GERMAN EXPERIENCE WITH PROMOTION OF RENEWABLE ENERGY

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1 GERMAN EXPERIENCE WITH PROMOTION OF RENEWABLE ENERGY prepared for National Rural Electric Cooperative Association prepared by Mathew J. Morey Laurence D. Kirsch Christensen Associates Energy Consulting LLC March 28, 2014 Questions regarding this report should be directed to: David L. Mohre Executive Director, Energy & Power Division National Rural Electric Cooperative Association 4301 Wilson Blvd. Arlington, Va office Christensen Associates Energy Consulting, LLC 800 University Bay Drive, Suite 400 Madison, WI Voice Fax

2 German Experience with Promotion of Renewable Energy Table of Contents Executive Summary...ii 1. Legislative History... 1 a. Pre 1990 Treatment of Renewable Energy... 1 b. Feed In Law of c. The Renewable Energy Sources Act... 3 d. Recent Developments in RE Legislation... 4 e. FIT Structure German Electricity Sector History... 7 a. Electricity Demand by Sector b. Electricity Prices Prices by Customer Class Electricity Price Composition Renewable Energy Shares of RESA Costs Economic Impacts of German Energy Policy a. Retail Electricity Prices Allocation of Costs for CREs and RESA b. The Cost of Subsidizing Renewable Energy in Germany c. GHG Reductions and Costs d. Impact on Conventional Generation e. Investment in Renewable Energy Technologies f. Job Creation g. Grid Stability and Industrial Production h. Energy Security Conclusions Appendix A: European Union Emissions Trading System Christensen Associates Energy Consulting LLC i 3/28/2014

3 German Experience with Promotion of Renewable Energy Executive Summary In Germany, a system of subsidies modest for wind power and other sources, extremely generous for solar power has supported and encouraged the rapid expansion of renewable energy (RE) production. On the whole, the well intentioned laws promoting RE development have proven to be an extraordinarily wasteful means of supporting improvements in environmental quality and reducing greenhouse gas (GHG) emissions. 1 The German subsidies are implemented through a system of feed in tariffs (FITs) that require electric utilities to pay above market rates for electricity produced by RE resources and then recover the costs of these subsidies from electricity consumers. The subsidies have helped bring the combined generation from on shore wind and solar power from 1.7% of German electricity production in 2000 to 12.5% in 2012, and have also helped increase biomass fuel electricity from 0.8% in 2000 to 6.9% in But the subsidies have been so costly that, as shown in Figure Ex 1, they have contributed mightily to increased residential electricity rates. Indeed, partly due to the tariff charges related to RE and energy efficiency that account for nearly 20% of residential bills in Germany, German households were paying nearly 39 per kwh in This is roughly triple the contemporaneous average U.S. residential electricity rate of about 12.2 per kwh, in which charges for RE and energy efficiency amounted to an average of about 2% of residential bills. 2 A primary purpose of the subsidies to RE is to lower GHG emissions. The German subsidization scheme has been extremely costly relative to the GHG benefits, however. In 2012, RE resources supported by the subsidies produced billion kwh of electricity, which was about 23% of the electricity generated to serve customers. This power cost German electricity consumers $26.2 billion, which was about $21.0 billion more than its wholesale market value. Because this subsidized electricity avoided emission of an estimated 81 million tons of CO 2 equivalent, the cost to reduce GHGs through subsidies in Germany in 2012 was about $259 per ton of CO 2 reduction (i.e., $21 billion divided by 81 million tons). By contrast, the Certified Emission Credits traded on the Intercontinental Exchange in 2012 had an average price of only $3.26 per ton. This means that REs were paid $21.0 billion for environmental benefits that have a market value of only $0.3 billion or, equivalently, could have been provided by emission reducing alternatives that would have cost only $0.3 billion. German electricity consumers thus overpaid 1 Throughout this report, except where noted otherwise, all German prices or costs are expressed in nominal U.S. dollars, with conversions from Euros to dollars based on the annual average Euro dollar exchange rate for the year considered. 2 Average residential electricity rates in Germany assume consumption of 450 kwh per month. U.S. average electricity rate was obtained from Energy Information Administration, Short Term Energy Outlook, February 2014, RE and EE s share of the residential retail rate in the U.S. is based on a sample of 16 utilities that explicitly recover RE and EE costs through rate riders (i.e., surcharges). Christensen Associates Energy Consulting LLC ii 3/28/2014

