On 13 February 2013, the two coalition parties in the German government reached a compromise on new measures which should lead to a reduction of costs for renewable energy for consumers. The changes are intended to come into force in August 2013. Although the changes still need to be ratified by both houses of the German parliament and it is expected that the upper house in particular will carefully scrutinise the changes, most parties in parliament are generally in agreement that costs for consumers need to come down and that the support for renewable energy therefore needs to be capped, reduced or restructured.

Background

The share of renewable energy-generated electricity has substantially increased in recent years and all of these projects benefit from the German feed-in tariff, the EEG (Erneuerbare Energien Gesetz). Under the EEG, the utilities have to buy this electricity and have to pay a certain tariff and that tariff is – currently – higher than what utilities would have to pay for other electricity, generated, for example, by coal. The higher costs for this electricity are shared by all utilities and they, in turn, pass the costs on to consumers. So, in effect, the German rate payer foots the bill for renewable energy. Until recently, this was more or less accepted, especially after the Fukushima disaster, but recently concerns have been voiced that the costs are getting out of hand, that renewable energy projects benefit too much from the EEG (and that they do not need the current level of support) and that the costs for consumers are unacceptably high. These concerns have grown even stronger in the face of continuing growth of renewable energy, especially in solar projects, and the expected commissioning of large offshore wind projects, which will receive a very high tariff under the EEG.

The ministry for economy, run by a Liberal Democrat, wanted to cut the tariff and support under the EEG substantially, while the ministry for the environment (which has responsibility for renewable energy and is run by the conservative Christian-Democrats) agreed only to small reductions. The two ministers have now reached a compromise, which will be introduced as the government’s new policy. Since both coalition partners were involved and agreed, it can be assumed that the bill, which is intended to become law by August 2013, will pass the lower house of parliament, the Bundestag. The bill, however, also requires the consent of the upper house of parliament (the Bundesrat) which consists of representatives of the local states, and since a majority of the states have majorities from the Social Democrat and Green parties, it is quite possible that the law will not pass in its current version. The Greens, in particular, are ardent supporters of renewable energy and will try to stop every effort to cut the support regime. They have already stated that they would fight the proposal "tooth and nail".

The Proposed Changes

The two ministries published a short paper which summarizes their proposal (currently only available in German). Some of the proposed steps represent an almost radical change from the previous set-up, at least for new projects.

Mandatory PPA: It would appear from the draft that all renewable energy projects which start operations after August 2013 will need to have a power purchase agreement for the direct marketing of their electricity.

Under the current EEG, generators have a choice: either sell their electricity to the grid operator and get the tariff set by the EEG or opt for what is called direct marketing. Under the direct marketing option, generators can sell their electricity directly to buyers. Under this option, they will enter a PPA and will receive a price for their electricity¹. In addition, they will get the difference between the statutory feed-in tariff and the "market electricity price" which is calculated in accordance with a formula, which in turn is based on average prices at the Leipzig EPEX. This is called "market premium". It was thought that under a PPA, the sellers would probably get the market price, so the market premium would bring the income up to a guaranteed level of the feed-in tariff but with a potential upside, i.e. if they can sell for more than market price. In addition they also get a so-called "management premium". This management premium currently varies between 0.30 cent/kWh and 0.75 cent/kWh, depending on the renewable source and on whether or not the facility can be controlled remotely (and thus easily turned on and off). The reason for this additional payment is that lawmakers acknowledged that direct marketing would incur additional costs for the sellers, relating to PPA negotiations, and output forecasts which they are required to make for which they should receive compensation.

Under the new proposal, projects which start operations after August 2013 will not have a choice; they will have to direct market their electricity. Therefore, all developers would need a PPA with a buyer. The government paper is silent on the situation in which a project cannot find a buyer, or a buyer that offers reasonable terms. There is, yet, no provision for an off-taker of last resort. Presumably, the electricity could be sold on the electricity exchange but this would not really be a sustainable solution and would make the financing of new projects difficult if not impossible. In any event, it seems clear that the idea of a guaranteed price, as enshrined in the EEG, will remain, so that new projects will not be exposed to full competition with other energy sources, which would – at least at the moment – mean that they could not survive.

In addition, the paper provides that NO management fee will be paid for new projects; another loss of income for new projects.

For old projects, i.e., those that came online before August 2013, the feed-in management compensation shall be reduced "significantly" ("deutlich abgesenkt") for projects that benefit directly from the feed-in tariff, but there is no information or indication as to what (and how much reduction) that means. The feed-in management compensation is paid to generators if the grid operator violates its obligation to expand its grid to off-take renewable electricity. This only applies if the grid operator has acted at least negligently. It is not clear why this reduction is contemplated and what difference it would make. This provision removes (or may remove, depending on the final figures) potentially huge liabilities for grid operators if they fail to invest and expand the grid. Given that the German decision to abandon nuclear power for renewable energy requires substantial investment in new transmission lines and that the grid operators have been shown to be unable to provide that level of investment, this change could (depending on the exact figures) constitute a substantial change and may lead to grid operators taking the deliberate decision not to invest and expand because it could be cheaper to pay compensation than making the investment.

It would appear that offshore grid expansion is not affected by this change because it is covered by a separate set of rules which have been changed by the government recently.

Tariff Reduction: Another big change is the proposed reduction of the applicable tariff for projects which commence operations after August 2013. In the first five months of their operation, the tariff will be reduced to "market price". This reduction does not apply to PV projects. It is not clear what the coalition partner means by market price but it can be assumed that some price finding mechanism, similar to that for the market premium, would be applied.

This could potentially mean a significant reduction of income for a new project, but recent experience has shown that the market price for electricity is actually not that much lower than the feed-in tariff – one of the reasons why many projects have opted for direct marketing. Still, the government believes that it can save EUR 500M a year with this change, so they clearly assume that there is, and will be, a continuing difference between market price and feed-in tariff.

In addition, the government proposes to reduce the tariff for onshore wind (after month six) and for new projects to 8 cent/kWh, down from 8.93 cent/kWh, i.e., a reduction of just over 10%. Together with the reduction in the first five months, this is likely to constitute quite a significant reduction of income for new projects.

Furthermore, the repowering and the SDL bonus will be scrapped. These are additional payments which are payable if a new project replaces an existing one and/or if the technology meets certain criteria which should lead to better grid stability.

One-time Payment Holiday: The proposal also provides a one-time reduction of 1.5 percent of the feed-in tariff in year 2014 for all projects which have commenced operations before August 2013. This is a rather drastic step but will, according to the government, save about EUR 350M per year – one of the greatest savings in the proposed changes. It can be expected that this proposed payment holiday will be challenged in the courts for compliance with German constitutional law and with the Energy Charter if applied to existing projects.

Offshore Wind: Generally, it can be assumed that all measures mentioned above do apply for onshore as well as offshore wind, unless the proposal clearly says differently. This means that the large offshore wind projects will need to enter into PPAs to sell their output and since they have installed capacities of, very often, more than 300 or 400 MW, it may be difficult to find a suitable buyer for this much electricity. 

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¹ This does not apply for projects with a size of 150kW or less.

Client Alert 2013-045