German consumers of power were presented with a pricey green energy bill this week. The add-on to their power bills for supporting the investment in green power, the so-called “Erneuerbare Energie Gesetz (EEG) Entgelt”, has been raised to 52,77 EUR/MWh for 2013, compared to 35,92 EUR/MWh in 2012. With current Cal 13 baseload electricity prices around 47 euro per MWh, this means that base load consumers of electricity are likely to pay more for support of green electricity next year than for the commodity, the product electricity itself. It also means that such consumers will pay more than twice the price of their competitors in France with its regulated electricity tariffs. Who said that greening our electricity production wouldn’t be a costly affair? If one thing, it can be argued that this rise doesn’t come unexpected. Everyone knows that the cost of greenery in the German electricity has grown out of control. And if Germany made one policy mistake, it was that it realized this too late to really do something about it. The EEG was a ticking time bomb, but nobody seems to have heard it soon enough.
The EEG is a classical example of a feed-in tariff subsidy scheme. Producers of renewable electricity in Germany can sell their production at a fixed tariff to grid operators. To jump-start the development of green power, these tariffs were originally set at high levels, up to 574 EUR/MWh for small-scale solar power, for example. The grid operators buy the green power and sell it into the markets. They are than compensated for the losses that they suffer on these transactions. Since 2009, this compensation is based on the difference between overall EEG costs (leveled out for the whole of Germany), and the average year ahead wholesale power price. The compensation is paid by the end-consumers through the EEG-Umlage that they pay on their power bills. Every year the German authorities takes a decision on the exact amount, which has now reached the staggering level of 52,77.
There are three factors that drive the cost of EEG. The first one is the overall amount of green electricity production, the second one the level of the year ahead market. The higher the first and/or the lower the second, the more EEG taxes are to be paid by the end-consumers. Thirdly, EEG costs are also driven up by lower energy demand.
Germany was an early adopter of renewable power technology. They jump-started wind and solar technology, buying much of it at the high initial prices. Now that the costs have come down, other countries will be able to build up their renewable power shares at much lower costs. From this perspective, you can consider that the Germans are paying the bill for the industrial development of the renewable power technologies for the rest of the world. Thanks to the rapid development in Germany, the production cost of windmills and solar panels became cheaper. The Germans pay the development costs of renewable energy. This story becomes extra painful, if you consider that German solar power factories are currently in serious trouble because of Chinese competition, stealing away some of the jobs that the renewable power sector was supposed to bring to Germany.
The high bills for green electricity obviously constitute a competitive problem for the German industry. Fortunately there is the Härtefallregelung, which reduces the EEG-bill for large, energy-intensive consumers. However, this rebate arrangement is very hard. Either you meet the criteria and you enjoy the full rebate, or you don’t meet them and you have to pay the full bill. German policymakers are now discussing the Härtefallregelung. From the left side, it is hinted that too many companies enjoy Härtefall, rather than not enough. I can tell you that many of our clients cannot enjoy and are experiencing heavy competitive pressure due to high EEG costs. Frau Merkel’s suggestion to grant the rebate only to companies that have to confront international competition, seems reasonable. But most of all, it would be good if German policymakers produced a more layered rebate approach, such as we see in Belgium or the Netherlands, allowing more companies to enjoy some relief, rather than just a few that enjoy the full relief. It would also be a good idea to allow companies with multiple sites across Germany to enjoy the Härtefallregelung on a company-wide and not on a site-by-site basis.
The EEG developments teach us two lessons:
Germany’s attempts in the next months to clean up the green energy mess will be interesting to watch, especially for other countries that are building up high green energy bills.