Subsidy Reductions

Germany Slows Renewable Energy Push

Wind power mills power lines tower source Reuters 33216299
Germany's energy landscape keeps changing.
  • Why it matters

    Why it matters

    The subsidy changes could give more time to traditional utilities E.ON, RWE and others to adapt to the transformation of the country’s electricity market.

  • Facts

    Facts

    • Germany is shutting down nuclear power by 2022 and shifting to 80 percent renewable energy production by 2050.
    • Government subsidies, funded by a levy on consumer electricity bills, have risen to €24 billion last year, stressing individuals and companies that use a lot of electricity.
    • The transition has led to a concentration of new wind power parks in northern Germany but a bottleneck in the south, where wealthy states like Bavaria have blocked the construction of necessary transmission cables.
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In Germany’s transition to renewable energy, it’s too much of a good thing. That’s a big reason why the German government on Wednesday voted to slow the nation’s massive build-out of wind, solar and bio-gas power installations to limit costs and, ironically, limit the waste of billions of euros in unused green energy.

State subsidies to companies that produce electricity from wind, solar and bio waste have led to an unbridled growth in alternative energy installations across the German countryside.

The massive energy transition project, begun after Japan’s Fukushima nuclear disaster in 2011, currently costs German taxpayers about €25 billion ($28.5 billion) per year, a dramatic increase from only €883 million in 2000, shortly after the government began subsidizing alternative producers.

The massive infusion of government subsidies has flooded the German market with a glut of electricity, and thrown its conventional power companies, E.ON and RWE, into existential crises as they cope with dramatically lower revenue and a government mandate to retire their nuclear power plants by 2022.

“We are paying for electricity which is not being used. The costs for this are currently €1.1 billion. When we don’t do anything it will rise to €4 billion.”

Sigmar Gabriel, Germany's Economics Minister

The subsidies have been so popular, that Germany is now producing way more electricity that it needs, or can use, or even resell. Last week, German Economics and Energy Minister Sigmar Gabriel told parliament that numerous renewable energy plants producing a total capacity of 4,600 gigawatt-hours had been taken off the country’s electric grid because the electricity could not be transported to places in southern German where it was needed.

Most of Germany’s wind turbines have been built in the country’s windier northern regions. But the prosperous southern state of Bavaria has effectively blocked the federal government from building north-south high-voltage power transmission lines to bring the energy to the south, where it is needed.

The government has bowed to Bavaria’s request to build the cables underground, but the massive costs of the project will push construction of the needed lines far into the future. In the interim, the government has decided to slow its build-out until the infrastructure is in place to distribute the electricity.

“We are paying for electricity which is not being used,” Mr. Gabriel told members of the Bundestag. “The costs for this are currently €1.1 billion. When we don’t do anything it will rise to €4 billion.”

 

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The decision taken Wednesday in Chancellor Angela Merkel’s cabinet, which was signed off by the major representatives of her conservative-led coalition with Social Democrats, will effectively ratchet down its ambitious alternative energy program, at least until the necessary transmission infrastructure can be built.

The decision by the party leaders will become law after formal legislative votes later this summer.

“The government will no longer support every single plant, meaning capacities will no longer grow unchecked,” said Thilo Schaefer, who heads the environment, energy and infrastructure research team at the Cologne Institute for Economic Research, or IW Köln, a think tank.

The expansion has advanced so rapidly across Germany that the economics ministry forecasts that renewable energy could reach a share of around 40 percent of total German power generation as soon as 2020, five years ahead of schedule. Renewable energy made up 30 percent of production last year.

To slow down the expansion, Chancellor Merkel’s government agreed to limit for the first time from next year on how many new renewable energy projects it would subsidize. Previously, there was no official limit on the number of projects the government would financially support each year.

The ruling political parties also agreed to change the subsidy system itself to effectively force alternative energy producers to lower their prices. The changes will require the government to award subsidies based on an auction system with only the lowest bidder getting support to build a solar or wind power plant.

“It will not become any cheaper because the costs to expand the power grid will also be carried by electricity customers and rise considerably in the following years.”

Thilo Schaefer, Cologne Institute for Economic Research

Under the existing system, investors that install a wind or solar park receive a guaranteed price from the government of about 9 euro cents (10 U.S. cents) for every kilowatt hour of electricity fed into the grid for 20 years.

Ms. Merkel’s predecessor, Gerhard Schröder, formally boosted support for renewable energy production starting in 2000 and the funding accelerated when Ms. Merkel decided to shut Germany’s nuclear plants by 2022 following Japan’s nuclear disaster. Germany’s population supports the environmental goals associated with the transition, but some consumers have criticized their skyrocketing utility bills.

The changes are the latest in a periodic attempt since Germany passed its Renewable Energy Law in 2000 to contain the projects costs, all of which have largely failed to slow the spending.

Retail consumers have seen their annual electricity bills double to around €1,000 over the past 15 years amid the renewable-energy levies passed on to consumers to fund the subsidies for wind turbines and solar panels. The surcharge are fixed to rise automatically with the demand for subsidies.

Some analysts also doubt the changes approved today would reduce the bill to taxpayers. While Germany may end up building fewer wind turbines or solar parks, the country is just beginning to embark on a massive project to build out the transmission infrastructure, including the costly lines to Bavaria.

“If only those power plants are supported that can manage under lower state subsidies, it will slow the growth rate of the renewable energy law’s costs,” Mr. Schaefer of the Cologne Institute for Economic Research told Handelsblatt Global Edition in an email. “However, it will not become any cheaper because the costs to expand the power grid will also be carried by electricity customers and rise considerably in the following years.”

Ms. Merkel’s government last year decided to build two north-south high-power grid lines underground instead of overhead. The underground lines could cost €3 billion to €8 billion more than the €4 billion already planned, a study by the German economics ministry estimated.

 

Utilities Suffer Losses-EON RWE 01 e.on e-on utility

 

Frank Peter, a consultant at research firm Prognos, said it was unlikely that the renewable energy levy paid by individual and corporate consumers would drop any time soon because several offshore wind power plants are to go online over the next few years and these will still be entitled to receive high subsidies for eight years.

“The new law could also lead to a bit less construction in northern Germany and a bit more in the south, where renewable energy plants, in particular wind, tend to be more expensive. Then subsidies are likely to rise instead of drop,” Mr. Peter told Handelsblatt Global Edition.

The real potential beneficiaries of the government’s green energy slowdown could be the four largest p0wer suppliers, E.ON, RWE, Vattenfall and EnBW, which have suffered in the transition, experts said.

“For the big energy companies the new renewable energy law will bring a certain degree of planning certainty,” Mr. Schaefer of the Cologne Institute for Economic Research said.

Mr. Peter at Prognos agreed: “The overall pace of renewable energy coming to market will slow, meaning energy companies will have a couple of years more to adapt to the changes.”

The glut of renewable energy has slashed German wholesale electricity prices in half, forcing the four big utilities to write off more than €60 billion worth of assets.

E.ON booked a record loss of €7 billion last year, while RWE lost €200 million. Both utilities have seen their share prices plunge more than half.

After the agreement was announced Wednesday, shares in both utilities rose more than 2.5 percent as the European Central Bank started buying bonds issued by power companies, according to news agency Bloomberg.

To cope with the renewable energy boom, both E.ON and RWE have decided to split their fossil and legacy nuclear business from their alternative energy businesses. Vattenfall, a Swedish state-owned utility that supplies electricity to Berlin and Hamburg, has since agreed to sell its brown coal holdings in Germany.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author:  kreijger@handelsblatt.com

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