Topic Area: Energy
Geographic Area: Germany
Focal Question: How Have Feed in Tariffs Affected Renewable Energy Production in Germany?
Sources:
(1) Federal Ministry of the Environment, Nature Conservation and Nuclear Safety. EEG- The Renewable Energy Sources Act: The success story of sustainable policies for Germany. July 2007, accessed April 5, 2007.

http://www.invest-in-germany.com/uploads/media/EEG_Brochure_01.pdf

(2) Mendonça, Miguel. Feed in Tariffs: Accelerating the Deployment of Renewable Energy. London: Earthscan, 2007.

(3) Lesser, J; Su, X. “Design of an economically efficient feed-in tariff structure for renewable energy development.” Energy Policy 36 (2008) 981–990.

(4) The Economist. “German Lessons.” April 3, 2008, Accessed April 5, 2008.

http://www.economist.com/business/displaystory.cfm?story_id=10961890

Reviewer: Gautam Nair, Colby College '08
Review:

A feed in tariff promotes renewable energy technologies (RETs) that are not currently cost-competitive with fossil fuels by legally obliging electricity suppliers to buy electricity produced from renewable energy producers at fixed prices over a fixed time period. Tariff rates are fixed through production cost estimates, or by paying a premium over conventional energy costs. The additional costs to the grid of renewable energy are then passed on to the consumer in the form of higher end user prices (Mendonça, 8).

Germany uses a feed in tariff model that began in 1990 as the Electricity Feed Act ("Stromeinspeisungsgesetz"), and was revised in 2000 by the Renewable Energy Sources Act ("Erneuerbare-Energien-Gesetz" EEG). The EEG guarantees a fixed tariff for electricity generated from RETs that would allow normal profits with current technology and geographical advantage. Grid operators must provide priority connections to RET producers, and pay the statutory tariff to the plant operator. These higher costs are passed on to all consumers. Tariffs are fixed by contracts for 20 years from the installation of the plant, at which point they expire. The fixed tariff, the obligation for the grid to purchase renewable energy, and the time horizon create a guaranteed market and revenue stream, lower cost of capital due to reduced uncertainty, and allow the creation of economies of scale over time (Mendonça, 30-36).

The tariff is differentiated by type of RET used, year the plant began operation, and size of the plant. Thus, solar, wind, biomass, hydroelectric, mine gas, and geothermal producers receive different tariffs. This allows the simultaneous expansion of a wide array of RETs, thus lowering their cost curves at the same time. While tariffs within contracts are fixed for all producers for twenty years, tariffs in future contracts are adjusted for the technological learning curve. This measure induces innovation with an incentive for new installations to lower production costs (Federal Ministry, Mendonça, 30-36).

The size and quality of site also determine the tariff received, allowing producers of any size and geographical region to participate at a profit instead of restricting generation to large institutions or the most favorable areas. This policy is aimed at enabling broad participation and greater localization. Additionally, such “stepped” tariffs serve to lower the social cost of tariffs by reducing windfall profits gained through economies of scale. Finally, while all producers face fixed tariffs for twenty years, tariffs for future installations are reviewed every four years, and adjusted for technological and price developments (Mendonça, 30-36).

The feed in tariff has led to the creation of a dynamic and efficient renewable energy sector that has many benefits.

• From less than 1% in 1995, by mid- 2007 the EEG had already achieved its 2010 goal of 12.5% of electricity generation (over 70 billion kilowatt-hours) from RET sources. RETs produced 14.2% of Germany’s electricity in 2007. In 2006, Germany had the world’s largest installed RET generating capacity, over 25,000 megawatts. Wind energy (45% locally owned) accounted for 20,000 megawatts and solar for 2500 megawatts of installed capacity (The Economist, Federal Ministry).

• This sector employed 250,000 people in 2007, with an annual turnover of €32 billion. The industry anticipates employing over 500,000 individuals by 2020 and 710,000 by 2030 (Federal Ministry).

• RETs resulted in C0₂ emission reductions of some 100 million tons in 2006 and are forecast to play an important role in meeting greenhouse emission targets (Federal Ministry).

• Pollutants associated with electricity generation from conventional sources have decreased.

• Germany has reduced its dependence on fuels imported from politically unstable countries, and secured greater control over its energy portfolio in the face of volatile and rising conventional energy prices (Federal Ministry).

However, critics have pointed out several shortcomings of the program.

• .Its costs totaled €7.7 billion in 2007, a 38% increase from 2006. The program added an average of 1 Euro cent per kilowatt-hour of to the price of electricity in 2007, increasing the average household bill by 5% or €3 per month (The Economist).

• Although per unit costs of renewable energies have declined over time, they are projected to remain more expensive in the short and medium term than conventional sources.

• Given the lack of price competition, it is unlikely that the costs of generating energy from RETs are as low as would prevail in a competitive market.

• It is not proven whether Germany’s renewable energy industry will be able to survive without subsidies (The Economist).

Important lessons from the German case include that a successful feed in tariff should provide tariffs for all potential developers, provide financial security over the long term, have no barriers to grid connection, have limited administrative barriers, and enjoy strong public support (Mendonça, xvii).

Despite notable criticisms, feed in tariffs have been a success story in Germany. As a result of feed in tariffs, the country has achieved a significant share of RETs in its energy portfolio, greater energy independence, dramatic reductions in carbon and other emissions, and the creation of a vibrant new industry.