The Renewable Energy Sources Act is a piece of legislation to promote electricity from renewable energy and thus to make our electricity supply more environmentally friendly. The Act is thus helping Germany to achieve its climate targets. The Act entered into force in the year 2000. Since then it has guaranteed fixed funding rates for each kilowatt-hour of clean electricity generated from the sun, the wind, etc. It also makes sure that the grid operators purchase the clean electricity from the producers and give it priority in terms of the electricity fed into the grid. This gave renewables the chance to gain a foothold on the electricity market and to compete with electricity from conventional sources like coal and gas.
The Act has already achieved an important target: since 2015, the biggest share of Germany’s electricity consumption has been covered by electricity from renewables – around 32%, much more than from hard coal, lignite, gas or nuclear power. But the Act can achieve even more: the introduction of the 2017 Renewable Energy Sources Act brings to an end the phase of technology funding in which prices were set by the government. We are moving over to the use of competitive auctions, meaning that the level of the fees paid for electricity generated from renewable energy will be determined by auction. This ensures that future expansion will take place at competitive prices. There will be no more over-funding. The legislation also enables us to ensure that the high level of market-player diversity that has characterised the energy transition will be upheld. The law gives the first-ever statutory definition of a “citizens’ energy company” and provides for these to participate in the auctions on simplified terms. Auctions will be held for funding for onshore and offshore wind energy, PV energy, and biomass. Small installations are exempted from this requirement. These measures will raise the share of renewables in electricity consumption from its current level of approximately 30% in 2016 to at least 35% by the year 2020. At the same time, they will increase cost efficiency.
Expanding the use of renewable energy
Prior to the introduction of the 2017 Renewable Energy Sources Act, fixed funding rates applied for the operators of renewable electricity generation facilities. Anyone operating a wind turbine or a solar power installation, generating electricity from geothermal energy or biomass, receives a fixed, statutory fee for each kilowatt-hour fed into the grid.
It is now important to systematically develop the energy transition: with more competition, more predictability, and more cost-efficiency. The 2017 Renewable Energy Sources Act is heralding this paradigm shift with two key reforms:
1. In future, the rate of funding for renewables-based electricity will be set by auction. So the amount of funding for renewables will be determined by the market rather than by the government. This will safeguard an ongoing expansion of renewable energy and can cut the funding costs, assuming there is sufficient competition.
2. The expansion in renewables capacity is synchronised with the pace of grid expansion, so as to ensure that the clean power reaches the consumers. Firstly, for each type of technology – onshore and offshore wind power, photovoltaics, and biomass – specific expansion volumes have been set, in line with the available grid capacity. Also, the new Renewable Energy Sources Act restricts the expansion of onshore wind power in areas with grid congestion. As of 2017, a new ordinance designates areas within which the pace at which wind power capacity is being developed will be limited to a maximum of 58 per cent of the average capacity added over the last three years. This restriction applies until the grid has been sufficiently upgraded. This is necessary because it is pointless to generate electricity which cannot be transported to the customers. Additional installations which cannot be built in areas with grid congestion are built in other parts of Germany instead. The grid congestion areas thus have no impact on the overall expansion of renewable electricity.
The share of renewables is growing rapidly in Germany, from 17 per cent in 2010 to approx. 32 per cent today. The state funding provided in recent years has given the energy transition a reliable foundation. What were previously niche technologies have become competitive market players. For this reason, the new auction model has three key goals:
1. Improving our ability to plan the energy transition: The “deployment corridors” agreed under the 2014 Renewable Energy Sources Act are to be adhered to. The auctions will make it possible to control the construction of installations in an efficient manner.
2. Introducing more competition: The auctions are to foster competition between plant operators – this will keep down the costs of expanding renewable energy. The main principle here is that funding for renewable power is to be limited to the amount that is needed to allow for the installations to be economically viable.
3. Ensuring a high level of diversity: From small cooperatives to large companies, the diversity of plant operators is to be maintained, and a level playing field is to be ensured. This is the intention behind the 750 kW de minimis threshold (150 kW in the case of biomass installations). In addition to this, the selected auction model is simple and transparent, which means that it accounts for the challenges of operators of smaller installations. Also, locally anchored citizens’ energy companies bidding in auctions for onshore wind funding will benefit from less restrictive rules.
Does the reform of the Renewable Energy Sources Act ensure that we will attain our renewable energy targets?
Yes. The reform of the Renewable Energy Sources Act will continue the expansion of the share of total electricity consumption covered by renewables. At present it stands at about 32 per cent; it is to reach 40-45 per cent by 2025, and 55-60 per cent by 2035. We have set specific expansion targets for each technology:
- In the case of onshore wind, 2,800 MW will be auctioned each year in the three years from 2017, and then 2,900 MW per year.
