Germany, a system of subsidies – modest for wind power and other sources, extremely generous for solar power – has supported and encouraged the rapid expansion of renewable energy (RE) production. On the whole, the well‐intentioned laws promoting RE development have proven to be an extraordinarily wasteful means of supporting improvements in environmental quality and reducing greenhouse gas (GHG) emissions.1 The German subsidies are implemented through a system of feed‐in tariffs (FITs) that require electric utilities to pay above‐market rates for electricity produced by RE resources and then recover the costs of these subsidies from electricity consumers. The subsidies have helped bring the combined generation from on‐shore wind and solar power from 1.7% of German electricity production in 2000 to 12.5% in 2012, and have also helped increase biomass‐fuel electricity from 0.8% in 2000 to 6.9% in 2012. But the subsidies have been so costly that, as shown in Figure Ex‐1, they have contributed mightily to increased residential electricity rates. Indeed, partly due to the tariff charges related to RE and energy efficiency that account for nearly 20% of residential bills in Germany, German households were paying nearly 39¢ per kWh in 2013. This is roughly triple the contemporaneous average U.S. residential electricity rate of about 12.2¢ per kWh, in which charges for RE and energy efficiency amounted to an average of about 2% of residential bills.2 A primary purpose of the subsidies to RE is to lower GHG emissions. The German subsidization scheme has been extremely costly relative to the GHG benefits, however. In 2012, RE resources supported by the subsidies produced 136.1 billion kWh of electricity, which was about 23% of the electricity generated to serve customers. This power cost German electricity consumers $26.2 billion, which was about $21.0 billion more than its wholesale market value. Because this subsidized electricity avoided emission of an estimated 81 million tons of CO2 equivalent, the cost to reduce GHGs through subsidies in Germany in 2012 was about $259 per ton of CO2 reduction (i.e., $21 billion divided by 81 million tons). By contrast, the Certified Emission Credits traded on the Intercontinental Exchange in 2012 had an average price of only $3.26 per ton. This means that REs were paid $21.0 billion for environmental benefits that have a market value of only $0.3 billion or, equivalently, could have been provided by emission‐reducing alternatives that would have cost only $0.3 billion. German electricity consumers thus overpaid 1
Throughout this report, except where noted otherwise, all German prices or costs are expressed in nominal U.S. dollars, with conversions from Euros to dollars based on the annual average Euro‐dollar exchange rate for the year considered. 2
Average residential electricity rates in Germany assume consumption of 450 kWh per month. U.S. average electricity rate was obtained from Energy Information Administration, Short‐Term Energy Outlook, February 2014, http://www.eia.gov/forecasts/steo/report/electricity.cfm. RE and EE’s share of the residential retail rate in the U.S. is based on a sample of 16 utilities that explicitly recover RE and EE costs through rate riders (i.e., surcharges). Christensen Associates Energy Consulting LLC ii 3/28/2014 almost $21.0 billion for the 81 million ton reduction in CO2. Consistent with the foregoing figures, a recent report from the MIT Center for Energy and Environmental Research estimates the average explicit cost of GHG reduction over the period 2006 through 2010 at about $60 per ton for on‐shore wind and $683 per ton for PV solar. By any measure, Germany’s RE subsidization scheme is a spectacularly wasteful approach toward GHG reductions. Figure Ex‐1. German Residential Electricity Net Prices and Taxes, Levies & Fees, 2000 – 2013 45.0
Electricity Rate (Cents per kWh)
40.0
35.0
10.9 30.0
11.0 10.4 11.0 10.8 10.3 10.2 25.0
20.0
15.0
10.0
5.0
8.2 8.4 4.6 5.2 ‐
‐
7.4 1.7 1.8 8.6 1.4 7.8 4.9 4.6 2.7 1.1 0.6 0.9 5.6 0.5 4.7 4.9 19.2 18.2 19.6 19.1 19.7 0.3 17.0 16.7 0.2 0.2 14.7 14.4 13.5 14.0 12.4 11.6 8.0 7.7 9.2 ‐
1998199920002001200220032004200520062007200820092010201120122013
Gen. Trans, Dist
EEG Charge + Off‐Shore Liability Charge
Taxes + Fees
Germany’s commitment to promoting RE has GHG reductions as its principal objective. It also has been hailed as a vehicle to increase employment, especially in the solar cell industry. But the German experiment with RE development, on an unprecedented scale and pace, has had unintended adverse consequences. In particular, the FIT subsidies have contributed to a substantial increase in coal‐fired generation, so that more electricity was produced from brown coal (i.e., lignite) in 2013 than at any other time since German unification in 1990. Since 2009, electricity production from brown coal has risen by 11.3% while production from hard coal has increased by 14.9%. Ten new hard‐coal power stations totaling 7,985 MW are scheduled to start producing electricity within the next two years.3 At the same time, electricity production from relatively clean natural gas has declined by 18.5%. Coal is experiencing a renaissance in 3
Mengewein, J.,“ Steag Starts Coal‐Fired Power Plant in Germany,” Bloomberg News, November 15, 2013, at http://www.bloomberg.com/news/2013‐11‐15/steag‐starts‐germany‐s‐first‐coal‐fired‐power‐plant‐in‐8‐
years.html.
Christensen Associates Energy Consulting LLC iii 3/28/2014 Germany partly because subsidized RE has driven down wholesale electricity prices, partly because high natural gas prices have put combustion turbines out of the market, and partly because low worldwide coal prices improve the profitability of coal‐fired power plants. With regard to the employment effects, RE advocates claim that the gross employment generated by economic activities connected with RE in 2012 totaled 368,400. Such numbers suggest RE has had an impressive impact on gross employment. However, these figures fail to tell the whole story. They conceal the ramifications for broader economic and social welfare by failing to account for offsetting impacts. The offsetting impacts include the job losses that result from undermining less expensive forms of conventional generation and the depressive effects on the general economy of the subsidies for RE that must be paid by residential and small commercial electricity customers as well as by some industrial electricity customers. Furthermore, the solar PV industry in Germany is suffering mightily from an influx of inexpensive imports of solar PV equipment. Thus, the net jobs created are far less numerous than touted by RE advocates. If the German government has job growth as a policy objective, it should promote employment in the most cost‐effective way, rather than resorting to gross distortions of the investment and consumption decisions in the electricity sector. The enormity of the subsidies and their perverse economic impacts has compelled the German government to cap subsidies through the end of 2014 and limit annual increases to 2.5%. The government also plans to tighten industry exemptions and possibly cut FITs for wind and biomass plants, calling into question investment security for those technologies. The German experiment with subsidizing RE offers valuable lessons for the rest of the world, including the United States. First, government promotion of RE through subsidies financed by retail electricity consumers distorts both consumption and investment decisions relative to what would take place if RE were left to succeed or fail on its merits in a competitive wholesale electricity marketplace. The German experience demonstrates that it is difficult to anticipate correctly the reaction of investors and consumers and of RE supply and demand to such subsidies and retail price distortions. Consequently, the government finds itself constantly tinkering with rules, regulations, and price subsidies in an attempt to control electric sector consumption, investment, and financial impacts. Second, governments do not do well at picking electric generation technology winners and losers. The physics of the electricity grid and the operation of electricity markets automatically make all generation technologies interrelated, operationally and financially. Without a technological breakthrough in energy storage in the immediate future, the intermittency of wind and solar resources, especially at the penetration levels achieved in Germany, requires a continued investment in conventional generating technology to both back up the RE with ancillary services and “fill the energy gap” when RE does not produce. Third, the rate impacts and operational difficulties experienced in Germany offer a valuable lesson for the U.S. of the risks and unintended consequences that can result from inefficient promotion of RE expansion. RE expansion requires long‐range planning and strategic collaboration among stakeholders that will enable RE resources to provide the full value to power system operations. Christensen Associates Energy Consulting LLC iv 3/28/2014 German Experience with Promotion of Renewable Energy Out of concern for the effects of global climate change, the German people and their government have enthusiastically embraced renewable energy (RE) and have aggressively promoted it through the use of financial incentives embedded in retail electricity rates in the form