The German feed-in tariff: Lessons for an effective renewable energy source policy

(1)

The German feed-in tariff:

Lessons for an effective renewable energy source policy

Student: Marc Soesman

Supervisor: dr. mr. S. A. C. M. Lavrijssen November, 2012

(2)

Abbreviations

BMU Federal Ministry for the Environment, Nature

Conservation and Nuclear Safety

CO2 Carbon dioxide

EEG Act on Granting Priority to Renewable Energy Sources

(Renewable Energy Sources Act)

FIT Feed-in tariff

kWh Kilowatt Hour

MW MegaWatt

RE Renewable Energy

RES Renewable Energy Sources

StrEG ‘Stromeinspeisungsgezetz’ (Feed-in law of 1991)

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The European Union has entered into a new energy era and is confronted with several challenges. In the first place, the growing dependency of the EU on oil imports and the environmental problems from fossil energies increases the demand for usage of renewable energy sources. Further, Europe does not have fully developed competitive internal energy markets. Only if such markets exist, the European Union can enjoy the benefits of security of supply and lower prices.

In 2006 the European Commission issued a Green Paper entitled ‘A European strategy for sustainable, competitive and secure energy’. This paper puts forward suggestions and options that could form the basis for a new comprehensive European energy policy.1 With the

directives 2009/28/EC and 2009/72/EC, the European Union established measures in order to increase the overall share of RES in the total consumption and established common rules for the generation, transmission, distribution and supply of electricity.

Before the establishment of the directives, several member states have adopted their own regulatory models in order to promote the usage of RES. In Germany for example, the production of renewable energy has increased remarkably. In 2011 the installed capacity for wind power was 29.075 MW2 compared to 2.328 MW3 in The Netherlands.

The promotion of the usage of RES in Germany started in 1991 when they introduced the system of FIT policy. This policy finds his origin in the Germany’s Electricity Feed-in law of 1991 (‘Stromeinspeisungsgesetz’) and was updated in the Renewable Energy Law (EEG) and refined in the EEG amendment of 2004.4 The FIT refers to a regulated, minimum,

guaranteed price per kWh that an electricity utility has to pay to a private, independent producer of renewable power fed into the grid.5

1_{Commission
of
the
European
Communities,
Green
paper:
“A
European
Strategy
for}

Sustainable, Competitive and Secure Energy, COM (2006) 105 final, p.4.

2_{Zeitreihen
zur
entwicklung
der
eneurbaren
Energien
in
Deutschland,
unter}

verwendung von Daten der Arbeitsgruppe Erneuerbare Energien Statistik (AGEE-‐Stat), Bundesministerium fur Umwelt, Naturschutz und Reaktorsicherheit, marz 2012

3_{Wind
in
Power:
2011
European
Statistics,
The
European
Wind
Energy
Association,}

february 2012

4_{Zeitreihen
zur
entwicklung
der
eneurbaren
Energien
in
Deutschland,
unter}

verwendung von Daten der Arbeitsgruppe Erneuerbare Energien Statistik (AGEE-‐Stat), Bundesministerium fur Umwelt, Naturschutz und Reaktorsicherheit, marz 2012

5_{Sijm,
J.P.M.,
2002.
The
Performance
of
Feed-in
Tariffs
to
Promote
Renewable
Electricity}

(5)

In this paper I will examine the German renewable energy policy and specifically the feed-in tariff. The German experience with the FIT provides important lessons for Member States that are in the process of developing their policy regarding the promotion of RES.

In Chapter 1 I will focus on the promotion of RES at European level. First, I will focus on the development of European Union energy policy by analyzing the Green Paper issued by the European Commission. Then, I will look into relevant legislation like Directives 2009/28/EC on the promotion of the use of RES and the Directive 2009/72/EC concerning common rules for the internal market in electricity.

In Chapter 2 I will provide some background information regarding development of

renewable energy policy in Germany. Subsequently, I will elaborate on the development of renewable energy policy in Germany and the concept ‘feed-in tariff’ will be explained. At last, the different impacts of the German legislation will be discussed.

In Chapter 3 the compatibility of the German feed-in tariff with European legislation is examined. In order to clarify the relation between national and EU law, I will analyze a number of important cases of the Court of Justice of the European Union.

After these analyses, recommendations for implementation of the German ‘feed-in tariffs’ policy will be given.

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Chapter 1.

RES policy at European level

1.1. Green Paper of the European Commission

In 2006, before the establishment of the Directives 2009/72/EC and 2009/28/EC the European Commission issued a Green paper entitled ‘A European strategy for sustainable, competitive and secure energy’. This Green paper is very important for the development of the European Union energy policy. The paper puts forward suggestions and options that could form the basis for a new comprehensive European energy policy. The most fundamental question is whether there is agreement on the need to develop a new, common European strategy for energy, and whether sustainability, competiveness and security should be the core principles to underpin the strategy.6

This Green Paper identifies six key areas where action is necessary to address the challenges we face.

1) Competitiveness and the internal energy market 2) Diversification of the energy mix

3) Solidarity

4) Sustainable development 5) Innovation and technology 6) External policy

In the next paragraph I shall only examine the area of priorities of completing the internal European electricity market and the further development of renewable energy sources in the EU.

1.1.1 Competitiveness and the internal energy market

According to the European Commission, a sustainable, competitive and secure energy will not be achieved without open and competitive energy markets. Companies should look to become European-wide competitors instead of dominant national players.

