Monday, June 20, 2016

Germany’s Unique Energy Conundrum – What the Future of Energy Policy Needs to Address

By David Heberling, Policy Intern
Solar panels on a roof in Hesse, Germany.

Last week I discussed the struggles of energy-poor countries to literally bring the light to their citizens. But what happens if the opposite is the case? What if a country is producing so much energy that it has a surplus? Surely this would be a celebrated milestone and a boon for all pushing for a renewable energy future. However, as Germany has seen, the reality of a renewable surplus can actually be a difficult situation to handle effectively. Today’s blog post will explore what can happen to a pro-renewable country when it starts growing very quickly, and what lessons can be learned to ensure that renewable energy has room to grow.

 Germany as a Renewable Energy Role Model

Germany has long been a champion for renewable energy deployment and policy, inspiring more renewable energy adoption globally. Germany has pushed for ever increasing adoption of renewable energy since it passed the Renewable Energy Law (“EEG” in German) of 2000. Since the EEG passed, the law has helped Germany’s renewable energy production increase from a mere 6% in 1999 to 33% in 2015. EEG has helped foster this growth by establishing a feed-in tariff subsidy (commonly referred to as a “FIT”) for renewable energy production. Germany’s FIT required utility companies to buy any third-party solar or wind generation at a set rate per kilowatt-hour (kWh) through a 20-year contract. At the beginning of the program, the FIT was set quite high to help offset the then-high prices of renewable energy development. Over time, these tariffs have dropped as renewable technology advanced. The EEG also gave renewable energy production preferred access to the grid so it was dispatched before conventional fossil fuel-generated electricity. This policy ensured that producers of renewable energy were guaranteed a market for their power, spurring regional and global development of renewable energy technology and deployment.

Last year, European deployment of renewable energy reached a new zenith.  In May 2016, the United Kingdom generated 1,336 gigawatt-hours (GWh) of solar electricity compared to 893 GWh from coal. This was the first time that the UK ever generated more solar electricity than coal-generated electrity. In the same month, Portugal was able to produce enough renewable electricity to power the entire country for 107 hours. From May 7 to 11, 2015, Germany ran 100% off solar, wind, and hydro power. Also in 2015, Denmark generated enough renewable-generated electricity to meet 140% of its demand. Interconnections with Germany and Norway enabled Denmark to export this excess energy.

Struggling with Surplus

In light of all this progress, the ruling party coalition in Germany has proposed a radical shift from the current FIT system, away from the guaranteed kWh rate and towards a more competitive market based system. . Beginning in 2017, Germany will cap the amount of new solar and wind projects that go online, as well as create a bidding system in which project proposals will compete in a auction in which the lowest kWh rate offer will win. Onshore wind capacity will be capped at 2.8 GW a year, and solar capacity at 2.5 GW. At first glance these policies  may seem designed to completely hamstring Germany’s remarkable  renewable progress. However,  it deserves a more nuanced analysis.

Currently Germany ranks third among countries in terms of overall renewable energy production capacity. However, it far outshines China and the U.S. (number one and two in terms of capacity) in renewable energy capacity(?) per capita. Despite all of this renewable energy, Germany’s household electric bills continue to be extremely expensive.  A large portion of this cost, nearly 22% of the total bill, is attributable to the structure of the EEG itself. By guaranteeing rates to producers, consumers end up shouldering the difference in cost of wholesale, conventional electricity versus renewable electricity. Since oil and gas prices have dropped, the EEG rate per kWh has increased. The EEG-surcharge has risen from 2.05 cents per kWh in 2010 to 6.35 cents kWh in 2016.

Germany’s FIT surcharge is partially responsible for the country’s upcoming policy revisions, but another more practical issue is the lack of infrastructure to efficiently handle intermittent renewable energy and transport it from the energy-rich north to the demanding south. However, recent efforts to expand the capacity for north-south transmission have seen some political setbacks. Thus, German leadership has looked to alternative measures to try to balance the interests of all parties. Fossil fuel utilities want to ensure that they don’t have to pay to deliver their energy to the grid and reduce their production in times of solar and wind booms. This occurred just last month on May 8 when power prices went negative for a few hours. While low power prices may be good for consumers, utilities end up operating at a loss because they cannot easily ramp down the coal and nuclear plants they operate and must take a mandated backseat to renewable production.

All Eyes on Germany’s Green Energy Experiment

While the grid in Germany is currently lacks capacity and flexibility to handle incremental renewable generation, many are looking to increase the flexibility of the country’s transmission infrastructure to ensure that renewable sources can continue to provide record levels of electricity to consumers. These efforts make fiscal sense. The German government is planning for a renewable dominated market, and has approved a €400-million program to research smart-grid and storage technology. Flexibility and expansion in the grid could help solve many of the problems that abundant third-party energy poses to utilities. Even the embattled Volkswagen company is taking an opportunity to rethink how it will do business in this green energy rich future.

For the time being, an alteration of Germany’s energy program may be a practical short-term solution. However, many critics watch with a wary eye as the same country that helped establish a burgeoning global market for clean energy might be pumping the brakes. For now, the great German role model continues to break new grounds of renewable adoption as the rest of the world looks on, eager to see how their great policy experiment plays out.