German Renewable Energy Act
The German Renewable Energy Act (in German: Erneuerbare-Energien-Gesetz, EEG) was designed to encourage cost reductions based on improved energy efficiency from economies of scale over time. The Act came into force in the year 2000 and was the initial spark of a tremendous boost of renewable energies in Germany.
German Energy Agency DENA reports that as of January 2011, around 17% of electricity, 8% of heat and 6% of fuel used in Germany is generated from renewable sources, further reducing Germany’s energy imports. In addition, 110 million metric tons of CO2 emissions were cut due to the use of renewable energies only during 2010. The renewable energy industry employs today more than 350,000 people in Germany (up from 30,000 people in the year 1998) and is home to several world market leaders like Enercon, Nordex and Repower in the wind industry and Q-Cells, Schott Solar and SolarWorld in the solar industry. Germany is today among the world’s three major renewable energy economies (Renewable Energy Network 21, 2011). Due to its success, the German Renewable Energy Act can serve as an archetype of similar legislation in other countries.
Founding of the German Renewable Energy Act
The German Renewable Energy Act is the successor to the 1991 Electricity Feed Act Stromeinspeisungsgesetz. The founding fathers of the Act were:
- Prof. Dr. Klaus Töpfer (German Federal Minister of the Environment, retd.), Member of the Christian Democratic Union (Germany)
- Dietmar Schütz, President of the Federal Association of Renewable Energies, Member of Parliament, Social Democratic Party (Germany)
- Hans-Josef Fell, Member of Parliament, Alliance '90/The Greens
- Dr. Hermann Scheer (Member of Parliament Social Democratic Party (Germany)
- Sigmar Gabriel, German Federal Minister of the Environment, Member of the Social Democratic Party (Germany)
- Josef Göppel, Member of Parliament, Christian Social Union of Bavaria
- Jürgen Trittin, Member of Parliament, Alliance '90/The Greens
The three main principles
The three main principles of the EEG are:
a) Investment protection through guaranteed feed-in tariffs and connection requirement: Every kilowatt-hour that is generated from renewable energy facilities receives a fixed feed-in tariff. Furthermore, the network operators must feed in this electricity into the grid preferentially to the electricity generated by conventional sources (nuclear power, coal and gas). Renewable energy plant operators receive a 20 year, technology specific, guaranteed payment for their produced electricity. In particular, small and medium-sized enterprises (SMEs) have been given new access to the electricity market, along with private land owners. The Federal Ministry for Environment, Nature Conservation and Nuclear Safety (2010) argues that anyone who produces renewable energy can now sell his ‘product’ for a 20-year fixed price.
b) No charge to Germany’s public purse: as of today, the promotion of renewable electricity is still necessary. The EEG rates of remuneration clearly show what electricity from wind, hydro, solar, bio and geothermal energy actually cost. Unlike fossil fuels, there are no external costs such as damages to the environment, the climate or human health. The remuneration rates are not subsidies as such since they are not paid for by taxes. On the contrary, the “polluter pays principle” (OECD, 2006) is distributed to the consumer: who consumes more pays more. The remuneration rates are paid for by every consumer with the electricity bill.
c) Innovation by falling feed-in-tariffs: periodically lowering rates of remuneration for new plants (degression of 1% per year) exerts cost pressure on manufacturers. Thus, technologies are becoming more efficient and less costly.
The EEG also differentiates between technologies such that each renewable energy source (RES) receives a different payment guaranteed price according to its generation cost, ranging from 3.58 - 9.67 €-Cents per kilowatt-hour for hydropower to 35.49 – 51.7 €-Cents per kilowatt-hour for solar power (Rickerson, et al., 2007; Hirschl, 2008). Solar power recompense in the first half of 2011 ranges from 21.11 - 28,74 €ct/ kWh depending on installation size and form, with a further decrease of 9% to 15% foreseen in June, 2011.
The grid feed-in tariffs provide incentives to every company involved in renewable energy generation business, especially the small and medium-sized energy firms, to invest in developing and generating RES, decrease initial market entry barrier for these businesses, and reduce the costs of RES for production and consumption over a period of time. With an increase of over 20% profit in the first two years
The impact of the Renewable Energy Act on the German Market
The Renewable Energy Act was the central political element of one of the greatest paradigm shifts since the start of the industrial revolution: the shift from fossil and atomic energy supplies to renewable energy sources (Green Energy Act Alliance, 2011). The German energy market has started to turn away from fossil fuels and centralized electricity structures towards a decentralized approach of energy production. With the investor friendly remuneration rates, electricity production is no longer in the hands of a few big energy companies. Chart 1 (Renewables 2010 – Global status report – Renewable Energy Policy Network for the 21st century (REN21)) shows today’s favorable position of Germany in the global Renewable Energy markets (2009).