Not protectionism, but open markets will strengthen Europe and makes it possible to tackle its problems. Furthermore, a truly competitive single European electricity and gas market will

6_{Commission
of
the
European
Communities,
Green
paper:
“A
European
Strategy
for}

(7)

boost the competitiveness and would bring down prices and improves the security of supply7. One of the options to encourage a harmonized electricity and gas market is to create a

European grid. Ensuring common rules and standards on issues that affect cross-border trade contributes to this European grid.8

1.1.2. Sustainable development

Although the EU agreed that the share of electricity from renewable energy sources in the EU consumption should reach 21% by 2010, in the green paper is stated that the EU need to go beyond these targets in order to its long-term climate change goals and reduce its dependence on fossil fuel imports. A number of countries are showing rapid increase in renewable energy through supportive national policy frameworks.9

However, to fulfill the potential for renewable energy it is necessary that the policy framework is supportive and stimulates increasing competiveness of such energy sources, respecting the competition rules.10

In order to fulfill its long-term climate change goals and reduce the dependency on fossil fuel imports, the European Union has implement these targets in the Directive 2009/28/EC.

1.2. Directive on the promotion of the use of energy from renewable sources

The scope of this Directive11 is “to establish a common framework for the promotion of energy from renewable sources […] it sets mandatory national targets for the overall share of energy from renewable sources in gross final consumption of energy and for the share of energy from renewable sources in transport […] it lays down rules relating administrative procedures and access to the electricity grid for energy from renewable sources.”12

One of the goals of this directive is that each Member State “shall ensure that the share of energy from renewable energy sources is at least 20% of the final consumption in 2020 […]

7_{Commission
of
the
European
Communities,
Green
paper:
“A
European
Strategy
for}

8_{Commission
of
the
European
Communities,
Green
paper:
“A
European
Strategy
for}

9_{Ibid,
p.11-‐12} 10_{Ibid,
p.
12}

11_{Directive
2009/28/EC
of
the
European
Parliament
and
of
the
Council
of
23
April
2009}

on promotion of the use from renewable energy sources, (OJ L 140/16, 23 April 2009)

(8)

in order to achieve the targets laid down in this Article […] each Member State shall promote and encourage energy efficiency and energy saving.”13

This directive obliges Member States to take appropriate steps towards those targets. Hence, each Member State “shall adopt a national renewable energy action plan […] plans shall set out Member States’ national targets for the share of energy from renewable sources consumed in transport, electricity and heating and cooling in 2020.”14

In order to reach these targets, Member States may apply support schemes.15

A support schemes means “any instrument, scheme or mechanism applied by a Member State[…] that promotes the use of energy from renewable sources by reducing the cost of that energy or increasing the price at which it can be sold […] this includes direct prices support schemes including feed-in tariffs and premium payments.”16

Furthermore, the Member States “shall bring into force the laws, regulations and

administrative provisions necessary to comply with this Directive by the 5th of December 2010 without prejudice to article 4(1), (2) and (3).”17

However, the implementation of support schemes including FIT affects the internal market in electricity. Therefore, the directive concerning common rules for the internal market in electricity need to be taken into account

1.3. Directive concerning common rules for the internal market in electricity18

The scope of this Directive is to “establishes common rules for the generation, transmission, distribution and supply of electricity, together with consumer protection provisions, with a view to improving and integrating competitive electricity markets in the Community.” Furthermore, this directive creates “ rules relating the organization and functioning of the electricity sector, open access to the market, the criteria and procedures applicable to calls for tenders and the granting of authorizations and the operation of systems.”

Besides, it creates “universal service obligations and the rights of electricity consumer and clarifies competition requirements”. 19

13_{Art.
3
of
the
Directive
2009/28/EC} 14_{Art.
4(1)
of
the
Directive
2009/28/EC} 15_{Art.
3(3)(a)
of
the
Directive
2009/28/EC} 16_{Art.
2(k)
of
the
Directive
2009/28/EC} 17_{Art.
27(1)
of
the
Directive
2009/28/EC}

18_{Directive
2009/72/EC
of
the
European
Parliament
and
of
the
Council
of
13
July
2009}

concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC

(9)

Hence, Member States shall ensure, with due “regard to the principle of subsidiarity […] electricity undertakings are operated in accordance with the principles of this Directive and with a view to achieve a competitive, secure and environmentally sustainable market in electricity, and shall not discriminate between those undertakings as regards either rights or obligations.”20

The principle of subsidiarity determines whether the EU or the Member States should have action in a sphere in which competence is shared rather than exclusive to the EU.21

The principle examines whether “the Union act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.”22

Furthermore, Member States “may impose on undertakings in the electricity sector, in the general economic interest, public service obligations which may relate to […] energy from renewable energy sources […] such obligations shall be clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for electricity undertakings of the Community to national consumers [...] having full regard to the relevant provisions of the Treaty, in particular Article 106 TFEU (ex art. 86 TEC) thereof.”23

According to article 106 TFEU (ex article 86 TEC), Member States “shall neither enact or maintain in force any measure contrary to the rules contained in the Treaties, in particular to those rules provided for in Article 18 and Articles 101 to 109 TFEU.”24

“Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular the rules on competition […] the development of trade must not be affected to such an extent as would be contrary to the interests of the Union.”25

20_{Art.
3(1)
of
the
Directive
2009/72/EC}

21_{Art.
5(3)
Consolidated
version
of
the
Treaty
on
European
Union
30.3.2010
(TEU)} 22_{Art.
5(3)
Consolidated
version
of
the
Treaty
on
European
Union
30.3.2010
(TEU)} 23_{Art.
3
(2)
of
the
Directive
2009/72/EC}

24_{Art.
106(1)
TFEU} 25_{Art.
106
(2)
TFEU}

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According to the previous directive (2001/77/EC) on the promotion of electricity produced from renewable energy sources in the internal electricity market, “the guarantee of origin is necessary to facilitate trade in electricity produced from renewable energy sources and to increase transparency for the consumer’s choice between electricity produced from non-renewable and electricity produced from non-renewable energy sources, the guarantee of origin of such electricity is necessary.”26

As a consequence, in Article 15 of Directive 2009/72/EC, Member States “shall ensure that the origin of electricity produced from renewable energy sources can be guaranteed as such within the meaning of this Directive, in accordance with objective, transparent and non- discriminatory criteria.”27

26_{Considerant
(10)
of
Directive
2001/77/EC} 27_{Art.
15
of
the
Directive
2009/72/EC}

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Chapter 2.

