Overview of the current energy mix, and the place in the market of different energy sources
The so-called “energy turnaround” (Energiewende) is still an ongoing process in Germany. In 2016, the renewables sector contributed 29.0% to gross electricity generation in Germany, whereas it was 25.8% in 2014.1 Wind power remains the main source of renewable energy, supplying 11.9% of gross electricity production in Germany. The shares of natural gas (12.4%), hard coal (17.2%), lignite (23.1%) and nuclear energy (13.0%) have decreased marginally in the last two years.
With regard to gross electricity consumption, the Energiewende remains on track. Again, renewable energies were the main source of electricity at 31.7% of total supply.2 Onshore and offshore wind energy continued to expand. Wind power now accounts for about 12% of the German power supply. Besides an increased expansion of suitable rural locations and the replacement of older, smaller turbines with new and more powerful turbines – also known as repowering – offshore wind energy plays a growing role. The offshore wind power capacity in the grid reached about 4,100 MW by the end of 2016. The German government’s aim is to bring the capacity up to 15,000 MW by 2030.3
By 2025 the government also intends to increase the share of renewable energies in total energy consumption to 40–45%. To reach this goal, as part of the 2017 Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, “EEG 2017”), renewable energies are now set to compete based on market-based conditions. Beginning in 2017, funding rates for renewable energy installations in Germany are determined via a competitive auction procedure in which the plant operators submit bids for funding.
Developments in government policy/strategy/approach
From 2017 onwards, each year 5% of newly installed renewables capacity will be opened up to installations from other EU Member States. This innovation was kicked-off in pilot auctions for ground-mounted PV installations in the second half of 2016. These auctions were held by the German Federal Network Agency and the Danish Energy Agency and were the first cross-border auctions in Europe open to bidders with installations in Germany or Denmark. Further auctions are planned for 2017, also involving other technologies.4 The process is intended to anchor the energy transition on a cross-border basis and to harmonise the funding systems for renewable energy throughout the EU.
To receive funding as an installation from another European Member State pursuant to the EEG 2017, certain conditions must be fulfilled. Firstly, the principle of reciprocity must be observed; meaning that installations in another Member State can only receive funding in accordance with the EEG 2017 if the other Member State opens up its national auctions for German installations in exchange. Secondly, foreign energy shall be physically imported, i.e. funded electricity must actually be able to reach Germany. Thirdly, a bilateral agreement governed under international law between the Member States, which implements the details of the cooperation, must be in place.
Germany signed a cooperation agreement with Denmark, the first of its kind, on the mutual opening of auctions for PV installations in July 2016. This agreement set the framework for a pilot auction round that was held in Denmark and Germany in 2016, allowing for cross-border participation of installations. According to the agreement, Germany opened one auction round for ground-mounted PV projects with a capacity of 50 MW to installations located in Denmark, while in exchange Denmark partially opened one auction round with a total capacity of 20 MW by dedicating up to 2.4 MW to bids for ground-mounted PV projects located in Germany. Due to the lack of bids for installations located in Germany, only installations in Denmark were awarded.5
Developments in legislation or regulation
The German government has very recently adopted the 2017 Renewable Energy Sources Act. The EEG 2017, which came into force on 1 January 2017, marks the beginning of a new stage of the Energiewende, based on new rules. The EEG 2017 provides for a paradigm shift: future rates of renewables funding will be determined by the market by means of dedicated auction schemes, rather than being fixed by the government. The new auction scheme shall ensure that the expansion of renewables proceeds at a steady and controlled pace and at low cost.
Setting the funding level (i.e. the fixed funding value) by way of an auction process is not completely new to the German market. The first pilot auctions for ground-mounted photovoltaic installations took place in 2015. Now that these pilot auctions have been successfully tested, the new competition-based system is extended to cover funding for other green technologies such as wind energy.
Under the EEG 2017, funding rates (i.e. the so-called fixed funding value) for certain renewable energy sources will no longer be fixed by the law itself, but will be determined by a competition-based auction system in which the plant operators submit bids for funding. The auction determines the fixed funding value for the entire funding period for 20 years upon commissioning of the facility. The EEG 2017 stipulates the rules for this new system.
Generally, the promotion under the EEG 2017 is remitted as the market premium. The market premium is determined as the difference between the respective fixed funding value and the monthly average market value for electricity generated by the renewable energy source, e.g. offshore wind farms, on the spot market of the EPEX Spot SE energy exchange in Paris in Ct/kWh. By way of example, an offshore wind farm operator may tender a bid for a fixed funding value of 10.0 Ct/kWh. If this bid is awarded under the auction, the market premium is calculated based on this bid value. Accordingly, if the monthly average spot market price is 5.4 Ct/kWh, the operator of the wind farm would be eligible for a market premium of 4.6 Ct/kWh.
