Handelsblatt Exclusive

Energy Costs Shock

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Germany is producing too much electricity from wind mills in the north for the grid to transport across the country. Julian Stratenschulte / DPA
  • Why it matters

    Why it matters

    Higher electricity costs will hit consumers’ spending power of consumers and companies’ profitability, potentially hurting economic growth and Germany’s competitiveness.

  • Facts

    Facts

    • Germany aims to phase out all nuclear energy in the country by 2022 and draw at least 80 percent of energy from renewables by 2050.
    • Consumers and companies pay a surcharge on their electricity bill to fund the expansion of solar, wind and other renewable energy sources.
    • The levy has been rising over the past years as renewable energy production increased faster than expected.
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    Audio

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Additional costs to cover the Germany’s shift to renewable energy could far exceed government estimates, according to a new study, with grid charges also set to rise.

Electricity consumers in Germany are on the hook for billions of euros in additional costs to cover the country’s continued shift toward renewable sources of energy in coming years.

Grid operators are finalizing their 2017 consumer surcharge for renewable energy to present to Economics Minister Sigmar Gabriel on Oct. 14. Currently set at 6.35 euro cents, or 7.12 U.S. cents, per kilowatt-hour, the surcharge is poised to rise to approximately 7 euro cents next year, according to power industry sources.

Under Germany’s Renewable Energy Law, operators of solar, wind and biomass power plants receive guaranteed long-term premium payments for electricity fed into the grid. But the total costs to consumers for providing these payments – so-called feed-in tariffs – threaten to far exceed federal government estimates over the next decade, cautions a forthcoming report from the Cologne Institute for Economic Research (IW).

The report, seen by Handelsblatt, forecasts that costs could jump to as high as €25.8 billion in 2017 from €22 billion this past year. With ever increasing volumes of renewable energy fed into the grid, the think-tank anticipates costs could surge to €31.8 billion in 2020 and €32.9 billion in 2025.

“Politicians must confront the question of whether the current surcharge system is appropriate for the future.”

Esther Chrischilles, Cologne Institute for Economic Research

The costs represent the difference between wholesale market energy prices and the above-market feed-in tariffs. Consumers and companies pay the surcharge on their electricity bill to fund the expansion of solar, wind and other renewable energy sources.

When an earthquake and subsequent tsunami triggered Japan’s nuclear disaster in Fukushima five years ago, Chancellor Angela Merkel decided to shutter all nuclear power plants by 2022. She set the goal of drawing at least 80 percent of energy from renewables by 2050.

The move has sped up the build-up of renewable energy production, but Germany’s growing renewable energy price tag is troublesome for Minister Gabriel.

Head of the Social Democratic Pary and a possible candidate for chancellor in 2017, Mr. Gabriel has tried for years to rein in the rising cost of renewable energy payments with reforms of the Renewable Energy Law – known by its German acronym EEG.

So far his efforts have failed – in part because of low wholesale energy prices that have only recently begun to rise, and also due to the slow pace of reform. For instance, the most recent cost-cutting measures, concluded a few weeks ago, will take years to make measurable impacts because of a long transition period.

Meanwhile, electricity consumers face a mountain of accumulated cost in the form of renewable energy feed-in tariff commitments made in past years. Large numbers of solar photovoltaic systems installed from the middle to the end of the previous decade account for a significant share of the cost, with premium payments guaranteed into the next decade for each kilowatt-hour fed into the grid.

Feed-in tariffs have fueled Germany’s renewable energy market for years. Profits generated from these payments have helped technology developers to improve the efficiency of wind and solar systems, while also allowing government to cut payments from newly installed systems to levels that still enable investors to make reasonable returns.

But renewable energy output continues to grow rapidly, with expansion of on-shore wind farms outpacing government targets and the market for offshore turbines also set to take off, thanks to new rules that award higher payments in the first eight years of operation.

The IW report, commissioned by business associations in the states of Hesse and Lower Saxony and a national trade group for energy-intensive industries, estimates a surcharge hike, in the worst-case scenario, to 9.7 euro cents per kilowatt-hour in 2020 and to 10.2 euro cents per kilowatt-hour in 2025.

 

Alternative Resources-01 energy energiewende solar power renewables wind lignite coal nuclear natural gas electricity consumption

 

At the current surcharge rate of 6.35 euro cents per kilowatt-hour, an average household consuming 3,500 kilowatt-hours annually pays €222 per year. Including a 19-percent value-added tax, the total annual cost for the average household equals €264. If the surcharge rises to 10 euro cent, the annual cost for the average household would grow to €416 per year, including value-added tax.

Private households in Germany still appear willing to pay the price for the country’s renewable energy transition. But the same cannot be said of German businesses. While around 2,000 operations are exempt due to their high electricity consumption, the vast majority of German companies pay the full EEG surcharge.

This is why most German businesses are critical of the increasing renewable energy surcharge.

“The development of EEG costs give cause for concern, also in the long term,” said Holger Lösch, a member of the executive board for lobby group the Federation of German Industries. He told Handelsblatt that the IW report shows that the latest reforms to the Renewable Energy Law will not reduce costs.

The study recommends a total overhaul of German renewable energy policy.

“Politicians must confront the question of whether the current surcharge system is appropriate for the future,” said Esther Chrischilles, author of the think-tank report. “An end to the present system should definitely be considered.”

Moreover, given “the many uncertainties,” controlling the costs of the EEG was almost impossible, Ms. Chrischilles added, and government cost assumptions were “rather optimistic.” That made it “quite probable that the costs for supporting renewable energy will once again significantly grow,” she said.

But Germany’s energy transition isn’t just boosting consumer energy prices. It’s also creating the need for greater investment in electric grids, which have lagged behind the expansion of renewable energy resources for years.

This has created a situation where power lines are overstressed, renewable energy must be curtailed, and coal- and natural gas-fired power plants must continually ramp up and down to compensate for the fluctuating supply of wind and solar power.

That’s also driving up costs. Tennet – one of four transmission system operators in Germany – recently announced it would boost grid charges by 80 percent in 2017. Another grid operator, 50Hertz, said it would increase grid charges by 45 percent.

Rising transmission system charges combined with increasing EEG surcharges, are a “toxic cocktail” that hurts the country’s grand energy transition project, said one member of Germany’s ruling coalition government, who declined to be named.

According to a recent survey of more than 2,100 businesses conducted by the Association of German Chambers of Commerce and Industry, a cut in energy taxes and surcharges is a pressing concern for business. The group’s Energy Transition Barometer 2016, viewed by Handelsblatt, shows that 57 percent of respondents identified such cost-control measures as a top priority, while 60 percent called for better coordination of the energy transition.

“Business has done a lot in past years to advance the energy transition,” said Eric Schweitzer, the group’s president. He added that “the competitiveness of industry continues to suffer” under the burdens of the EEG.

 

Klaus Stratmann is the deputy chief of the Berlin bureau and covers energy policy. To contact the author: stratmann@handelsblatt.com

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