German Lesson for Renewable Power Policies

on May 13, 2014 at 12:00 PM

Germany Invests Heavily In Solar Energy

Peak solar & wind power production in Germany are considerably lower than installed capacity  

The EU Commission recently unveiled new regulations for the period 2014 to 2020 to gradually phase out support for renewable energy technologies. In a press release the commission stated the guidelines are intended to “promote a gradual move to market-based support for renewable energy.”

In Germany, for example, state subsidies were used to promote solar and wind power. The subsidies were basically funded with a renewable energy surcharge in the form of concomitant higher electricity prices for all households and German industry – exempting, however, Germany’s heavy industry. In this context, Joaquin Almunia, European Commissioner responsible for competition, is quoted by DW (Deutsche Welle): “It is time for renewables to join the market. (…) The new guidelines provide a framework for designing more efficient public support measures that reflect market conditions, in a gradual and pragmatic way. Europe should meet its ambitious energy and climate targets at the least possible cost for taxpayers and without undue distortions of competition in the single market.” Nevertheless, political will and strong support for renewable energy policies in Germany resulted in reduced costs for solar PV, with a much higher installed capacity base, making Germany a global clean energy economy leader.

Gavin Purchas, Policy Director for EDF Clean Energy, recently wrote in an article – also published by Breaking Energy – addressing the question of what the US could learn from the European experience: “If the U.S. is to learn a lesson from this experience, it is not that renewable policies are ready to be removed, but rather that they need to be maintained (…).”

In this respect, the policy mechanism designed to accelerate growth in the sector becomes crucial. Germany became thanks to favorable feed-in tariffs the largest market for solar PV in the world in 2011. In 2014, China, followed by Japan and the US are expected to be the world’s three biggest solar markets. Giles Parkinson of RenewEconomy notes that “demand in both China and Japan is being supported by feed-in-tariffs, while in the US solar is supported by tax credits, net metering, and power purchase agreements set by an auctioning process for large utility-scale projects.”

Thus, the two currently relevant renewable power policies are feed-in tariffs and renewable energy quota systems such as a renewable portfolio standard (RPS). So far, feed-in tariffs seem to have an edge globally, being responsible for 64 per cent of wind power and 87 per cent of the solar power. Feed-in tariffs have also driven Germany’s rapid solar PV growth.

roman german solar1

Source: Institute for Local Self-Reliance (ILSR), via CleanTechnica 

Germany’s Renewable Energy Act with feed-in tariffs (locally referred to as EEG) specifies that renewables have guaranteed access to and priority on the grid. This legal requirement for grid operators – electric power utilities – to purchase renewable power via long-term – guaranteed for 20-year – contracts with a state-set price is the centerpiece of Germany’s ‘Energiewende’. The result is a high degree of certainty in the business environment, which makes funding renewable projects much easier. In contrast, quota systems “do not provide investors with [certainty] or incentives to ensure that a wide range of renewable technologies are deployed so they can become less expensive,” the German think tank Heinrich Boell Stiftung points out.

The renewable energy quota system prevalent in the US is an RPS model, which the EPA defines as follows:

“A [RPS] provides states with a mechanism to increase renewable energy generation using a cost-effective, market-based approach that is administratively efficient. An RPS requires electric utilities and other retail electric providers to supply a specified minimum amount of customer load with electricity from eligible renewable energy sources. The goal of an RPS is to stimulate market and technology development so that, ultimately, renewable energy will be economically competitive with conventional forms of electric power.”

The NREL adds “that an RPS is most successful in driving renewable energy projects when combined with the federal production tax credit. Having adequate transmission capacity to accommodate generation from renewable resources is important for the success of an RPS.” There is currently no RPS program at the federal level, the EIA notes. In general, increases in renewable power generation have been driven by the availability of federal tax incentives, state mandated renewable capacity policies, and market conditions.

The following map shows US states that have renewable portfolio standards, which vary widely. The percentage represents the set goal each state has committed to getting from renewable energy sources by a given year. In contrast, renewable portfolio ‘goals’ are softer targets.

roman german solar2

Source: AllianceBernstein, via Business Insider

While feed-in tariffs equally support all types of renewable energy, quota systems give the utility the discretion to look for the cheapest renewable power source available, which is “almost always wind power [from] almost always large wind farms,” according to the Heinrich Boell Stiftung. Warren Buffett’s latest remarks – properly dignified by the WSJ – relating to the US wind energy industry further help to make the case against quota systems: “[We] get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”

The following graphic published by RealClearEnergy illustrates Mr. Buffett’s point. Once the production tax credit was not renewed for 2013, the installation of new wind farms plummeted from Q4 12 to Q1 13 as a result, showing that “the huge run-up at the end of 2012 (…) was driven by developers getting things into the ground to qualify before the credit expired.”

roman german solar3

Source: RealClearEnergy

At this juncture, interesting findings by the renowned German Fraunhofer Institute for Solar Energy Systems (ISE) – Europe’s largest application-oriented research organization – provide additional evidence as to why German-style feed-in tariffs have advantages over renewable energy quota systems. Unsurprisingly, the research finds that solar and wind can effectively complement existing conventional capacity on the grid and provide electricity at comparatively lower cost.

Solar and Wind Complement Each Other but…

roman german solar4

Source: Fraunhofer Institute for Solar Energy Systems (ISE)

High Insolation and High Wind Speeds are Negatively Correlated in Germany

roman german solar5

Note: Graphic shows monthly solar PV and wind power production in 2013

Source: Fraunhofer Institute for Solar Energy Systems (ISE)

However, what may come as a surprise is the fact that due to climatic conditions in Germany, high insolation and high wind speeds are negatively correlated. As a result, despite approximate installed capacities for solar PV of 35 GW and wind of 32 GW in 2013, both graphics show that solar and wind in aggregate only fed more than 35 GW into the German grid on rare occasions, which constitutes only about half the installed capacity. Consequently, a balanced mix of renewable power generation capacity has advantages – from a grid management perspective – over lop-sided expansion of renewables stimulated by a quota system with supporting tax credits for newly installed capacity.