The Revision of the Electricity Feed Act is a Temporary Solution

The draft bill of the government parties for a German Renewable Energy Act addresses many criticisms of renewable energy associations and power supply companies concerning the current Electricity Feed Act ("Stromeinspeisegesetz"). Both from a regulatory standpoint as well as in the context of European law and constitutional concerns, however, the current draft can only be a temporary solution in case of its implementation.

The existing provisions of the Electricity Feed Act display important shortcomings, which make a reform of the law necessary. In particular, the hardship clause to protect network operators liable for purchase and remuneration against excessive financial burden is problematic since it has proven to be a limiting factor for the expansion of renewable energies.

The hardship clause limits the obligation of purchasing renewable electricity to five per cent of a company's electricity sales. PreussenElektra had reported in mid-1999 that this limit was reached soon, which is why the expansion of wind energy in Lower Saxony and Schleswig-Holstein was in danger of coming to a standstill. However, the promotion of wind energy and other renewable energies is still necessary. In the bill for a Renewable Energy Act drafted by the government parties for the purpose of replacing the Electricity Feed Act, such a hardship clause will therefore be omitted.  Instead, grid operators are obliged to provide for load balancing. Its aim is to compensate for competitive disadvantages that individual grid companies suffer from by the unequal distribution of potentials for renewable energies. The effect is twofold: on the one hand, there is a financial relief for those companies, who had been suffering from the unequal regional distribution of financial burdens due to the Electricity Feed Act.  On the other hand, it addresses the criticism of renewable energy organisations that the five percent clause limits the expansion of green electricity.  The new law is also welcomed by electricity suppliers. Basically, from now on they also have the possibility to feed in electricity according to the compensation regulations of the Renewable Energy Act.

The law clearly takes account of the interests of the wind and solar energy lobby with respect to the amount and the determination of the remuneration. The remuneration rates according to the Electricity Feed Act had previously been determined by the average returns of the electricity suppliers. With the electricity market liberalisation and the subsequent fall in prices in the past few months, the feed-in remuneration for renewable energies is expected to be reduced accordingly. The draft bill therefore provides for fixed remuneration amounts per kilowatt hour of green electricity. The adequacy of the amount will be reviewed in a two-year cycle by the Federal Ministry of Economics and Technology. Furthermore, the remuneration rates were adjusted to the costs of each technology. The effects are most dramatically shown in photovoltaics, where from now on each kilowatt hour will be remunerated with 99 pfennigs instead of about 17 pfennigs.

Although the bill drafted by the government parties addresses many concerns concerning the Electricity Feed Act, the conceptual problems of the Electricity Feed Act continue to persist in the Renewable Energy Act. Studies by the Centre for European Economic Research (ZEW) in Mannheim have come to the conclusion that particularly the load balancing obligation of the grid operators has the effect of a permanent special levy. From a financial constitutional standpoint, it is therefore unjustified.

From a regulatory standpoint, on the other hand, a guaranteed price scheme for the promotion of renewable energies is generally questionable. Price guarantees act as subsidies, which in turn are generally considered to present a only small incentive for the development of cost-effective technologies. In fact, operators of wind turbines in Germany receive a very high remuneration compared with other European countries.  Various draft directives of the European Commission on the harmonisation of support mechanisms for renewable energies have underlined the Commission's reservations against guaranteed price schemes. A possible way contemplated by the Commission to tackle excessive national subsidies is to offer national support schemes to all Member States in the European Union from 2010 onwards. By then, (financial) limits would have been reached if a regulation according to the bill drafted by the government parties was to be implemented. There is a strong likelihood that operators of wind farms in Denmark and biomass plants in Sweden would then export electricity in large quantities to Germany, while receiving comparatively high remuneration rates as regulated in the Renewable Energy Act. The associated costs would allocated to the German grid usage fees and ultimately passed on to the German consumer. In view of these developments, it comes as no surprise that many EU Member States have started to promote renewable electricity by using a quota system. In Italy, Denmark, Belgium, and the Netherlands producers, end-users, or electricity suppliers must cover a certain proportion of their electricity purchases and sales with renewable energy. Such quota models involve producers of green electricity by way of  their generated amount of electricity to usually obtain a (green) certificate, which they then sell back to the ones obliged to fulfil a quota. The efficiency of a quota model can be ensured by the trade with green certificates since such promotion schemes exert constant pressure on the producer to reduce costs. In the long run a quota system is therefore expected to lead to lower promotion costs and faster market maturity for renewable energies as compared to a guaranteed price scheme. In addition, the concept of green certificates is consistent with the Commission's desire for trade-oriented support frameworks.

European's large power companies have recognised the advantages of this concept and now try to standardise the criteria for the issuing of green certificates and to gain experience in trading with them as part of a joint initiative (RECS - Renewable Energy Certificate System). Germany's large power companies also take part in this initiative. Due to the government policy rejecting market-based mechanisms, these companies are running the risk of isolation within the RECS initiative.  In the medium-term this can lead to competitive disadvantages in the European electricity market.

Thanks to the very generous remuneration rates, it is safe to say that the Renewable Energy Act prove very successful in terms of the expansion of renewable energy. However, it is also clear that the promotion of renewable energies in Germany will produce considerable costs, which by law must be allocated to the grid usage fee of the grid operators. As a result, there is reason to fear that access to the German electricity market will be impeded for cheap providers from abroad due to the high network charges.  The idea of a European domestic market, however, is thereby abandoned.  It is therefore to be expected that the European Commission will not tolerate the Renewable Energy Act as a permanent solution the way it is proposed in the draft bill of the government parties. Should the law be adopted in its present form, it is already foreseeable that it will only be a temporary solution.

Contact

Wolfgang Bräuer, E-mail: braeuer@zew.de