Germany ponders how to finance renewables expansion in the future

Weaning a major economy off fossil fuels, while phasing out nuclear power at the same time, comes at a cost. Major investments are needed, not only to transform the power sector, but also to find sustainable solutions for transport and heating. Shifting these sectors to clean electricity as their primary source of energy – a process referred to as sector coupling – will further increase demand for renewable power. Many oberservs believe Germany's current system is not up to the task of financing this new phase of the Energiewende.

With general elections looming later this year, the debate over a general overhaul of Germany’s much-imitated system for renewables support – shouldered by electricity consumers – has gathered pace.

Renewables surcharge: The end is nigh?

The Renewable Energy Act (EEG) surcharge has been the main driver of renewables expansion. Paid by consumers with their power bill, the EEG-surcharge pays for the feed-in tariffs that have made investment in wind, solar, biomass, hydro and geothermal facilities profitable, and kick-started their growth without tax-funded subsidies. [For more on how the EEG-surcharge finances renewables expansion, see the CLEW factsheet Balancing the books: Germany's "green energy account"]

But the surcharge keeps on rising and weighs heavily on consumers’ power bills. Currently, over 50 percent of the price households and many small and mid-sized businesses pay for power is determined by fees, levies and taxes.

The government has sought to address cost concerns by reforming the EEG and replacing pre-fixed feed-in tariffs with competitive auctions. But there are doubts this will do enough to lower costs.

Urgent fix needed for "next wave of Energiewende"

According to Deutsche Bank, a fundamental reform of financing could pave the way to a "second wave of Energiewende." Energy analyst Martin Brough argues low interest rates currently favour a new phase of the energy transition, because they make the necessary investments cheaper.

But Germany's energy pricing system is flawed and “urgently needs fixing,” as prices fail to reflect costs, writes Brough. “Germany has the opportunity to reap the rewards of being an early mover on green energy. Reforming pricing in power, carbon, transport and heat can allow markets to deliver a sustainable future, and provide a showcase for Europe and the world.”

Energy think tank Agora Energiewende agrees that Germany’s current system of levies, taxes, and fees on energy is unsuitable for the next phase of the country’s energy transition.  The current system “punishes climate-friendly energy consumption, while rewarding climate-damaging behaviour,” because it makes power expensive while fossil fuels like petrol, natural gas, and heating oil remain relatively cheap, according to a press release. The think tank’s director Patrick Graichen said a fundamental reform of the system was one of the central challenges for the next government but essential to encourage the use of electricity in heating and transport. “Otherwise a comprehensive energy transition won’t work.”

Looking for alternatives

Even before the 2017 EEG reform took effect, politicians from Chancellor Angela Merkel’s Christian Democratic Union (CDU) were floating ideas on how to outright abolish EEG support by the end of the coming legislature.

Thomas Bareiß, representative for energy policy of the CDU/CSU parliamentary group, told the Clean Energy Wire in December that from 2017, “we have to talk about a gradual end to renewables support”. With prices continuing to drop, these technologies were capable of facing the competition in the market, he said.

Others believe the renewables expansion will still need support, but through a different system. Late last year, then economy minister Sigmar Gabriel (SPD) said the EEG surcharge was insufficient for a comprehensive energy transition, because sector coupling would undermine the Energiewende’s financial basis.

Germany’s energy and economy ministry (BMWi) has begun to research alternatives to the EEG. In a “very first step of a long process”, it is already investigating alternative ways to fund the country’s switch to renewables. At the end of 2016, the ministry tendered for a study to explore “models for the future financing of renewable energy”. “There is broad agreement that in the short and medium term, renewable energies cannot be re-financed solely via the power market,” the BMWi says in the tender description. The final report of the study will be available two and a half years after the project’s kick-off.

A question of redistribution

Replacing Germany’s renewables surcharge with a tax-financed energy transition fund could help distribute the financial burden of expanding low-carbon energy sources more fairly, according to a study commissioned by the Federation of German Consumer Organisations (vzbv). Because the current system does not take consumers’ financial means into account, poorer households spend a larger share of their income on funding renewables, the vzbv says. Taxes on corporations and those with a higher income could be used to finance the fund.

The Cologne Institute for Economic Research (IW) proposes replacing the EEG-surcharge with a surcharge on the income and corporate tax. Regarding questions of efficiency and redistribution, “financing from the state budget seems [the] most convincing” alternative to the renewables levy. High income tax payers with low energy consumption would pay more, while low income households and companies with high electricity intensity would pay less, writes IW in a paper. The authors propose that such an ‘energy solidarity-surcharge’ could replace the existing solidarity tax that Germany introduced in 1991 as an additional tax to finance development in former East Germany and other state expenses. It is due to run out in 2019 and its volume is only about ten percent below that current EEG support needs.

A reform of Germany’s system to finance the country’s Energiewende is needed to distribute costs more fairly and push renewable electricity use in heating and transport, writes a cross-sector alliance of associations in a joint statement. In comparison to energy sources in the heating and transport sectors, electricity today is “heavily burdened” by taxes and levies, which inhibit expanding the energy transition to those two sectors. The group proposes reallocating Renewable Energy Act (EEG) costs according to energy sources and sectors and based on the sources’ CO₂ emissions, which would bring down the EEG surcharge by outsourcing costs for industry exemptions to the federal budget, and abolishing the electricity tax. A CO₂ floor price in the power sector could further help bring down the EEG surcharge, writes the group. The alliance includes consumer, tenant, environment protection and trade associations.