Renewable Energy policy in Germany:

In this chapter I will start with some background information regarding the change of the German public opinion towards sustainable energy. Subsequently, I will describe the

development of renewable energy policy in Germany explaining the concept ‘feed-in tariff’. After that, I will examine the different impacts of the German legislation.

2.1 Change of public opinion towards sustainable energy

In Germany, the sustainable energy discourse started during the oil crisis in 1973. This crisis demonstrated the dependence on energy imports.28 Furthermore the use of nuclear energy became increasingly controversial. Civil society organizations campaigned heavily against the construction of nuclear power plants and believed that the government should focus on

renewable energy. Besides, the Chernobyl accident in 1986 contributed towards the shift of the public opinion.29_{Between the period 1984 and 2003, a large representative survey showed}

the shift of the public opinion towards renewable energy.

Fig. 1. Shift of the public opinion in Germany30

28_{Pulczynski,
J.,
1991.
Interorganisationales
Innovationsmanagement.
Eine
kritische}

Analyse des Forschungsprojektes GROWIAN, Kiel.

29_{Wustenhagen,
R.,
Bilharz,
M.,
2004.
Green
energy
market
development
in
Germany:}

effective public policy and emerging customer demand. Institute for Economy and Environment, University of St. Gallen, p.1682

30_{Wustenhagen,
R.,
Bilharz,
M.,
2004.
Green
energy
market
development
in
Germany:}

effective public policy and emerging customer demand. Institute for Economy and Environment, University of St. Gallen, p.1683

(12)

In the German feed-in law the concept ‘feed-in tariff’ is sometimes used slightly different. Usually, feed-in tariff sets a fixed price for the purchase of renewable power, usually paying producers a premium rate over the retail rate for each unit of electricity, or kWh, fed into the grid. Also, feed-in tariffs usually requires power companies to purchase all electricity from eligible producers in their service area at this premium rate, over a long period of time.31 In Germany, the legislation for the promotion of RE was introduced in the

“Stromeinspeisungsgesetz of 1991”, restructured in 2000 as the Act on Granting Priority to Renewable Energy Sources (EEG of 2004) and updated in the EEG amendment of 2004. Currently, the EEG amendment of 2009 is into force. Thereafter, the German government shall evaluate the Act and amend the FIT legislation every four years.32

2.2. Feed-in law of 1991: “Stromeinspeisungsgesetz” (StrEG)

Although the aim of this Feed-in law was not clearly stated, the feed-in law aimed at

promoting renewable energy generation. The Feed-in law of 1991 “regulates the purchase and price of electricity generated exclusively from hydropower, wind energy, solar energy,

landfill gas, sewage gas or biomass in the area of validity of this act by public electric

utilities”.33 For electricity from hydro–power, landfill gas, sewage gas and biomass, the price shall amount to at least 80 per cent of the average revenue per kWh from the delivery of electricity by electricity-utilities to all final consumers.34 The payment for electricity from solar energy and wind energy shall be at least 90 per cent of the average revenue.35

Furthermore, “the electricity utilities, which operate a system for the general supply, are obliged to purchase the electricity generated form renewable energies in their supply area and to pay for the electricity fed into the system […] this obligation shall apply to the utility, which has the system suitable for receiving the electricity located closest to the site of the

31_{Mendoca,
M.,
Jacobs,
D.,
Sovacool,
B.,
2010.
Powering
the
Green
Economy:
The
Feed-‐in}

tariff handbook. Earthscan, London. p.

32_{Section
65,
Act
on
Granting
priority
to
renewable
energy
sources,
Renewable
Energy}

Sources Act of 25 October 2008, EEG, Federal Law Gazette I p.2074

33_{Section
1,
Gesetz
uber
Einspeisung
von
Strom
aus
erneuerbaren
Energien
in
das}

offentliche Netz (Stromeingspeisegesetz) 1990,

http://www.ena.de/pdf_bunker/stromeinspeisungsgesetz.pdf

34_{Section
3(1),
Gesetz
uber
Einspeisung
von
Strom
aus
erneuerbaren
Energien
in
das}

35_{Section
3(2),
Gesetz
uber
Einspeisung
von
Strom
aus
erneuerbaren
Energien
in
das}

(13)

facility […] extra costs arising can be allocated in accounts to distribution or transmission and can be included in the setting of the price for third-party access”.36

The price for electricity from wind energy and the payment shall be at least 90 percent of the average revenue.37

To sum up, the feed-in law of 1991 obliged the grid companies to purchase renewable electricity from eligible sources and to pay the producers an annually fixed feed-in tariff. For example, if consumers paid on average of €0.10/kWh for electricity, a farmer exploiting a wind turbine received €0.09 for every kWh fed into the grid, because the payment shall be at least 90 per cent of the average revenue.38

Although, the ‘Stromeinspeisungsgesetz” of 1991 was successful, there were a couple of reasons for updating the legislation. First of all, the growth of the green electricity output beyond the five percent ceiling previously set for support entitlement. Furthermore, the increasing demand for a national distribution of costs beyond the regions, the lack of planning and investment security and the required adjustment for compliance with EU directives led this revision.39 With the adoption of the EEG of 2000 as the Act on Granting Priority to Renewable Energy Sources, an important breakthrough in the development of sustainable energy has been achieved.