4 almost $21.0 billion for the 81 million ton reduction in CO 2. Consistent with the foregoing figures, a recent report from the MIT Center for Energy and Environmental Research estimates the average explicit cost of GHG reduction over the period 2006 through 2010 at about $60 per ton for on shore wind and $683 per ton for PV solar. By any measure, Germany s RE subsidization scheme is a spectacularly wasteful approach toward GHG reductions. Figure Ex 1. German Residential Electricity Net Prices and Taxes, Levies & Fees, Electricity Rate (Cents per kwh) Gen. Trans, Dist EEG Charge + Off Shore Liability Charge Taxes + Fees Germany s commitment to promoting RE has GHG reductions as its principal objective. It also has been hailed as a vehicle to increase employment, especially in the solar cell industry. But the German experiment with RE development, on an unprecedented scale and pace, has had unintended adverse consequences. In particular, the FIT subsidies have contributed to a substantial increase in coal fired generation, so that more electricity was produced from brown coal (i.e., lignite) in 2013 than at any other time since German unification in Since 2009, electricity production from brown coal has risen by 11.3% while production from hard coal has increased by 14.9%. Ten new hard coal power stations totaling 7,985 MW are scheduled to start producing electricity within the next two years. 3 At the same time, electricity production from relatively clean natural gas has declined by 18.5%. Coal is experiencing a renaissance in 3 Mengewein, J., Steag Starts Coal Fired Power Plant in Germany, Bloomberg News, November 15, 2013, at /steag starts germany s first coal fired power plant in 8 years.html. Christensen Associates Energy Consulting LLC iii 3/28/2014

5 Germany partly because subsidized RE has driven down wholesale electricity prices, partly because high natural gas prices have put combustion turbines out of the market, and partly because low worldwide coal prices improve the profitability of coal fired power plants. With regard to the employment effects, RE advocates claim that the gross employment generated by economic activities connected with RE in 2012 totaled 368,400. Such numbers suggest RE has had an impressive impact on gross employment. However, these figures fail to tell the whole story. They conceal the ramifications for broader economic and social welfare by failing to account for offsetting impacts. The offsetting impacts include the job losses that result from undermining less expensive forms of conventional generation and the depressive effects on the general economy of the subsidies for RE that must be paid by residential and small commercial electricity customers as well as by some industrial electricity customers. Furthermore, the solar PV industry in Germany is suffering mightily from an influx of inexpensive imports of solar PV equipment. Thus, the net jobs created are far less numerous than touted by RE advocates. If the German government has job growth as a policy objective, it should promote employment in the most cost effective way, rather than resorting to gross distortions of the investment and consumption decisions in the electricity sector. The enormity of the subsidies and their perverse economic impacts has compelled the German government to cap subsidies through the end of 2014 and limit annual increases to 2.5%. The government also plans to tighten industry exemptions and possibly cut FITs for wind and biomass plants, calling into question investment security for those technologies. The German experiment with subsidizing RE offers valuable lessons for the rest of the world, including the United States. First, government promotion of RE through subsidies financed by retail electricity consumers distorts both consumption and investment decisions relative to what would take place if RE were left to succeed or fail on its merits in a competitive wholesale electricity marketplace. The German experience demonstrates that it is difficult to anticipate correctly the reaction of investors and consumers and of RE supply and demand to such subsidies and retail price distortions. Consequently, the government finds itself constantly tinkering with rules, regulations, and price subsidies in an attempt to control electric sector consumption, investment, and financial impacts. Second, governments do not do well at picking electric generation technology winners and losers. The physics of the electricity grid and the operation of electricity markets automatically make all generation technologies interrelated, operationally and financially. Without a technological breakthrough in energy storage in the immediate future, the intermittency of wind and solar resources, especially at the penetration levels achieved in Germany, requires a continued investment in conventional generating technology to both back up the RE with ancillary services and fill the energy gap when RE does not produce. Third, the rate impacts and operational difficulties experienced in Germany offer a valuable lesson for the U.S. of the risks and unintended consequences that can result from inefficient promotion of RE expansion. RE expansion requires long range planning and strategic collaboration among stakeholders that will enable RE resources to provide the full value to power system operations. Christensen Associates Energy Consulting LLC iv 3/28/2014

6 German Experience with Promotion of Renewable Energy Out of concern for the effects of global climate change, the German people and their government have enthusiastically embraced renewable energy (RE) and have aggressively promoted it through the use of financial incentives embedded in retail electricity rates in the form of surcharges called Feed in Tariffs. The relevant German policies, going back more than a decade, pay renewable resources above market prices for their electricity, thereby encouraging investment in sources such as wind and solar power. German energy policy has been enormously successful in increasing electricity production from renewable resources, but the costs to the German economy and to its citizens to achieve the environmental goal of significant reductions in emissions of GHGs seem to vastly exceed the benefits. Many of the costs associated with implementation of this well intentioned policy were likely not imagined at the time of the policy s creation. Nothing on this scale had ever been attempted before. Furthermore, it was simply not possible to know the future paths of the German, European, and world economy and of worldwide energy prices. Germany has conducted a bold experiment to rapidly deploy renewable resources through a program of subsidizing RE rather than through reliance on the market forces that would have otherwise determined the growth of that sector and the degree of its penetration in electricity supply. That experiment and its economic consequences offer great lessons for the rest of the world, including the U.S., in which states and the federal government are considering how best to address the challenges of mitigating the long term effects of greenhouse gas (GHG) emissions. The first section of this report summarizes the history of the German legislation in support of RE. Section 2 provides a history of the German electricity sector, including its prices. Section 3 presents information on the environmental, cost, price, and job impacts of German energy policy. The last section offers some concluding thoughts. An appendix describes the European Union Emissions Trading System. 1. Legislative History Feed In Tariffs (FITs), which are also called Renewable Tariffs or Renewable Energy Payments, are a retail electricity ratemaking mechanism by which utilities are more or less guaranteed recovery of their expenditures on third party RE generation. The economic incentive for investment in RE is provided by high above market government mandated prices for RE. FITs are the mechanism by which retail electricity consumers are forced to pay the above market subsidies. They require consumers to reimburse electricity companies for the latters mandated above market payments to owners of RE resources. a. Pre 1990 Treatment of Renewable Energy Germany has a long history of promoting RE alternatives to conventional electricity technologies. In the late 1980s, Germany adopted several measures to create markets for RE Christensen Associates Energy Consulting LLC 1 3/28/2014

