Spurred by the mounting costs from past contracts for solar power, the Merkel administration has proposed major changes to Germany’s landmark energy laws promoting renewables.

While some will charge that the energy transition policy known as the Energiewende has failed, there is no discussion in Germany about abandoning aggressive energy and climate goals. They just want to save a little money.

The explosive growth of solar energy in the last few years has pushed German policy instruments to the breaking point. The government has proposed a variety of reforms to shift and cut costs, tighten loopholes and introduce more competition. But the fundamental issue -- long-term contracts signed for high-priced solar power -- seems unfixable.

“It’s about saving money, but there aren’t many opportunities to save money,” said Christoph Podewils, spokesperson for Agora Energiewende, a Berlin-based think tank. “You can’t shave the old contracts, and new contracts are very cheap. The only possibility is to broaden the sources of income.” 

The main problem centers around the surcharge that is used to pay for feed-in tariffs. 

A key tool in the renewable energy law (Erneuerbare-Energien-Gesetz, or EEG) is the well-known feed-in tariff (FIT), which requires utilities to accept power from independent generators. The price is set by regulators, according to the cost of each renewable technology. This predictability results in low-risk financing, which lowers the cost of capital-intensive renewables.

But because the FIT guarantees producers a fixed payment over twenty years, past higher costs for renewables persist -- and add up. A homeowner with a small rooftop solar system who signed a FIT contract in 2009, for example, will be paid 43 cents per kilowatt-hour through 2029. The rate for a similar system installed this past January fell to 13.7 cents.

The above-market cost of the FIT is collected from consumers through a surcharge (EEG-Umlage), which rose to 6.24 euro cents in 2014. The energy ministry expects the EEG surcharge to rise to 7.7 euro cents by 2020, with the Centre for European Economic Research pegging it at 8.3 euro cents.

This cost overhang is a fundamental problem that reforms aim to address. 

According to Agora Energiewende, the largest part of the surcharge -- amounting to slightly more than €10 billion in 2014 -- is paying for the huge growth in solar from 2010 through 2013, when Germany was installing 7 gigawatts per year. The biggest increase going forward is expected to be for offshore wind. The group has developed a new online calculator that provides transparency on the surcharge.

Simply lowering new tariff prices will have little effect on this backlog of high-priced contracts, since current FIT prices are much more competitive. 

“Additional measures to throttle the expansion of PV through further amendments to the EEG will not affect a decrease in the total remuneration,” according to the Fraunhofer Institute. “Such a measure would, however, cause a slowdown in the construction of very inexpensive systems.”

“It would be inconceivable if…the development of solar energy slows now just as it has become inexpensive,” said Carsten Körnig, head of the national solar trade group BSW, on the website PV Tech.

Abrogating past FIT contracts is not an option. “That is forbidden by law,” said Agora Energiewende's Podewils. “It would be against our constitution.”

Because the fundamental problem of cost overhang is unsolvable, the government is trying to recover costs wherever it can. 

The reform bill proposes cutting exemptions for industrial customers, imposing the surcharge on customers who generate their own power, putting a quantitative cap (a “corridor”) on new development, accelerating the decline in payments for certain renewables, and cutting “market incentives” to sell renewables on the power exchange.

Among the most contentious issues is the fact that the surcharge is not collected from all customers. 

Partial exemptions are given to 2,100 companies that are “electricity-cost intensive and trade intensive,” according to the Ministry of Economic Affairs and Energy (BMWi). These “privileged” customers use 25 percent of Germany’s power, but only pay 2 percent of the surcharge. As a result, residential and small commercial customers pick up the slack, paying about €24 billion per year.

This exemption has been a key source of controversy, not only between customer classes, but also between Germany and the European Union. The EU has alleged that the exemption creates an unfair advantage over foreign competitors and has pushed for it to end. 

But political leaders are reluctant to eliminate the advantage for important industries. In the proposed reform, the Merkel administration is floating a compromise of cutting 500 companies out, and forcing the remaining companies to pay 20 percent of the surcharge, cutting the value of the exemption from €5 billion down to €1 billion per year.

Another sticking point will be the plan to apply the surcharge to customers that produce their own power. 

With solar FIT prices well below the retail price of power, regulators are worried that more customers will opt out of the grid and produce their own power. This would cut not only energy sales, but also tax payments and payment of the EEG surcharge. As a result, the Merkel administration is proposing to apply the surcharge (with a 50 percent discount) to “own generation,” or power produced and used by the customer. Already, by one estimate, 10 percent of the country’s power is self-generated, largely in CHP operations by industrial customers.

Solar lobby group BSW and the Federation of German Consumer Organizations have announced plans to challenge the surcharge in court, if adopted. 

The proposal from the Merkel administration is expected to be voted on in the two houses of parliament, the Bundestag and the Bundesrat, this summer. The final law is slated to go into effect on August 1.

Tags: europe, feed in tariffs, germany, solar policy