Thursday, August 15, 2013

Renewable Energy in Germany

Germany is trying to transition to a more sustainable energy mix in the future. You might have read one of two stories about the effort, or even both depending on your personal filter bubble.
  1. The switch away from nuclear power and fossil fuels is not going so well in Germany. The consumer prices are increasing massively. In July 2013 the inflation of electricity prices reached a whopping 11.9 %. In 2013 consumers have to pay more than €0.28 per kWh; ten years ago the price was around €0.17/kWh. Also, the contribution of lignite, black coal and natural gas to the energy mix has not changed much at all in the last ten years. Only the share of nuclear power has fallen significantly, so the CO2 production of power plants was not reduced all that much.
  2. The energy transition in Germany is happening at a faster rate than expected. In 2011 renewable energy made up 20.5 % of electricity produced; and in 2012 it was up to 22 %. This development has caused the prices at the energy exchange to fall significantly. In the first 2013 the price per MWh fell by 20 % compared to 2012. It is expected to decline some more. Of course, some of this development was caused by falling coal prices, but for example on the  June 16th this year the average price at the exchange was minus €3.33 per MWh. It fell to minus €100 per MWh for an hour and trading had to be stopped, so it is safe to assume that the huge amount of electricity produced does play a significant role in the much lower prices.
It might come as a surprise, but both stories are correct. The prices at the energy exchange are falling fast, while consumers have to pay ever more for electricity. This is due to the way renewable energy is subsidised. The owner of a renewable energy plant is guarantied a certain price for twenty years after the plant goes on line. Also, the firm is guarantied that all energy it is able to produce will be fed into the power grid (or be paid even if that cannot be the case). Especially solar energy, which was not competitive at all in 2000, when the Erneuerbare-Energien-Gesetz (EEG renewable energy law) was introduced, profited from massive subsidies. In 2004, the guarantied price was at least 54 ct/kWh for installed power on top of buildings. eight years later the price has fallen to between 18.3 ct/kWh and 24.4 ct/kWh. The resulting difference between exchange and guarantied price has to be paid by the consumers and companies (not energy-intensive ones, though).  At the moment the so called EEG reallocation charge is at 5.28 ct/kWh or over 18 percent of the total electricity price. In 2003 it was only responsible for 2.4 percent of the consumer price.

The above graphic shows the composition of the electricity prices for consumers. Today, fees and taxes make up over 50 % of the total price. The increase compared to 2003 is primarily due to the EEG allocation fee. 

The increase from around 17.2 ct/kWh to 28.7 ct/kWh in 2013 has three main sources. 
  1. Production costs, transport and especially profits have gone up due to higher resource prices, shutting down highly subsidised nuclear power plants, and to a smaller share CO2 trading.
  2. The EEG allocation fee has increased significantly, since the prices are guaranteed for 20 years additional renewable energy power plants will keep pushing the fee up, while decreasing the exchange price.
  3. The VAT (value added tax) was increased from 16 % to 19 %; of course when the price increases there is always an automatically higher absolute price for VAT to pay.
It is important to note that the EEG allocation fee is not a good indicator for the cost of the energy transition. Large parts of the the increase from 2012 to 2013 were due to underestimation of the expansion of the renewable energy sector, which caused the account responsible for the payments fall into negative territory which now has to be rebalanced. As mentioned, falling exchange prices due to the increased amount of electricity available cause the fee to increase since the difference to the guaranteed price becomes higher. Additionally, an ever larger share of industry does not have to pay the fee (28 % at the moment) which leads to a higher burden for everybody else. So it is a very distorted value, and should not be used as a "warning for other countries".
Productivity increases have pushed the price for the installation of renewable energy down, which in turn allowed the guaranteed prices to fall, therefore the future increases through the continuing expansion of the sector lead to smaller EEG allocation fee increases. The mistakes of the past (far too high subsidies for solar energy guaranteed for 20 years), will remain with the country for the whole decade though; and will make it all but impossible for the consumer prices to fall significantly.

Prices for consumers in Germany are high compared to other countries, this is due to Germany being one of the first countries to attempt a large scale energy transition. The share of renewable energy is now over 20 % and is still increasing, but additional capacity is costing significantly less than ten years ago. Eight nuclear power plants have been shut down and everybody that believed that this would lead to medium term shortages in supply has been proven wrong, completely and utterly wrong. Germany is a net exporter of electricity. Any country which now chooses to go a similar path will not face the same costs as Germany has and will be for some time. The transition does not come free, but the know-how gained in Germany will push down costs for every other country choosing a similar path.

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