of surcharges called Feed‐in Tariffs. The relevant German policies, going back more than a decade, pay renewable resources above‐market prices for their electricity, thereby encouraging investment in sources such as wind and solar power. German energy policy has been enormously successful in increasing electricity production from renewable resources, but the costs to the German economy and to its citizens to achieve the environmental goal of significant reductions in emissions of GHGs seem to vastly exceed the benefits. Many of the costs associated with implementation of this well‐intentioned policy were likely not imagined at the time of the policy’s creation. Nothing on this scale had ever been attempted before. Furthermore, it was simply not possible to know the future paths of the German, European, and world economy and of worldwide energy prices. Germany has conducted a bold experiment to rapidly deploy renewable resources through a program of subsidizing RE rather than through reliance on the market forces that would have otherwise determined the growth of that sector and the degree of its penetration in electricity supply. That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S., in which states and the federal government are considering how best to address the challenges of mitigating the long‐term effects of greenhouse gas (GHG) emissions. The first section of this report summarizes the history of the German legislation in support of RE. Section 2 provides a history of the German electricity sector, including its prices. Section 3 presents information on the environmental, cost, price, and job impacts of German energy policy. The last section offers some concluding thoughts. An appendix describes the European Union Emissions Trading System. 1. LegislativeHistory
Feed‐In Tariffs (FITs), which are also called Renewable Tariffs or Renewable Energy Payments, are a retail electricity ratemaking mechanism by which utilities are more or less guaranteed recovery of their expenditures on third‐party RE generation. The economic incentive for investment in RE is provided by high above‐market government‐mandated prices for RE. FITs are the mechanism by which retail electricity consumers are forced to pay the above‐market subsidies. They require consumers to reimburse electricity companies for the latters’ mandated above‐market payments to owners of RE resources. a. Pre‐1990TreatmentofRenewableEnergy
Germany has a long history of promoting RE alternatives to conventional electricity technologies. In the late 1980s, Germany adopted several measures to create markets for RE Christensen Associates Energy Consulting LLC 1 3/28/2014 generation technologies. In particular, Germany adopted a wind program and a solar roof program, and created a legal basis for utilities to pay higher costs for RE than were competitive in the market place. In the late 1980s, Germany initiated two important market‐creation programs for RE. First, there was a “1,000 roof” program (not to be confused with 1,000 MW program) for photovoltaic (PV) electricity generation.4 From 1991 to 1995, this program rebated to applicants 70% of their PV investment costs – 50% from the federal government plus another 20% from the Land government.5,6 As a result of this program, 2,250 roofs were equipped with PV modules, leading to about 5.3 MW of installations by 1993.7 This market volume was not large enough to justify increased investment in PV production facilities in the solar cell industry. Second, there was a wind energy program for subsidizing 100 MW of wind turbines (later increased to 250 MW). This initially paid wind developers 5.3¢ per kWh (later reduced to 4.0¢ per kWh), which was justified on the grounds that such a subsidy was needed in order for wind developers to gain practical experience with different approaches under real life conditions.8 The wind subsidy program combined with the Feed‐in Law enacted in 1990 provided strong economic incentives for wind developers, resulting in significant quantities of newly installed wind capacity. b. Feed‐InLawof1990
The Feed‐in Law required electric utilities to connect RE generators to the grid and to buy the electricity at rates of 65% to 90% of the average tariff for final customers. RE generators were not required to negotiate contracts. Together with the wind subsidization program and subsidies from various state programs, the Feed‐In Law gave considerable financial incentives to RE investors, though they were less effective for solar power due to the latter’s high cost.9 One of the declared purposes of the law was to “level the playing field” for RE by setting feed‐in rates that took account of the external costs of conventional power generation. In this context, the chief member of the Bundestag supporting the feed‐in bill on behalf of the Christian Democrats mentioned external costs of about 4.0¢ to 6.7¢ per kWh for coal‐based electricity. Although there were challenges to the Feed‐in Law throughout the 1990s, it remained essentially unchanged throughout that decade. Combined with the wind subsidization program, it led to a market breakthrough for wind. By contrast, the Feed‐In Law provided little help to 4
Kords, U., Die Entstehungsgeschichte des Stromeinspeisungsgesetzes vom 5. 10. 1990. Master of Arts thesis in political science, Free University of Berlin, 1993. 5
Germany is made up of sixteen Länder (singular Land), which are the partly sovereign constituent states of the Federal Republic of Germany. 6
The support was subsequently revised to 60% from the federal government and 10% from the Land government. 7
Ristau, O., Die solare Standortfrage, Bad Oeynhausen, Solarthemen, 1998; Staiss, F. (ed.), Jahrbuch Erneuerbare Energien, Radebeul: Bieberstein, 2000. 8
Throughout this report, all German prices or costs are expressed in nominal U.S. dollars, with conversions from Euros to dollars based on the annual average Euro‐dollar exchange rate for the year considered. 9
Hemmelskamp, J., “Umweltpolitik und technischer Fortschritt,” Physica, 1999. Christensen Associates Energy Consulting LLC 2 3/28/2014 solar power since rates did not come near covering PV costs, and a new demonstration program was not forthcoming. If the PV industry was to survive, market creation had to come from other quarters. This led to intensified efforts to mobilize other resources, a process that demonstrated the high level of support that solar PV enjoyed in German society.10 c. TheRenewableEnergySourcesAct11
In April 2000, the German government adopted the Renewable Energy Sources Act (RESA), the declared purpose of which was to double RE production by 2010. RESA repealed the Feed‐In Law of 1990 but maintained reliance on FITs to encourage the development of RE. In many respects, the law improved the incentives for RE generators in terms of rates and, most important of all, improved the long‐term security of economic support for RE. It also declared expressly that RE compensation should account for the externality costs of conventional generation and should support the long‐term development of RE technologies. RESA set in place a FIT policy design intended to provide “Transparency,” “Longevity”, and “Certainty” (i.e., “TLC”) to RE investors. RESA was amended in 2004 in ways that generally strengthened the position of RE generators vis‐à‐vis the utilities. The amendments reduced rates for onshore wind and excluded turbine facilities in low‐wind zones from qualifying for FITs. However, it improved FIT rates for off‐shore wind, made hydro plants up a 150 MW eligible for FITs, and added significant new incentives for biomass (especially small plants) with additional bonuses for innovative technologies.12 The most important change was the significant increase of solar PV FIT rates, which made them commercially attractive. This change was actually introduced in late 2003 and led to a veritable PV boom that began in 2004 and has continued since then. German FITs for the generation of electricity from RE have developed in three phases under RESA. In Phase One (2000 to 2009), Germany focused on scaling up residential renewable electricity generation. The costs of electricity from technologies such as solar PV and wind were far from competitive with conventional technologies (e.g., coal, natural gas, and nuclear). Therefore, in Phase One, the RE subsidy in the FIT rate was reduced only modestly over time in keeping with expected reductions in the cost of RE electricity production; and adjustments to the RESA occurred at regular planned intervals. In Phase Two (2009 to 2011), rapid declines in the cost of solar PV modules prompted Germany to more actively reduce the RE subsidy in its PV FIT in order to manage the volume of annual PV installations qualifying under its PV FIT programs. This was accomplished by linking FIT subsidy reductions for PV to the volume of annual PV installations in previous periods and reviewing the PV policy more frequently. Costs for solar PV, wind, and biomass generation resources 10
Jacobsson, S. and V. Lauber, “The politics and policy of energy system transformation – explaining the German diffusion of renewable energy technology,” Energy Policy, 34, 2006, pp. 256–276. 11
This is also known as the Act on Granting Priority to Renewable Energy Sources, or Erneuerbare‐Energien‐Gesetz (EEG). 12