In April 2017, EnBW Energie Baden-Württemberg AG was successful against other bidders in the first offshore auction with its bid for the “He Dreiht” wind farm by renouncing EEG subsidies, as it tendered a bid for a fixed funding value of 0 Ct/kWh.
The restructuring of the funding regime is designed to focus on funding in favour of those technologies which are intended to make the greatest contribution to green electricity in the foreseeable future.
Against this background, the following technologies will be affected by the new auction mechanism:6
- For onshore wind energy, a gross amount of 2,800 MW is to be auctioned each year over the next three years (2017, 2018 and 2019).
- According to the 2017 Renewable Energy Sources Act, offshore wind energy is to be expanded to reach 6.5 GW by 2020 and 15 GW by 2030. In order to achieve a steady expansion curve, the amounts up for auction equally over the years 2021 to 2030 will be distributed. The annual volume for the years 2021 and 2022 will be 500 MW; for the years 2023 through 2025 it will be 700 MW; and from 2026 on it will be 840 MW per year.
- In case of photovoltaic (“PV”), 600 MW will be auctioned each year. In addition to ground-mounted installations, other large PV installations (with a minimum of 750 kW) will be included.
- With regard to biomass installations (both new and existing ones), an amount of 150 MW is to be auctioned each year between 2017 and 2019. Between 2020 and 2022, the annual auction volume will rise to 200 MW.
Other technologies (such as hydropower, geothermal energy) are not affected by the EEG 2017. In addition, small installations with a capacity of less than 750 kW (biomass: 150 kW), will be exempted from the auction process.
In principle, all renewable energy installations commissioned on or after 1 January 2017 are subject to the new EEG 2017. However, certain exceptions apply. All facilities which have been commissioned before this cut-off date will be grandfathered from changes under the EEG 2017. The law provides for two major transition periods. Any onshore wind turbine (i) with a permit granted prior to 1 January 2017, and (ii) which has been put into service prior to 1 January 2019, will be exempted from the auction mechanism. The same rule applies to offshore wind turbines with a binding grid connection pledge or grid connection capacity granted prior to 1 January 2017 at the latest and commissioned prior to 1 January 2021. Such onshore and offshore installations will be governed by fixed funding values set by law.
The EEG 2017 provides for specific auction designs for each different green technology. The main reason for different auction designs is that an auction scheme for large-scale offshore wind farms needs to be designed differently from an auction scheme for solar power plants. But, despite the differences, all auction designs are based on the same common principles. Any State funding depends on an acceptance granted by the Federal Network Agency after each auction. For onshore wind and PV, three to four auctions will be organised by the Federal Network Agency per year. The Federal Network Agency will thereby determine the capacity (in MWh) to be auctioned and will set a cap for the bids. Both parameters will be published prior to an auction. Each bidder can make only one tender per auction. All auctions follow the pay-as-bid principle, i.e. the amount of funding corresponds to the individual (fixed funding value) bid placed and each bidder has to provide security for its bid. Bids are awarded starting with the lowest bid made until the capacity is completely allocated to the bidders. Finally, after a bid is awarded, the winning bidder is obliged to realise its project within a certain time limit. Alongside adopting the EEG 2017, the German government has also passed the Offshore Wind Act (Wind-auf-See-Gesetz). The purpose of this law is to steadily and cost-efficiently expand the usage of offshore wind energy in the interests of climate and environment protection. The Offshore Wind Act introduces a so-called central model. This means that the areas of the land development plan which are considered, are pre-examined by the Federal Agency for Sea Shipping and Hydrography at first, and then tendered. This shall serve the goal that not every applicant needs to examine the land himself. Also, the market premium is determined for each piece of land through this process. Through the land development plan as the key planning instrument for the period after 2025, the departmental planning stipulations for the exclusive economic zone of the Federal Republic of Germany in the North Sea and the Baltic Sea will be conducted. This is how the expansion of wind energy facilities and offshore connection lines shall be synchronised in the best possible way.7
Judicial decisions, court judgments, results of public enquiries
In December 2013, the European Commission initiated a procedure in accordance with Article 108 para. 2 of the Treaty on the Functioning of the European Union (TFEU) to analyse whether or not State aid was involved in the financing mechanisms covered by the former EEG 2012, which had been in force from 1 January 2012 until 31 July 2014. On 25 November 2014, the Commission finally delivered its decision. It concluded that the EEG 2012 (i.e. the predecessor of the EEG 2014) involved State aid. However, in the Commission’s view, aid granted for the production of energy from renewable energy sources under the EEG 2012 was in line with EU State aid rules. Only some reductions for energy-intensive users (EIU) exceeded what was permitted. Therefore, the aid should be recovered to the extent that it was incompatible with the internal market.
