This isn’t Georg. As soon as he wears lederhosen to the office we will replace this picture.

For much of this year Economists at Large has been lucky to have Georg Molz helping out on various projects.  Now he turns his Teutonic talents to examining his homeland, EXCLUSIVE to the Ecolarge blog.  Danke, Georg!  

In 1993, German electricity providers ran a media campaign cautioning against the closure of nuclear power plants. In a series of ads appearing in newspapers around the country, suppliers claimed that shutting down nuclear power would lead to Germans becoming more reliant on coal-burning for their electricity. An increase in CO2 emissions, they argued, would be the inevitable outcome of doing so.

But what about renewables? Energy providers had that covered. “Renewables cannot cover more than 4% of the future energy demand in Germany” the advertisements confidently proclaimed. Further sources of energy supply were not considered. Electricity from solar panels and wind turbines seemed neither as technically feasible nor economically justifiable as staying nuclear.

Twenty years later the energy landscape in Germany has transformed. By 2011 the share of electricity generated by renewables had reached 20.3%. This rise in renewable energy, particularly electricity from solar and wind power, is the result of the 2000 Renewable Energy Act (EEG). The Act was the product of a coalition formed in 1998 between the Social Democrat Party and the Green Party. Along with the phasing out of nuclear power and introduction of an eco-tax, the EEG was one of the most important energy projects of the coalition.

The aims of the Act were straightforward: sustainable development of energy supply; internalisation of external effects; reduced reliance on fossil fuels and enhancement of technologies to generate more electricity from renewables. Back in 2000 electricity generated by renewables accounted for 6.8% of Germany’s total gross energy consumption. The new legislation aimed to double that amount by 2010.

Feed-in tariffs were introduced in order to achieve this target. Under the terms of the tariff, producers of renewable energy would be paid a fixed rate over 20 years for electricity they fed into the public grid. The rates paid to renewable energy producers varied depending on the energy source, plant capacity and construction type. In 2001 electricity producers from wind electricity received between €0.062 ($0.091) and €0.091 ($0.0133) per kilo Watt hour (kWh), while producers of electricity from solar power were paid €0.506 ($0.739) per kWh.

Thanks to fixed rates, investment in renewable energy at last became profitable and many households and farmers became electricity producers on a small scale. The total nominal power of wind farms in Germany climbed from 6.06 gigawatt (GW) in 2000 up to 30.75 GW by 2012. Nominal solar power rocketed from 0.07 GW in 2000 up to 32.41 GW over the same period. With the total nominal power for solar facilities worldwide estimated at 100 GW, Germany now accounts for almost one-third of nominal solar electricity across the planet. Aside from the feed-in tariffs, take-up has also been driven by the decreasing cost of solar plants, with prices halving in the last three years alone.

By June 16 this year electricity generated from solar and wind power accounted for a record 61% of total electricity generated in Germany.

However, this rapid expansion in renewable energy has not occurred without one or two less positive outcomes. Obviously much renewable energy is weather-dependent; electricity from solar and wind power is only available while the sun continues to shine and the wind to blow. So far disruption has been minimal, but energy providers are concerned the supply might be too uneven and has the potential to cause trouble in the future.

Another consequence of renewable energy’s popularity is already being felt by the public: power prices have risen markedly. Back in 2000 an average household consuming 3,500 kwh/a paid €40.67 ($59.37) per month for electricity. By 2011 the same amount of electricity cost €72.78 ($106.23) per month. Experts are forecasting another drastic price hike in 2014.

The rising cost of power is partly – but not entirely – due to the introduction of fixed rate feed in tariffs: growth in the amount generated by renewable sources leads to a higher amount paid to the producers. Consumers pay the total sum of these tariffs minus revenue generated when excess electricity is traded and sold at the European Energy Exchange (EEX) in Leipzig. The final amount paid by consumers is called EEG-surcharge (EEG-Umlage).

Public discussion often deceptively confuses the EEG-surcharge and the amount paid to producers. While renewable electricity producers were paid €17.96bn under the feed-in tariff scheme in 2012, only €14.11bn was paid by electricity consumers as €4.96bn was traded on the EEX.

It is now common for German newspapers to lay the blame for higher prices wholly on the surcharge for renewable energy production. One factor that is too often overlooked, however, is the increasing number of exemptions from the surcharge, which results in the remaining, non-exempt consumers paying more. In 2010 approximately 650 companies were not required to pay the whole EEG-surcharge. The electricity consumption by these companies represented one-third of Germany’s total industrial electricity consumption for 2010 (ca. 67 gwh out of 237 gwh). To qualify for exemption (introduced so that the international competitiveness of German companies would not be damaged), companies had to prove that they consumed more than 10 gwh/a and that their ratio of consumed electricity to gross value creation was higher than 15%.

Overall, half of the electricity used for industrial production in Germany was either exempt or partially exempt from the surcharge. Companies that generated their own electricity were also completely exempt.

But recently the conditions for surcharge exemption have eased considerably. The threshold for electricity consumption has been slashed from 10 gwh/a to only 1 gwh/a. The ratio of consumed energy to gross value creation has also been lowered to 14% (down from 15% in 2010). As a consequence of these changes, 1,550 companies have already qualified for EEG-surcharge exemption this year, with authorities reportedly considering a further 500 more applications in the pipeline. The ministry overseeing these applications allegedly employs 50 assistants solely to work on the assessment process.

Due to the growing number of exempt users, the EEG-surcharge payable per household and per non-exempt company will climb this year. And, with 2,367 applications for exemption in 2014 already having been lodged, the price of electricity is on track to climb still further.

Certainly more electricity from renewables results in an increasing payments to producers. But the partial amount every consumer must pay for the EEG-surcharge is affected by the total number of exempt companies. Other effects which have an impact on electricity price are too rarely considered, such as transmission, generation, grid access and trading at the EEX.

A growing chorus of politicians are now calling for adjustments, if not a complete halt, to feed-in tariffs for renewable electricity producers. This would only affect prospective producers; households and farmers who set up their solar panels or wind farms 10 years ago receive guaranteed rates for 20 years. Be that as it may, claims that the rising costs of renewables are driving low-income households to the wall are bogus. Hikes in the EEG-surcharge are as much the result of more and more exemptions being granted to the German industrial sector and not solely due to the popularity of small-scale renewables.