2.3 The Renewable Energy Sources Act (the EEG of 2000)

The purpose of this Act is to “facilitate a sustainable development of energy supply in the interest of managing global warming and protecting the environment and to achieve a substantial increase in the percentage contribution of renewable energy sources to the power supply”. By 2010, the total share of renewable energy sources in the total energy consumption

36_{Section
2,
Gesetz
uber
Einspeisung
von
Strom
aus
erneuerbaren
Energien
in
das}

37_{Section
3,
Gesetz
uber
Einspeisung
von
Strom
aus
erneuerbaren
Energien
in
das}

38_{Sijm,
J.P.M.,
2002.
The
Performance
of
Feed-in
Tariffs
to
Promote
Renewable
Electricity}

in European Countries

39_{Act
on
granting
priority
access
to
renewable
energy
sources,
Renewable
Energy}

Sources Act (the EEG of 2000). The Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, 2000, Berlin, Germany,

(14)

should at least be doubled, taking the objectives defined of the European Union and the Federal Republic of German into account.40

The EEG of 2000 “regulates the prioritization of grid-supplied electricity from renewable sources. Furthermore, it specifies mechanisms for implementing the option of granting priority to renewable power generation envisaged in the EU Directive on the internal market in electricity. Besides, energy utilities will also now benefit from the compensation for supplying the grid with electricity from renewable sources […] by guaranteeing

compensatory payments down to the last pfennig (before introducing the euro in 2000) per kWh, the act restores a secure climate for investment”.41 The new act has abolished the regulation contained in the Electricity Feed Act, which “limits the uptake at preferential rates of electricity from renewable energy sources to a maximum share of five percent of overall output. Instead, they have introduced a nation-wide cost-sharing arrangement”.42

Moreover, grid operators are obliged to “connect their grids electricity generation installations to purchase electricity available form these installations as a priority, and to compensate the suppliers of this electricity. This obligation shall apply to the grid operator, whose grid is closed to the location of the electricity generation installation, providing that the grid is technically suitable to feed in this electricity”.43

The upstream transmission grid operator for electricity generated from wind energy is “obliged to purchase, and pay compensation for, the amount of energy purchased by the grid operator […] if there is no domestic transmission grid in the area serviced by the grid operator entitled to sell electricity, the next closest domestic transmission grid operator shall be obliged to purchase and pay compensation for this electricity”.44

Furthermore, the EEG of 2000 introduced a nation-wide equalization scheme. From now on, “the transmission grid operators shall be obliged to record any differences in the amount of energy purchased and compensation payments mentioned above and shall equalize such differences amongst themselves”.45

40_{Idem,
section
1,
p.3,} 41_{Idem,
p.1.} 42_{Idem,
section
1,
p.3} 43_{Idem,
section
3
(1),
p.
4} 44_{Idem,
section
3
(2),
p.4} 45_{Idem,
section
11
(1),
p.8}

(15)

By 31 March of each year, the transmission grid operators “shall determine the amount of energy purchased and the percentage share, which this amount represents relative to the overall amount of energy delivered to final consumers either directly by the operator or

indirectly via downstream grids […] if transmission grid operators have purchased amounts of energy that are greater than the average share, they shall be entitled to sell energy to, and receive compensation from, the other transmission grid operators, until these other grid operators have purchased a volume of energy which is equal to the average share mentioned above”.46

2.4. The EEG amendment of 2004

The purpose of this Act is laid out in more specific terms and objectives compared to the previous Act. The amended Act of 2004 has “reduced payment for power from onshore wind energy […] an annual decrease in the rates is applied to new plant coming on stream across all renewable energy sources […] these annual decreases have been set to reflect the

efficiency potential of each energy source […] create challenging incentives to reduce costs and improve plant efficiency”. Furthermore, “The rates of payment for most renewables have been falling since 2002 as a result of the annual decrease mechanism; if we also take into account trends in real prices, which are subject to inflation, payments have been decreasing even faster”.47

Hence, the German legislator decided to amend the FIT legislation every four years by allowing tariff degression.

Tariff degression allows the automatic reduction of the remuneration rate in the meantime without the negative effects of lengthy political decision-making process. This tariff degression stimulates investors to speed up the planning process: “the quicker you get connected to the grid, the higher the tariff payment for the power plant.”48 Germany was the first country to implement this design option in order to anticipate both on technological learning and provide an incentive for the industry to further improve RE technologies. According to the EU Directive 2001/77/EC on the promotion of electricity from RES in the internal electricity market, standarised rules are required for issuing a guarantee of origin. Therefore, Germany established standardized rules for issuing a guarantee of origin. Such

46_{Idem,
section
11
(2),
p.8}

47_{Amending
the
Renewable
Energy
Sources
Act
(EEG),
key
provisions
of
the
new
EEG
as}

amended on 21 July 2004, BMU, Z III 1, August 2004, p.14

48_{Mendoca,
M.,
Jacobs,
D.,
Sovacool,
B.,
2010.
Powering
the
Green
Economy:
The
Feed-in}

(16)

guarantee must specify: “type of energy used and essential components; quantity of power generated and the period in which it was generated and whether the power was paid for in accordance with EEG provisions; location, capacity and commissioning of the plant”.49

2.5. The amendment of 2009

Currently, the amendment of 2009 is into force. According to the regulations of the EEG of 2009, the initial fee (first 5 years from beginning of operation) for wind power from onshore wind turbines is raised to €0.092 kWh instead of €0.0787 kWh in the EEG of 2004. After 5 years, the final fee is €0.0502 kWh instead of €0.0497 kWh in the EEG of 2004. The degression for onshore wind in 2009 is 1.0% instead of 2.0%.50

The EEG of 2009 The EEG of 2004 Initial fee (first 5

years form beginning of operation)

€0.092 kWh €0.0787 kWh

Final fee €0.0502 kWh €0.0497 kWh

Tariff degression 1.0% 2.0%

Fig. 2.