Effectiveness of the German Renewable Energy Act
Various studies, including EC's study reveal that because the feed-in tariff provides financial certainty, it is more cost effective and less bureaucratic than other support schemes such as investment or production tax credits, quota based renewable portfolio standards (RPS), and auction mechanisms.(EC, 2005; Morris, 2007; Butler & Neuhoff, 2008)
The economic outcome of the EEG for Germany has been impressive. According to the Green Energy Act Alliance, 2011, the net benefit of the EEG exceeds the additional costs of initial investment - by 3.2 billion Euros. Building a safe and clean power supply incurs costs. However, Krewitt and Nitsch (2001) compared the external costs avoided in the German energy system to the compensation to be paid by grid operators for electricity from renewable energies and found that results clearly indicate that the reduced environmental impacts and related economic benefits outweigh by far the additional costs for the compensation of electricity from renewable energies.
In addition, the feed-in tariff generates more competition, more jobs and more rapid deployment for manufacturing, and does not pick technological winners, such as more mature wind power technology versus solar photovoltaics technology (EC, 2005; Morris, 2007; Butler & Neuhoff, 2008).
The positive impact on the environment is less clear. The chairman of ifo institute, Sinn (2007), argues that Germany's renewable energy subsidies reduce world market prices for fossil energy. Thus, countries like China or the US have an incentive to consume more, and the net effect on climate is zero.
Regardless of the boom of Renewable Energies in the last decades, there are still many challenges that have to be met. One of them is integrating the electricity generated by decentralized renewable energy power plants into the existing electricity grid structure. The challenge here is that the existing grids were built in accordance to the centralized energy system of the four main energy companies in Germany (namely: E.ON, Vattenfall, RWE and EnBW). The more decentralized clean energy is produced (since the ratio of renewable energy of today 20% will be growing in the following years), the more necessary it gets to adapt the grid infrastructure. Furthermore, yet another challenge is the storage of electricity that is of paramount importance in order to be able to store and transport electricity generated by renewable energies.
- Butler, L. & Neuhoff, K. (2008) "Comparison of feed-in tariff, quota and auction mechanisms to support wind power development." Renewable Energy 33, 1854–1867.
- Commission of the European Communities (EC). (2005) The Support of Electricity from Renewable Energy Sources, Brussels.
- Hirschl, B. (2008) Erneuerbare Energien-Politik im Mehrebenensystem: Eine Multi-Level Policy Analyse der deutschen Politik für erneuerbare Energien im Strommarkt. Energiepolitik und Klimaschutz. Wiesbaden: Verlag für Sozialwissenschaften.
- Morris, C. (2007) ‘The Irony of U.S. and UK Renewable Policies. What prevents these two counties from accepting Germany's success?’ Renewable Energy World. June 25.
- Rickerson, W. et al. (2007) ‘If the Shoe FITs: Using Feed-in Tariffs to Meet U.S. Renewable Electricity Targets.’ The Electricity Journal 20(4), 73-86.
- German Renewable Energies Agency (Deutsche Erneuerbare Energien Agentur, DENA), January 2011, http://www.unendlich-viel-energie.de/de/politik/10-jahre-eeg.html
- German law firm for Renewable Energies, http://www.kanzlei-blunk.com/law-firm/
- Green Energy Act Alliance, January 2011, http://www.greenenergyact.ca/
- International Energy Agency, 2011, World Energy Outlook 2010, http://www.worldenergyoutlook.org/
- Organisation for Economic Cooperation and Development (OECD), Environment Directorate, Paris, France (2006). Extended Producer Responsibility. Project Fact Sheet. http://www.oecd.org/document/53/0,3343,en_2649_34395_37284725_1_1_1_1,00.html
- Renewable Energy Network for the 21st century, February 2011, http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR_2010_full_revised%20Sept2010.pdf
- The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (2010), http://www.bmu.de/english/aktuell/4152.php
- European Commission, Action Plan for Energy Efficiency: Realising the Potential, COM/2006/0545 final, 2006), http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0545:EN:HTML:NOT