Wednesday, August 24, 2016

Beyond Growing Pains:  Germany’s New Normal in Renewable Energy Policy

German windfarm (Photo Credit: Sheila Sund via Flickr) Click to Enlarge.
In July 2016, the German government decided to abolish the country’s feed-in tariff (FIT) for renewable electricity generation.  Instead, the government now plans to auction contracts for renewable electricity deployment to the lowest bidders.

The FIT is a policy that basically forces electric utilities to buy renewable electricity from generators for a premium price.  Since 1990, the German FIT had played a key role in making the country a pioneer in the use of renewable energy.  Why did Germany replace the FIT after almost three decades of unparalleled growth in renewable electricity generation?

As a policy, the FIT has many virtues in the early stages of renewable electricity generation.  It reduces uncertainty for electricity producers as the FIT guarantees a fixed, above-market price for a defined time period, such as ten years.

The German law also gives priority to renewable electricity, thus granting grid access to renewable producers.  This design protects independent small-scale producers by preventing electric utilities from closing the electricity market.  Politically, this feature is key to understanding the FIT’s popularity:  it creates benefits to a large number of small generators.

No wonder, then, that the FIT has been the most critical driver behind Germany’s aggressive growth in renewables.  In fact, renewable electricity generation since 1990 increased by a factor of ten, with renewables now accounting for almost a third in the country’s electricity mix.

However, the cost of the FIT policy increases over time, as the cost of generating renewable electricity declines.  This development typically shows in increased electricity prices for household customers.  As a result of the FIT, average retail prices have soared, at least over the last decade.  Residential consumers are charged about 35 cents/kWh compared to about 13 cents/kWh in the United States, making Germany the country of some of the highest electricity prices in Europe.

Germany’s decision to drop the FIT policy and to become an auctioneer is thus an attempt to control the rate and cost of growth in renewable electricity generation.  Auctioning not only promises to reduce the cost of renewable electricity generation, but it also gives policymakers more flexibility in achieving their goals.
Now that cost-effectiveness of renewable production is becoming more and more important relative to mere growth, tailoring cash incentives towards the government’s strategic expansion plans is key to success.  Auctions enable continued growth in renewables at a low cost relative to the FIT, while giving the government more control over technologies and types of renewables.  In this sense, auctions promise to be a useful tool in Germany’s pursuit of a “new normal” in renewable electricity production.
A particular challenge for Germany is that auctions are not suited for supporting the growth of small-scale, distributed renewable electricity generation.  Because small producers cannot compete on cost basis with major players or do the complicated paperwork in bidding, different policies are needed to support this segment.  The goal here must be to continue to support distributed electricity generation in the country of Bürgerenergie – citizen energy. The German government recognizes these issues.  For example, small installations still benefit from an FIT up to a certain limit.

Read more at Beyond Growing Pains:  Germany’s New Normal in Renewable Energy Policy

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