2.6. Effects of the German FIT

In this paragraph different effects of the German FIT will be examined, taking the cost and benefits into account.

2.6.1. Share of RES in total final energy consumption

The share of RES in the total final energy consumption increased from 3.8% in 2000 to 11% in 2010. Besides, the share of RES in the total gross electricity consumption increased from 6.4% in 2000 to 16.8% in 201051.

49_{Amending
the
Renewable
Energy
Sources
Act
(EEG),
key
provisions
of
the
new
EEG
as}

amended on 21 July 2004, BMU, Z III 1, August 2004, p.13

50_{2009
EEG
payment
provisions,
as
adopted
by
the
German
Bundestag
Parliamentary}

Decision from June 6, 2008

www.bmu.de/erneuerbare_energien/downloads/doc/42033.php

51_{Renewable
Energy
Sources
2010,
Data
from
the
Federal
Ministry
for
the
Environment,}

Nature Conservation and Nuclear Safety (BMU) on the development of renewable energy sources in Germany in 2010 based on information supplied by the Working

(17)

2004 2005 2006 2007 2008 2009 2010 TARGET 2020

Netherlands 1.9 2.3 2.7 3.1 3.4 4.1 3.8 14.0

Germany 5.1 5.9 6.9 9.0 9.1 9.5 11.0 18.0

Fig. 3. Eurostatt: Share of renewable energy in gross final energy consumption (%)

2.6.2. Employment

The BMU published a report regarding the gross employment in the renewable energy sector in Germany in the year 2011.52_{In this report, the total number of jobs in the RES sector since}

2004 increased with 138%, rising to 381.600 jobs by 2011. As pictured in fig. 4., gross employment growth in the wind industry increased from 63.900 in 2004 to 101.00 jobs in 2011.

Fig. 4. Gross employment in the renewable energy sector

2.6.3. Energy security

The decreased dependency on fuel imports due to support of renewable energy promotion, results in an increased energy security. However, backup energy systems that use fossil fuels must be in place in order to ensure against blackouts. The maintenance of such systems is costly, estimating costs in 2006 were €590 million.

Group on Renewable Energy Sources – Statistics (AGEE-‐Stat), Available on the internet at <http://www.erneuerbare-‐energien.de>

52_{O’Sullivan,
M.,
Edler,
D.,
Nieder,
T.,
Ruther,
T.,
Lehr,
U.,
Peter,
F.,
2011.
Gross}

Employment from Renewable Energy in Germany in 2011 – A first Estimate, March 2012, Berlin. p.11

(18)

Also, 36% of the gas imports is originating from Russia, which still reflects the dependency nowadays.53

2.6.4. Cost and Benefits

In this subparagraph, the cost and benefits of the German FIT will be examined. Therefore, the interaction between renewable support schemes and market prices will be analyzed. Furthermore, the electricity generated by RES has an impact on the market price, resulting in different effects for producers and consumers of electricity.

2.6.4.1 Electricity prices

The electricity generated by RES also has an impact on the market prices itself.

In the paper of Senfuss et al and Traber et al. the interaction between renewable support schemes and the market prices has been analyzed.

According to the Renewable Energy Sources Act, German grid operators have to buy electricity generated by specific RES at a guaranteed ‘feed-in tariff’. Because, the electricity generated by RES has to be bought by supply companies in advance, the remaining demand load that has to be purchased on the electricity markets is reduced correspondingly. Therefore, the guaranteed feed-in of electricity generated by RES has the effect of a reduction in the electricity demand (merit-order effect). The merit-order effect describes the influence, that preferential feed-in of electricity generated from renewables, has on wholesale electricity prices. It determines that as the demand for conventional electricity decreases, the most expensive power plants that would otherwise be used are no longer needed to meet the demand. Accordingly, the exchange price falls. Whereas this reduces the income of the electricity generators, the suppliers and (depending on market conditions) electricity consumers profit from the price reductions.54

According to the association of German grid operators, in the period of 2001-2006 the payments for the FIT rose from €1.6 billion to €5.6 billion per year.

53_{Frondel,
M.,
Ritter,
N.,
Schmidt,
C.,
Vance,
C.,
2009.
Economic
impacts
from
the}

promotion of renewable energy technologies: The German experience. Energy Policy 38 (2010) p. 4054-‐4055

54_{Renewable
Energy
Sources
in
Figures,
National
and
International
Development,}

Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), July 2011, p.40

(19)

Hence, in this period, the renewable electricity generation in Germany rose from 18.1 TWh to almost 52 TWh per year.55

The additional costs of the support from a consumer perspective could be defined by the FIT minus the market value of the renewable electricity. The market value of the renewable electricity can be estimated by multiplying the electricity production by the spot market price. The market value of the generated renewable electricity can be estimated to ca. €2.5 billion, almost 45% of the support payments.

