What’s next for “green” Germany: The EU probing Renewable Energy Act

Originally published on 2013/08/08

Security of energy supply is a major issue for all economies. Without energy our world would literally stand still – this is in particular true for the highly developed European economies. The most basic definition applicable would state that energy has to be available at any given moment in sufficient amount for a reasonable price. However, the EU has expanded its understanding of energy security to include other factors such as diversity of sources and environmental impact. The “triple 20” goals (the reduction of 20% of greenhouse gas emissions compared to 1990 levels, the increase of 20% of energy efficiency and that of 20% of the part of energy from renewable energy sources) were understood by some member states as a chance to relieve much of its external dependencies whilst encouraging the overhaul of its old economic structures. One of these states was Germany which soon took the top position among green energy producers in the EU.

Germany’s Erneuerbare Energien Gesetz (EEG – Renewable Energy Act which provides investment protection through guaranteed feed-in tariffs and connection priority for green energy generators to the power grid as well as remuneration based on the polluter-pays-principle – no tax money is used to promote green energy) helped kick-start the “green revolution”. In the first half of 2012, almost a quarter of all electricity generated in Germany was “green” and the sector employs almost 400.000 people. Three years ago the German government announced that due to the success of the EEG it would increase its RES (Renewable Energy Sources) goals and predicted that by 2020 more than 35% of all electricity generated, and by 2030 at least 50%, should be from wind, solar and other renewable sources.

Germany’s neighbours have been following developments closely and more than one country have decided to incorporate elements of the German Feed-In System after their initial programmes had foundered. Germans, though not fond of huge turbines in their backyard have taken pride in becoming the first big industrialized nation to successfully transform its economy away from fossil fuels, and after the Fukushima incident, nuclear power.

The EEG explained and why DG Competition believes it distorts competition

However, not all is well in the German musterland. News that the European Commission might launch an official probe into whether the EEG is violating EU competition law has caused a stir in Berlin. Even though the government believes it has no reason to worry (and other, more important issues to address), the decision of the Commission sheds light on issues largely unmentioned in Berlin. The EU’s Commissioner for Competition, Joaquín Almunia, is critical of what is perceived in Brussels as “competition-distorting subsidies” for Germany’s energy consuming companies. In order to understand this, one needs to be aware that the EEG is more than just a support scheme for the development of green energy – one that every user pays for by paying their energy bills. In order to ensure that its highly energy intensive industries -such as metallurgy or petro-chemicals- do not suffer competition disadvantages caused by higher electricity bills, the EEG contained exemption clauses that applied to companies with consumption above 10GWh/a. These consumers received discounted rates for each MWh consumed above 10GWh. Recently the threshold has been lowered to 1GWh annually and figures have been adjusted to ensure that companies only pay 10% of the EEG levy for consumption between 1-10GWh and above this only 1%. In 2013 more than 4500 companies have requested to be exempted from paying the EEG levy, more than double of the amount in 2012.

The problem is that due to the 20-year guaranteed feed-in tariffs (energy producers get paid a fixed amount for each kW of energy they feed into the power grid), the costs of the EEG still need to be covered. Yet, as an increasing number of companies “opt” out, the burden falls onto those that have no option to apply for exemptions – small scale consumers like households, corner shops or small enterprises.

The EEG levy is no longer a small surcharge – from its initial value of 0.41ct/kWh in 2003 it has increased more than ten-fold to reach 5.227ct/kWh in 2013. Between 2012 and 2013 the levy was raised by almost 50% and it is likely that it will reach more than 6.1ct/kWh next year.

In order to illustrate just how much burden the EEG levy puts on ordinary citizens, Germany’s biggest customer portal Verivox estimates that roughly 50 per cent of the annual energy bill of an average household will be made up from taxes and levies. More specifically, the EEG levy will amount to roughly 19% of that bill. Moreover, Germany’s Bundesnetzagentur (Federal Network Agency) criticised in May 2012 that “EEG exempted companies consume roughly 18% of the electricity total, but pay only 0.3% of annual EEG total”

Subsidy or not – why the ECJ ruling will matter

The question remains whether Almunia and DG Competition are right and the EEG exemption can be considered a subsidy – at least as far as the definition is concerned this might be less straight forward than might be expected. German companies were not propped up with financial payments, nor did they (technically speaking) receive tax cuts – the two most common forms of subsidies. Instead they were exempted from paying the full EEG levy. In 2001 the predecessor of the EEG, the Electricity Feed In Act, had come under scrutiny from Brussels based on a similar reasoning, but the ECJ ruled that the exemption then did not constitute a form of subsidy. However, compared to 2001’s Stromeinspeisegesetz the current legislation affects more companies, and creates significantly more pressure on those that cannot opt out, whilst energy prices on the European Energy Exchange (EEX) have been falling since 2009.

Whichever ruling the ECJ will provide, it seems likely that the next German government will have to modify the EEG to bring it in line with EU competition law and in particular the EU’s vision of a common energy market. It is therefore not surprising that one of the first to criticise the current EEG and demand that it be altered was EU Energy Commissioner Günther Oettinger, former minister president of Baden-Württemberg and a vocal critic of Angela Merkel. Oettinger is convinced that the German Sonderweg is impeding the development of a real European energy policy. Instead of subsidising the development of wind and solar power industries in Germany, Brussels is hoping that wind and solar energy will be generated where conditions are best, i.e. where long periods of sunshine are the rule, and not the exception, such as Spain, southern Italy or Greece, and where the wind blows constantly (again not Germany). The EEG has allowed Germany to build up these industries almost from scratch, however, as without the EEG none of them would be competitive – a clear case of competition distortion and one reason why Germany’s neighbours will not object the EU’s probe of the German Renewable Energy Act.