7 generation technologies. In particular, Germany adopted a wind program and a solar roof program, and created a legal basis for utilities to pay higher costs for RE than were competitive in the market place. In the late 1980s, Germany initiated two important market creation programs for RE. First, there was a 1,000 roof program (not to be confused with 1,000 MW program) for photovoltaic (PV) electricity generation. 4 From 1991 to 1995, this program rebated to applicants 70% of their PV investment costs 50% from the federal government plus another 20% from the Land government. 5,6 As a result of this program, 2,250 roofs were equipped with PV modules, leading to about 5.3 MW of installations by This market volume was not large enough to justify increased investment in PV production facilities in the solar cell industry. Second, there was a wind energy program for subsidizing 100 MW of wind turbines (later increased to 250 MW). This initially paid wind developers 5.3 per kwh (later reduced to 4.0 per kwh), which was justified on the grounds that such a subsidy was needed in order for wind developers to gain practical experience with different approaches under real life conditions. 8 The wind subsidy program combined with the Feed in Law enacted in 1990 provided strong economic incentives for wind developers, resulting in significant quantities of newly installed wind capacity. b. Feed In Law of 1990 The Feed in Law required electric utilities to connect RE generators to the grid and to buy the electricity at rates of 65% to 90% of the average tariff for final customers. RE generators were not required to negotiate contracts. Together with the wind subsidization program and subsidies from various state programs, the Feed In Law gave considerable financial incentives to RE investors, though they were less effective for solar power due to the latter s high cost. 9 One of the declared purposes of the law was to level the playing field for RE by setting feed in rates that took account of the external costs of conventional power generation. In this context, the chief member of the Bundestag supporting the feed in bill on behalf of the Christian Democrats mentioned external costs of about 4.0 to 6.7 per kwh for coal based electricity. Although there were challenges to the Feed in Law throughout the 1990s, it remained essentially unchanged throughout that decade. Combined with the wind subsidization program, it led to a market breakthrough for wind. By contrast, the Feed In Law provided little help to 4 Kords, U., Die Entstehungsgeschichte des Stromeinspeisungsgesetzes vom Master of Arts thesis in political science, Free University of Berlin, Germany is made up of sixteen Länder (singular Land), which are the partly sovereign constituent states of the Federal Republic of Germany. 6 The support was subsequently revised to 60% from the federal government and 10% from the Land government. 7 Ristau, O., Die solare Standortfrage, Bad Oeynhausen, Solarthemen, 1998; Staiss, F. (ed.), Jahrbuch Erneuerbare Energien, Radebeul: Bieberstein, Throughout this report, all German prices or costs are expressed in nominal U.S. dollars, with conversions from Euros to dollars based on the annual average Euro dollar exchange rate for the year considered. 9 Hemmelskamp, J., Umweltpolitik und technischer Fortschritt, Physica, Christensen Associates Energy Consulting LLC 2 3/28/2014

