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Dissecting Germany's EEG Surcharge

Highlights

  • The EEG surcharge for 2014 will be €64.2/MWh (~$88/MWh) – an amount almost double the wholesale electricity price.
  • The surcharge is influenced by numerous factors that can be interpreted differently depending on subjective viewpoints.
  • Ultimately, Germans pay about quadruple the actual market value for the ~25% renewable electricity on their grid.

Introduction

Germany is conducting a very daring experiment with a large-scale transformation to renewable energy. For everyone participating in the energy and climate debate, it offers an excellent real-world dataset about the implications of a sustained subsidized deployment of renewable energy. Currently, things seem to be on track towards the minimum 2020 target (shown below), but rapid rises in electricity costs combined with rises in CO2 emissions have given sceptics plenty to talk about.

German electricity from renewables 2012

The above-mentioned costs are primarily implemented through the EEG surcharge which is basically the difference between the electricity price and the fixed feed-in tariffs paid to renewable energy producers. This surcharge will rise to €64.2/MWh ($88.3/MWh) in 2014 and is the subject of ever-increasing amounts of scrutiny from various groups.

Interpretations of the EEG surcharge

Naturally, reactions to this large additional charge depend greatly on the affiliation of interested parties. For example, a background paper recently released from a German renewable energy industry group states that only €25.4/MWh of this surcharge is actually direct support for renewable energy. The rest of the surcharge is primarily due to falling electricity prices, industry exemptions and carry-over from the previous year. This breakdown is shown below.

Components of the EEG surcharge

The carry-over component (“equalization of negative balance from the previous year”) appears to be an interesting bit of accounting. To correct for this component, the 0.63 c/kWh in 2013 should have been charged in 2012, bringing the 2012 “pure support costs” up to 2.8 c/kWh. Similarly, the component in 2014 should have been charged in 2013, bringing the 2013 “pure support costs” up to 3.25 c/kWh. Chances are that this charge would again appear next year and again be marketed as having nothing to do with direct renewable energy subsidies.

The industry privileges component is a fairly contentious issue and is currently being investigated by the EU as potentially illegal state aid. It is true that industry exemptions place an additional burden on retail electricity consumers, but this is done for a good reason. Scrapping these exemptions would imply that energy intensive German industries (those where electricity costs represent at least 14% of their gross added value) would jump from the current €143/MWh (which is already high) to about €206/MWh (which could send lots of German jobs abroad).

Finally, we come to the electricity price reduction issue. Renewable energy advocates like to point out that wholesale electricity prices dropped from almost €70/MWh in 2008 to just €37/MWh in 2013. As shown below, however, it is clear that most of this price drop was due to the recession (which is still lingering in Europe).

German electricity prices 2013

That being said, however, it is an indisputable fact that intermittent renewables enjoying dispatch priority reduce the wholesale electricity price simply because such bursts of must-take power reduces the demand for the existing fleet of dispatchable capacity. Contrary to the great positive that wind & solar advocates make this out to be, a previous article outlined why this effect actually makes intermittent renewables subsidy-dependent even after so-called grid parity is achieved. This effect was recently discussed in more detail using real-world data from Germany.

Ultimately, however, the best way to understand the EEG surcharge is to break it down to its foundation: the difference between the cost of feed-in tariffs and the revenues gained from the sale of renewable energy. The difference between these numbers is then socialized across the population by means of the EEG surcharge on retail electricity.

Fundamental breakdown of the 2014 EEG surcharge

It is easy to get lost in €/MWh metrics which can be difficult to put into perspective, but the difference between the costs of feed-in tariffs and the revenues from electricity sales is fairly easy to understand. This is given below based on the breakdown of the 2014 EEG surcharge (in German).

German EEG costs and revenues 2014

The above figure gives a pretty stark representation of the value/cost ratio of renewable electricity in Germany, but requires a little bit of additional explanation to understand correctly.

The most direct indication of the value/cost ratio of renewable energy in Germany can be gained by comparing the green and orange bars (a direct value/cost comparison). For the green bar, the monetary value was estimated by setting the market price of renewable electricity sales at €35/MWh which should be a conservatively high value given the falling value of intermittent renewables with increasing penetration. This metric shows that Germans paid quadruple the market value for the ~25% renewable electricity on their grid.

The small blue bar at the top is the estimated value of renewables that receive a fixed EEG subsidy instead of a premium above the market price. This value represents the revenue component in the calculation of the EEG surcharge. Finally, the large red bar at the bottom includes all additional charges (primarily the EEG account deficit from the previous year and a 10% liquidity reserve).

Future prospects

Contrary to the beliefs of solar and wind advocates, it is unlikely that this very poor 1/4 value/cost ratio will improve significantly over coming years. Yes, solar and wind technology costs are dropping with increasing deployment, but so is their value. Since the relatively easy gains from biomass and low-penetration onshore wind have already been exploited, progress is likely to become increasingly difficult as more expensive solar and offshore wind are utilized to drive the Energiewende forward (shown below).

