The Renewable Energy Act (EEG) is one of the most important climate change protection tools and the principal driver behind the expansion of renewables in Germany.
The Renewable Energy Act (EEG) is one of the most important climate change protection tools and the principal driver behind the expansion of renewables in Germany. The law came into effect in April 2000 and has been revised several times to address new challenges as Germany expanded its renewable generating capacity.
Initially, feed-in-tariffs within the EEG were quite simple – owners of renewable power generators would receive a set rate for each kilowatt-hour of renewable power over a guaranteed 20 year period. The specific rate would depend on the type of renewable energy technology and location. The feed-in-tariffs received widespread support in Germany since it provided reliable and sometimes lucrative returns for investors, creating a wave of renewable projects.
Over the past few years, the government has launched significant changes to the EEG as it attempts to tackle three energy-related issues simultaneously: (1) cutting carbon emissions by reducing fossil fuel consumption, (2) boosting renewable generation, and (3) phasing out nuclear power. As one would imagine, some of these changes are highly controversial. The revised EEG framework is now referred to as EEG 2.0.
EEG 2.0 is significantly more complex than the original rules. It revised exemptions for energy-intensive electricity consumers and the framework policy for establishing new renewable projects. Typically, German power consumers are required to pay a surcharge called the "EEG levy," which presently accounts for a significant portion of the consumer's energy bills. The state applies this charge to each kWh of energy consumed and is collected to support Germany's development of renewable power. In 2020, the EEG levy was 6.76 ct/kWh. For 2021, the EEG levy was set to increase to 8.0 ct/kWh, but due to the economic crisis caused by COVID-19, it was reduced to 6.5 ct/kWh. The steady increasing progression of the EEG levy since 2000 can be seen in the following chart.
Since renewable energy costs are progressively decreasing due to the economies of scale and improving technology, some argue the EEG levy should also decrease. For 2022, the EEG levy is projected to be 6.0 ct/kWh.
EEG 2.0 allows exemptions for certain qualified energy-intensive consumers. The application process has become increasingly complex. Moreover, each application is only valid for single year. These hurdles to securing an exemption are not surprising - the intention is to have fewer consumers benefit from these targeted exemptions. It is common practice for industrial consumers to hire an energy expert or consulting firm to handle EEG levy exemption applications.
With regard to the expansion of renewable energy, Germany has set several ambitious goals. Germany has pledged to phase out nuclear power by 2022 and phase out coal by 2035. In the first half of 2020, 11.3% of the energy production came from nuclear, 6.4% from hard coal, and 13.5% from lignite (known as brown coal). Germany also set very ambitious climate targets for 2050. Today, roughly half of Germany's power production comes from renewables. It will need to expand its renewable generation to achieve these targets but also keep the cost affordable to keep the country running.
At the initial phase of EEG, anyone with a permit, whether it is a corporation or an individual, could set up a green power project, such as wind parks or solar farms, and receive government subsidies for the project. Under EEG 2.0, however, the government established a bidding process to increase market competition and control the construction of new renewable projects. Practically, the government posts a tender to build a new wind or solar park, and the investor who offers to sell electricity at the lowest price - i.e., investors requesting the lowest subsidies for construction and operation wins the project. Many people criticized the new policy as unfair because this policy excludes corporations and individuals from the bidding process; however, municipal utilities and large power providers all support the new tendering process. Inevitably, EEG 2.0 will help these entities, such as Innogy, to gain more generation capacity and increase their market share. The more generation capacities one company has, the more market influence it will have. As most municipal utilities and larger power providers are publicly owned infrastructure, the energy sector will continue to remain a highly regulated industry in Germany.
Many people have a negative view of EEG 2.0. The controversial revamp of the renewable energy law exerts greater control over renewables' expansion which reduces market competition. Germany set ambitious carbon reduction targets, so many see the changes as necessary. The key question is whether EEG 2.0 will promote or obstruct Germany's transition to a low-carbon economy?