8 solar power since rates did not come near covering PV costs, and a new demonstration program was not forthcoming. If the PV industry was to survive, market creation had to come from other quarters. This led to intensified efforts to mobilize other resources, a process that demonstrated the high level of support that solar PV enjoyed in German society. 10 c. The Renewable Energy Sources Act 11 In April 2000, the German government adopted the Renewable Energy Sources Act (RESA), the declared purpose of which was to double RE production by RESA repealed the Feed In Law of 1990 but maintained reliance on FITs to encourage the development of RE. In many respects, the law improved the incentives for RE generators in terms of rates and, most important of all, improved the long term security of economic support for RE. It also declared expressly that RE compensation should account for the externality costs of conventional generation and should support the long term development of RE technologies. RESA set in place a FIT policy design intended to provide Transparency, Longevity, and Certainty (i.e., TLC ) to RE investors. RESA was amended in 2004 in ways that generally strengthened the position of RE generators vis à vis the utilities. The amendments reduced rates for onshore wind and excluded turbine facilities in low wind zones from qualifying for FITs. However, it improved FIT rates for off shore wind, made hydro plants up a 150 MW eligible for FITs, and added significant new incentives for biomass (especially small plants) with additional bonuses for innovative technologies. 12 The most important change was the significant increase of solar PV FIT rates, which made them commercially attractive. This change was actually introduced in late 2003 and led to a veritable PV boom that began in 2004 and has continued since then. German FITs for the generation of electricity from RE have developed in three phases under RESA. In Phase One (2000 to 2009), Germany focused on scaling up residential renewable electricity generation. The costs of electricity from technologies such as solar PV and wind were far from competitive with conventional technologies (e.g., coal, natural gas, and nuclear). Therefore, in Phase One, the RE subsidy in the FIT rate was reduced only modestly over time in keeping with expected reductions in the cost of RE electricity production; and adjustments to the RESA occurred at regular planned intervals. In Phase Two (2009 to 2011), rapid declines in the cost of solar PV modules prompted Germany to more actively reduce the RE subsidy in its PV FIT in order to manage the volume of annual PV installations qualifying under its PV FIT programs. This was accomplished by linking FIT subsidy reductions for PV to the volume of annual PV installations in previous periods and reviewing the PV policy more frequently. Costs for solar PV, wind, and biomass generation resources 10 Jacobsson, S. and V. Lauber, The politics and policy of energy system transformation explaining the German diffusion of renewable energy technology, Energy Policy, 34, 2006, pp This is also known as the Act on Granting Priority to Renewable Energy Sources, or Erneuerbare Energien Gesetz (EEG). 12 Bechberger, M. and D. Reiche, Renewable Energy Policy in Germany: pioneering and exemplary regulations, Energy for Sustainable Development, 8:1, March 2004, pp Christensen Associates Energy Consulting LLC 3 3/28/2014

9 continued to decline, making them increasingly more competitive with traditional sources of electricity. In Phase Three (2012 to the present), the central goal is to encourage RE to behave more like conventional generation with respect to the wholesale market value of the energy RE produces. Traditional (previous) FIT contracts rewarded the production of RE electricity regardless of where or when it was produced; but these traditional FIT contracts resulted in rapid additions of wind and solar capacity that have caused the supply of electricity to exceed demand during several periods of the year and that have driven wholesale market prices to zero (or below) at those times. While some industrial electricity consumers benefit from these low wholesale market prices (at least in the short term) as residential and small commercial customer bear the brunt of the RE subsidies in their retail rates, the economic consequences of such low prices in the long term are motivating Germany to revise its RE policies today. Consequently, the key elements of Germany s 2012 RESA amendments include the following: reduced FIT payments; a market premium option under which FIT eligible generators can choose to sell directly into the wholesale spot market and receive a supplemental FIT payment that varies inversely with the monthly average wholesale spot market price; 13 application of the FIT subsidy to no more than 90% of the electricity produced by an eligible RE resource; and a 52 GW PV capacity limit. The preceding elements are intended to achieve a grid parity future in which RE policy is more flexible and may offer less TLC to RE investors. d. Recent Developments in RE Legislation The German government is now attempting to address the growing economic problems created by the RESA subsidies for wind and solar renewables. On January 21, 2014, Germany s new energy minister, Sigmar Gabriel, 14 indicated that the rapidly rising costs of RE resources risked losing public support and jeopardizing the competitiveness of the German industrial base. Mr. Gabriel said that annual consumer costs for renewables of about $32.5 billion were pushing the limits of what the German economy could handle. He was quoted as saying: 13 The market premium option thus provides an incentive for RE operators to maximize the market value of wholesale power and to gain experience with operating in a wholesale market. 14 Mr. Gabriel is chairman of the Social Democratic Party, which formed a coalition government in December 2013 with Ms. Merkel s Christian Democrats. Christensen Associates Energy Consulting LLC 4 3/28/2014

10 We need to keep in mind that the whole economic future of our country is riding on this The energy transformation has the potential to be an economic success, but it can also cause a dramatic de industrialization of our country. 15 Proposed revisions to the Energy Transition Policy (Energiewende) would curb some of the subsidies paid to producers of electricity generated by solar and wind, cutting them by about a third by 2015, while setting limits to improve control of the expansion of onshore wind and solar farms. Mr. Gabriel stated, We need to control the expansion of RE, and not have the anarchy that we have seen previously we need to reduce costs so that it remains affordable. 16 The proposed revisions mostly target future PV solar investment, but would also retroactively affect some solar arrays. In 2009, Germany implemented a kind of real time net metering called own consumption. It specifies that a greatly reduced FIT is paid for power never exported to the grid. If the owner can consume the power when it is generated, then she need not pay the retail rate for power consumed, which thus avoids the RESA surcharge. If the owner cannot consume the power immediately, she can store it (in batteries, for instance), in which case it is also considered to have been consumed directly. Those who installed solar arrays when it was relatively more expensive than it is today continue to find FITs attractive and can profit from selling power to the grid at the current retail rates (nearly 37 per kwh in 2013). But the per kwh cost of newly installed solar over the past two years has fallen well below the retail rate. Consequently, many industrial and commercial electricity consumers (and some households) who have not been exempt from paying the EEG surcharges have invested in PV arrays that generate electricity for 10 to 14 per kwh. Given the relatively low cost of self generation, such customers consume their own power whenever possible and buy from the grid only when their own power is insufficient to meet their own needs. By consuming their own power, PV array owners have been able to avoid paying the RESA surcharge on a significant amount of the electricity they use. This has resulted in shifting the burden of recovering the RE subsidy to an even smaller group of consumers as well as reducing revenue that could be devoted to investment in grid support. As a result, under the proposed revisions to the EEG, power generated by a customer and consumed by that customer must contribute to the costs for grid expansion as follows: 17 New RE resources will be required to pay 90% of the FIT surcharge, effectively reducing the rate they will receive for electricity production Eddy, M., German Energy Official Sounds a Warning, New York Times, January 21, 2014, at environment/german energy official sounds awarning.html?_r=0. 16 Id. 17 German Energy Blog, EEG 2.0: Further Information on Key Points of Reform of German Renewables Law, January 24, 2014, obtained at 18 This change is expected to reduce the surcharge from 8.49 per kwh in 2013 to 7.64 per kwh in Christensen Associates Energy Consulting LLC 5 3/28/2014