- In the case of offshore wind, 500 MW will be auctioned in both 2021 and 2022, and then 700 MW each year in 2023-2025, and then 840 MW a year from 2026-2030.
- For photovoltaic installations above a capacity of 750 kW, 600 MW will be auctioned each year. The aim is to have a total deployment corridor for photovoltaics of 2,500 MW per year.
- For biomass installations, 150 MW will be auctioned each year from 2017-2019, and 200 MW a year from 2020-2022.
These auction targets mean that we will be able to keep expanding the share of electricity generated from renewables in a predicable way.
Germany wants to achieve further sharp cuts in its greenhouse gas emissions: by 40 per cent by 2020 and by 80-95 by 2050 (from the 1990 level). The goals fit with the Paris climate agreement. In the electricity sector, we will gradually replace conventional electricity generation with renewables, and thus reduce carbon emissions.
At the same time, however, we also need to cut greenhouse gas emissions in other areas too – by means of a conscious and more efficient use of energy: in the building sector, where there is particularly great potential to save energy by retrofitting existing buildings and building new efficiency houses; in the transport sector, where electrical drives, for example, can make a significant contribution to climate change mitigation; and in industry, where efficient technologies can save energy and thus reduce greenhouse gas emissions. We will be setting the course for 2050 in the coming years. Decisions we make will have a long-term impact in the energy sector and are therefore of central importance for 2050: heating systems are often used for 20 years or longer, while buildings, power plants and industrial installations are frequently even in service for more than 40 years. Therefore, investments made in the 2020s and 2030s will shape our energy system in 2050. They should take place in sustainable technologies. In this way, stranded investments can be avoided, and society can be spared the need to undertake expensive repairs to the energy system in future. In the next phase of the energy transition, we will need to take the right energy and climate policy decisions for these investment decisions.
Starting in 2015, the level of support for electricity produced from renewable sources was first set by auction – in a pilot product for ground-mounted photovoltaic installations (solar farms). Since then, operators of new solar farms have only received funding under the Renewable Energy Sources Act if they win funding in an auction – by submitting a bid for funding per kilowatt-hour which is as low as possible, calculated by them to ensure that their solar farm is economically viable.
The pilot project was as successful as had been expected: the level of funding granted to solar power has dropped significantly without the economic viability of the solar farms being endangered. At the beginning of 2014, i.e. prior to the auctions, the fees for electricity from ground-mounted photovoltaic installations stood at 9.17 ct/kWh. By the beginning of 2016, i.e. just under a year after the launch of the pilot project, the average funding award had fallen to 7.25 ct/kWh. The lowest funding award for a bid on farmland was just under 7 ct/kWh. That shows how much the payments can be cut by auctions.
The fact that the projects awarded funding are being realised is indicated by the fact that no bidder had returned the funding award by mid-2016.
Many different players submitted bids, and small bidders and projects also won funding. This suggests that smaller bidders can also compete successfully. However, the pilots showed that there is still a lot of room for improvement in this regard. For this reason, the 2017 Renewable Energy Sources Act gives specific assistance to citizens’ energy companies and energy cooperatives. In the wind energy sector, for example, they do not need to obtain a certificate of compliance with immissions control regulation before submitting a bid, and this reduces the cost of participating in the auction. In the photovoltaics sector, a threshold of 750 kW was introduced, below which installations do not need to bid in the auctions: such ground-mounted installations can claim funding under the Renewable Energy Sources Act system.
Funding and auctions for renewable energy: the funding goes to those who demand the least
Auctions can result in lower funding costs. This was shown clearly by the test phase for ground-mounted photovoltaic installations, which started in 2015: the rate of the funding has kept falling from one auction to the next, due not least to the brisk participation in each auction round. At the beginning of 2014, the funding level for electricity from ground-mounted photovoltaic installations stood at an average of 9.17 ct/kWh, but competition forced this figure down to an average of 7.25 ct. That is good news for electricity consumers. Similar results can be expected from the next auctions.
The EEG surcharge (renewables surcharge) finances the expansion of renewables. It provides the money to pay for the funding of electricity from wind, solar and biomass. It made the advances in renewables possible, because it provided a reliable financial base for 15 years.
Under the Renewable Energy Sources Act, power plant operators receive a market premium for every kilowatt-hour of renewable power that they feed into the grid over a 20-year period. The tariff is paid by a transmission system operator (TSO), but the operators need to market the electricity themselves. The market premium compensates for the difference between the feed-in tariff and the average trading price for electricity.