The Commission assessed, in particular, the capped EEG-surcharge for an EIU and the so-called green electricity privilege. According to the EEG 2012, electricity suppliers were obliged to pay the so-called EEG-surcharge to the transmission system operators (TSO), depending on the amount of electricity delivered to their final consumers. The EEG-surcharge serves to finance the support to electricity production from renewable energy sources. Its level was determined by the TSOs in accordance with detailed legal guidelines which allowed no discretion to the TSOs. Energy suppliers were entitled to pass the EEG-surcharge on to their customers.
The green electricity privilege stands for a reduction of the EEG-surcharge for electricity suppliers provided that certain conditions are met. In particular, at least 50% of the electricity delivered to all of their final customers had to be domestically produced from renewable sources or mine gas, and purchased by way of direct marketing. The Commission underlined that support under the EEG 2012 may be limited to national production but must not, however, introduce discriminatory charges. Although still arguing that the green electricity privilege does not constitute a discriminatory charge, Germany provided a commitment to invest in interconnectors and similar European energy projects amounting to the estimated amount of alleged discrimination. The Commission accepted this offer as a suitable remedy to historical potential discrimination.
Furthermore, an EIU could apply for a limitation of the EEG-surcharge if, inter alia, its energy consumption exceeds 1 GWh and the ratio of electricity costs to gross value added exceeds 14%. The Commission assessed the possibility of limitation as an economic advantage, because the EIU may be relieved from a cost burden which it would have to bear under normal conditions. Germany considered that there was no State aid involved, because the EEG support mechanism only involved private undertakings, while public authorities had no control over either the collection or use of the surcharge, nor did they determine its level. The Commission found that the mere fact that the advantage was not financed directly from the State budget did not exclude the existence of State aid. It emphasised, in contrast, that electricity suppliers did not pay the EEG-surcharge voluntarily but were obliged to do so by law. In its view, it is sufficient that the State had set the purpose of the EEG-surcharge and regulated the method of calculation in detail. Furthermore, public authorities were involved in the monitoring of the system and were responsible for approving surcharge reductions.
With regard to compatibility with the internal market, the Commission applied the “Guidelines on State aid for environmental protection and energy 2014–2020”, which include provisions on aid in the form of reductions in funding support for electricity from renewable sources. As a general rule, undertakings belonging to the sectors listed in the guidelines must pay at least 15% of the EEG-surcharge. The amount can be reduced to 4% of the gross value added of the undertaking concerned, or even to 0.5% of its gross value added, if electro-intensity is at least 20%. The Commission concluded that the reductions for an EIU according to the EEG 2012 only partially met those rules. Advantages granted beyond the guidelines should be recovered.
Nevertheless, according to the guidelines, all aid granted to reduce the burden related to funding support for electricity from renewable sources in respect of the years preceding 2019 can be declared compatible with the internal market to the extent that it complies with an adjustment plan. Germany has submitted such an adjustment plan, providing that the adjusted EEG-surcharge must not exceed 125% (for 2013) or 150% (for 2014) of the surcharge the EIU actually paid in 2013. Therefore, the Commission ruled that recovery should be limited accordingly. The German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) assumes that recovery will only amount to approximately €40m in total, while the combined reductions in 2013 and 2014 for EIUs amounted to approximately €11bn.
Germany was not willing to accept the Commission’s decision and brought the case before the European Court of Justice in February 2015.
Germany relies on three grounds in law:
- First, Germany claims that the Commission misunderstood the financial flow system under the EEG 2012 and the role of ‘the State’ as legislator and as the body with responsibility for supervision, and incorrectly deduced a situation of control therefrom.
- Second, EIUs were not favoured by the EEG 2012 according to the case-law of the Court of Justice.
- Third, public authorities had no control over the assets of the various private companies participating in the regime of the EEG 2012.
The General Court (Third Chamber) recently dismissed the action confirming that the German EEG 2012 did, in fact, involve State aid. The Court ruled that the Commission was correct in taking the view that the reduction in the EEG surcharge for EIU granted them an advantage within the meaning of EU law on State aid. The reduction released them from a charge which they would normally have had to bear. The grounds underlying an aid measure are not adequate to exclude the measure at the outset from classification as aid. The Commission was also correct in taking the view that the EEG 2012 involved State resources, the Court said.
