German Council of Economic Experts Calls for Moratorium of Renewables Law and Search for Consistent Energy Policy Approach

Today the German Council of Economic Experts (GCEE) presented its Annual Economic Report 2013/2014. One chapter is dedicated to energy policy matters, providing food for thought for the new coalition government that is in the process of being created between the conservative CDU and CSU sister parties and the Social Democrats (SPD). The energy policy shift in 2011 away from nuclear power towards a renewable energy supply is currently being implemented without a consistent overall approach, the authors say. Inter alia they propose a freeze of the Renewable Energy Sources Act (EEG) while developing a conclusive policy.

1. General Comments

“The present economic situation and Germany’s healthy position compared to the euro area’s crisis countries seem to have obstructed many politicians’ view of the major future challenges”, the economists warn this year. They point out that measures currently discussed such as raising pensions, minimum wages and tax increases would hurt growth and job creation and had to be paid for by future generations. The reform progress made in the past should be safeguarded and a forward-looking economic policy should strengthen Germany’s economic growth and ensure the viability of public finances and the social security systems, the professors demand in their report that is entitled “Against a backward-looking economic policy”.

Concerning the energy policy following the 2011 energy policy shift they further write:

“Apart from the necessary grid expansion and restructuring, the main national (energy) issues are reducing the costs of renewable growth and  creating an electricity market framework so that conventional (back-up) capacities can be maintained and extended and renewable growth takes place without state subsidies. The climate policy aims of the energy policy shift are unlikely to be achieved at the national level, anyway. Solely for grid expansion and restructuring important measures have been taken since the summer of 2011 (concerning the law on the Federal Requirement Plan for Transmission Networks, please see here) that remove barriers and accelerate grid expansion. In all other (energy-related) areas disappointingly little to nothing has happened. This is completely unacceptable for in industrialised country like Germany: The costs for subsidising renewables have more tripled since 2010 and are among the highest subsidies in Germany.

A fundamental reform of the Renewable Energy Sources Act (EEG) is urgently needed. In view of the skyrocketing costs a moratorium would provide the necessary breathing space to finally develop a conclusive overall concept for the energy transition. Such a concept is lacking as much as the integration of the German energy transition in the European electricity market. … Therefore the EU Emissions Trading System (EU ETS) has to be made the main tool of the European climate policy, while abstaining largely from additional partly counterproductive instruments like national support schemes for renewable energies. To this end the inefficiencies of the EU ETS have to be overcome, emission trading extended to new sectors and emission threshold fixed beyond the year 2020.”

2. Special Equalisation Scheme for Large Energy Consumers

Regarding large energy consumers GCEE points out that Germany has the second-highest electricity prices in Europe. Abolishing the special equalisation scheme stipulated in Sections 40 to 44 EEG, according to which energy-intensive consumers can apply for (staggered) reductions of the EEG surcharge on the electricity prices, would negatively affect consumers that are subject to international competition, the economists say. They warn that even if an abolition would not necessary lead to immediate closures of plants, declining investments in replacement and extension were to be expected. This would in turn affect other industries. In view of the fact that the reduced EEG surcharge results in the remaining customers paying approximately 1 ct/kWh more, doing away with the equalisation scheme would on also not reduce the EEG surcharge (that will amount to 6.24 ct/kWh in 2014) significantly. However, it was questionable whether an extension of the provision to more industries granted in 2011 was worth the bureaucratic effort, the experts say.

3. Capacity Market

Given the current generation capacities and the possibilities to procure reserve capacity pursuant the Ordinance on Reserve Power Plants (ResKV), GCEE does not see the need for a capacity market in which conventional power plants receive a remuneration for providing back-up capacity for renewables.

4. EEG Reform

Promoting renewables and setting specific targets for the supply of energy by renewable energy sources means inherently setting up a promotion scheme, GCEE states. However, schemes can be more or less market-oriented, the experts say, pointing out that the EEG is demonstrably not a market-oriented scheme as is involves “costly political price determining mechanisms that are influenced by specific interests (of certain beneficiaries)” (cf. point 800). Besides, it was not obvious that a national support scheme for renewables was preferable to the EU ETS, even though the latter had to be strengthened.

Like the Monopolies Commission GCEE argues in favor of a quota model (with the exception of Mr Bofinger who wrote a dissenting opinion) under which electricity suppliers would be obliged to submit a certain amount of green electricity certificates to show compliance with the national renewable targets. A quota model would favour the least expensive renewable energy source and could be aligned with similar systems in other European countries, leading to synergies, the economists say. They also discuss other proposals like an auction scheme for renewable energy (favoured by Mr Bofinger), but come to the conclusion that it would be more difficult to implement.

In the end, it was almost irrelevant how to replace the EEG as long the new system could ensure that declining costs for renewables would be reflected, the authors say, adding that even a harmonisation of the different EEG feed-in tariffs for the various renewable energy sources on a low common level would be a progress. Yet, the EEG was basically irreformable as the discussions about feed-in tariff reductions in the past had shown, which was attributable to the fact that the EEG provides for support in the order of EUR 20 billion a year, the economists point out.

The experts give the new government the following advice:

a) EEG Revision

The government should strive for a revision of the EEG that introduces technology-neutral support. Whether support was provided by a quota model, as favoured by GCEE, or by a marketing premium for green electricity (regarding discussions in this regard among the potential coalition partners, please see here) was not as important as to make sure that more costly technologies did not receive additional benefits. Until a consistent approach was found, a moratorium on the EEG was advisable, GCEE says.

b) Stronger Focus on European Electricity Market and EU-ETS

As already said, GCEE advocates for widening the German perspective on renewable support in favour integrating the energy policy in the European context by strengthening the EU ETS and giving it priority over the national support system.

c) Global Approach

GCEE calls on the German government to do more to come to a global climate protection agreement, providing specific advice.

The German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) is an academic body consisting of five economists who advise the German government on economic matters. Each year in mid-November the Council publishes its Annual Economic Report.

Source: German Council of Economic Experts

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