The volume of the merit order effect rose from €1 billion in 2001 to €5 billion in 2006.56_The

main driving factors for this development are the installed capacity of renewable electricity generation, the development of fuel prices and the CO2 price.57

As a result, in 2006 the support payments amounted €5.6 billion. Hence, if you take off the value of renewable electricity of €2.5 billion and the volume of the merit-order effect of €5 billion from the support payments, a net profit for the consumers occurs. Question at hand is whether the savings created on the wholesale market are passed on to consumers, heavily depends on the competiveness of the electricity supply system, especially the consumer market.58

As for producers, the total effect consists of a negative substitution effect of 2% and a

negative permit price effect of 6%. Furthermore, the generation of renewable electricity leads to changes in the import and export load flows of electricity. Due to the limited cross-border transmission capacities between markets, the Netherlands and Switzerland are the only countries whose producer prices are also influenced by the substitution effect.59

55_{Senfuss,
F.,
Ragwitz,
M.,
Genoese,
M.,
The
merit-order
effect:
A
detailed
analysis
of
the}

price effect of renewable energy generation on spot market prices in Germany. Energy policy 36 (2008) p. 3086

56_{Senfuss,
F.,
Ragwitz,
M.,
Genoese,
M.,
The
merit-order
effect:
A
detailed
analysis
of
the}

price effect of renewable energy generation on spot market prices in Germany. Energy policy 36 (2008) p. 3086

57_{Senfuss,
F.,
Ragwitz,
M.,
Genoese,
M.,
The
merit-order
effect:
A
detailed
analysis
of
the}

price effect of renewable energy generation on spot market prices in Germany. Energy policy 36 (2008) p. 3088

58_{Senfuss,
F.,
Ragwitz,
M.,
Genoese,
M.,
The
merit-order
effect:
A
detailed
analysis
of
the}

price effect of renewable energy generation on spot market prices in Germany. Energy policy 36 (2008) p. 3093

59_{Traber,
T.,
Kemfert,
C.,
2009.
Impacts
of
the
German
Support
for
renewable
energy
on}

(20)

2.6.4.2. Savings on imports

In 2006, the EEG-related savings on imports of hard coal and gas into Germany were around €0.9 billion.60

2.6.4.3. Investments

According to the BMU, investments in RES installations are increasing annually. In 2010, the investments in RES installations were €26.6 billion against €19.9 billion in 2009.61_{Due to}

this development, the RES sector shows their growing importance as an economic factor.

Summing up, the different effects of the feed-in tariff on the German economy most of the effects are positive. In the first place, the share of RES in the total final energy consumption and the total number of jobs in the RES sector has increased remarkably. Further, the legislation has led to a decreased dependency and savings on imports of fossil fuels. Therefore, the RES sector increasingly shows their importance as an economic factor. For consumers, the competiveness of the electricity supply system eventually determines whether a net profit for consumers occurs. For producers, only the prices in Germany and neighboring countries Switzerland and the Netherlands are influenced by the substitution effect.

60_{Wenzel,
B.:
Kosten-
und
Nutzenwirkungen
des
Erneuerbaren-Energien-Gesetzes.}

Untersuchung im Rahmen von Beratungsleistungen für das Bundesministerium fur Umwelt, Naturschutz und Reaktorsicherheit. Teltow, November 2007.

61_{Renewable
Energy
Sources
2010,
Data
from
the
Federal
Ministry
for
the
Environment,}

Nature Conservation and Nuclear Safety (BMU) on the development of renewable energy sources in Germany in 2010 based on information supplied by the Working Group on Renewable Energy Sources – Statistics (AGEE-Stat), Available on the internet at <http://www.erneuerbare-‐energien.de>

(21)

Chapter 3.

Compatibility of the feed-in tariff with Community law

In this chapter the compatibility of the German feed-in tariff with European legislation is examined. In order to examine the relation between national and EU law, I will analyze a number of important cases of the Court of Justice of the European Union.

3.1. Costa v ENEL

In this case, the basic principle of the supremacy of EU law is stated.

“By contrast with ordinary international treaties, the EEC Treaty has created its own legal system which, [..] became an integral part of the legal systems of the Member States and which their courts are bound to apply […] Member States have limited their sovereign rights […] and have thus created a body of law which binds both their nationals and themselves.” 62 As a result, the judgment of the ECJ in the Costa v ENEL case led to the requirement that national legislation need to comply with EU law.

3.2. Infringement with article 3 of the Directive 2009/72/EC concerning common rules for the internal market in electricity.

Article 3 of this Directive, is the first provision to determine the legitimacy of the German support scheme. In Article 3(1), (2) of the Directive 2009/72/EC concerning common rules for the internal market in electricity and Article 3(1), (2) of the Directive 2003/55 concerning common rules for the internal market in natural gas, same conditions were set out regarding state intervention.

3.2.1. Federutility

In article 26 TFEU is stated that the Union shall adopt measures with the aim of establishing or ensuring the functioning of the internal market, in accordance with the relevant provisions of the Treaty. The internal market shall comprise an area without internal frontiers, in which the free movement of goods, persons, services and capital is ensured. Although, the Union shall adopt measures with the aim of establishing or ensuring the functioning of the internal market, Member States may impose measures restricting the internal market.63

62_{ECJ,
Case
6/64
–Flaminio
Costa
v
ENEL
[ECR
I-‐585],
593}

(22)

In the Federutility case, a Member State imposes a ‘reference price’ for the supply of natural gas and therefore restricting the internal market. The applicant argued that as from 1 July 2007, the date of full liberalization of the natural gas market provided for in article 23(1)(c) of the Directive 2003/55, the sale price of natural gas must be determined solely by supply and demand and not by a ‘reference price’. Therefore, they claim that the ‘reference price’ infringes with Community law.64 In the Federutility case, the Court sets out conditions for state intervention. By using the Federutility case, I will examine whether or not the feed-in tariff complies with the condition of state intervention.

3.2.1.2. Conditions of State intervention

The conditions of State intervention are specified in Article 3 (1), (2) of the Directive: “Having full regard to the relevant provisions of the Treaty in particular article 106 thereof […] Member States may impose undertakings in the electricity sector, in the general economic interest […] such obligations should be clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for electricity

undertakings of the Community to national consumers”.65 Furthermore, the undertakings “must comply with the principle of proportionality”.66

3.2.1.3. Intervention justified in the general economic interest

In the Federutility case, the Court concluded that the articles 3(2) and article 23(1) of the Directive 2003/55/EC not infringes with the national legislation ‘reference price’.