11 Operators of renewable power plants, combined heat and power (CHP) plants, and process related cogeneration gases must pay 5.94 per kwh (70% of the surcharge) in 2014, again reducing the rate they will receive for their power production. Existing non renewable power plants shall continue to benefit from a surcharge exemption of up to 6.98 per kwh. New and old power plants with a capacity of up to 10 kw do not have to pay the surcharge for up to 10 MWh per year. Generation needed to power a plant itself shall not be subject to the surcharge. In addition, the reform proposals seek to cap the quantity of new RE that will be eligible to receive the surcharge. The Cabinet adopted the proposed changes on January 24, The revisions to the law must now go to the two chambers of Parliament (Bundesrat and Bundestag) and could become law by August 1, Significant opposition to the reform proposals has been raised by local governments and by the representatives of the CHP industry who claim that the present 2.4 per kwh subsidy to CHP plant operators will be more than offset by the proposed imposition of an EEG surcharge and therefore will sound the death knell for that industry. Consequently, there may be substantial changes made to the proposals before any reform becomes law later this year. e. FIT Structure The RE legislation promises that RE plants will have access to the grid, and provides a subsidized rate, guaranteed for 20 years, this is determined by the technology and the vintage (year of investment) of the resource. The long term rate guarantee ensures price certainty for investors. For RE plants coming into service, the FIT rate is reduced each year according to a predefined schedule. The reductions are technology specific so that they are aligned with the expected declines in each technology s fixed and variable costs, and so that they encourage technology innovation and cost efficiency. Table 1 illustrates the pattern followed by the FITs for on shore wind and solar for the years 2010 to In each successive year, the FITs are reduced for the next vintage of plants. The table also highlights the significantly higher rates paid to solar than on shore wind, which in 2013 were about twice what wind received Solar contributes a much smaller share of the total kilowatt hours produced by REs (21% in 2013) each year than does on shore wind (33% in 2013). Christensen Associates Energy Consulting LLC 6 3/28/2014

12 Table 1 German Feed In Tariffs for On shore Wind and Solar Under RESA, Technology Type On shore Wind Initial fee (first 5 years) Base Fee (after 5 years) Repowering Transmission system supporting Solar Roof Top 21 small medium large very large Own Consumption ( 30 kw) Free Standing ( 10 MW) German Electricity Sector History Table 2 summarizes German electricity production from 1990 to 2012 by RE type. The totals of electricity generated (GWh) by RE sources and all sources are presented in the right side columns, along with the percentage shares of RE generated electricity. A key implication of Table 2 is that RE generated electricity has grown significantly since the 2000 passage of RESA, reaching a share in 2012 that is roughly three times what it was in In correlation with the introduction of the generous incentives from 2000 onward, wind (onand off shore) and PV solar are two principal sources of this rapid growth. The combined generation from these RE sources was 1.7% in 2000 and reached 12.5% by The third RE source is biomass, which increased from 0.8% in 2000 to 6.9% in In contrast, hydro declined from a share of 4.3% in 2000 to 3.6% in Lang, M. and M. Mutschler, German Energy Blog, for years 2010 through 2013, Feed In Tariffs have been converted from Euros to dollars using the average Euro dollar exchange rate for each year. 21 For years , small was up to 30 kw, medium was 30 kw up to 100 kw, large was 100 kw up to 1 MW, and very large was greater than 1 MW. For 2013, small was up to 10 kw, medium was 10 kw up to 40 kw, large was 40 kw up to 1 MW, and very large was 1 MW up to 10 MW. Christensen Associates Energy Consulting LLC 7 3/28/2014