Bechberger, M. and D. Reiche, “Renewable Energy Policy in Germany: pioneering and exemplary regulations,” Energy for Sustainable Development, 8:1, March 2004, pp. 25‐35. Christensen Associates Energy Consulting LLC 3 3/28/2014 continued to decline, making them increasingly more competitive with traditional sources of electricity. In Phase Three (2012 to the present), the central goal is to encourage RE to behave more like conventional generation with respect to the wholesale market value of the energy RE produces. Traditional (previous) FIT contracts rewarded the production of RE electricity regardless of where or when it was produced; but these traditional FIT contracts resulted in rapid additions of wind and solar capacity that have caused the supply of electricity to exceed demand during several periods of the year and that have driven wholesale market prices to zero (or below) at those times. While some industrial electricity consumers benefit from these low wholesale market prices (at least in the short term) as residential and small commercial customer bear the brunt of the RE subsidies in their retail rates, the economic consequences of such low prices in the long term are motivating Germany to revise its RE policies today. Consequently, the key elements of Germany’s 2012 RESA amendments include the following: 
reduced FIT payments; 
a market premium option under which FIT‐eligible generators can choose to sell directly into the wholesale spot market and receive a supplemental FIT payment that varies inversely with the monthly average wholesale spot market price;13 
application of the FIT subsidy to no more than 90% of the electricity produced by an eligible RE resource; and 
a 52 GW PV capacity limit. The preceding elements are intended to achieve a “grid parity” future in which RE policy is more flexible and may offer less TLC to RE investors. d. RecentDevelopmentsinRELegislation
The German government is now attempting to address the growing economic problems created by the RESA subsidies for wind and solar renewables. On January 21, 2014, Germany’s new energy minister, Sigmar Gabriel,14 indicated that the rapidly rising costs of RE resources risked losing public support and jeopardizing the competitiveness of the German industrial base. Mr. Gabriel said that annual consumer costs for renewables of about $32.5 billion were pushing the limits of what the German economy could handle. He was quoted as saying: 13
The market premium option thus provides an incentive for RE operators to maximize the market value of wholesale power and to gain experience with operating in a wholesale market. 14
Mr. Gabriel is chairman of the Social Democratic Party, which formed a coalition government in December 2013 with Ms. Merkel’s Christian Democrats. Christensen Associates Energy Consulting LLC 4 3/28/2014 We need to keep in mind that the whole economic future of our country is riding on this … The energy transformation has the potential to be an economic success, but it can also cause a dramatic de‐industrialization of our country.15 Proposed revisions to the Energy Transition Policy (Energiewende) would curb some of the subsidies paid to producers of electricity generated by solar and wind, cutting them by about a third by 2015, while setting limits to improve control of the expansion of onshore wind and solar farms. Mr. Gabriel stated, “We need to control the expansion of RE, and not have the anarchy that we have seen previously… we need to reduce costs so that it remains affordable.”16 The proposed revisions mostly target future PV solar investment, but would also retroactively affect some solar arrays. In 2009, Germany implemented a kind of real‐time net‐metering called “own consumption.” It specifies that a greatly reduced FIT is paid for power never exported to the grid. If the owner can consume the power when it is generated, then she need not pay the retail rate for power consumed, which thus avoids the RESA surcharge. If the owner cannot consume the power immediately, she can store it (in batteries, for instance), in which case it is also considered to have been consumed directly. Those who installed solar arrays when it was relatively more expensive than it is today continue to find FITs attractive and can profit from selling power to the grid at the current retail rates (nearly 37¢ per kWh in 2013). But the per kWh cost of newly installed solar over the past two years has fallen well below the retail rate. Consequently, many industrial and commercial electricity consumers (and some households) who have not been exempt from paying the EEG surcharges have invested in PV arrays that generate electricity for 10¢ to 14¢ per kWh. Given the relatively low cost of self‐generation, such customers consume their own power whenever possible and buy from the grid only when their own power is insufficient to meet their own needs. By consuming their own power, PV array owners have been able to avoid paying the RESA surcharge on a significant amount of the electricity they use. This has resulted in shifting the burden of recovering the RE subsidy to an even smaller group of consumers as well as reducing revenue that could be devoted to investment in grid support. As a result, under the proposed revisions to the EEG, power generated by a customer and consumed by that customer must contribute to the costs for grid expansion as follows:17 
New RE resources will be required to pay 90% of the FIT surcharge, effectively reducing the rate they will receive for electricity production.18 15
Eddy, M., “German Energy Official Sounds a Warning,” New York Times, January 21, 2014, at http://www.nytimes.com/2014/01/22/business/energy‐environment/german‐energy‐official‐sounds‐a‐
warning.html?_r=0. 16
Id. 17
German Energy Blog, EEG 2.0: Further Information on Key Points of Reform of German Renewables Law, January 24, 2014, obtained at http://www.germanenergyblog.de/?p=15159. 18
This change is expected to reduce the surcharge from 8.49¢ per kWh in 2013 to 7.64¢ per kWh in 2014. Christensen Associates Energy Consulting LLC 5 3/28/2014 
Operators of renewable power plants, combined heat and power (CHP) plants, and process‐related cogeneration gases must pay 5.94¢ per kWh (70% of the surcharge) in 2014, again reducing the rate they will receive for their power production. 
Existing non‐renewable power plants shall continue to benefit from a surcharge exemption of up to 6.98¢ per kWh. 
New and old power plants with a capacity of up to 10 kW do not have to pay the surcharge for up to 10 MWh per year. 
Generation needed to power a plant itself shall not be subject to the surcharge. In addition, the reform proposals seek to cap the quantity of new RE that will be eligible to receive the surcharge. The Cabinet adopted the proposed changes on January 24, 2014. The revisions to the law must now go to the two chambers of Parliament (Bundesrat and Bundestag) and could become law by August 1, 2014. Significant opposition to the reform proposals has been raised by local governments and by the representatives of the CHP industry who claim that the present 2.4¢ per kWh subsidy to CHP plant operators will be more than offset by the proposed imposition of an EEG surcharge and therefore will sound the death knell for that industry. Consequently, there may be substantial changes made to the proposals before any reform becomes law later this year. e. FITStructure
The RE legislation promises that RE plants will have access to the grid, and provides a subsidized rate, guaranteed for 20 years, this is determined by the technology and the vintage (year of investment) of the resource. The long‐term rate guarantee ensures price certainty for investors. For RE plants coming into service, the FIT rate is reduced each year according to a predefined schedule. The reductions are technology‐specific so that they are aligned with the expected declines in each technology’s fixed and variable costs, and so that they encourage technology innovation and cost‐efficiency. Table 1 illustrates the pattern followed by the FITs for on‐shore wind and solar for the years 2010 to 2013. In each successive year, the FITs are reduced for the next vintage of plants. The table also highlights the significantly higher rates paid to solar than on‐shore wind, which in 2013 were about twice what wind received.19 19
Solar contributes a much smaller share of the total kilowatt hours produced by REs (21% in 2013) each year than does on‐shore wind (33% in 2013). Christensen Associates Energy Consulting LLC 6 3/28/2014 Table 1 German Feed‐In Tariffs for On‐shore Wind and Solar Under RESA, 2010 ‐ 201320 Technology Type On‐shore Wind Initial fee (first 5 years) Base Fee (after 5 years) Repowering Transmission system supporting Solar Roof Top21 small medium large very large Own Consumption (≤30 kW) Free Standing (≤10 MW) 2010 2011 2012 12.09
6.59
0.93
0.65
12.56
6.85
0.97
0.68
51.92
49.39
46.73
38.96
30.19
37.79
40.01
38.05
36.00
30.02
22.80
30.73
2013 11.48 6.26 0.64 0.62 31.40 29.86 28.25 23.56 21.05 24.11 11.38
6.35
0.65
0.62
22.52
21.35
19.05
15.58
21.67
15.58
2. GermanElectricitySectorHistory