In this case, the Court concluded that the Directive allows Member States to assess whether, in general economic interest, it is necessary to impose on undertakings operating in the gas sector public service obligations. “Member States are entitled, while complying with the law of the Union, to define the scope and the organistion of their services in the general economic interest. In particular, they may take account of objectives pertaining to their national policy”. Hence, these undertakings must be in compliance with the rules on competition and

preservation of the unity of the common market.67

64_{ECJ,
Case
265/08
–
Federutitlity
and
others
v
Autorita
per
l’energia
elettrica
e
il
gas,}

[ECR I-‐3377], para. 13

65_{Art.
3(2)
of
the
Directive
2009/72/EC} 66_{Art.
106
TFEU}

67_{ECJ,
Case
265/08,
Federutitlity
and
others
v
Autorita
per
l’energia
elettrica
e
il
gas,}

(23)

What does the legislator means with services of general economic interest?

In article 14 TFEU is stated that services of general economic interest are shared values of the Union. “Member States, each within their respective powers and within the scope of

application of the Treaties, shall take care that such services operates on the basis of the principles and conditions particularly economic and financial conditions. Besides, “the European Parliament and the Council […] in according with the ordinary legislative procedure, shall establish these principles and set conditions without prejudice to the competence of Member States, in compliance with the Treaties, to provide, to commission and to fund such services”.

In Article 1 Protocol nr. 26 on services of general interest, the shared values of the Union includes: “the essential role and wide discretion of national, regional and local authorities in providing, commissioning and organizing services of general economic interest as closely as possible to the needs of the users. Furthermore, these services should achieve a “high level of quality, safety and affordability, equal treatment and the promotion of universal access and of user rights”.68

Although, the services of general economic interest are subjected to the community rules of competition and internal market, it is not clearly defined in the Treaty or secondary

legislation. Therefore, the definition was developed in the jurisprudence and documents of the European Commission. In the White Paper on services on general interest, the European Commission noted that services of general economic interest “covers in particular certain services provide by the big network industries such as transport, postal services, energy and communications”.69

Even though the Union shall adopt all measures in order to obtain an internal market without internal frontiers, in which the free movement of goods, persons, services and capital is ensured, sometimes the Member States may impose measures restricting the internal market. Those restrictions must be in the general economic interest. Furthermore, Member Sates must

68_{Protocol
nr.
26
on
services
of
general
interest,
attached
to
the
Treaty
on
the}

functioning of the European Union.

69_{Communication
from
the
Commission
to
the
European
Parliament,
The
Council,
The}

European Economic and Social Committee and the Committee of the Regions, White Paper on services of general interest COM (2004) 374 final, 12.05.2004, Annex 1 Definition of Terms

(24)

balance the objective of liberalization and that of the necessary protection of final consumer in services of general economic interest such as the service of energy.70

3.2.1.4. Compliance with the principle of proportionality

As stated in the Federutility- and Costa-Enel case and article 106 TFEU, the method of intervention needs to comply with the principle of proportionality.

According to article 3(2) of the Directive 2009/72/EC Member States may impose

undertakings in the electricity sector in the general economic interest, but should have full regard to the relevant provisions of the Treaty, in particular art. 106 TFEU.

In article 106 TFEU, undertakings entrusted with the operation of services of general economic interest shall be subject to the rules contained in the Treaties, in particular to the rules on competition. In the Federutility case, the Court states that it follows from the very wording of article 106 TFEU that imposed undertakings must also comply with the principle of proportionality71_{. Although, the proportionality of a measure is sometimes used differently,}

the Court argues that the method of intervention used must not go beyond what is necessary to achieve the objective, which is being pursued in the general economic interest.72

3.2.1.5. Public service obligations should be clearly defined, transparent,

non-discriminatory and verifiable, and guarantee equal access for EU electricity undertakings to national consumers.

Article 3(2) of the Directive requires that the public service obligations adopted under that provision must be clearly defined, transparent, non discriminatory and verifiable, and

guarantee equal access for EU gas companies to consumers. The Court held that the provided conditions are met. Nonetheless, the Court stated that a reference price would in fact be discriminatory if, applied to all undertakings, in reality imposed the financial burden arising from the reference price on some of the undertakings.

Hence, the Court held that State intervention in setting the price of gas is permitted. Thus, when considering implementing a regulated price on the cost of electricity or gas, a Member State must be aware of the judgment laid down in the Federutility case.

70_{ECJ,
Case
265/08,
Federutitlity
and
others
v
Autorita
per
l’energia
elettrica
e
il
gas,}

[ECR I-‐3377] – para. 32

71_{ECJ,
Case
265/08,
Federutitlity
and
others
v
Autorita
per
l’energia
elettrica
e
il
gas,}

[ECR I-‐3377] – para -‐ para. 33

72_{ECJ,
Case
265/08,
Federutitlity
and
others
v
Autorita
per
l’energia
elettrica
e
il
gas,}

(25)

3.3. Applying the conditions of state intervention on the German feed-in tariff

In order to comply with the criteria of article 3(2) of the Directive, the German FIT must be justified on the grounds of ‘general economic interest’. Member States may impose measures restricting the internal market, but those restrictions must be in the general economic interest. In article 3(1) of the Directive 2009/72/EC, Member States “shall ensure, on the basis of their institutional organization […] that electricity undertakings are operated in accordance with the principles of this Directive with a view to achieving a competitive, secure and

environmentally sustainable market in electricity”. Furthermore, Member States must balance objective of liberalization and that of the necessary protection of final consumer in services of general economic interest such as service of energy.

In article 14 TFEU is stated that services of general economic interest are shared values of the Union. The FIT shares the same values of the Union, because they both aim at increasing the overall share of RES in gross final consumption of energy. Besides, one of the objectives of the EEG of 2000 is to follow the objectives defined by the European Union.