13 Year Table 2 German Renewable Energy Electricity Production (GWh) and Shares (%): Hydro On shore Wind Offshore Wind GWh Biomass PV Solar Geoth Total RE Generated Total Electricity Generated RE Share (%) , , , , % , , , , % , , , , % , , , , % , , , , % ,747 1,500 2, , , % ,340 2,032 2, , , % ,453 2,966 2, , , % ,452 4,489 3, , , % ,686 5,528 3, , , % ,867 9,513 4, , , % ,241 10,509 5, , , % ,662 15,786 6, , , % ,722 18,713 8, , , % ,910 25,509 10, , , % ,576 27,229 14,025 1, , , % ,042 30,710 18,685 2, , , % ,169 39,713 24,281 3, , , % ,446 40,574 27,531 4, , , % ,036 38, ,341 6, , , % ,958 37, ,866 11, , , % ,674 48, ,603 19, , , % ,200 45, ,850 28, , , % Figure 1 highlights the striking gap between on shore wind s contribution to RE electricity production and that of PV solar. The difference is not so surprising when one considers the fact that Germany has regions quite favorable to wind installations (in the east) but the country is not one of Europe s sunnier climes. 22 Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) based on information supplied by the Working Group on Renewable Energy Statistics (AGEE Stat), Christensen Associates Energy Consulting LLC 8 3/28/2014

14 Share of RE GWh (%) Figure 1 On shore Wind and PV Solar Shares of RE Production, % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% On shore Wind Share PV Solar Share 23 Based on data in Table 2. Christensen Associates Energy Consulting LLC 9 3/28/2014

15 a. Electricity Demand by Sector Table 3 summarizes electricity end use consumption in Germany over the period 2002 to Industrial, residential, and commercial customers are responsible for the vast majority of electricity consumption, with these classes responsible respectively for 44%, 27%, and 24% of total consumption in Table 3 German Electricity End Use Consumption by Major Customer Class, , GWh 24 Year Industrial Residential Commercial Agriculture Transport Total , , ,238 8,000 16, , , , ,218 8,200 16, , , , ,975 8,300 16, , , , ,868 8,300 16, , , , ,302 8,300 16, , , , ,800 8,400 16, , , , ,726 8,700 16, , , , ,827 8,600 15, , , , ,165 9,000 16, , , , ,662 9,000 16, , , , ,666 8,660 16, , , , ,813 8,470 16, ,846 b. Electricity Prices 1. Prices by Customer Class For the period from 2008 through October 2013, Table 4 summarizes retail electricity prices in Germany for the residential and industrial customer classes as well as German wholesale spot market prices in base and peak load periods. The impact of the significant rise in the share of RE (wind and solar in particular) of total electricity production in Germany coupled with the subsidies flowing to RE through the FITs can be seen in the disparity between the general trend of flat retail prices compared to the generally falling wholesale prices since (The retail prices shown in the table exclude taxes, levies, and fees, particularly those required to cover the substantial FIT subsidies. With taxes, levies, and fees, retail prices would show a sharp upward trend.) 24 International Energy Agency, for years 2002 to 2011, obtained at 0. For years 2012 and 2013, data from IEA for total electricity production net of exports and imports was allocated across customer classes using class average shares for the period 2009 through Christensen Associates Energy Consulting LLC 10 3/28/2014

16 Table 4 German Electricity Prices by Customer Class, 2008 to 2013, ($ per kwh) 25 Year Residential 26 Industrial 27 Wholesale Base Load Period Spot Market Price Wholesale Peak Load Period Spot Market Price Electricity Price Composition Figure 2 summarizes the breakdown between net electricity prices (generation, transmission and distribution, metering, sales and marketing) and government taxes, levies and fees (including the RESA surcharge). The generation, transmission and distribution (G, T, & D) segments of each bar have values similar to those shown above in Table 4. Since 2011, government taxes, levies and fees have amounted to about 50% of the nominal price per kwh paid by residential households in Germany. 25 Source for Domestic and Industrial retail prices: Electricity prices have been converted from Euros to U.S. dollars using the annual average U.S. Euro exchange rate for each year. 26 Domestic price is based on consumption of 2,500 kwh to 5,000 kwh per year. Prices do not include taxes, levies, and fees. 27 Industrial price is based on consumption of 500 MWh to 2,000 MWh per year. Prices do not include taxes, levies, and fees. Christensen Associates Energy Consulting LLC 11 3/28/2014