Table 2 summarizes German electricity production from 1990 to 2012 by RE type. The totals of electricity generated (GWh) by RE sources and all sources are presented in the right‐side columns, along with the percentage shares of RE generated electricity. A key implication of Table 2 is that RE generated electricity has grown significantly since the 2000 passage of RESA, reaching a share in 2012 that is roughly three times what it was in 2000. In correlation with the introduction of the generous incentives from 2000 onward, wind (on‐ and off‐shore) and PV solar are two principal sources of this rapid growth. The combined generation from these RE sources was 1.7% in 2000 and reached 12.5% by 2012. The third RE source is biomass, which increased from 0.8% in 2000 to 6.9% in 2012. In contrast, hydro declined from a share of 4.3% in 2000 to 3.6% in 2012. 20
Lang, M. and M. Mutschler, German Energy Blog, for years 2010 through 2013, http://www.germanenergyblog.de/. Feed‐In Tariffs have been converted from Euros to dollars using the average Euro‐dollar exchange rate for each year. 21
For years 2010‐2012, small was up to 30 kW, medium was 30 kW up to 100 kW, large was 100 kW up to 1 MW, and very large was greater than 1 MW. For 2013, small was up to 10 kW, medium was 10 kW up to 40 kW, large was 40 kW up to 1 MW, and very large was 1 MW up to 10 MW. Christensen Associates Energy Consulting LLC 7 3/28/2014 Table 2 German Renewable Energy Electricity Production (GWh) and Shares (%): 1990 ‐ 201222 GWh Year Hydro Off‐
shore Wind On‐shore Wind Biomass PV Solar Geoth Total RE Generated Total Electricity Generated RE Share (%) 1990 15,580 71 1,434 1 ‐ 17,086 551,148 3.1% 1991 15,402 100 1,471 2 ‐ 16,975 547,568 3.1% 1992 18,091 275 1,558 3 ‐ 19,927 538,573 3.7% 1993 18,526 600 1,636 6 ‐ 20,768 532,508 3.9% 1994 19,501 909 1,875 8 ‐ 22,293 530,786 4.2% 1995 20,747 1,500 2,013 11 ‐ 24,271 539,356 4.5% 1996 18,340 2,032 2,102 16 ‐ 22,490 548,537 4.1% 1997 18,453 2,966 2,277 26 ‐ 23,722 551,674 4.3% 1998 18,452 4,489 3,260 32 ‐ 26,233 558,149 4.7% 1999 20,686 5,528 3,589 42 ‐ 29,845 552,685 5.4% 2000 24,867 9,513 4,737 64 ‐ 39,181 576,191 6.8% 2001 23,241 10,509 5,207 76 ‐ 39,033 582,582 6.7% 2002 23,662 15,786 6,038 162 ‐ 45,648 585,231 7.8% 2003 17,722 18,713 8,247 313 ‐ 44,995 599,933 7.5% 2004 19,910 25,509 10,077 556 0.2 56,052 609,263 9.2% 2005 19,576 27,229 14,025 1,282 0.2 62,112 614,972 10.1% 2006 20,042 30,710 18,685 2,220 0.4 71,657 617,736 11.6% 2007 21,169 39,713 24,281 3,075 0.4 88,238 617,052 14.3% 2008 20,446 40,574 27,531 4,420 17.6 92,989 615,819 15.1% 2009 19,036 38,602 38 30,341 6,583 18.8 94,619 576,944 16.4% 2010 20,958 37,619 174 33,866 11,729 27.7 104,374 610,373 17.1% 2011 17,674 48,315 568 37,603 19,340 18.8 123,519 602,531 20.5% 2012 21,200 45,325 675 40,850 28,000 25.4 136,075 594,216 22.9% Figure 1 highlights the striking gap between on‐shore wind’s contribution to RE electricity production and that of PV solar. The difference is not so surprising when one considers the fact that Germany has regions quite favorable to wind installations (in the east) but the country is not one of Europe’s sunnier climes. 22
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) based on information supplied by the Working Group on Renewable Energy‐Statistics (AGEE‐Stat), http://m.germany.info/contentblob/4125002/Daten/3903529/BMURESourcesFigures2012DD.pdf. Christensen Associates Energy Consulting LLC 8 3/28/2014 Figure 1 On‐shore Wind and PV Solar Shares of RE Production, 1990 ‐ 201223 50%
45%
Share of RE GWh (%)
40%
35%
30%
25%
20%
15%
10%
5%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0%
On‐shore Wind Share
PV Solar Share
23
Based on data in Table 2. Christensen Associates Energy Consulting LLC 9 3/28/2014 a. ElectricityDemandbySector
Table 3 summarizes electricity end‐use consumption in Germany over the period 2002 to 2013. Industrial, residential, and commercial customers are responsible for the vast majority of electricity consumption, with these classes responsible respectively for 44%, 27%, and 24% of total consumption in 2013. Table 3 German Electricity End‐Use Consumption by Major Customer Class, 2002 – 2013, GWh24 Year Industrial Residential Commercial Agriculture Transport Total 2002 220,680 136,500 127,238 8,000 16,190 508,608 2003 221,223 193,100 128,218 8,200 16,144 566,885 2004 227,826 140,400 126,975 8,300 16,200 519,701 2005 2006 231,286 141,300 123,868 8,300 16,200 520,954 229,402 141,500 130,302 8,300 16,300 525,804 2007 242,752 140,100 119,800 8,400 16,300 527,352 2008 242,123 139,500 118,726 8,700 16,500 525,549 2009 202,046 139,200 129,827 8,600 15,900 495,573 2010 225,393 141,700 136,165 9,000 16,700 528,958 2011 230,655 136,600 128,662 9,000 16,600 521,517 2012 235,228 144,344 129,666 8,660 16,646 534,608 2013 230,052 141,168 126,813 8,470 16,280 522,846 b. ElectricityPrices
1. PricesbyCustomerClass
For the period from 2008 through October 2013, Table 4 summarizes retail electricity prices in Germany for the residential and industrial customer classes as well as German wholesale spot market prices in base and peak load periods. The impact of the significant rise in the share of RE (wind and solar in particular) of total electricity production in Germany coupled with the subsidies flowing to RE through the FITs can be seen in the disparity between the general trend of flat retail prices compared to the generally falling wholesale prices since 2008. (The retail prices shown in the table exclude taxes, levies, and fees, particularly those required to cover the substantial FIT subsidies. With taxes, levies, and fees, retail prices would show a sharp upward trend.) 24
International Energy Agency, for years 2002 to 2011, obtained at http://www.iea.org/statistics/statisticssearch/report/?country=GERMANY&product=electricityandheat&year=201
0. For years 2012 and 2013, data from IEA for total electricity production net of exports and imports was allocated across customer classes using class average shares for the period 2009 through 2011. Christensen Associates Energy Consulting LLC 10 3/28/2014 Table 4 German Electricity Prices by Customer Class, 2008 to 2013, ($ per kWh)25 Year Residential26 Industrial27 2008 0.191 0.137 Wholesale Base
Load Period Spot Market Price 0.082 2009 0.195 0.136 0.048 0.063 2010 0.183 0.122 0.055 0.068 2011 0.196 0.125 0.065 0.076 2012 0.185 0.115 0.053 0.066 2013 0.196 0.114 0.046 0.060 Wholesale Peak Load Period Spot Market Price 0.109 2. ElectricityPriceComposition
Figure 2 summarizes the breakdown between net electricity prices (generation, transmission and distribution, metering, sales and marketing) and government taxes, levies and fees (including the RESA surcharge). The generation, transmission and distribution (G, T, & D) segments of each bar have values similar to those shown above in Table 4. Since 2011, government taxes, levies and fees have amounted to about 50% of the nominal price per kWh paid by residential households in Germany. 25
Source for Domestic and Industrial retail prices: http://epp.eurostat.ec.europa.eu/portal/page/portal/energy/data/database. Electricity prices have been converted from Euros to U.S. dollars using the annual average U.S.‐Euro exchange rate for each year. 26
Domestic price is based on consumption of 2,500 kWh to 5,000 kWh per year. Prices do not include taxes, levies, and fees. 27
Industrial price is based on consumption of 500 MWh to 2,000 MWh per year. Prices do not include taxes, levies, and fees. Christensen Associates Energy Consulting LLC 11 3/28/2014 Figure 2 Composition of German Residential Electricity Prices, 1998 to 2013, ¢ per kWh28 45.0
40.0
2.7 0.3 0.4 0.2 35.0
30.0
25.0
20.0
15.0
‐
2.0 0.8 ‐
2.6 1.9 2.4 10.0
5.0
14.4 12.4 2.6 2.6 0.4 ‐
2.5 0.4 1.1 ‐
0.9 ‐
0.3 2.2 0.6 2.3 2.2 2.2 ‐
0.4 0.5 3.4 2.0 3.1 3.2 1.2 ‐
0.1 0.2 1.7 1.8 2.9 ‐
0.0 2.6 7.5 ‐
0.2 3.0 2.9 4.9 0.0 ‐
0.3 ‐
0.3 1.8 2.7 4.6 ‐
2.8 1.7 2.5 0.2 2.5 2.4 2.7 2.6 ‐
0.4 2.3 1.4 2.4 2.5 5.2 5.6 5.1 5.2 5.3 5.0 4.5 1.6 ‐
0.2 0.3 2.7 1.4 1.7 ‐
0.2 1.6 2.1 1.8 8.0 7.7 9.2 19.2 18.2 19.6 19.1 19.7 17.0 16.7 13.5 14.0 14.7 11.6 ‐
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
G,T,& D
VAT
Concession Chg
EEG Chg
CHP Chg
Strom‐NEV Chg
Off‐Shore Chg
Elec Tax
Figure 3 summarizes the composition of German residential electricity prices in 2013 and divides the total electricity price into costs associated with generation and delivery of electricity and taxes and surcharges imposed by the government. Hence, in 2013, 19.5% of residential electricity bills29 went to pay the RESA surcharge to subsidize RE, the Combined Heat & Power surcharge, and the Off‐shore Liability charge (shown as the “RE + EE Charge” in the figure). The only other components of the residential electricity bill that are larger, and that would naturally be expected to have significant shares of the bill, are generation (“Energy Charge”), transmission, and distribution, which together are roughly half of the bill. 28
BDEW Bundesverband der Energie‐ und Wasserwirtschaft e.V., Energie‐Info: Erneuerbare Energien und das EEG: Zahlen, Fakten, Grafiken, January 31, 2013, Figure 21, p. 41. G,T,&D = Generation, Transmission & Distribution; VAT = value added tax; Concession Chg = concession fee paid to local authorities; EEG Chg = RESA surcharge; CHP Chg = surcharge for combined heat & power facilities; Strom‐NEV Chg = transmission grid access fee; Off‐Shore Chg = off‐
shore liability surcharge that compensates off‐shore wind developers for delays in interconnecting to the grid or for disruptions in transmission service; and Elec Tax = German government electricity tax. 29
19.5% equals 7.5¢ divided by 38.5¢. Christensen Associates Energy Consulting LLC 12 3/28/2014 Figure 3 Composition of German Residential Electricity Price in 2013 (38.5¢ per kWh)30 Distribution Charge, 6.0
15.6%
