German energy transition caught in subsidies’ trap 

German households face steeply rising electricity bills, companies threaten to move abroad, engineers raise the specter of blackouts. A reform of Germany’s green energy revolution must top the new government’s agenda.

In January 2013, German Environment Minister Peter Altmaier sought to land a political coup which could have become an election winner for his and Chancellor Angela Merkel’s Christian Democratic Union (CDU). Almost single-handedly, Altmaier drafted legislation to cap subsidies to renewable energy producers in an effort to stop the recent steep rise in electricity bills caused by those subsidies.

Altmaier noted that it was unacceptable that electricity customers should continue to bear all the costs of Germany’s transition to green energy, which he said could amount to 1 trillion euros ($1.32 trillion) by 2050.

However, Altmaier’s draft reform to the German Renewable Energies Law (EEG) foundered in the Bundesrat, the upper house of parliament, dominated by the opposition Social Democrats (SPD) and the Green party.

Soaring bills

Under an ambitious new energy policy, Germany seeks to boost renewables to make up 80 percent of total power generated by 2050. Along the way, nuclear power is to be completely phased out by 2022, and fossil-fuel based energy production sharply reduced.

However, since the EEG law was implemented in 2000, German electricity retail prices have risen from then 14 eurocents per kilowatt-hour to almost 29 cents today, according to data released by the Association of Energy and Water Industries (BDEW).

Much of the increase is the result of a surcharge on electricity bills paid by private households and businesses to finance state subsidies for renewable energies. Wind, solar and biomass energy producers are guaranteed fixed so-called feed-in tariffs above market price for 20 years. These subsidies have led to an investment boom propelling the amount of renewable energy from 15 percent of German power generation in 2008 to 23 percent in 2012.

Accordingly, the surcharge on electricity rose steeply, too, increasing by 47 percent just within the last year. In a recent estimate, the government has calculated that the surcharge will likely rise from currently 5.3 eurocents per kilowatt-hour to 6.2 eurocents in 2014.

Caught in a subsidies trap

Curiously enough, the more renewable energy is being fed into the German power grid the more people and businesses pay for the green energy. On July 16, which was a windy as well as sunny day, the wholesale electricity price even slumped to below zero on an excess of power from those renewable sources. Consumers had to pay the price difference to the feed-in tariff guaranteed to renewable producers.

Moreover, the subsidies are further inflated under a government policy to exempt energy-intensive industries such as steel mills and aluminum smelters from paying the renewables surcharge. But those breaks, which were originally meant for only a few companies competing internationally, are meanwhile being granted to over 4,000 businesses.

In addition, the costs of massive infrastructure updates, which are needed to accommodate the vast amounts of green energy, are also footed by consumers through their electricity bills. This includes expanding the power grid as well as creating storage systems for solar and wind power.

Mounting anger amid political stalemate

According to an opinion poll made by Forsa research group in July 2013, one out of two Germans is unhappy with the way the energy transition is being handled by politicians.

However, Germany’s political parties are miles apart on finding common ground about how to curb the costs of the green energy revolution.

Merkel’s CDU wants to cap the surcharge through 2014 and aims to limit its rise to 2.5 percent annually from 2015. The CDU wants to achieve this through a suspension of feed-in tariffs for new installations for some months as well as an energy solidarity tax for existing renewable energy producers.

Merkel’s party also plans to reduce exemptions for power-intensive industries by 500 million euros from a total of 4.3 billion euros currently.

The SPD rejects cutting the feed-in tariffs and aims for legislation that would force power utilities to pass on lower wholesale electricity prices to consumers. In addition, they want to lower a general tax on energy and limit the number of businesses exempt from the green energy surcharge.

The environmentalist Greens want to abolish these exemptions altogether, and push for the introduction of a CO² emissions tax for conventional power plants. And finally, the pro-business Free Democratic Party (FDP) aims to drastically lower the energy tax as well as the subsidies for renewables subsidies.

No matter which policy measure will be finally implemented, the renewables subsidies’ bill for German consumers – currently standing at a total of 20.3 billion euros a year – won’t be substantially lower in the years to come. As existing renewable power producers will continue to be guaranteed fixed feed-in prices for the next 20 years, slowing the rise in costs is the best a new government might hope to achieve.