What Does the Future Hold for German Green Power Subsidies? For the Foreseeable Future, Renewable Energy Will not Be Able to Manage Without Subsidies

Next year, German consumers will have to dig much deeper into their pockets to support green electricity. A surcharge on electricity consumption used to finance subsidies, the so-called EEG levy, will jump from its current rate of about 3.6 cents to 5.3 cents. In light of the costs to consumers, ZEW environmental economist Andreas Löschel argues for moderation in expanding renewable energy.

Prof. Dr. Andreas Löschel is the head of ZEW’s Environmental and Resource Economics, Environmental Management research department. In addition, he is Professor of Economics at the University of Heidelberg. Löschel is the lead author for the Fifth Assessment Report (2010–2014) of the Intergovernmental Panel on Climate Change (IPCC). He chairs the Expert Commission that regularly analyses and reports to the German government on the status of the broader effort to transition to renewables. He has advised a number of federal ministries, the European Commission, and the European Parliament on matters related to the environment.

The EEG levy is designed to share the costs of promoting power generated from renewable sources among all electricity consumers. How can we explain the sharp increase in the levy from 2012 to 2013?

Major expansion of renewable energy and the increased feed-in of green power have driven up the costs of subsidies from 14 to 20 billion euros. Combined with decreased sales revenues in the electricity market, this will lead to a 1.7 cents per kilowatt-hour (ct/kWh) rise in the levy in 2013. About 0.9 ct/kWh of the increase can be attributed directly to the expansion of individual types of renewable energy. Because of the rapid boom – PV generation capacity alone rose by seven gigawatts (GW) in 2011 – actual expenditures have turned out to be much higher than was forecast at the time the EEG levy was set during the previous year. Because of declining CO2 prices, the price of electricity has also fallen on wholesale exchanges, and, by extension, revenues from the sale of green power have declined as well. This has led to a shortfall in the levy of about 0.5 ct/kWh. As a result, a liquidity reserve is also being set up for the future, and represents about 0.3 ct/kWh of the increase in the levy.

Firms that are particularly energy-intensive may claim partial exemption from the EEG levy. What impact will the coming expansion of the exemption have on the subsidy system?

At the beginning of 2013 electricity-intensive firms that consume between 1 and 10 gigawatt-hours of electrical power will only have to pay ten per cent of the levy. This payment obligation falls to 1 per cent for consumption between 10 and 100 gigawatt-hours, and for electricity consumption above 100 gigawatt-hours, it falls again to only 0.05 cents per kilowatt-hour. Other consumers must pay more in order to make up for the revenues lost from expanded levy reductions for energy-intensive firms. The increase in the levy slated for 2013 could have been about 0.1 to 0.2 ct/kWh lower if the levy reduction for industry had not been expanded. Overall, the exemptions will lead to reduced subsidy revenues of nearly four billion euros. Virtually half of the power consumed by industry will not fully share the burden of promoting green electricity.

What would constitute sensible reforms for the EEG levy to keep cost increases more moderate in the future and to maintain the affordability of electrical power?

From an economic perspective, any further substantial expansion of the existing subsidy system would be unsustainable. The newly established cap in the construction of solar plants will lead to another boom in new facility construction. In addition, there is currently global excess capacity, and it is in Germany that the subsidies are the highest. This leads to the exact opposite of what we need. It would be better to moderate the expansion of renewable energy, in order to allow new construction of electricity networks to keep pace. If we do not want to endanger public acceptance of the broader effort to transform our energy economy, we need to reconsider the effects of the levy exemptions for industry. In my view, only firms that are unable to pass along increases in the cost of electricity to their customers through price increases should receive special treatment.

Can the expansion of renewable energy in Germany be achieved without subsidies?

There is no free lunch in the energy revolution. While hydroelectric power and wind turbines are comparatively inexpensive, the costs of electrical power generation through photovoltaics is still nearly four times the current wholesale price for electricity. Offshore wind energy is also expensive. We cannot anticipate that these technologies will be able to survive without subsidies in the foreseeable future. Nevertheless, I believe that it is sensible and important to promote renewable energy. However, in the medium term this subsidy support should be further developed in the direction of a premium for renewable energy – i.e. as a surcharge on the wholesale price for electricity, independent of the underlying technology.