Transmission Charge, 9.7
29.2%
Energy Charge, 4.05
25.2%
RE + EE Charge, 7.51
19.5%
Tax + Other Charges,
11.24
10.5%
Figure 4 summarizes the average composition of residential electricity prices for a sample of sixteen U.S. utilities in 2013.31 These utilities report separate line items for RE, EE, and related charges on residential bills. These utilities are not necessarily representative of the U.S., as their average per kWh rate of 16.1¢ per kWh is about 4¢ per kWh higher than the U.S. average price of 12.2¢ per kWh as reported by the Energy Information Administration for 2013. The RE and EE surcharges accounts for only 0.3¢ per kWh of the difference. The rest is due to many of the sample utilities being located in the Northeastern U.S. and California, where residential rates are above the national average. The average RE plus EE surcharge observed in Figure 4 contributes about 2% to the residential bill in contrast to the RESA surcharges in Germany that comprise nearly 20% of the residential price of electricity. This suggests that Germany’s enthusiastic embrace of RE may be adding ten times as much to the German residential rates as experienced in the United States. However, the key difference between the countries’ shares of RE subsidies in residential rates is that the share of RE in overall electricity production is much higher in Germany than in the United States. Were the U.S. to follow in Germany’s footsteps and increase RE’s penetration levels to that achieved in Germany, the price impacts likely would be much more similar. 30
The household consumption assumed in this example is 450 kWh per month. Shares will be somewhat different for households consuming different monthly amounts. The figure is based on data obtained from European Commission, Eurostat, Electricity prices for residential consumers, from 2007 onwards ‐ bi‐annual, obtained at: http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/dataset?p_product_code=NRG_PC_204 31
To accurately determine the share that RE and EE resources hold in U.S. residential rates and to permit an apples‐to‐apples comparison with residential electricity prices and the EEG surcharge in Germany, it would be necessary to conduct a comprehensive analysis of U.S. utility‐level expenditures on RE energy and capacity relative to wholesale market prices, utility avoided costs, transmission costs, and ancillary service costs. Such a study is beyond the scope of this report. Christensen Associates Energy Consulting LLC 13 3/28/2014 Figure 4 Residential Electricity Price Composition for a Sample of U.S. Utilities That Include Surcharges for RE and EE on Bills (16.1¢ per kWh)32 2%
6%
25%
Distribution Charge, 4.0
Transmission Charge, 1.0
Energy Charge, 9.8
6%
RE + EE Charge, 0.3
Tax & Other Charges, 1.0
61%
Another view of the rate impact of RE in the U.S. can be attained by examining the residential rate premiums set in utility “green pricing” programs. Such programs offer customers an option to pay a premium for “green” energy produced (in most instances) by a range of RE technologies (e.g., biodiesel, biomass, geothermal, hydro, land fill gas, solar, and wind). The average residential premium for buying “green energy” in 2013 was 1.7¢ per kWh, based on a sample of 193 utilities that have established “green pricing” programs.33 Adding that average premium to the EIA U.S. 2013 average residential rate increases it to about 13.9¢ per kWh, in which case RE and EE would comprise about 12.4% of the average residential bill. Figure 5 summarizes the composition of industrial electricity price in Germany in 2012. Electricity tax (Stromsteuer), also referred to as Eco‐tax, is an indirect excise tax placed on consumption of electricity, introduced in 1999 as part of the law intended to encourage 32
The figure presents the unweighted average electricity price across sixteen U.S. utilities, for a residential household consuming 500 kWh per month. The sixteen sample utilities are: Ameren – Illinois (IL), Baltimore Gas & Electric (MD), Commonwealth Edison (IL), Connecticut Light & Power (CT), Consumers Power (MI), Dominion Virginia Power (VA), Empire District Electric Company (MO & KS), National Grid (MA), NSTAR Electric and Gas (MA), NV Energy (NV), Pennsylvania Electric (PA), PEPCO (MD & DC), Public Service Electric & Gas (NJ), Public Service New Hampshire (NH), Sacramento Municipal Utility District (CA), and Weststar Energy (KS). In the figure, the Distribution Charge includes Customer and Distribution Charges. Taxes & Other Charges includes state and local taxes, stranded cost recovery charges for states that enacted retail competition and various other charges that could not be classified in the other categories. 33
U.S. Department of Energy, Energy Efficiency and Renewable Energy, Green Pricing, Utility Programs by State, obtained at http://apps3.eere.energy.gov/greenpower/markets/pricing.shtml?page=1, based on a study by the National Renewable Energy Laboratory. Christensen Associates Energy Consulting LLC 14 3/28/2014 reduction in electricity consumption and to reduce GHG emissions.34 The Concession fee (konzessionsabgabe) is a license fee paid to municipalities and varies with the local government. For industrial customers, the maximum amount is 0.14¢ per kWh. Under the Combined Heat and Power Act (CHP), the levy is between 0.24¢ and 0.34¢ per kWh. It is instructive to note that the German industrial electricity price in 2012 was nearly equal to the residential rate in the U.S. in 2013. Figure 5 Composition of German Industrial Electricity Price in 2012, (15¢ per kWh) (VAT excluded)35 1%
8%
10%
Generation, 0.062
41%
Network & Sales, 0.045
Eco‐tax, 0.015
10%
EEG, 0.015
CHP, 0.002
Concession Fee, 0.012
30%
3. RenewableEnergySharesofRESACosts
Table 5 summarizes the total RESA costs over the period 2002 to 2013 in billions of U.S. dollars. Over this period, RESA costs rose fourteen‐fold. The table also shows the shares of that cost associated with wind, biomass, and PV solar. The shares do not sum to 100% because the table does not include all categories of RE that receive remuneration based on the RESA. Solar has been the favored technology from the standpoint of subsidies provided through the FIT. Solar electricity provided 18.5% of the total electricity produced in 2012 by subsidized REs, but received approximately 38.7% of the total $24.57 billion in RESA‐related payments made by German electricity consumers. In contrast, on‐shore wind installations contributed 35.6% of the electricity produced by subsidized RE in 2012, but received 11.0% of the RESA‐related payments in that year. 34
The Eco‐tax was part of a legislative package that taxed industrial electricity consumption as a means of financing central government contributions to Land pensions. 35
Based on 2012 data obtained from N. G. B. Morgantini, C. Camporeale, and A. Purpura, A comparison of taxes and other system charges on electricity prices in Europe, 12th IAEE European Energy Conference, September 2012. Christensen Associates Energy Consulting LLC 15 3/28/2014 Table 5 Total RESA Costs and Cost Shares for the Most Important RE Technologies36 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total RESA Costs in $US B 2.11 2.95 4.49 5.48 7.05 10.4 13.27 15.06 17.51 23.37 24.57 31.24 Wind power 64.5% 65.1% 63.7% 54.3% 47.1% 44.5% 39.5% 31.5% 25.2% 16.7% 11.0% 15.7% Biomass 10.4% 12.5% 14.1% 17.7% 23.0% 27.4% 29.9% 34.3% 32.2% 17.9% 19.4% 17.8% Photovoltaics 3.7% 5.9% 7.8% 15.1% 20.3% 20.2% 24.6% 29.3% 38.6% 39.9% 38.7% 35.1% The reason for the significant difference between the shares of PV and on‐shore wind production and the shares of RESA‐related revenue is the generous subsidy flowing to solar electricity. For example, PV installed in 2006 could receive up to 65¢ per kWh, which was nearly ten times higher than the wholesale market price for electricity and almost six times the FIT rate for wind, which was about 11¢ per kWh. This pronounced difference was well out of proportion to the contributions each made to total electricity production, a reflection of solar’s relatively lower technical efficiency and Germany’s unfavorable geographic location. 3. EconomicImpactsofGermanEnergyPolicy
a. RetailElectricityPrices–AllocationofCostsforCREsandRESA
In Germany, the costs of German and European Union energy policies designed to reduce GHG emissions and to promote RESA have been allocated primarily to residential and smaller commercial customers. There are two mechanisms that have shifted this cost burden away from industrial customers. First, the European Union Energy Trading System (EU ETS)37 and the European Union’s corresponding state aid guidelines allow the member states to compensate energy‐intensive industries for the carbon costs priced into the wholesale electricity market.38 The corresponding 36
Frondel, M., C. M. Schmidt, C. Vance, Germany's solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: Rheinisch‐Westfälisches Institut für Wirtschaftsforschung (RWI), Table 2, p. 8. Original source, for 2002 to 2009: BDEW 2001‐2010. For 2010: ÜBN (2011). For 2011 to 2013, estimates are based on information obtained from Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Renewable Energy Sources In Figures: National and International Development, Electricity Quantities and Payment Under Renewable Energy Sources Act (EEG), table at p. 35, and Development of EEG Differential Costs from 2001 to 2013, table at p. 37. 37
