Written by Gerry Runte
German Electricity Rates held down by the impact of renewable energy
In 2015 Germany enacted a law whose short title is the Renewable Energy Sources Act of 2014 (Erneuerbare-Energien-Gesetz, or EEG 2014). EEG 2014 formalizes the fundamental shift in energy policy in Germany, the Energiewende, from a coal and nuclear system to one which requires the mix of electricity generation in Germany to reach 40% – 45% renewable sources by 2025 and 55% – 60% renewable sources by 2035.
This is to be encouraged by feed in tariffs that guarantee prices for new renewable entrants while requiring grid operators to receive and purchase electricity from these sources. As expected, EEG 2014 met with some criticism, primarily a claim that it would be too expensive.
Agora Energiewende, an energy policy group, commissioned the Oeko Institute e.V. to model the effects of EEG 2014 specifically on its likely impact on consumer electricity rates. The report concluded that:
- The cost of electricity to consumers increases through to 2023 by between one and two cents per kwh, but then declines at a rate of between two and four cents/kwh until 2035. In 2035 rates are forecast to be the same as 2015 – 8 to 10 cents/kwh.
- By 2035 60 percent of German electricity will come from renewable energy sources, from about 28% today.
- As the real costs for renewable generation decline, the primary drivers to the incremental costs of the German Energy Plan become the actual demand levels and the extent to which energy intensive industries are subsidized.
- Investments in renewable energy increase through 2023 and then decline, however renewable energy’s share of the generation mix continues to rise.
The assumed generation mix that was used in the reference case for this study is presented in the figure below:
This translates to the following projected share of the overall electricity source mix for renewables:
EEG 2014 provides for the following feed in tariffs, cents/kWh:
Source: Agora Energiewende
Note that the system average feed in tariff declines over time. Nonetheless, these tariffs are significantly higher than wholesale power costs from conventional sources. Under EEG 2014, transmission system operators (TSOs) are permitted to charge electric utilities an “EEG Levy” to compensate them for paying these feed in tariffs and the utilities pass these charges on to consumers.
The EEG Levy assumed in this analysis, along with the base cost of electricity, is shown in the following graphic.
Based on the assumptions inherent in this analysis, the overall cost of electricity to the consumer rises a few cents in the early 2020’s and then declines to rates comparable to rates experienced in 2010.
The Big Loophole
Not all consumers are subject to the EEG Levy, however. Many electricity intensive industrial and commercial end users have received exemptions from the EEG Levy, a point of considerable controversy in the country. Some 58 TWh are totally exempted and 110 Twh are partially exempted.
Most notably residential customers pay full freight. Were there less exemptions, the EEG Levy would be much lower, as shown in the figure below. No exemptions for any customer basically cuts the levy in half.
The EEG Levy cannot be viewed in isolation, however. No doubt, applying the levy to all industries would have some concomitant effect on the economy and some exempting is necessary. That said, however, even with loopholes, maintaining a relatively flat trajectory on consumer rates while radically increasing the renewable energy mix in electricity generation to over 60% will be quite an achievement.
Gerry Runte is Managing Director of Worthington Sawtelle LLC a consulting and research firm which provides a full portfolio of business planning and strategy services to both new and existing participants in emerging energy markets.
Recent engagements include market assessments, policy analysis and development; business strategy; go-to-market planning and launch; product commercialization strategies; feasibility studies; and due diligence on behalf of investors.
Gerry has 38 years of experience in the energy industry, much of which at the executive level. He holds a B.S. and M.Eng in Nuclear Engineering from Pennsylvania State University. Contact firstname.lastname@example.org; tel: +1 (207) 361-7143; skype: gerry.runte