As cost pressures mount in the German energy transition, the Merkel administration is proposing to abandon the feed-in tariff in favor of market-based policies for renewables.

The administration is not proposing to a total retreat from its Energiewende goals. And because most current costs are the results of long-term contracts for solar projects built between 2010 and 2012, there is little that can be done to reduce costs in the short term. But in the long term, regulators are looking to market forces to deliver the goals at a lower cost.

In fact, the competitive tools the Germans have proposed -- including pushing renewable energy into the wholesale power market and using competitive procurement -- could make the Energiewende look more American.

Most notably, this move comes at the expense of the feed-in tariff, the policy that has spurred the rapid growth of renewables in Germany, spread to 64 countries around the world, and driven down solar prices worldwide. 

Because of its ease of implementation and prices tailored to small producers, the FIT has led to the democratization of energy production in Germany. Almost half of the renewable capacity is owned by individuals and farmers.

“The feed-in tariff system made Germany famous as the 'Energiewende' country,” said Oliver Krischer, the Green Party’s speaker for energy issues in the Bundestag. “Looking at other countries where they have a system of competitive bidding, the electricity prices [have] not only raised, but the development of renewables slowed down.”

Dusseldorf-based energy lawyer Matthias Lang, author of the German Energy Law blog, thinks that while the ideas may be American, they were filtered through European Union policy.

“Contrary to what you read in many international newspapers, the German public is fine with paying higher electricity prices,” he said. “People [in Germany] think renewable energy is a good idea and shutting down nuclear is good, and if it costs something, it costs something.”

“Why is Germany doing it? Because there was very strong influence from Brussels,” he said in an interview. 

Last year, the EU energy commissioner Günther Oettinger warned that solar development was "getting out hand" and suggested putting limits on the industry.

The European Commission issued new guidance to member states on April 9, requiring policies that reduce the cost of renewables without interfering with free trade between countries or creating unfair advantages for native industries.

“Some renewable energy technologies have reached a stage of maturity that calls for their integration in the market,” the guidance read. “To increase cost-effectiveness and limit distortions, the new guidelines foresee the gradual introduction of competitive bidding processes for allocating public support. [...] The guidelines also foresee the gradual replacement of feed-in tariffs by feed-in premiums, which expose renewable energy sources to market signals.”

Not all renewables are required to be exposed to competition. Small installations will still get a support scheme similar to a feed-in tariff. Furthermore, the new rules won't impact current support structures that have already been developed.

Lang thinks the proposed reform bill in Germany is the first to be influenced by the European Commission. "There was a lot of pressure coming from Brussels," he said. "It is quite a different approach than in the past. It’s a paradigm change in how Germany and other states approach renewable energy policy.”

The proposal from the Merkel administration is to phase out the FIT by 2018 for new installations, with projects larger than 500 kilowatts being targeted in the first phase of the process. Existing contracts will not be affected.

The FIT will be replaced by a “tendering” or a competitive bidding system, with rules to be determined by the Bundesnetzagentur, the national power network agency. A pilot program for ground-mounted solar will test the system before it is applied to other renewables.

“The photovoltaic sector has been chosen for its short planning and licensing processes and comparatively low investment costs at an early planning stage,” according to Jens Suhrbier and Felix Dinger of Norton Rose Fulbright, a Hamburg law firm. 

Experts assert that these changes will reduce the dominance of individuals in the renewable sector, giving an advantage to utilities and deep-pocketed developers.

“It is a fair guess that this will be advantageous for...larger players and that some of the smaller direct marketers will disappear," they wrote.

Dörte Ohlhorst, professor of environmental policy at the Free University Berlin, agrees. “The bidding system might be an instrument to control the renewable energy expansion rate, but it will change the profile of producers in Germany,” she said. “Small enterprises and citizens can't take the risk of such a large investment without the kind of long-term security that the FIT provided."

The proposed EEG reform will also increase competitive forces by requiring sales on the power exchange. Larger generators have been getting a “market incentive” to voluntarily sell power on the exchange, essentially a measure that guarantees they will be no worse off than if they got paid through a FIT. Virtually all wind producers have switched to this approach, according to Lang.

“The days of such an easy system may be numbered,” according to Suhrbier and Dinger.

Instead, following EU guidance, the bill proposes requiring larger producers to sell power either through the power pool or directly to electricity retailers, rather than to grid operators, who then resell it on the exchange. A fixed “market premium” will be added to the market price to incentivize development, similar to the now-expired U.S. Production Tax Credit, which offers 2.3 cents per kilowatt-hour for new renewable projects over the course of ten years for eligible installations that met the cutoff date.

The reform also proposes a “corridor” of development of about 2.5 gigawatts per year for onshore wind and PV, with a cap of 6.5 gigawatts of offshore wind by 2020 -- a reduction from the current 10-gigawatt goal. If development exceeds or falls short of the corridor, incentives will be adjusted up or down accordingly.

What the Merkel administration has not proposed is to change the goals of the Energiewende. German law sets out a suite of energy and climate goals for the coming years, including obtaining 80 percent of energy from renewable electricity, cutting primary energy consumption by half, and achieving greenhouse gas reductions of at least 80 percent by 2050.

The proposal from the Merkel administration is expected to be voted on in parliament by July 11. The final law is slated to go into effect on August 1. Since the Merkel administration comprises a “grand coalition” of the two dominant political parties, some think there could be few changes to the bill.

MP Krischer is not so sure. “Members of parliament from the coalition and the opposition agree that this reform will slow down the development of the renewables,” he noted in a recent interview. He said the priority issues for the Green Party will be to eliminate the “corridor” quotas for onshore wind and solar, as well as blocking the “tax” on self-generation.