Renewable Energy Act with feed-in tariffs and auctions

Perhaps no other legislation has been copied worldwide as much as Germany's Renewable Energy Act (EEG), making it a tremendous success story. The law is the basis for Germany's Energiewende and specifies two things: priority dispatch for renewable power and a floor price for that electricity. The resulting high level of investment security and the lack of red tape are often cited as the main reasons why the EEG has brought down the cost of renewables so much.

In the early 1990s, Germany came up with a very simple policy to promote electricity from renewable energy sources, including wind power, solar energy, and small hydropower generators. In 2000, these feed-in tariffs were revised, expanded, and increased; every three to four years, they were subsequently reviewed and the law was amended. The last major revision of the law was being undertaken in 2016 to coordinate a switch from feed-in tariffs to auctions as the main policy for larger renewable energy projects. Feed-in tariffs remain in place for solar and wind below 750 kW.

Under the EEG, owners of solar arrays and wind farms have guaranteed access to the grid. Grid operators are required by law to purchase renewable power, with the result that conventional power plants have to ramp down accordingly. In the process, renewable power directly offsets conventional power production.

In Germany, the standard contract for feed-in tariffs that you sign with your utility is two pages long for solar. In contrast, the United States has Power Purchase Agreements (PPAs), which can easily be 70 pages long and are individually negotiated between the seller and the buyer. In Germany, feed-in tariffs are guaranteed for 20 years, which would be unusually long for PPAs. And let us not overlook one important aspect – you will need a lawyer, if not a team of lawyers, to formulate a PPA, whereas the average German has no problem understanding the two-page contract for feed-in tariffs.

The EEG specifies that green electricity is sold to the grid operator, which cannot refuse the contract. Without the EEG, renewable energy projects in Germany would have had to find a buyer for that electricity. Most utilities would have rejected the offer outright, arguing that these third-party investments conflict with their existing assets. The EEG thus opened up the power market to newcomers, who believed they could make solar and wind work. If the transition had been left to utilities with conventional assets to defend, it would never have progressed as much.

Flexible tariffs

The feed-in tariffs themselves are quite simple to explain. Basically, you take the cost of a particular system, divide that figure by the number of kilowatt-hours the system can reasonably be expected to generate over its service life (generally 20 years), and you get the cost of that system per kilowatt-hour. Now, tack on whatever return on investment (ROI) you want to provide, and you have your feed-in tariff. In Germany, the target ROI is around five to seven percent.

This approach allows distinctions to be made not only between technologies (such as solar, wind, and biomass), but also between system sizes. After all, a giant ground-mounted photovoltaic array on a brownfield will produce electricity that is cheaper than power from a large number of distributed solar rooftops on homes. By offering different feed-in tariffs for different system sizes, you ensure the economic viability of the various applications, thereby preventing windfall profits for large projects.

The EEG sets very ambitious targets. For instance, Germany plans to get at least 40 to 45 percent of its power from renewables by 2025, and at least 80 percent of its power from renewables by 2050. This legal requirement to switch power generation almost entirely to renewable sources is one of the main pillars of Germany's Energiewende.

EEG 2016 and the switch to auctions

By 2017, Germany is to phase out feed-in tariffs for large systems and switch to auctions, in which the buyer receives bids from sellers. This a fundamental shift change from the system that was based solely only feed-in tariffs. Pilot auctions already began in 2015 for ground-mounted solar. Prices fell to an average of 6.58 euro cents per kWh in the final pilot round at the beginning of 2017 - quite an accomplishment for a relatively cloudy country. There were some concerns as well, based on outcomes of auctions in other countries, that projects may not be completed on time. However, 96 percent of the projects from the first pilot auction held in April 2015 were finished by the deadline two years later. The German government is therefore happy with the progress.

When praising the price results at auctions, it is important to keep these deadlines in mind. If a project has years to finish, bidders estimate where prices will be in the future. For instance, in 2017, Germany launched its first auctions for offshore wind. The result was that some bidders offered to accept the wholesale rate, leading many onlookers to report that "subsidy-free" offshore wind power had finally arrived. However, those projects have until 2025 to finish. In addition to likely further reductions in equipment prices, wholesale power prices are expected to rise in Germany, largely because the nuclear phase-out will remove nearly another 10 GW of dispatchable capacity (some 10 percent of the total installed capacity) by the end of 2022, thereby doing away with the excess in baseload capacity currently causing the unprofitable low wholesale rates.

In 2017, Germany also held its first auction for onshore wind, and the outcome was surprising: more than 90 percent of the volume went to bidders that fit the category "community projects", which were specifically definded by the EEG in 2017 for the first time. Cooperatives had argued that they would not be able to compete under an auction design because they often only pursue a single project or a small number of projects. In other words, they would not be able to spread lost revenue from losing bids across multiple projects, like larger companies can do. They therefore asked to be included in the category "non-competitive bidder," meaning that they could build their projects at the strike price from the auction.

In the end, the compromise reached allowed community projects to place non-competitive bids without having all their permits granted; the permit process can be expensive, and a losing bid could cost a six-figure sum. However, this exemption may have given community projects an unfair advantage given their dominance in the first round of onshore wind auctions. It remains unclear how many of these winning community projects will actually receive construction permits. Therefore, the auction design is likely to be amended further.

Solar remains close the annual minimum target of 1.5 megawatts. Now, arrays larger than 750 kW will no longer be eligible for feed-in tariffs and instead have to be auctioned. Below that level, solar will increasingly offset power purchases from the grid, but the governments wants to rein in this potentially strong market as well. If more than 20 MWh of solar power is consumed directly, the electricity tax of 2.05 cents per kWh is payable for the entire amount of electricity in addition to roughly 2 cents for the renewable surcharge. Solar power from new arrays may only cost nine cents, but the German government is adding four cents to systems of this size. Mainly, very large commercial roofs are affected.

New biogas plants will only receive feed-in tariffs for half of the hours in the year. They will then focus more on producing when wholesale power prices are high. In other words, biogas is being made flexible to complement wind and solar.