In an otherwise well-written and informative article on the recent decision by the EU Court of Justice on renewables policy, Energy Post repeats the unfounded notion that Germany has generous subsidies. This is wrong – and the difference matters: the German system of feed-in tariffs favours small companies and cooperatives. Now, the EU wants to kill feed-in tariffs, ostensibly because of the cost – but what’s at stake is freedom.
Many of us in Germany wonder why top EU experts not only still refuse to recognise the success of feed-in tariffs, but also continuously fail to describe them properly. We need not look far for the reasons – outside Germany, energy experts think the energy transition is something for utilities to handle, so the German bottom-up movement is a threat, not the solution. Energy cooperatives have no major lobby group in Brussels – the first lobby group for energy cooperatives in Germany, the DGRV, was founded in November and still only works in German from Berlin – so the press still mainly speaks with experts from the major corporations that could be hurt in the transition.
In a recent article in Energy Post, Sonja van Renssen explains the recent ruling of the EU Court of Justice protecting national policies at the expense of cross-border power trading within the EU. In her passing remark about German renewables policy as involving “generous subsidies,” van Renssen repeats a common complaint in the conventional energy world. But Germany does not have any generous subsidies for renewables. It has feed-in tariffs that, like public healthcare products and services, are prices agreed between government and industry to ensure that manufacturers and service providers remain profitable without gouging customers. If you think feed-in tariffs are subsidies, you’ll want to call your public healthcare service a subsidy as well. And if you think German customers are actually being gouged in the Energiewende, keep in mind that the public here disagrees with you; there have been no demonstrations against the German energy transition yet, and people from legal expert Matthias Lang to German journalist Gerd Rosenkranz have noted that the public accepts high power prices in return for the freedom to make their own energy.
If FITs are not subsidies, are they at least generous?
The target return for FITs in Germany is six percent, a level far below the guaranteed profit of up to and exceeding nine percent provided to German grid operators – a level these firms find unattractive, which helps explain why German grid upgrades are progressing so slowly. Proving that nine percent is too low, these firms also sued (unsuccessfully) to have this guaranteed return increased to 11 percent. In the US, the return (not the price!) for grid operators is also guaranteed at roughly 12-13 percent. And as Bloomberg reported in June, the average profit margin for Germany’s eight biggest utilities in the last decade – before the energy transition began to hurt them – was 15 percent.
In contrast, FITs do not guarantee a return at all – they simply set a price per kilowatt-hour you sell to the grid; the law does not guarantee how many kilowatt-hours you will produce, but the price is designed to provide a roughly six percent return if a generator is properly installed and operated. Note again that the corporate world does not like such risks, so when the UK offered feed-in tariffs for the new nuclear plant at Hinkley, the strike price was guaranteed, but so was the number of kilowatt-hours that would be paid for over decades – regardless of whether the power market needs them all.
Likewise, offshore wind is largely a sector for corporations, which explains why these feed-in tariffs start off at 19 cents per kilowatt-hour in Germany for the first eight years. Instead of stretching out that meagre return across 20 years, the same profit margin is squeezed into the first eight years, so corporations get their money back more than twice as quickly – essentially, a more than 12 percent return for eight years followed by a breakeven for 12 years.
In contrast, feed-in tariffs for onshore wind target that six percent return over 20 years, which is attractive to smaller investors. In a recent analysis, German economists at the German Institute for Economic Research (DIW Berlin) found that roughly half of onshore wind had been funded with investments from citizens. The DIW agrees that large investors want a greater return than small ones; while the latter make do with five percent, the former are uninterested below eight percent, its analysts say.
If FITs are not generous subsidies, we should start calling them “payments” and describe them for what they do:
- Unleash billions in investments from normal citizens otherwise shut out of energy markets. According to the DGRV, energy cooperatives alone have already invested €1.35 billion in renewables in Germany, and that’s not including the nearly one million residential solar roofs in the country.
- Make renewables cheap. Germany has the lowest prices for solar arrays in the world, for instance, partly because the return is six percent, not the 12 percent that corporations want, and partly because feed-in tariffs reduce administrative costs and the cost of capital.
- Allow people to make their own energy profitably.
- Allow SMEs to compete with big business, rather than having energy sources compete with one another. The energy transition requires a mix of renewables, so if you don’t want that mix, you don’t want the transition.
- Hurt corporate utilities that won’t listen.
EU Energy Commissioner Günther Oettinger recently stated at a meeting with fellow Christian Democrats in Germany that citizens have “infiltrated” the German power sector with their grassroots Energiewende movement. Does the EU’s Energy Commissioner represent citizens or corporations? He is in line with Merkel’s new coalition, which wants to switch from feed-in tariffs to auctions, to “reduce the influence of renewables lobby groups.”
As policy researcher David Jacobs has documented, Brussels has long opposed feed-in tariffs for not being “market-based” because fixed prices for energy sources mean that energy sources do not compete with one another on the market. Brussels should acknowledge that FITs provide greater competition between companies. Instead, in its new State Aid guidelines, published in April and effective from 1 July 2014, the EU indicates it wants to get rid of them and see EU member states switch to “competitive bidding processes”. Germany aims to switch from feed-in tariffs to a bidding process over the next three years in line with these new policies from Brussels.
But getting rid of feed-in tariffs will not necessarily make the energy transition cheaper. First and foremost, the move would hand the transition back to the utilities that have played a small to negative role in it up to now.
Will the press please tell this side of the story? Otherwise, a lot of people are going to be surprised to see the cost of the transition increase when feed-in tariffs are thrown out and higher corporate profit margins kick in. And you may be surprised to be told one day that your utility does not need the energy from your solar rooftop, local wind turbine, or community biomass unit.