Expanding the renewables surcharge to other sectors

The renewables surcharge on electricity could fall significantly if the system was based not just on power consumption, but also on final energy consumption in the heating and transport sectors, according to a study by the Institute for Ecological Economy Research (IÖW), commissioned by the Association of Energy Market Innovators (bne). According to the study proposal, the surcharge would also be paid on the use of gas, oil, coal, petrol and diesel. However, depending on the scenario and specific situation, this ‘broadening’ of the surcharge could lead to higher burdens on private households, as they consume fossil fuels for heating. On the whole, systems that use renewable energy become more attractive in relation to fossil systems, which would advance developments in sector coupling. In an update to the proposal, the IÖW suggested a gradual inclusion of other energy forms and further industry sectors, which the bne said would lead to more certainty for the planning of investment decisions and energy use.

A price tag for CO₂ emissions

In December 2016, an expert commission tasked with monitoring the progress of the energy transition recommended a “general CO2 price tag” across all sectors to finance future renewable energy expansion. The renewables surcharge, the electricity tax (see below) and other levies could be integrated into this one instrument, which would be more efficient and could therefore be cheaper than the current levies combined, the experts write in their opinion accompanying the 5th Energiewende Monitoring Report. This would tackle the problem that the current support makes renewable power more expensive than fossil energy sources, and also reduce the burden on low-income households.

The experts recommend that in case Germany misses its emissions reductions goal 2020, the government should buy the necessary amount of EU Emissions Trading System certificates to fulfil its pledge, and take them out of the market permanently. Germany would thus ‘reach’ its target “in a flexible way”, but total EU emissions allowances would decrease. This mechanism – if coordinated with the other member states – was preferable to “an inefficient way to reach national targets with an abundance of overlapping and partly contradicting measures,” write the experts. However, a stringent EU emissions trading system would be the best solution, they say.

Germany will have to replace its current renewables (EEG) surcharge model with a combination of market and tax-based mechanisms, using a CO2 price as an indicator, Jochen Flasbarth, state secretary in the environment ministry, recently said in Berlin. Flasbarth said it “didn’t make sense” that the current EEG surcharge made electricity more expensive, because it will have to form the basis of Germany’s future economy. Renewables expansion should be funded by targeted taxes, for which a CO2 price would serve “as the leading indicator.” At the same time, the carbon price would steer market players towards emissions reduction, Flasbarth argued.

A CO₂ tax of 100 euros per tonne of CO₂ equivalents on all fossil primary energy sources (before their conversion into power, heat or other forms of energy) could replace current energy taxes on electricity and fuels, according to a model by consultancy Schultz projekt consult, which was presented at a Green Budget Germany (FÖS) event. The nuclear fuel tax would remain and renewable energy would not be taxed.

Abolishing the electricity tax

The federal government coalition of Social Democrats and Green Party introduced the electricity tax as part of the ecological tax reform package in 1999. The package was proposed as a way to make consumers save energy and discourage environmentally harmful activities, while giving incentives to use natural resources more efficiently. In that year, only about 5 percent of German electricity was generated from renewables. In 2017, private households pay about 2.05 cents/kilowatt hour electricity tax, about seven percent of the total power price.

Hermann Albers, vice-chairman of the German Renewable Energy Federation (BEE), said Germany should replace its electricity tax with a price tag for CO2 emissions. “The taxation scheme needs restructuring” in order to lower the current Renewable Energy Act (EEG) surcharge, Albers said at a 2016 conference. A price tag for CO2 emissions could help reduce fossil fuel overcapacities, Albers added.

Germany’s electricity tax is no longer justified in its current form and should be lowered, Hubertus Heil, deputy chairman of the Social Democrats’ (SPD) parliamentary group, said in an interview with Der Tagesspiegel. “If power becomes more and more green, it doesn't make sense to tax this green power,” he said.

Stefan Kapferer, head of Germany’s largest energy industry association BDEW, says the country’s next government would be prudent to repeal the electricity tax. The tax "can no longer be justified" and power prices would become “more competitive” without it, Kapferer said in an interview with Der Tagesspiegel. Lower fees and taxes on power are needed to enable companies to make important investments during the transformation of the power market, Kapferer added.

A quota for renewables sales

Business lobby group Initiative Neue Soziale Marktwirtschaft (INSM) said the renewables surcharge could be abolished and replaced by a quota determining how much of utilities’ power must come from renewable sources. The Swedish Electricity Certificates Act serves as the model. This system would spur competition between different technologies based on market economy principles, INSM says.

Addressing the cost legacy

The cost for future renewables development is only part of the challenge. Some reform proposals focus on the fact that high feed-in tariffs dating from early renewable boom years, when solar and wind installations were much more expensive than today, are still responsible for the bulk of the costs covered by today’s renewable surcharge.

The remuneration rates were fixed for 20 years, so today’s power consumers continue to finance high renewable payments pledged in the early stages of the Energiewende. The renewable installations receiving the highest payments are solar PV systems installed at a time when high feed-in tariffs were aimed at kick-starting the market.

Ilse Aigner and Garrelt Duin, the state economy ministers of Bavaria and North Rhine-Westphalia (NRW) respectively, jointly proposed a permanent cap to the Renewable Energy Act (EEG) surcharge for power consumers at 6.5 cents per kilowatt hour (ct/kWh). They said a federal fund, initially covered via loans, should distribute the cost of renewables support over several years. It would be used until around 2028, when surcharge revenues would exceed payments to renewable facility operators and could be used to repay the loans.

Robert Habeck, the Green State Minister for the Energiewende in Schleswig-Holstein also went on the record proposing a government-administered fund, financed through reformed energy tax payments, mainly to deal with older pledges. Agora Energiewende suggested a similar fund in 2015.*

*Like the Clean Energy Wire, Agora Energiewende is a project funded by Stiftung Mercator and the European Climate Foundation.