Projected growth of renewable electricity generation in Germany

One has to commend the amazing German willingness to pay for the perceived environmental protection associated with solar and wind technology-forcing. Getting an entire nation to pay quadruple-price for a quarter of their electricity would seem like a political impossibility, but the Germans have actually pulled it off.

The increasing political wrangling driven by factors such as escalating costs, reports about serious impacts on the poor and EU investigations into the legality of industry exemptions is an ominous sign though. Germany is unique in the Western world in terms of its commitment to producing great value for relatively low wages, but one has to wonder how long this hardworking nation can maintain the Energiewende in the face of gathering headwinds.

Schalk Cloete's picture

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Discussions

Scott Luft's picture
Scott Luft on Jan 15, 2014 6:13 pm GMT

Supporting the point on falling market value of renewables generation, the German Energy blog has posted an average sales revenue of 3.6 ct/kWh in 2013 (Euro cents, for renewable energy obtained by the “TSOs”), down from 4.2 in 2012 … which was down from 4.9 in 2011

Bas Gresnigt's picture
Bas Gresnigt on Mar 10, 2014 2:58 pm GMT

Nice post.
But the German renewable energy industry group really has a point:

If the wholesale market price would still be €70/MWh and not €35/MWh, then
the appeal on the Energiewende fund/levy of a solar installation with FiT of €95/MWh would be only €25/MWh (95-70) and not €60/MWh (95-35). 
That differs more than a factor two.

It is not relevant whether recession or renewable or new capacity installed by the incumbent utilities caused the overproduction, hence the low whole sale price.
The incumbents delivered a major contribution to those low prices by installing more new power plants than needed (they now want to escape closing plants by asking for capacity pricing).

The fast upcoming role of batteries thanks to the price decrease (the German rooftop battery subsidy program to stimulate further price decreases is an huge succes), is not taken into account. Together with the continued price decrease of solar, I think the installation rate of 2-3 GW/a will increase, even when in the 2018-2023 period all FiT’s for solar will be deleted (now already no FiT for >10MW installations).

Example.
An house that consumes 4MWh/a, installs solar that produces 6MWh/a with a battery.
Yearly that installation costs then ~€150/MWh produced.
The installation avoids buying 3MWh which then costs €300/MWh.

So without solar the owner pays: 300×4 = €1200/year.
With solar and €30/MWh for electricity fed into the grid, he pays: 6×150+1×300-3×30 = €1110/year.
The only reason to postpone, is the expectaton that postponement brings more profit.

Furthermore:
I find it remarkable how fast negative predictions regarding the Energiewende resume after:

  • Many nonsense predictions, such as black-outs after closing 8 NPP’s, no support in the population, unreliable intermittent electricity supply, renewable/wind/solar can only be marginal, etc.
  • The opinion polls and last autumn elections showed overwhelming support by the population, resulting in a coaltion agreement that decided to speed up.
  • Predictions by Merkel and German responsible institutes that the Energiewende levy will rise only marginally and decrease after ~2023. While those institutions were almost always right in their predictions (except the pricefall of solar in 2011-2012).
    While the Germans spent hundreds of millions studying the best scenario until 2050 (=80% renewable).
Bas Gresnigt's picture
Bas Gresnigt on Mar 10, 2014 10:28 pm GMT

Without solar your price, calculated with 30cnt/KWh, of €1200/year is correct.

The solar+battery installation costs €900/yr (no subsidies, incl interest, depreciation, maintenance) and produces a volume of 6000Kwh/yr. Which implies 15cnt/Kwh (=€900/6000).
The houseowner gets 3cent/KWh for the electricity he delivers to the grid.

The house needs only 4000KWh/yr, but the battery is not very big so the house owner consumes 3000KWh/yr of his own production and has to buy 1000KWh/yr from the grid.
That implies he sells 3000KWh/yr (6000 production -3000 own consumption) to the grid.

He then pays per year:
 + €900 (= 6000 x 15cnt/KWh for the installation)
 + €300 (= 1000 x 30cnt/KWh bought from the grid)
 –  € 90  (= 3000 x 3cnt/KWh for the electricity delivered to the grid)
_______
So €1110 in total. So the home owner saves €90/year.

It is an example of around the switch-over moment = The moment the Feed-in-Tariff = the whole sale price (so the installation generates no Energiewende levy), and the installation is still economic to install.

My estimation is that the switch-over moment for such small installations will be in the period 2018-2022. The estimation is based on the observation that: 
– the solar FiT goes down with ~1%/month (and still installation rate ~3GW/yr)
– prices of batteries now also come down with ~20%/year.

Note
After the switch-over moment the Energiewende levy regarding solar can only go down, as no ‘new’ levies and the levies for installations older than 20years stop.
So after 2023 no more levies for installations installed in 2003 (or earlier), which old installations get a FiT of ~50cent/KWh (looks unbelievable high now).

