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The Gains And Pain Of Energiewende

December 2nd, 2013 by Fereidoon Sioshansi, EEnergy Informer

Germans, as everyone knows, are an efficient lot. Once they put their mind to it, they deliver results. For some time, Germany has been on the path of increasing its reliance on renewables – the marching order was further fortified when Chancellor Angela Merkel decided to immediately shut down half of the country’s operating reactors following the Fukushima disaster in 2011 and hastily phase out the remaining ones by 2022.

The impact of Energiewende or energy turnaround is being gradually felt, not only in the impressive growth of renewables but also some of its unpleasant consequences – falling wholesale prices due to the glut of capacity and, ironically, rising retail tariffs because the wholesale and retail prices have become virtually decoupled.
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Germany now routinely experiences episodes when renewables easily exceed 50 of total generation. As illustrated in graph on page 6, on 3 October 2013, a sunny and breezy day, renewable production reached 59.1% of total generation around noon. For the day, renewable generation exceeded 36% of total production. In sunny August 2013 Germany, which has over 35 GW of installed solar capacity, set a new record for solar generation producing 6.5 times the US solar output.

No wonder thermal generators are complaining. Not only are wholesale prices low, the number of hours they get dispatched is shrinking as time goes on. In the absence of a capacity payment scheme, their survival is threatened.

To pay for the renewables, Germany’s grid operators raised the surcharge consumers pay for renewable energy by 18%. While Germans support the nuclear phase out and favor more renewables, the rising retail tariffs are beginning to pinch, not just the domestic consumers but also small to medium size businesses. Since a number of large, energy-intensive and export-sensitive industries are exempt from paying the renewable levies, more of the cost burden is born by smaller consumers.
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According to TransnetBW, one of the 4 grid operators, the renewable levy, which is added to retail tariffs, will raise to 6.24 euro cents/kWhr (8.5 US cents) starting in 2014 from the current 5.28 euro cents/kWhr. The levy has more than quintupled since 2009, making German domestic tariffs the third-highest in the EU. Export-sensitive industrial customers are largely exempt from the levies.

Being a good politician, Merkel is looking for ways to modify the 13-year-old EEG law while maintaining the goal of meeting 80% of German electricity from renewables by 2050 from about 23% today. The total EEG subsidy, which is collected through consumers’ bills along with an assortment of taxes and other levies, is projected to reach about €23.6 billion ($32 billion) in 2014. The fee increase will raise the bill of the average German household using 3,500 kWhrs by about €34/year in 2014.

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The BDI, an industry federation representing about 100,000 companies, has proposed a radical reform of EEG to reduce industry costs. The Green party is often blamed for runaway retail prices. Deflecting the criticisms, Oliver Krischer, energy policy spokesman for the Green party, however, explains that the renewable levy is rising “because the power market isn’t working and the old government has piled more and more industry aid onto non-privileged (i.e., non-exempt) electricity consumers.”

It is a zero sum game. If large, export sensitive industry is exempt from paying the levy, others have to shoulder more of the costs.

F.P. Shioshansi

This post is extracted from EEnergy Informer, October 2013 issue.

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One Response to “The Gains And Pain Of Energiewende”

  1. Romain Maire Says:

    In theory, the EEG seemed necessary in the hypothesis that Germany was to dramatically develop its renewable capacity, and cut into its nuclear capacity at the same time. Indeed, it was supposed to:
    • promote investments in the renewable energies, by guarantying fixed prices above the market,
    • reduce (or even nullify) the charge of these investments on the German government,
    • drive innovation thanks to decreasing feed-in-tariffs, thus decreasing the overall costs of renewable energies, until they reached market price.

    However, the dramatic increase in renewable production means capacity that resulted, coupled with a very brutal decision to end nuclear production by 2022, led the German electricity market in a transition phase, as there was no sufficient time to tackle the inherent changes due to the shift of production means. Therefore:
    • thermal energies, that provide back-up, are endangered by the correlation between wholesale and retail prices, which created an absurd situation where retail prices for consumers skyrocket while the overall supply security decreases. The policies in place are not yet adequate to deal with massive amounts of solar and wind energy on the market.
    • the grids had no time to adapt either, and are congested because most of the industrial consumption lies in the south while the largest wind farms were built in the north. Strong investments are needed to secure the conveyance of electricity.
    • consumption control means were not sufficiently developed. If the electricity production includes a large part of renewable energies, then the production becomes less and less predictable as their part in the mix increases. As a result, the classical schema where production adapts to demand needs to revert to a schema where the consumption is subjected to the production. Yet, smart grids solutions are far from being ready to be set-up on a large scale.

    German consumers suffer high prices mainly because the market is ill-adapted and technical solutions that required to be developed in the meantime as the production means were not put in place. Moreover, the increase in retail prices was emphasized by unlimited funding to the solar industry, quite inefficient in Germany, and the drop from 10GWh a year to 1GWh only as the lower limit for an industry to be considered as energy intensive contributed to increase the consumers’ bill. As a result, the viability of the EEG is key as it helps Germany fulfilling the latter points, and the question of its funding is an important one to raise.

    Nevertheless, the main issue of the EEG may lie somewhere else. The question is not to know who will fund it on the short term, but will the EU authorities force the companies that benefited from the relief resulting from the EEG levy and grid charges to fully or partially refund their savings, on the ground of a distorted competition among European countries. It would of course be a catastrophe for the German industries, and would definitely seriously hinder their acceptance of expensive green energy subsidies and the transformation of the energy supply.

    The German government must reform the EEG properly, so that its very existence can be guaranteed and back all the investments required to control a high capacity of renewable energies, otherwise the Energie Wende may be in serious danger. A judgement mistake in the exonerations put the whole renewable development in jeopardy. The current situation has been worsened by the haste with which the German government rushed into developing its energy mix, even though the prices were too high, the EU policies led to market absurdities, their infrastructures (grids and storage) were insufficient, and they were the only country of this size to do it in so little time.

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