In Australia there is great current debate about the Renewable Energy Target (RET) and whether it will increase or decrease energy prices.

We often look to Germany for direction on successful renewable energy policy, with their strong growth in renewable over recent years. Are the Germans just more sensible and united on this than Australians? Or does a more complex story exist in the land of sausages and beer.  Ecolarge’s own Georg Molz put his lederhosen back on to find out…

Last October I wrote about the German Renewable Energy (EEG) Act and its effect on electricity prices in Germany.

One of the main points I raised in that post was that while renewable were often blamed, there were a growing number of companies receiving exemptions from the EEG surcharge. These exemptions for big energy users were resulting in higher retail prices for private and corporate electricity consumers who were not exempt.

The rise in EEG exemptions was reviewed by the European Commission (EC) last year. It ruled that the exemptions were illegal subsidies and filed an action against Germany. In response, Germany announced that it would cut the number of exempt companies from 2,100 to 1,600.

The EC was unsatisfied with this response, insisting that the 1,600 exempt companies should pay at least 20 per cent of the EEG-surcharge. However, the metal and chemical industry – which includes some of the biggest opponents of further reform – claimed that energy-intensive companies would struggle if they have to pay 20 per cent of the surcharge. Interestingly, the American Chamber of Commerce in Germany also argued that energy prices hikes were a competitive disadvantage for Germany.

Researchers of the German Institute for Economic Research (DIW) came to a different conclusion, reporting that energy costs were only a significant cost driver for a small number of industrial sectors and that rising energy costs would not affect the choice of industrial location.

German Minister of Economic Affairs Sigmar Gabriel, who is in charge of the Energiewende (energy transition) and the EEG, disregarded the findings of the DIW. He called it “naïve” to reduce the electricity bill for an average household while losing hundreds of thousands of jobs because insolvent companies cannot deal with the rocketing electricity costs of the EEG. Without a job no one could effort electricity anyway; such was the logic of Minister Gabriel and it prevailed over the EC.

The final adjustments, which will take effect in 2019, are the result of a compromise with the EC. The majority of the exempted companies now have to pay 15 per cent of the EEG-surcharge. However, costs will be capped at 4 per cent if a company is liable for more than 4 per cent of its yearly gross value added (GVA). For other highly energy-intensive companies the cap applies at 0.5 per cent of their GVA. The GVA is the only criteria that applies and a case-by-case review will not take place. EC Competition Commissioner Joaquin Almunia was utterly disappointed about the result and admitted that “more was politically not possible”.

Will this result in lower retail prices for other electricity consumers?

It will not. Absurd as it may sound, the €5.1bn allowance for the exempt companies won’t change. Partly this is due to the 4 per cent cap. The €5.1bn sum still has to be paid by the remaining consumers. In fact, the German Institute for Applied Ecology estimates that the allowances could be even higher than €5.1bn, leading to even higher retail prices for electricity.

For many Germans the problem doesn’t stop at rising energy prices. Complicated adjustments like the exemption rules make it hard to make sense of the whole Energiewende concept. Rising prices for electricity together with complicated adjustments will certainly lead to more Germans getting a bit hot under the collar (and no one likes grumpy Germans, Chancellor Merkel least of all).

To that extent it’s reassuring to learn that, despite mismanagement and rising costs, public support for the transition to renewable and “democratised” energy generation remains strong. Various measures have been proposed to keep that support high. One involved setting up a fund to be made up of the capped costs accrued from the EEG surcharge. This fund – the brainchild of former United Nations Environment Programme (UNEP) executive director, Klaus Toepfer – would have had the same effect as a levy for all Germans.

The basic idea behind Toepfer’s proposal was that Germans would be able to reap the benefits of cheap energy as renewables became less expensive. In fact prices for solar panels did decrease dramatically from 2009 to 2012. This lead to more homeowners and farmers putting panels on their roofs and farmlands.

One would expect that the falling cost of solar panels would also result in falling electricity prices. Paradoxically, the exact opposite happened. This is because the rates that solar panels owners received for the electricity they produced were fixed at a price close to highs recorded in 2001.

The politicians in charge responded too late to the massive price decline for solar panels. On the one hand it was worthwhile that more electricity came from renewables which was the intention of the EEG; on the other hand the neglected adjustments of the fixed rates are now resulting in dwindling acceptance of renewables and the Energiewende itself. Renewables have become a victim of their own success. The forgotten adjustments are by far one of the most serious mistakes relating to the EEG over the past decade. Klaus Toepfer’s idea of setting up a fund has since been rejected. No one in charge wanted to burden future generations with more debt.

Despite the price challenges and the mismanagement of the EEG-surcharge, further criticism came up because renewables as part of the Energiewende were supposed to help Germany reducing its greenhouse gases until 2020 by 40 per cent compared to 1990. Most likely Germany will fail to reach the target in 2020. This is due to rising carbon emissions from increased electricity generation from coal based power plants.

Aside from the price challenges and mismanagement of the EEG-surcharge, the Energiewende has also been criticised for its failure to cut carbon emissions. When the policy first came in, renewable energy take-up was expected to lower Germany’s greenhouse emissions by 40 per cent of the 1990 level by 2020. But coal-fired power generation is actually increasing in Germany, so the chances of meeting its emissions target are slim.

Why is coal based electricity generation rising?

There are two reasons for this development. The first is that hard coal and lignite (brown coal) prices are falling worldwide. The second is the inefficiency of the European Union Emissions Trading System (EU ETS). Germany’s lignite-based power plants are operating at their highest output since 1990. Lignite and hard coal together accounted for 46 per cent of the country’s energy production in 2012. Electricity exports reached record volumes for Germany that same year.

Viewed in terms of carbon footprint, gas-fired power generation offers clear advantages over lignite. Gas-fired plants are more efficient and don’t require much time to start operating. The short offset time is a huge advantage over coal based power plants. This advantage could help Germany meet electricity demands on days where solar panels and wind turbines cannot supply enough electricity. But because of the low wholesale coal price, gas-fired power plants cannot perform competitively in Germany. The sale price for electricity on the European Energy Exchange (EEX) (not to be confused with the retail price for consumers) is much lower than the import price for gas from Russia and Norway. As a consequence a growing number of German gas-fired power plants do not operate at full capacity. Even in the Netherlands, one of the biggest importers of German electricity, gas-fired plants are shutting down because of the low price for electricity generated in German lignite based power plants. The same thing is happening in Austria.

The head of the International Energy Agency (IEA), Maria van der Hoeven, has criticised Germany’s energy policy and warned other EU countries off using Energiewende as a model for cutting emissions. Of course, more investment in renewables would make the trade-off regarding the operation of gas-fired or coal based power plants redundant, but it appears fewer and fewer Germans are willing to pay the bill for that.

Some further readings in English:

• The Economist, July 2012: Energiewende

• New York Times, September 2013: Germany’s Effort at Clean Energy Process

• The Guardian, February 2014: North-south divide threatens Germany’s renewable energy highway

• BBC News, April 2014: German coal industry underpins renewable push

• Co.Exist, April 2014: Solar Power Is Now As Cheap as Grid Electricity In These European Countries

• New York Times, April 2014: Germany Moves Forward on Renewable Energy Plan