Bas Gresnigt's picture
Bas Gresnigt on Mar 10, 2014 11:14 pm GMT

Willem,
I find it difficult to believe that you really seem to think that the Germans did not make that type of projections, incl the consequences for the Energiewende levy and the infra, long ago.

I am convinced they did it again last summer when Merkel promised that the levy would rise a little and then go down in ~2023. And that they did it again and again when Gabriel planned more offshore.
Gabriel will loose his position when he brakes Merkel’s promise regarding the levy, by installing more offshore.

Especially since Merkel also made the remark last summer that they would install less offshore than in the original planning, because offshore was expensive. 

And the present plan is indeed less offshore than in the original Energiewende, hence it makes the offshore backlog permanent or legalizes it. I believe that that plan is still too optimistic regarding offshore.

Furthermore considering that the president of Sleeswijk-Holstein (the state with most wind turbines) opposes offshore and declared all can be installed within his state, the assumption that Germany runs out of onshore locations is not correct.

So I believe that the installation rate of offshore will stay less than ~10% of the installation rate of onshore (e.g. 200MW/yr new offshore while 2.5GW/yr new onshore).
Note that until now offshore is nothing (few %) compared to onshore despite all publicity, the Energiewende target, etc.

Offshore may take off once wind turbines require far less maintenance (=no gearbox, etc), have a bigger capacity each (>10MW), and last >30years. But that takes a number of years as the wind turbine research effort is small.

Schalk Cloete's picture
Schalk Cloete on Mar 11, 2014 3:12 am GMT

As I understand it, most power plant investment decisions for recently opened new powerplants were made during the boom days in the lead up to the 2008 crisis. From the turn of the century to the crisis, German electricity production climed more than 10% while prices kept on rising. One can therefore not blame utilities for wanting to build more power plants.

Then of course the party came to an end and now production is down about 3% while the price essentially halved. Had the pre-recession trends continued such as almost all major energy authorities predicted, demand would have climed another 10% up to now instead of declining and the capacity additions by utilities would have made sense. 

About the solar PV, no-one is disputing the fact that if FiT and/or residential electricity prices rise high enough rooftop solar becomes profitable for individual households. The issue is just that, on a societal level, the value of solar PV electricity is about €40/MWh in Germany (and set to fall further due to increasing intermittency effects at higher penetration) while the LCOE (under low financing costs that misprice the risks) amount to about €120/MWh. 

Putting up a solar array shifts electricity levies (now fully half of the German residential electricity price) and grid capital costs (which cannot be avoided at all by solar PV in Germany) from the homeowner to the rest of the population. This wealth transfer is obviously detrimental to broader society. 

I’m also a bit unclear about how a German household will be able to achieve 75% yearly self-consumption from a solar array oversized by just 50%. The seasonal output of PV in Germany is badly misalligned with demand (winter output is an order of magnitude less than summer output) and batteries will have no influence on this. Germany also has many longer cloudy spells where battery storage can only play a very minor role. 

Bas Gresnigt's picture
Bas Gresnigt on Mar 11, 2014 9:54 am GMT

Willem,
I used this example to show you, that German predictions that the Energiewende levy will go down in the 2020-2025 period (and thereafter) are sound. 

Btw.
Regarding the batteries, check the succesful German rooftop battery subsidy program which grants a subsidy of ~30%. Indicactions are that the costs of batteries will come down much more (50-80%).

Bas Gresnigt's picture
Bas Gresnigt on Oct 14, 2014 12:33 pm GMT

“…Had the pre-recession trends continued … demand would have climed another 10% up to now instead of declining and the capacity additions by utilities would have made sense. “

The Energiewende scenario of 2000 predicts that in 2020 renewable produce 35%, in 2030 50%, etc. (while in 2006 it was ~10%).
Hence the utilities knew since 2001 that the market for electricity produced by (FF+ nuclear) power plants would decrease greatly. From a share of ~90% in 2006 towards <65% in 2020, <50% in 2030, etc.

So those big incumbent utilities knew they were installing overcapacity when they were taking the decisions in ~2006!  Especially since new fluidized bed power plants are assumed to run for 30-50years; so up to ~2050 (then renewable will deliver >80%).

But incumbent utilities, such as Vattenfall, gambled that they could stop the Energiewende by lobbying, creating a lot of negative publicity, and sponsoring the Potsdam institute that publiced results fully in line with Vattenfalls portfolio, authored by a Vattenfall employee who was attached there, degrading renewable (as Vattenfall and the other incumbents don’t have those).

As their gamble failed, the big German incumbent utilities now have a P&L problem.

Bas Gresnigt's picture
Bas Gresnigt on Oct 15, 2014 9:45 am GMT

The German battery subsidy program is for people with <10KW solar panels on the roof.
The program targets that households use the stored electricity in their battery during the evening.

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