17 Figure 2 Composition of German Residential Electricity Prices, 1998 to 2013, per kwh G,T,& D VAT Concession Chg EEG Chg CHP Chg Strom NEV Chg Off Shore Chg Elec Tax Figure 3 summarizes the composition of German residential electricity prices in 2013 and divides the total electricity price into costs associated with generation and delivery of electricity and taxes and surcharges imposed by the government. Hence, in 2013, 19.5% of residential electricity bills 29 went to pay the RESA surcharge to subsidize RE, the Combined Heat & Power surcharge, and the Off shore Liability charge (shown as the RE + EE Charge in the figure). The only other components of the residential electricity bill that are larger, and that would naturally be expected to have significant shares of the bill, are generation ( Energy Charge ), transmission, and distribution, which together are roughly half of the bill. 28 BDEW Bundesverband der Energie und Wasserwirtschaft e.v., Energie Info: Erneuerbare Energien und das EEG: Zahlen, Fakten, Grafiken, January 31, 2013, Figure 21, p. 41. G,T,&D = Generation, Transmission & Distribution; VAT = value added tax; Concession Chg = concession fee paid to local authorities; EEG Chg = RESA surcharge; CHP Chg = surcharge for combined heat & power facilities; Strom NEV Chg = transmission grid access fee; Off Shore Chg = offshore liability surcharge that compensates off shore wind developers for delays in interconnecting to the grid or for disruptions in transmission service; and Elec Tax = German government electricity tax % equals 7.5 divided by Christensen Associates Energy Consulting LLC 12 3/28/2014

18 Figure 3 Composition of German Residential Electricity Price in 2013 (38.5 per kwh) % Distribution Charge, % Transmission Charge, % Energy Charge, 4.05 RE + EE Charge, % 10.5% Tax + Other Charges, Figure 4 summarizes the average composition of residential electricity prices for a sample of sixteen U.S. utilities in These utilities report separate line items for RE, EE, and related charges on residential bills. These utilities are not necessarily representative of the U.S., as their average per kwh rate of 16.1 per kwh is about 4 per kwh higher than the U.S. average price of 12.2 per kwh as reported by the Energy Information Administration for The RE and EE surcharges accounts for only 0.3 per kwh of the difference. The rest is due to many of the sample utilities being located in the Northeastern U.S. and California, where residential rates are above the national average. The average RE plus EE surcharge observed in Figure 4 contributes about 2% to the residential bill in contrast to the RESA surcharges in Germany that comprise nearly 20% of the residential price of electricity. This suggests that Germany s enthusiastic embrace of RE may be adding ten times as much to the German residential rates as experienced in the United States. However, the key difference between the countries shares of RE subsidies in residential rates is that the share of RE in overall electricity production is much higher in Germany than in the United States. Were the U.S. to follow in Germany s footsteps and increase RE s penetration levels to that achieved in Germany, the price impacts likely would be much more similar. 30 The household consumption assumed in this example is 450 kwh per month. Shares will be somewhat different for households consuming different monthly amounts. The figure is based on data obtained from European Commission, Eurostat, Electricity prices for residential consumers, from 2007 onwards bi annual, obtained at: 31 To accurately determine the share that RE and EE resources hold in U.S. residential rates and to permit an apples to apples comparison with residential electricity prices and the EEG surcharge in Germany, it would be necessary to conduct a comprehensive analysis of U.S. utility level expenditures on RE energy and capacity relative to wholesale market prices, utility avoided costs, transmission costs, and ancillary service costs. Such a study is beyond the scope of this report. Christensen Associates Energy Consulting LLC 13 3/28/2014

19 Figure 4 Residential Electricity Price Composition for a Sample of U.S. Utilities That Include Surcharges for RE and EE on Bills (16.1 per kwh) 32 2% 6% 61% 25% 6% Distribution Charge, 4.0 Transmission Charge, 1.0 Energy Charge, 9.8 RE + EE Charge, 0.3 Tax & Other Charges, 1.0 Another view of the rate impact of RE in the U.S. can be attained by examining the residential rate premiums set in utility green pricing programs. Such programs offer customers an option to pay a premium for green energy produced (in most instances) by a range of RE technologies (e.g., biodiesel, biomass, geothermal, hydro, land fill gas, solar, and wind). The average residential premium for buying green energy in 2013 was 1.7 per kwh, based on a sample of 193 utilities that have established green pricing programs. 33 Adding that average premium to the EIA U.S average residential rate increases it to about 13.9 per kwh, in which case RE and EE would comprise about 12.4% of the average residential bill. Figure 5 summarizes the composition of industrial electricity price in Germany in Electricity tax (Stromsteuer), also referred to as Eco tax, is an indirect excise tax placed on consumption of electricity, introduced in 1999 as part of the law intended to encourage 32 The figure presents the unweighted average electricity price across sixteen U.S. utilities, for a residential household consuming 500 kwh per month. The sixteen sample utilities are: Ameren Illinois (IL), Baltimore Gas & Electric (MD), Commonwealth Edison (IL), Connecticut Light & Power (CT), Consumers Power (MI), Dominion Virginia Power (VA), Empire District Electric Company (MO & KS), National Grid (MA), NSTAR Electric and Gas (MA), NV Energy (NV), Pennsylvania Electric (PA), PEPCO (MD & DC), Public Service Electric & Gas (NJ), Public Service New Hampshire (NH), Sacramento Municipal Utility District (CA), and Weststar Energy (KS). In the figure, the Distribution Charge includes Customer and Distribution Charges. Taxes & Other Charges includes state and local taxes, stranded cost recovery charges for states that enacted retail competition and various other charges that could not be classified in the other categories. 33 U.S. Department of Energy, Energy Efficiency and Renewable Energy, Green Pricing, Utility Programs by State, obtained at based on a study by the National Renewable Energy Laboratory. Christensen Associates Energy Consulting LLC 14 3/28/2014