The EU ETS is described in detail in the Appendix. 38
Communication from the Commission, Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post‐2012 (OJ EU C 158, 5 June 2012, p. 4) says, “The European Commission has adopted a framework under which Member states may compensate some electro‐intensive users, such as steel and aluminium producers, for part of the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme (ETS) as from 2013. The rules ensure that national support measures are designed in a way that preserves the EU objective of decarbonising the European economy and maintains a level playing field among competitors in the internal market. The sectors deemed eligible for compensation include producers of aluminium, copper, fertilisers, steel, paper, cotton, chemicals and some plastics. … They aim to mitigate the impact of indirect CO2 costs for the most vulnerable industries, thereby preventing carbon leakage Christensen Associates Energy Consulting LLC 16 3/28/2014 ruling for Germany, which has been in force since January 2013, allows for the compensation of a sizeable proportion of the carbon cost mark‐up on the wholesale market.39 The ruling stipulates that, in 2013, a company can be reimbursed for 85% of the reference cost mark‐up for 760 grams of CO2 per kWh, based on sector‐specific electricity consumption values. With a real carbon cost mark‐up on approximately 900 grams of CO2 per kWh in the Continental European market, this amounts to compensation of approximately 70% of the carbon costs effectively priced into the wholesale electricity market. With a medium carbon price of $6.03/MWh for the first half of 2013, compensation amounts to about $4.22 per MWh,40 which can be subtracted from an electricity price of approximately $50 per MWh, implying an effective cost of procuring electricity via the wholesale market of less than $46 per MWh.41 Second, energy‐intensive companies can be largely exempted from paying network access fees if they meet certain criteria.42 Pursuant to the German Electricity Network Charges Ordinance (StromNEV), companies can negotiate individual network access fees and can have themselves entirely exempted from network access fees if use exceeds 7,000 hours and 10 GWh from a single consumption point on the grid, and the ratio of electricity cost to gross value creation exceeds 15%.43 Most energy‐intensive industrial consumers qualify under these criteria. This treatment of industrial customers results in a revenue shortfall for distribution utilities. Utilities recover this shortfall by spreading the costs to all electricity consumers. In 2013, industrial customers’ share of this cost‐spreading amounted to $0.33 per MWh , which was negligible relative to what they saved due to their exemption from paying network access fees. In addition, individual network access fees may be arranged if a company’s coincident peak load deviates from the utility’s coincident peak load. In such instances, industrial customers may be awarded discounts of up to 80% of the network access fees. In the case of steel companies, for example, the discounts are at least 30% to 40% of the network access fees. which would undermine the effectiveness of the EU ETS. At the same time, the rules have been designed to preserve the price signals created by the EU ETS in order to promote a cost‐effective decarbonisation of the economy. They are also designed to minimise competition distortions in the internal market by avoiding subsidy races within the EU at a time of economic uncertainty and budgetary discipline. … The rules allow subsidies of up to 85% of the increase faced by the most efficient companies in each sector from 2013 to 2015, a cap that will gradually fall to 75% in 2019‐2020.” 39
German Federal Ministry of Economics and Technology (BMWi), Directive on state aid for companies in sectors/subsectors in relation to which the assumption is made that there is a considerable risk of ‘carbon leakage’ due to the costs relating to EU ETS certificates being priced into electricity prices (state aid for indirect carbon costs), 30 January 2013 (German Federal Gazette, BAnz AT 07.02.2013 B1). 40
$4.22 = $6.03 x 0.70. 41
Compensation of carbon costs priced in to the wholesale electricity market was not permissible prior to 2013. 42
The exemption afforded large industrial electricity users was intended to ensure that they remained competitive on the international level. 43
Electricity Network Charges Ordinance (StromNEV) dated 25 July 2005 (Federal Law Gazette BGBl. I, p. 2,225), as amended by Article 4 of the Act dated 28 July 2011 (BGBl. I, p. 1,690). Christensen Associates Energy Consulting LLC 17 3/28/2014 While the exemption from transmission access fees is on its face different from treatment of specific industries under the EU Commission’s guidelines to mitigate the cost impacts of the EU ETS, it in effect achieves the same result of partially insulating industrial electricity consumers from the effects of RESA surcharges, which the German government could not do directly without violating EU Commission rules in effect prior to 2013. b. TheCostofSubsidizingRenewableEnergyinGermany44
The four major German utilities and the Federal Network Agency and grid authority raised the surcharge that customers pay on their utility bills to fund RE in 2013 from 4.62¢ per kWh in 2012 (yielding $26.2 billion) to 6.98¢ per kWh45 (yielding about $38.5 billion). In October 2013, they announced a further increase to 8.0¢ per kWh for 2014, taking the annual surcharge on consumers to about $45.4 billion. This surcharge covers the increasing share of electricity produced from renewables and the utilities’ obligations to pay renewables at rates that greatly exceed wholesale market prices. For example, utilities are forced to pay 23.8¢ per kWh for PV solar that they can sell in the wholesale spot market for only 5.9¢ per kWh or less. Consequently, the 2013 RESA FITs will cost electricity consumers about $38.5 billion, compared to projected revenues from the sale of RE electricity in the wholesale spot market of about $3.4 billion. The subsidy flowing from consumers to RE in 2013 is thus about $35 billion. The RESA surcharge is due primarily to the excess of payments to RE through the FITs relative to the wholesale market value of the electricity RE produces. The enormity of this subsidy and its perverse economic impact has compelled the government to cap the surcharge through the end of 2014 and limit annual increases to 2.5%. The government also plans to tighten industry exemptions and possibly cut FITs for wind and biomass plants, calling into question investment security for those technologies. c. GHGReductionsandCosts
In 2012, RE resources supported by the RESA produced 136.1 billion kWh of electricity, which was about 23% of the electricity generated to serve end‐use customers. This electricity avoided an estimated 81 million tons of CO2 equivalent. Because the total RESA cost for RE was about $26.2 billion for energy that would have only received about $5.2 billion in the wholesale spot market, RESA cost German end use consumers about $21.0 billion. Germany’s cost of subsidizing REs to lower GHGs was about $259 per ton of CO2 reduction (i.e., $21.0 billion divided by 81 million tons) in 2012. The Certified Emission Credits traded on the Intercontinental Exchange in 2012 averaged about $3.26 per ton. This means that REs were paid $21.0 billion above wholesale spot market value for environmental benefits that have a market value of only $0.3 billion or, equivalently, could have been provided by emission‐
44
Estimates of RE remuneration and wholesale market revenues reported in this section are based on World Nuclear Association, Energy Subsidies and External Costs, obtained at http://www.world‐
nuclear.org/info/Economic‐Aspects/Energy‐Subsidies‐and‐External‐Costs/. 45
Note that the difference between the 6.98¢/kWh surcharge here and the 7.51¢/kWh surcharge found in Figure 3 is the addition of the CHP levy and Off‐Shore Liability charge. Christensen Associates Energy Consulting LLC 18 3/28/2014 reducing alternatives that would have cost only $0.3 billion. Thus, German electricity consumers overpaid about $20.8 billion for the 81 million ton reduction in CO2. A recent report from the MIT Center for Energy and Environmental Research compares the implicit carbon price embodied in Germany’s RESA incentive schemes with the price of European Union Allowances (i.e., emission credits).46 The comparison takes into account all the relevant costs and cost savings associated with the use of RE, but does not consider transmission and distribution costs nor benefits such as energy security, innovation, jobs, and non‐CO2 emissions. The report uses the CO2 abatement estimates for the years 2006 to 2010 provided by Weigt et al.47 To avoid problems of the front‐end loaded costs of the RE schemes, remunerations to RE were levelized for each investment‐year cohort over an assumed 25‐year life.48 The results of this analysis are summarized in Table 6. The report’s conclusions are: 
CO2 abatement costs of wind are relatively low, averaging $60 per ton during the 2006‐
2010 period. 
CO2 abatement costs of solar are very high, averaging $683 per ton during the 2006‐
2010 period. 
The cost of CO2 abated is almost entirely determined by the remuneration to RE generators net of the fuel cost savings of displaced generation. 
