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German Electricity Association still lobbying for replacement of feed-in tariff with quota model

The electricity giants and their mouthpiece, the German Electricity Association, are still trying to replace the system of guaranteed feed-in tariffs secured by the German Renewable Energy Law (EEG) with a quota model. While on one hand they are demonstratively entering into dialogue with representatives from the renewables branch, on the other they are circulating a strange mix of numbers to prove that costs of EEG tariffs are too high.

The new attack wasn't really a surprise. The German electricity branch has attempted to seize the ongoing tough negotiations between the Conservatives (CDU/CSU) and the Social Democrats (SPD) concerning their government program as an opportunity to torpedo the German Renewable Energy Law (EEG). At the beginning of October, the German Electricity Association (VDEW) launched a media campaign for introduction of its quota model, now called the »integration model.« This system would mean that electricity from renewables could no longer be fed into the grid for a fixed tariff guaranteed for a certain period without any restrictions regarding quantity. It would mean that only a predetermined quota – like with US renewable portfolio standards (RPS) – would be accepted, and grid operators could choose the cheapest among the different offers and technologies (see PI 6/2005, p. 18).

The VDEW is trying to use calculations from Energy Environment Forecast Analysis GmbH (EEFA) to substantiate so-called »efficiency profits,« which they claim would result from abandoning the EEG. EEFA's managing director Bernhard Hillebrand outlines an amazing €3.8 billion ($4.6 billion) that would be saved with the integration model alone by 2020. No wonder Roger Kohlmann, vice president at VDEW, presented these figures at the Green Power Marketing Conference in Berlin in early October. Since then, the figure has been quickly disseminated throughout the press and various political spheres. In the past, Hillebrand was head of the Essen, Germany-based energy department of the Rhine-Westphalia Institute of Economic Research (RWI) for several years. The RWI was regarded as a traditional consultant for the German Federal Economics Ministry (BMW), the RWE Group, and the aluminum industry. After the RWI was reoriented, Hillebrand left and started his own company, EEFA.

As expected, his VDEW study has been met with massive resistance from the renewable energy industry. »€3.8 billion ($4.6 billion) is a multiple of the total EEG tariffs could amount to in the year 2020. Nearly all figures for both conventional and renewable energies used in this calculation are far from reality,« criticizes Milan Nitzschke, head of the German Renewable Energy Association (BEE).

Nitzschke says the VDEW consultant used several tricks for his study. For example, Hillebrand calculates the advantage in costs primarily based on the assumption that all of today's rather expensive forms of renewable energy, such as PV, geothermal, and small local biogas power plants, would no longer be funded under the integration model. The VDEW has already made it clear that the electricity business has no interest in supporting these future technologies. If the state wants to continue support for these technologies, the government would have to set out its own incentive program, stresses VDEW. That would mean funding would be financed completely from taxes and no longer from electricity users. Ultimately, that would leave only wind power, water, and large biomass power plants owned by the large energy utilities within the scope of the VDEW model.

Hardened fronts

The VDEW had invited about 25 representatives from both its own ranks and the green energy branch to an »Integration Model Symposium« at the Berlin headquarters of Eon – one of the German electricity giants – in the last week of October. After the conference VDEW's Kohlmann said, »The constructive discussion at the event has contributed to the formation of trust.« However, in truth, neither of the parties had gotten any closer. According to BEE's Nitzschke, »The EEG is the most efficient instrument for the promotion of renewable energies in Europe. So why should we debate changing the system?«

The green power representatives at the meeting also noted that even within the VDEW member companies, the backing for the integration model is apparently beginning to crumble. No one could explain how the discrepancy between Hillebrand's calculations and the results of London-based management consultant Stefan Schmitz could be resolved. Schmitz, who works for consultancy group Haarman Hemmelrath (one of its customers is Eon) outlined that the financing costs and lawyers' fees alone would lead to higher costs for the quota model compared to the EEG system. The crucial question is whether project costs could all be decreased to such a point that additional financing costs could be balanced out, he said.

Correspondingly, at the workshop the first representatives from energy utilities further pressed the idea of getting rid of the quota in the integration model and replacing it with a tariff based on market price plus premium. As this would result in a premium feed-in tariff for green energies without any cap, representatives of other electricity utilities reacted to the proposal with much irritation.

How little the green branch could really trust the »hug-happy« atmosphere at the workshop was shown only a few days later, when the VDEW announced that electricity customers are carrying an ever-increasing burden as a result of the EEG tariffs. This year, total »additional costs« are at €2.7 billion ($3.3 billion), with around €3 billion ($3.6 billion) expected for 2006, according to VDEW.

It's all relative

It's not just Milan Nitzschke who is annoyed by this new assault: »The allocation for electricity from renewable resources will remain at the same level as last year – €2.3 billion ($2.7 billion). The utilities are intentionally calculating the EEG allocation incorrectly.« And indeed, in the first week of November, the German Federal Environment Ministry (BMU) confirmed that the calculations of the green electricity advocates point in the right direction. The BMU expects that the EEG net costs – the premium tariff paid after the normal market value of the electricity is deducted – will decrease in comparison to 2004. And it is only this premium, and not the total amount, which electricity customers have to pay for supporting green energies.

© BMU

Different calculations: The German Federal Environment Ministry's numbers shows where the differences lie between the renewables branch and the VDEW regarding the cost of EEG electricity. The average tariff per kWh of green electricity fed into the grid rose slightly from 2004 to 2005, but the stock price of electricity increased even more, resulting in dramatic reduction of specific EEG net costs. Depending on the development of the electricity market, this trend could continue next year.

It's true the BMU estimates that the total amount will sink only a little from €2.48 billion ($2.99 billion) in 2004 to €2.42 billion ($2.92 billion) in 2005 (see table), but at the same time the total amount of EEG electricity increases a good 20 percent. That means the year-on-year EEG costs for each kWh will even reduce by just about a fifth. The reason for this development is cited as »the massive increase in prices for conventional electricity seen on the Leipzig European Energy Exchange (EEX) this year.« With the average annual stock price for base-load electricity at 2.85 euro cents (3.45¢) per kWh in 2004, the same value has risen to 4.2 euro cents (5¢) in 2005 – that's a 50 percent increase in only 10 months. This rise has narrowed the price gap between conventionally generated electricity and expensive green electricity, says the BMU.

The EEX stock prices are also the reason that the relative costs of the EEG payments will rise in 2006 – although still much more slowly than the amount of electricity fed in: »If there is a further – albeit moderate – increase in the electricity prices to 4.5 euro cents (5.4¢) per kWh next year, then despite the greatly increasing amount of EEG electricity fed into the grid, this would only result in a rise in the EEG costs of 4 percent to around €2.5 billion ($3 billion),« according to the BMU. And even if the electricity stock prices were to remain constant, the EEG costs for German electricity users would amount to €2.7 billion ($3.3 billion) – and therefore would be far below the figures the VDEW is quoting.