The mechanisms under the EEG 2012 result principally from the implementation of a public policy, adopted by the State through the EEG 2012, to support producers of EEG electricity. Firstly, the funds generated by the EEG surcharge and administered collectively by the TSOs remain under the dominant influence of German authorities. Secondly, the amounts in question are funds which involve a State resource and can be compared to a levy. Finally, it may be concluded from the powers and tasks given to the TSOs that they do not act freely and on their own behalf, but as administrators of aid granted through State funds.
Since Germany is not willing to accept the judgment of the General Court (Case T-47/15), it appealed against the decision. The appeal will now be sent to the European Court of Justice (Case C-405/16P).8 However, the appeal does not affect the legality of the EEG 2014 and the EEG 2017.
Major events or developments
To better integrate renewable energies into the market and to react against rising energy prices for end users, market premiums shall not be paid in adverse market situations. Additionally to Section 51 para. 1 EEG 2017, which stipulates that if the value of the hourly contracts for the Germany/Austria price zone on the spot market of the EPEX Spot SE electricity exchange in Paris is negative for at least six consecutive hours, the value for the market premium shall be reduced to zero for the entire period in which the hourly contracts are negative without interruption; Section 51 para. 1 EEG 2017, implements an information obligation for installation operators, ruling that if electricity is sold with the feed-in tariff in a calendar month in which the preconditions pursuant to subsection 1 are fulfilled at least once, the installation operator must inform the grid system operator of the quantity of electricity which it fed in during the period in which the hourly contracts were negative. Otherwise, if the installation operator fails to inform the system operator, its entitlement will be reduced in the relevant calendar month by 5% for each calendar day in which this period wholly or partly lies.
Due to the German government’s policy mandating an accelerated exit from nuclear power RWE, Eon and Vattenfall have lodged numerous cases at the German Federal Constitutional Court (Bundesverfassungsgericht) in Karlsruhe. The energy companies argued that the mandate equals an expropriation without compensation, which would be unconstitutional. Eight out of 17 functioning nuclear power plants in Germany were shut down in the immediate aftermath of Fukushima, and the remaining nine plants will have to be shut down by 2022 according to a government timeline. The German Federal Constitutional Court decided that the acceleration of the phase-out of the peaceful use of nuclear energy was not unconstitutional.9 Nevertheless, the Federal Constitutional Court found that it is incompatible with the German constitution that the law does not provide for any settlement with regard to investments made in legitimate expectation of the additional electricity output allowances granted in 2010 and that were devalued as a result of amendment to the Atomic Energy Act. The Federal Constitutional Court urged the legislature to draw up new provisions by 30 June 2018.
The energy companies were also successful at another front: the German Federal Constitutional Court decided that the nuclear fuel tax was unconstitutional and that the tax collection in the years 2011 through 2016 in the amount of more than €6bn was unlawful.10
In 2016, the European Commission presented a package of measures regarding the European energy market (so-called Winterpaket). This package included legislative proposals covering energy efficiency, renewable energies, the electricity market’s design and the security of electricity supply. It also included actions to accelerate clean energy innovation and provided measures to encourage public and private investment.11
Proposals for changes in laws or regulations
With a growing proportion of intermittent renewable energy, there is a higher need for the energy system to become more flexible, while remaining stabile and reliable. Therefore, energy storage is one option to increase the flexibility of the power supply. In order to promote new storage projects, further regulatory relief, including a clear legal qualification of electricity storage, is needed. Additionally, better regulations for grid expansion as well as a compromise with the German federal states (Bundesländer) remain an ongoing challenge in Germany. Power lines which transfer wind power from the north to industrial regions in the south are still a major pillar of the success of the Energiewende. While public support for the shift to clean energy is high, there is determined opposition to the perceived blight of power cables and pylons straddling the country.
The Offshore Wind Act will potentially also influence the way projects are developed. Since the Federal Agency for Sea Shipping and Hydrography will pre-examine potential areas and then initiate a tender process in the central model (applies for offshore wind farms to be commissioned from 2025 onwards), tasks formerly executed via project developers are now under governmental control.
1. Cf. for the figures, Federal Ministry of Economic Affairs and Energy (BMWi): http://www.bmwi.de/Redaktion/EN/Dossier/renewable-energy.html.
2. Cf. for the figures, Federal Ministry of Economic Affairs and Energy (BMWi): http://www.erneuerbare-energien.de/EE/Redaktion/DE/Bilderstrecken/entwicklung-der-erneuerbaren-energien-in-deutschland-im-jahr-englisch.html.
8. http://curia.europa.eu/juris/liste.jsf?language=de&jur=C,T,F&num=T-47/15&td =ALL.