The difference between the spending on tariff and premium payments and the income from the marketing revenues of the grid operators (the "EEG differential costs") is divided up across the power consumption as long as it is not fully or partially exempted from the EEG surcharge under special regulations. The resulting figure is the EEG surcharge.
By 15 October of each year, Germany’s four transmission system operators set the EEG surcharge for the following year. To do this, the TSOs consult with recognised research institutions and prepare a sound, rigorous forecast of their expected expenses and their projected income from the sale of EEG power on the power exchange.
The only statutory feed-in tariffs are for small installations (below 750 kW, or 150 kW in the case of biomass) or for onshore wind turbines and biomass installations which were approved before the end of 2016 and are commissioned before the end of 2018. Longer transition periods exist only for offshore wind turbines. Auctions will only be introduced for offshore wind farms coming on stream from 2021.
Yes. Funding for renewable energy installations will remain available under the 2017 Renewable Energy Sources Act. The new funding model has started with the first auctions in 2017. However, given the necessary preparations for onshore wind turbines, the new installations will not be built before 2018/19. The previous funding rates set by the state apply to installations which were authorised by the end of 2016 and installed by the end of 2018. However, the later the installations are constructed in this transitional period, the smaller the funding will be (“special degression” – see below). If this is too little for an operator, he can switch to the auctions from 2017.
Operators of smaller installations (e.g. operators of photovoltaic installations with a capacity of less than 750 kW, or basically all home-owners) do not need to participate in the auctions. They will remain subject to statutory funding rates. So people building their own home who want to top it with a private solar installation will continue to receive statutory funding rates. At the time when the Act entered into force, this was between 11 and 12 ct/kWh, depending on the size of the installation. Hydropower installations are also exempted from participation in the auctions.
How can we make sure that smaller bidders like citizens’ cooperatives have a chance in the auction process?
The 2017 Renewable Energy Sources Act wants as many different players as possible to realise projects to generate electricity from renewables. The auctioning scheme is designed to favour citizens’ energy cooperatives over large corporations. Relaxed rules apply to their participation. For example, unlike larger players, they can make early bids for wind turbines. They do not need to present licences under immissions legislation until they have received a funding award. This saves them a lot of money before the auction – costs which are difficult for them to cope with, in contrast to large companies.
A pilot project to test auctions for photovoltaics showed that citizens’ energy cooperatives can also be successful and win funding for their projects.
That depends on the outcome of the bidding procedures in which all renewables installations have to participate from 2017. The funding rate is determined by the “pay as bid” procedure: all bidders receive the funding rate for which they successfully bid for 20 years. (Exception: local citizens’ energy companies: they are awarded funding based not on the price of their bid, but on the price of the highest bid which won funding.)
Small installations up to 750 kW (150 kW in the case of biomass) do not have to participate in the auctions: they receive a feed-in tariff set by the state for 20 years. This covers virtually all private rooftop solar panels.
Nothing will change for existing installations – they are protected by a grandfathering clause. Specifically, this means that they receive the funding rate which applied at the time they commissioned their renewable energy installation for 20 years.
There are also funding rates set by the state for installations which were authorised by the end of 2016 and installed by the end of 2018. In order to prevent projects being brought forward prior to the introduction of the auctions, the level of funding available for onshore wind installations which are commissioned from 1 March to 1 August 2017 will fall by an average of 1.05 per cent a month. If, despite this, the level of new-build is still too high, the funding rates will be reduced even more: should the target figure of 2,500 MW be exceeded, additional funding cuts of up to 2.4 per cent per quarter will be imposed from the fourth quarter of 2017 onwards.
Transitional rules also apply to offshore wind energy, where longer transition periods apply (cf. volume of auctions for offshore wind, above). Biomass installations which were approved or licensed before 1 January 2017 can still be commissioned under the rules of the 2014 Renewable Energy Sources Act until the end of 2018.
Producers of clean electricity which market this electricity themselves on the electricity exchange usually receive a market premium. It offsets the difference between the selling price earned by the generator on the exchange, and the higher state feed-in tariff. If the electricity price on the exchange is negative, this market premium may only be disbursed to a limited extent in the case of new generation installations since 2016. This is stipulated by the European Commission’s guidelines on environmental and energy aid.
Specifically, this means that the market premium drops to zero if the electricity price on the electricity exchange has been negative for at least six hours. This zero premium then applies retrospectively to these six hours and every subsequent hour with negative prices. The market premium only returns to its normal level once there is an hour with positive prices.