CO2 abatement cost can vary widely from year to year due to variation in fossil fuels prices, assuming constant remuneration. For example, relatively low abatement cost estimates for 2008 were partly due to high fuel prices, while relatively high abatement costs in 2009 and 2010 were partly due to lower fuel prices. 46
Marcantonini, C., and A. D. Ellerman, The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany, Center for Energy and Environmental Research, Massachusetts Institute of Technology, February 1, 2013. 47
Weigt, H., E. Delarue, and D. Ellerman, Co2 Abatement From REs Injections In The German Electricity Sector: Does A CO2 Price Help?, European University Institute Working Papers, RSCAS 2012/18, Robert Schuman Centre For Advanced Studies, Climate Policy Research Unit. 48
Inflation was assumed to be 2% per annum and capacity factors were assumed to be 18%. Christensen Associates Energy Consulting LLC 19 3/28/2014 Table 6 Estimates of CO2 Abatement Costs in Germany for On‐shore Wind and Solar PV, 2006 ‐ 201049 Wind Economic Impacts (mm $): Levelized Remuneration Additional Start‐up Cost Additional Balancing Cost Fuel Cost Saving Carbon Cost Saving Capacity Saving Net Cost (mm $) CO2 Emission Reduction (mm tons) 2006 3,361 (8) 77 (1,512) (478) (133) 1,306 28 2007 3,925 (19) 108 (2,163) (42) (160) 1,649 36 2008 4,481 (7) 119 (2,813) (644) (191) 944 47 2009 4,574 3 107 (1,849) (560) (202) 2,073 42 2010 Average 4,611 4,191 5 (5) 101 102 (1,794) (2,026) (533) (452) (210) (179) 2,181 1,631 36 38 Abatement Cost ($ / ton) Solar Economic Impacts (mm $): Levelized Remuneration Additional Start‐up Cost Fuel Cost Saving Carbon Cost Saving Net Cost (mm $) CO2 Emission Reduction (mm tons) 59 2006 1,213 (3) (134) (35) 1,041 3 63 2007 1,852 (4) (170) (1) 1,676 3 30 2008 2,784 (1) (312) (119) 2,352 6 69 2009 4,018 (14) (326) (91) 3,587 7 81 60 2010 Average 5,974 3,168 ‐ (4) (553) (299) (150) (79) 5,270 2,785 9 5 521 838 588 717 Abatement Cost ($ / ton) 753 683 d. ImpactonConventionalGeneration
In Germany, more electricity was produced from brown coal (i.e., lignite) in 2013 than at any point since German unification in 1990.50 Germany is the biggest producer of brown coal in the world. Lignite‐fueled power plants are responsible for about 21% of Germany’s electricity production. Supporters say burning lignite produces fewer harmful emissions than burning hard (i.e., anthracite) coal. However, since 2009, electricity production from brown coal has risen by 11.3%, from 146 billion kWh to 162 billion kWh, and production from hard coal (responsible for 16% of total German production in 2013) has increased by an even greater amount – 14.9%. At the same time, electricity production from natural gas has declined by 18.5%. The increased coal‐fired production is the result of the increased share of RE‐produced electricity and the low capacity factors of wind and solar PV that require backup from conventional power plants. In addition to brown coal, hard coal is experiencing a renaissance in Germany as a result of the confluence of the depressive effects that RE production has on wholesale spot market prices, the high natural gas prices that put combustion turbines out of the market, and the near 49
Marcantonini, C., The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany and Italy, CPRU Workshop on Renewable Costs, Florence, Italy, May 24, 2013, p. 21. All values converted from Euros in the original to US dollars. 50
AG Energiebilanzen, E.V., Bruttostromerzeugung in Deutschland von 1990 bis 2013 nach Energieträgern, obtained at http://www.ag‐energiebilanzen.de/. Christensen Associates Energy Consulting LLC 20 3/28/2014 record‐low worldwide prices for hard coal that make power plants fueled by hard coal significantly more profitable.51 In November 2013, Steag GmbH started the first new coal‐fired generator to go into operation in Germany since 2005. It marks the start of Germany’s biggest new‐build program for hard coal stations since market liberalization in 1998. Ten new hard‐coal power stations totaling 7,985 MW are scheduled to start producing electricity within the next two years.52 Peter Terium, the head of the German power company RWE, is reported to have said that nuclear energy might be phased out even earlier than the government has planned under the Energy Transition Policy, given that it is no longer profitable. “It would not be responsible to allow a reactor to continue to run when it is losing money every day,” Mr. Terium said.53 e. InvestmentinRenewableEnergyTechnologies
Germany’s energy policy aimed at encouraging aggressive investment in RE resources, solar PV and wind in particular, has been successful in terms of increasing the numbers of RE facilities and the quantity of energy produced by renewable resources, but has accomplished this at a cost that is huge relative to the energy and environmental values provided by those resources. Figure 6 compares the total capacity in MW of PV solar resources in Germany to capacity elsewhere in the world in 2011. Germany has nearly twice the capacity of the second leading country (Italy). As explained above, this success in numbers of MWs has come at the cost of a vast waste of resources. 51
Natural gas prices in Europe are pegged to oil prices in long‐term contracts and with oil prices at or near $100 per barrel, natural gas has become a relatively expensive fuel for electricity production. 52
Mengewein, J., “ Steag Starts Coal‐Fired Power Plant in Germany,” Bloomberg News, November 15, 2013, at http://www.bloomberg.com/news/2013‐11‐15/steag‐starts‐germany‐s‐first‐coal‐fired‐power‐plant‐in‐8‐
years.html.
53
Eddy, M., “German Energy Official Sounds a Warning,”, The New York Times, January 21, 2014, http://www.nytimes.com/2014/01/22/business/energy‐environment/german‐energy‐official‐sounds‐a‐
warning.html?_r=0. Christensen Associates Energy Consulting LLC 21 3/28/2014 Figure 6 Total Photovoltaic Capacities in Selected Countries in 2011 (MW)54 f. JobCreation
RE promotion is frequently justified by the associated impacts on job creation. In Germany, gross employment generated by economic activities connected with RE in 2012 totaled 368,400. Of these jobs, 73% (269,400) are connected with installation and use of electricity generation facilities, 21% (76,300) can be attributed to heat generation facilities, and the remaining 6% to production of biofuels for transport.55 The number of jobs that can be ascribed to the impact of the RESA in 2012 totaled 268,000. Of those, of which 117,900 were in wind energy, 87,800 were in PV, and 59,400 were in biomass. The number of people working in hydropower amounted to 1,700 and a further 1,200 jobs were in geothermal energy. As Figure 7 illustrates, the number of jobs generated by RESA in 2004 was 98,000 out of a total of 160,500 (61%). By 2012, RE industry jobs attributable to RESA reached 268,000 out of a total of 377,800 (71%), down one percentage point from the high reached in 2011. 54
Frondel, M., C. M. Schmidt, C. Vance, Germany's solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: Rheinisch‐Westfälisches Institut für Wirtschaftsforschung (RWI), Figure 1, p. 5. 55
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Short‐ and long‐term impacts of the expansion of renewable energy on the German labour market: annual report on gross employment; Gross employment from renewable energy in Germany in 2012 ‐ a first estimate, March 2013. Christensen Associates Energy Consulting LLC 22 3/28/2014 Figure 7 Employment Levels in the German RE Industry and Generated by RESA, 2004 to 201256 These estimates suggest a rosy outlook for gross employment growth. On the contrary, they hide the overall welfare effects that will arise from off‐setting economic impacts, the most important of these being job losses associated with the reduction in demand for relatively cheaper conventional energy generation. In addition, there is the indirect effect on consumers and commerce in upstream markets that must support the subsidies for RE. Higher electricity prices raise businesses’ costs and consumers’ overall cost of living, thus placing a significant drag on economic activity. Consumers’ overall net loss of purchasing power due to higher electricity prices in 2013 was approximately $21.0 billion ($26.2 billion retail electricity cost minus $5.2 billion wholesale electricity cost), with environmental benefits equal to a scant 2% of that loss. Investment in productive capacity by many industrial customers may be inhibited or constrained by their higher electricity costs and by their loss of sales due to consumers’ reduced purchasing power. Hence, the burden that RE subsidies impose on residential, commercial, and industrial consumers diverts a flow of funds away from alternative, more beneficial, investments. Overall, RESA’s drag on consumption and investment expenditures leads to negative employment effects and raises serious doubts about whether its overall employment effects are in fact positive. One government report acknowledges these cost considerations, and states that “the goal of environmental protection is not primarily to create as many jobs as possible, but rather to reach environmental goals efficiently, that is, at the lowest possible cost to the overall 56
Id., Figure 3, p. 8. Christensen Associates Energy Consulting LLC 23 3/28/2014 economy”.57 The same report, however, twists its own logic by asserting that an added benefit of environmental protection is net job creation because the associated resource reallocation is typically directed to more labor‐intensive renewable sectors. The conflation of labor‐intensive energy provision with efficient climate protection obscures much of the discussion on RE’s economic merits. In this regard, proponents of RE often regard the requirement for more workers to produce a given amount of energy as a benefit, failing to recognize that this puts downward pressure on wages and lowers the output potential of the economy, thus being counterproductive to net job creation and to workers’ welfare.58 Whether favorable conditions on the international market prevail for members of the RE industry in Germany is highly questionable, particularly given negligible or even negative net exports in recent years. According to a 2013 government report, “[e]xport of installations, components, biomass and biofuels for transport accounted for a total of 98,800 jobs or 26 % of employment” in the RE sector in Germany.59 The latest report from the German government indicates that the solar PV industry in Germany is suffering mightily from the influx of less expensive imports. Unable to keep up with competition from Chinese producers, big solar producers such as Conergy, Solon and Q‐Cells have all registered for insolvency over the past few years. With their demise came job losses. Figures from the Federal Office for Statistics, as reported by the Frankfurter Allgemeine Zeitung (FAZ), revealed a huge drop. Solar energy jobs in Germany fell from 10,200 at the beginning of 2012 to below 5,000 in 2014. The number of working hours available to those who remain employed in the sector is 625,000 compared with 1,400,000 hours at the beginning of 2012. In an attempt to control the decline, the EU imposed a tax on imported PV panels last summer.60 g. GridStabilityandIndustrialProduction61
The eastern part of Germany is home to over one third of its wind turbines, which at times can overload the grid and threaten grid stability. The grid is particularly vulnerable during public holidays when electricity consumption is significantly reduced but when wind production can 57
O’Sullivan, M., D. Edler, M. Ottmüller, and U. Lehr, Brut‐tobeschäftigung 2008 – eine erste Abschätzung, commissioned by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), March 2009. 58
Michaels, R., and R.P. Murphy, Green Jobs: Fact or Fiction?, Institute for Energy Research, January 2009. 59
Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Short‐ and long‐term impacts of the expansion of renewable energy on the German labour market: annual report on gross employment; Gross employment from renewable energy in Germany in 2012 ‐ a first estimate, March 2013, p. 7. 60
The Local: Germany’s News in English, “Solar energy jobs halve in two years,” http://www.thelocal.de/20140128/germany‐solar‐energy‐jobs‐halved‐in‐past‐two‐years.