20 reduction in electricity consumption and to reduce GHG emissions. 34 The Concession fee (konzessionsabgabe) is a license fee paid to municipalities and varies with the local government. For industrial customers, the maximum amount is 0.14 per kwh. Under the Combined Heat and Power Act (CHP), the levy is between 0.24 and 0.34 per kwh. It is instructive to note that the German industrial electricity price in 2012 was nearly equal to the residential rate in the U.S. in Figure 5 Composition of German Industrial Electricity Price in 2012, (15 per kwh) (VAT excluded) 35 1% 8% 10% 10% 41% Generation, Network & Sales, Eco tax, EEG, CHP, Concession Fee, % 3. Renewable Energy Shares of RESA Costs Table 5 summarizes the total RESA costs over the period 2002 to 2013 in billions of U.S. dollars. Over this period, RESA costs rose fourteen fold. The table also shows the shares of that cost associated with wind, biomass, and PV solar. The shares do not sum to 100% because the table does not include all categories of RE that receive remuneration based on the RESA. Solar has been the favored technology from the standpoint of subsidies provided through the FIT. Solar electricity provided 18.5% of the total electricity produced in 2012 by subsidized REs, but received approximately 38.7% of the total $24.57 billion in RESA related payments made by German electricity consumers. In contrast, on shore wind installations contributed 35.6% of the electricity produced by subsidized RE in 2012, but received 11.0% of the RESA related payments in that year. 34 The Eco tax was part of a legislative package that taxed industrial electricity consumption as a means of financing central government contributions to Land pensions. 35 Based on 2012 data obtained from N. G. B. Morgantini, C. Camporeale, and A. Purpura, A comparison of taxes and other system charges on electricity prices in Europe, 12th IAEE European Energy Conference, September Christensen Associates Energy Consulting LLC 15 3/28/2014

21 Table 5 Total RESA Costs and Cost Shares for the Most Important RE Technologies Total RESA Costs in $US B Wind power 64.5% 65.1% 63.7% 54.3% 47.1% 44.5% 39.5% 31.5% 25.2% 16.7% 11.0% 15.7% Biomass 10.4% 12.5% 14.1% 17.7% 23.0% 27.4% 29.9% 34.3% 32.2% 17.9% 19.4% 17.8% Photovoltaics 3.7% 5.9% 7.8% 15.1% 20.3% 20.2% 24.6% 29.3% 38.6% 39.9% 38.7% 35.1% The reason for the significant difference between the shares of PV and on shore wind production and the shares of RESA related revenue is the generous subsidy flowing to solar electricity. For example, PV installed in 2006 could receive up to 65 per kwh, which was nearly ten times higher than the wholesale market price for electricity and almost six times the FIT rate for wind, which was about 11 per kwh. This pronounced difference was well out of proportion to the contributions each made to total electricity production, a reflection of solar s relatively lower technical efficiency and Germany s unfavorable geographic location. 3. Economic Impacts of German Energy Policy a. Retail Electricity Prices Allocation of Costs for CREs and RESA In Germany, the costs of German and European Union energy policies designed to reduce GHG emissions and to promote RESA have been allocated primarily to residential and smaller commercial customers. There are two mechanisms that have shifted this cost burden away from industrial customers. First, the European Union Energy Trading System (EU ETS) 37 and the European Union s corresponding state aid guidelines allow the member states to compensate energy intensive industries for the carbon costs priced into the wholesale electricity market. 38 The corresponding 36 Frondel, M., C. M. Schmidt, C. Vance, Germany's solar cell promotion: An unfolding disaster, Ruhr Economic Papers, No. 353, provided in Cooperation with: Rheinisch Westfälisches Institut für Wirtschaftsforschung (RWI), Table 2, p. 8. Original source, for 2002 to 2009: BDEW For 2010: ÜBN (2011). For 2011 to 2013, estimates are based on information obtained from Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Renewable Energy Sources In Figures: National and International Development, Electricity Quantities and Payment Under Renewable Energy Sources Act (EEG), table at p. 35, and Development of EEG Differential Costs from 2001 to 2013, table at p The EU ETS is described in detail in the Appendix. 38 Communication from the Commission, Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post 2012 (OJ EU C 158, 5 June 2012, p. 4) says, The European Commission has adopted a framework under which Member states may compensate some electro intensive users, such as steel and aluminium producers, for part of the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme (ETS) as from The rules ensure that national support measures are designed in a way that preserves the EU objective of decarbonising the European economy and maintains a level playing field among competitors in the internal market. The sectors deemed eligible for compensation include producers of aluminium, copper, fertilisers, steel, paper, cotton, chemicals and some plastics. They aim to mitigate the impact of indirect CO 2 costs for the most vulnerable industries, thereby preventing carbon leakage Christensen Associates Energy Consulting LLC 16 3/28/2014