The following are exempted from this rule:
- Wind energy installations with a capacity of less than 3 MW
- all other renewable energy installations with a capacity of less than 500 kW and
- pilot onshore and offshore wind energy installations.
"The expansion of onshore wind energy was well above the planned level in 2014 and 2015: in 2014, new installations with an output of 4.4 GW were built, and the 2015 figure was 3.6 GW. The plan had been for 2.5 GW in each year. The problem this poses is that the current electricity grids cannot absorb all of the electricity being generated from wind energy. This causes costs of a billion euros each year for electricity which is produced but cannot be transported to the consumer.
In order to prevent projects being brought forward during the transitional period prior to the introduction of the auctions, the level of funding available for installations which are commissioned from 1 March to 1 August 2017 will fall by 1.05 per cent a month. If, despite this, the level of new-build is still too high, the funding rates will be reduced even more: should the target figure of 2,500 MW be exceeded, additional funding cuts of up to 2.4 per cent per quarter will be imposed from the fourth quarter of 2017 onwards (the "breathing cap"). This therefore applies to all onshore wind installations which are commissioned from 2017 and wish to benefit from funding set by the state rather than participating in the auctions.
In 2014 and 2015, much more wind energy capacity was constructed than had been planned (4.4 GW and 3.6 GW respectively, rather than 2.5 GW as planned). The “breathing cap” aims to ensure that the rate of new-build in 2016 and 2017 is closer to the planned figure until the launch of the auctions. If new wind turbines are erected with much more capacity than planned, the funding rates for additional wind turbines will automatically fall. In figures: the plan is for 2.5 GW in 2016 and in 2017. If the new-build exceeds 3.5 GW, the feed-in tariff for additional wind energy installations will drop by 2.4 per cent a quarter from summer 2017. This arrangement has already worked well for photovoltaic installations, and will also make it easier to plan onshore wind energy.
Home-owners wishing to install private solar systems on their roofs continue to receive a fixed, statutory payment per kilowatt-hour of electricity generated. The rate is currently between 11 and 12 ct, depending on the size of the installation. The only precondition is that the capacity of the installation must be less than 750 kW – private installations on single-family and two-family homes are much smaller.
The 2017 Renewable Energy Sources Act does not change anything for home-owners who already have a private solar installation. They will continue to receive the funding rate which applied when the solar installation was commissioned. So the grandfathering arrangements will remain in place. This is also true of all other forms of renewable energy.
Anyone who would like to receive funding for new onshore wind energy installations from 2017 must participate in an auction run by the Federal Network Agency. The operators of new wind energy installations compete with one another – funding only goes to the operators which run their installations as economically as possible. In other words, the funding rate is no longer set by the state, but is determined via competition
Each year, the Federal Network Agency auctions a certain quantity of onshore wind energy: 2,800 MW each year in the three years from 2017, and then 2,900 MW per year. In each auction round, operators can bid for one or several new installations. Here, they have to state what funding they require per kilowatt-hour. The funding is awarded to the operators with the lowest funding requirements.
However, there are some exceptions: installations approved by the end of 2016 and coming on stream by 2018 at the latest, and small installations below 750 kW and research installations, do not have to participate in the auctions.
Longer transitional periods apply to offshore wind energy installations so that this comparatively new branch of industry can develop, and the prices for such installations can fall. Specifically, this means that operators who would like to receive funding for new offshore wind energy installations from 2021 must participate in an auction run by the Federal Network Agency. Until then, the existing funding rates set by the state will apply. The first auction for this will be held in 2017.
The Federal Network Agency will design the auction procedure to ensure a continuous and slowly rising new-build rate. For 2021 and 2022 new-build of 500 MW, for 2023-2025 an annual new-build of 700 MW, and from 2026-2030 an annual new-build of 840 MW is planned. Once again, the operators can submit bids for the level of funding in each auction round. Here, they have to state what funding they require per kilowatt-hour. The funding is awarded to the operators with the lowest funding requirements.
From 2017, operators of new, larger-scale photovoltaic installations with a capacity of more than 750 kW must participate in the auctions of the Federal Network Agency. Otherwise, they will not receive any funding. In these auctions, the operators of new installations compete against one another. Funding is only awarded to those who can operate their installation in an economically viable manner at the lowest possible costs.
Each year, the Federal Network Agency will auction 600 MW of photovoltaic capacity. Once again, in each auction round, operators can bid for one or several new installations.
Operators of new biomass installations are only entitled to state funding if they have taken part in an auction run by the Federal Network Agency and their bid is successful. "Successful" means that they demonstrated in their bid that they will be able to operate the planned installation economically with as little funding as possible.