61
This section is partly based on Rheinisch‐Westfälisches Institut für Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, October 2009, p. 24. Christensen Associates Energy Consulting LLC 24 3/28/2014 nevertheless be significant, at times producing up to four times more than the demand. Consequently, system operators must intervene to maintain network stability. According to a report issued by the German grid operator (Bundesnetzagentur), the German transmission system experienced severe stability problems in 2011 and 2012 that required operator interventions to maintain system security. Acknowledging that the significant penetration of RE sources contributed to this instability, the report states: The situation in the electricity grid in the winter of 2011/2012 was severely strained. … If more electricity from renewable sources is sold than can be transported by the network, this results in added strain on the network via corresponding price signals, as the conventional plants are demoted in the merit order and the additional exports from Germany appear on the single market [the wholesale spot market]. In the opinion of the Bundesnetzagentur, the existing legal framework has scope for measures from the transmission system operators to limit sales to volumes that can actually be transported. Nevertheless, normative clarification would seem to be advised… There are no effective technical measures that could act as a substitute for grid expansion.62 Along the same lines, Jochen Homann, president of Bundesnetzagentur, recently said that Germany’s power system is “showing signs of declining security of supply” as renewable generation capacity strains the grid. Because of these strains, Bundesnetzagentur curtailed renewable energy production an astonishingly high 82% of all hours (7,200 hours) in 2012, up from an already high 21% of all hours (1,800 hours) in 2011.63 h. EnergySecurity64
Increased energy security resulting from decreased reliance on fuel imports has frequently been offered as an argument to support RE promotion. However, this argument works on the presumption that sun and wind are sufficiently abundant, which in Germany they are most definitely not. Consequently, backup fossil‐fired generation (coal plants in particular) must remain in place to ensure grid reliability. Maintenance of backup systems is costly (e.g., maintenance costs were $741 million in 2006).65 Increased energy security afforded by reliance on RE sources is offset by reliance on other fuel sources for backup energy, which includes natural gas (which is almost entirely imported), and now increased reliance on new coal‐fired generation. 62
Bundesnetzagentur, Report on the State of the Grid‐based Energy Supply in Winter 2011/2012, May 3, 2012. 63
“Germany’s Retail Tariffs Now Decoupled from Wholesale Rates, ”The Electricity Journal, November 2013, 26(9): 7‐8. 64
A portion of this section is based on information obtained from Rheinisch‐Westfälisches Institut für Wirtschaftsforschung, Economic impacts from the promotion of renewable energies: The German experience, Final Report, October 2009, p. 24. 65
Erdmann, G., Indirekte Kosten der EEG‐Förderung: Kurz‐Studie im Auftrag der WirtschaftsVereinigung Metalle (WVM), Technische Universität Berlin, August 2008, p. 32. Christensen Associates Energy Consulting LLC 25 3/28/2014 4. Conclusions
Germany has used various systems of subsidies to dramatically expand RE generation in Germany. This has come at a very high price, however: German electricity prices are substantially higher than they would otherwise be; Germany’s international economic competitiveness has been compromised; the job benefits are dubious; and environmental improvements have come at enormous cost relative to how equivalent benefits might have been achieved by alternate means. The German experience thus stands as a warning to other jurisdictions. Environmental protection can certainly be achieved by other means at substantially lower cost. The German experiment with subsidizing RE provides valuable lessons for the rest of the world, including the United States. First, government promotion of RE through subsidies financed by retail electricity consumers distorts both consumption and investment decisions relative to what would take place if RE were left to succeed or fail on its merits in a competitive wholesale electricity marketplace. The German experience demonstrates that it is difficult to anticipate correctly the reaction of investors and consumers and of RE supply and demand to such subsidies and retail price distortions. Consequently, the government finds itself constantly tinkering with rules, regulations and price subsidies in an attempt to control electric sector consumption, investment, and financial impacts. Second, governments do not do well at picking electric generation technology winners and losers. The physics of the electricity grid and the operation of electricity markets automatically make all generation technologies interrelated, operationally and financially. Without a technological breakthrough in energy storage in the immediate future, the intermittency of wind and solar resources, especially at the penetration levels achieved in Germany, requires a continued investment in conventional generating technology to both back up the RE with ancillary services as well as to “fill the energy gap” when RE does not produce. Third, the rate impacts and operational difficulties experienced in Germany offer a valuable lesson for the U.S. of the risks and unintended consequences that can result from inefficient promotion of RE expansion. RE expansion requires long‐range planning and strategic collaboration among stakeholders that will enable RE resources to provide the full value to power system operations. Christensen Associates Energy Consulting LLC 26 3/28/2014 AppendixA:EuropeanUnionEmissionsTradingSystem
The European Union Emission Trading System (EU ETS) was initiated in 2005 to address concerns over climate change. As of 2013, the EU ETS covers 31 countries – all 28 EU member states plus Iceland, Norway, and Liechtenstein. The system includes more than 11,000 factories, power stations, and other installations with net output or usage in excess of 20 MW. The installations regulated by the EU ETS are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total GHG emissions. The EU ETS operates under a “cap and trade” principle in which a cap is set on the total amount of GHGs that can be emitted by all participating installations. The cap is reduced over time in order to drive down the total emissions allowed. In particular, the proposed caps for 2020 represent a 21% reduction of GHGs relative to 2005. Allowances for emissions are then auctioned off or allocated at no cost, and subsequently can be traded. Participants can also buy limited amounts of international emission credits from emission‐saving projects around the world. Installations must monitor and report their CO2 emissions to ensure that they submit enough allowances to cover their emissions. If an installation’s emissions exceed its permitted allowances, it must purchase allowances to cover the gap. Conversely, if an installation has reduced its emissions below its permitted allowances, it receives credits that it can sell, or it can bank the spare allowances to cover its future needs. In theory, this allows the EU ETS to achieve the most cost‐effective means of reducing emissions without significant government intervention. The limit on the total number of allowances available ensures that allowances have a positive value. The market value of emission allowances that companies purchase becomes a part of their costs of production and thereby raises the prices of goods and services to reflect the environmental costs of their emissions. For the electricity market, the market value of emissions allowances raises the prices at which electric generators are willing to offer electricity. The EU ETS has seen a number of significant changes since 2005. Most permits are now sold (through auctions) rather than given away (“allocated”) for free. Covered emissions now include GHGs other than CO2, such as nitrous oxide and perfluorocarbons. In 2012, the EU ETS was extended to the airline industry, though this has been put on hold for one year given the possibility of the creation of a global system for these emissions. The price of EU ETS carbon credits has been lower than expected, with a large surplus of allowances, in part because the recent economic recession dramatically reduced electricity demand. In 2012, the European Commission announced that it would delay the auctioning of some allowances while it considers significant long‐term reforms to reduce oversupply of allowances. Christensen Associates Energy Consulting LLC 27 3/28/2014