The FIT and the services of general economic interest mentioned by the European

Commission in the White Paper covers the same services, namely services provided by big network industries.

Furthermore, the FIT is well balanced between the objective of liberalization of the market and the necessary protection of final consumer in services of general economic interest. Due to the global competition among manufacturers of wind energy converters, the production costs as well as the compensation paid in real terms have been successfully

reduced by 50 per cent since 1991.73 Eventually, these savings on the wholesale market could be passed on to consumers creating a net profit for the consumers.

In order to comply with the criteria of article 3(2) of the Directive, the German FIT must be ‘clearly defined’. In the EEG amendment of 2000, especially in section 4 – 8, the

compensations to be paid for electricity generated from RES are clearly defined.

Furthermore, the grid operators shall be obliged to record any differences in the amount of energy purchased and compensation payments made under section 3. Besides, in article 15 of the EEG amendment of 2004, the transparency criteria have been specified. Therefore, the FIT complies with the required ‘transparency’ criteria.

73_{Act
on
granting
priority
access
to
renewable
energy
sources,
Renewable
Energy}

Sources Act (the EEG of 2000). The Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, 2000, Berlin, Germany, A. General Provisions

(26)

Also, the requirement of ‘non-discriminatory’ will be fulfilled because the rules are equally applicable to all producers of RES, and equal access for electricity undertakings is

guaranteed. Since the amendment of 2000, the scope of application covers installations operated by electricity producers, which had been excluded in the past. The “unbundling of activities of producers, regional grid operators and distributors, legally puts producers of electricity from RES on the same level with conventional electricity producers.74

The FIT meets the criteria of ‘verifiability’ because every two years after the entry into force of the EEG of 2000, the Federal Ministry of Economics and Technology shall submit a report in consultation with the BMU as well as the Federal Ministry of Food, Agriculture and Forestry on the progress achieved in terms of the market introduction and the cost

development of power generation installations. Furthermore, every two years the Ministry shall, where necessary, propose adjustments of the compensation in keeping with

technological progress and market developments with regard to new installations.75

In order to fulfill the requirement of proportionality, the FIT must not go beyond what is necessary to achieve the objective, which is being pursued in the general economic interest The FIT is set with the objective of benefiting the seller of a product exclusively at the expense of the consumer and not to constitute state aid. Furthermore, the FIT does not imply any benefits, which are granted directly or indirectly from state resources. Instead, the FIT are straightforward financial transfers, which in accordance with the ‘polluter pays principle’ laid down in Community law, are used directly to cover electricity production costs.

In addition, the introduction of FIT at the expense of polluters is more legitimate and more justifiable in the field of energy supply because of the ecological damage associated with conventional electricity generation. Hence, the FIT is designed to promote the market introduction of emission-free and sustainable energy sources to substitute for conventional energy sources and provides for strictly consistent, equal burden sharing among all power

74_{Act
on
granting
priority
access
to
renewable
energy
sources,
Renewable
Energy}

Sources Act (the EEG of 2000). The Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, 2000, Berlin, Germany, Annex, B. Special Provisions, Section 2, paragraph 2

75_{Act
on
granting
priority
access
to
renewable
energy
sources,
Renewable
Energy}

Sources Act (the EEG of 2000). The Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, 2000, Berlin, Germany, Section 12.

(27)

suppliers.76 Taking this into account, the FIT does not go beyond what is necessary to achieve its objectives, which is being pursued in the general economic interest. Therefore, the FIT does fulfill the requirement of proportionality.

3.4. Infringement with article 34 TFEU, measures having equivalent effect Article 34 TFEU prohibits measures having equivalent effect to quantitative import restrictions. The obligation of granting prior grid access to renewable electricity sources might result in import restrictions for renewable electricity from other Member States because the electricity from other than German would not profit from the minimum feed-in tariff.

Therefore, it has to be analyzed whether the German feed-in tariff falls within the scope of article 34 TFEU. In the Dassonville case, the European Court of Justice established a

definition of the term ‘measures having equivalent effect’. The ECJ explained that “all trading rules enacted by Member States which are capable of hindering, directly or indirectly,

actually or potentially, intra-Community trade” are to be considered as measures having an equivalent effect to quantitative restrictions.77 Therefore, one must look to the effects of a measure rather than to its aims. In order to determine whether the FIT can be seen as a

measure having equivalent effect, the question at hand is: does this measure hinder the import of energy from other Member States?

Although, the FIT has led to changes in the import and export load flows of electricity (mentioned in paragraph 2.7.1) the generation of renewable electricity can be justified under article 36 TFEU. This article allows Member States to apply rules prohibited under article 34 TFEU, but only if they are justifiable “on the grounds of public morality, public policy, public security, protection of health and life of humans, animals or plants, protection of national treasures possessing artistic historic or archaeological value, or protection of industrial and commercial property”.78

76_{Act
on
granting
priority
access
to
renewable
energy
sources,
Renewable
Energy}

Sources Act (the EEG of 2000). The Federal Ministry of the Environment, Nature Conservation and Nuclear Safety, 2000, Berlin, Germany, A. General Provisions

77_{ECJ,
Case
8/74
–
Procureur
du
Roi
v
Benoit
and
Gustave
Dassonville
[ECR
I-‐837],
p}

852

(28)

In my opinion, the obligation to grant prior grid access and minimum feed-in tariffs to all renewable sourced electricity generated in Germany can be justified under the conditions: public morality and protection of health and life of humans, animals or plants. First of all, the public opinion in Germany shifted towards a renewable energy society. Secondly, stimulating the production of renewable energy results in a cleaner and healthier environment for humans, animals and plants.

The German feed-­in tariff: Lessons for an effective renewable energy source policy

Table of contents

The German feed-in tariff: Lessons for an effective renewable energy source policy