In 2017-2019, the Federal Network Agency will auction 150 MW of capacity each year, and 200 MW a year from 2020-2022. As in all the other auctions, operators can bid for one or several new installations in each auction round.
Existing installations whose funding under the Renewable Energy Sources Act is expiring can also participate in the auctions. This will give them the opportunity for ten years of follow-up funding. If existing installations are to take part in the auctions, they must meet the same standards as new installations in terms of flexible power generation which meets the needs of the electricity market.
Sharing the costs borne by businesses and consumers more fairly
The energy transition will only be successful if the whole of society participates in the costs. This means that both industry and other companies (e.g. commerce, skilled crafts and services companies) and private households bear a fair share of the costs. This was stipulated back in the 2014 Renewable Energy Sources Act, and remains the case. Exemptions apply only where they are genuinely needed: to electricity-intensive companies in sectors that compete internationally. In comparison with their international rivals, these companies are already paying high electricity prices. If, on top of that, they had to shoulder the full EEG surcharge, not only their competitiveness, but also their jobs would be endangered. For this reason, these electricity-intensive companies pay a reduced EEG surcharge.
The level of the EEG surcharge for these companies is stipulated in the "special equalisation scheme": for the first gigawatt-hour, they pay the full EEG surcharge, for every additional kilowatt-hour they generally pay 15 per cent of the EEG surcharge, but only up to a maximum of four per cent of the gross output of the company. If a company’s electricity costs amount to at least 20 per cent of its gross output, the burden of the EEG surcharge may only be 0.5 per cent of that output.
These rules for electricity-intensive and trade-intensive industries are stipulated for the whole of the EU in the European Commission’s guidelines on environmental and energy aid. Implementation in Germany is actually much more restrictive than the EU rules. Under the EU rules, all companies in many sectors can be privileged, but the German arrangement only grants exemptions to those companies in which electricity costs amount to at least 17 per cent of gross output. From 2017, there will be an upstream stage for particularly electricity-intensive and trade-intensive sectors above a threshold of 14 per cent, in which the companies normally pay 20 per cent of the full EEG surcharge.
The "special equalisation scheme" applies to just four per cent of all industrial companies. All other companies pay the full EEG surcharge. Overall, the business community bears the bulk of the costs caused by funding for renewables under the Renewable Energy Sources Act: in 2016, industry, commerce, trade, services, transport and agriculture shouldered approx. 64 per cent of the costs of the EEG surcharge. Private households contributed approx. 36 per cent.
The reforms of the Renewable Energy Sources Act in 2014 and 2017 helped to stabilise electricity prices. Household electricity prices have increased from 28.84 ct/kWh in 2013 to 29.23 ct/kWh in 2017, rising significantly less than general inflation.
Electricity prices in industry have developed differently: average electricity prices of non-electricity intensive companies with an annual electricity consumption of up to 20 million kWh have risen since 2013. This is largely attributable to an increase in grid fees in 2017, in particular at the transmission system level. In contrast, major industrial consumers with an annual electricity consumption of between 70 and 150 million kWh have benefited from falling electricity prices since 2013. The reason for this is that trading prices for electricity have declined, which is not least the result of the expansion of renewables.
It is not yet clear how electricity prices will develop in the future. This largely depends on the whole-sale electricity price level which is determined by many factors, e.g. the world market prices for coal, oil and gas, the carbon prices on the emissions trading market, and the costs of the electricity grid. The EEG surcharge to fund clean electricity only accounts for 24 per cent of the electricity price (status: 2017).
By switching the system to auctions, the 2017 Renewable Energy Sources Act is helping to make the funding for new installations cheaper. This further helps to stabilise the EEG surcharge and electricity prices. It ensures that clean electricity is affordable to everyone and that the energy reforms are a success, also in economic terms.
If, for example, an onshore or offshore wind farm generates more electricity than the grids can absorb, this wind farm needs to be switched off for a short period.
The Renewable Energy Sources Act provides that operators of renewable energy installations receive compensation for grid-related generation shortfalls. This means that, despite being switched off (curtailed), the operator of the wind farm receives state funding for the quantity of electricity he should have been able to generate. This compensation is particularly needed so that the operator can calculate his revenue side as precisely as possible. Under the new auction procedure, low-cost bids will only be submitted if the bidders can rely on this.
In order to reduce the quantities of curtailed electricity, it is necessary to improve the dovetailing of the expansion of renewables and the expansion of the electricity grids. And that’s precisely what the 2017 Renewable Energy Sources Act does.