A new, revised German renewables support framework will just have taken effect when the wind energy sector gathers at the Wind Energy Hamburg expo later this month. Once again, the German government has adjusted its main renewable energy policy instrument â€“ the EEG; once again support has been reduced; and once again, surprisingly, the market seems to have received the policy changes with muted satisfaction, despite the simultaneous introduction of a 2,500 MW cap on annual onshore wind installations and dramatically reduced targets for offshore wind energy.
For the past 15 years the same story has been repeated in Germany: the Government signals changes; the industry expresses wild disagreement and concern; and when the dust settles, everybody seems reasonably satisfied. That is a remarkable policy achievement, considering what goes on in wind energy policy in other corners of the world these years.
Germany was never the most exciting wind turbine market. Since 1999, a reasonably safe bet to make was that â€˜Germany will install 2,000 MW of wind capacity next yearâ€™. Annual installations have kept within a band of 1,500 MW and 3,200 MW (last year) without any dramatic ups, downs, booms or busts for the past 15 years.
German land-owners, manufacturers and turbine owners have made decent returns on their investments in the German market over the past 15 years. Some have even made very decent returns, if they managed to invest during the narrow window after technology cost had come down and before the feed-in tariff was adjusted. But few in Germany have made exorbitant profits from their wind energy investments, compared to the risk they undertook. Changing governments have been excellent at maintaining coherence between the level of the feed-in tariff and the cost of producing wind power in Germany.
The most recent incarnation of the German feed-in tariff bears little resemblance to the first one (the Stromeinspeisungsgesetz) introduced in 1990 – the year of German reunification – and to the first version of the EEG that replaced the Stromeinspeisungsgesetz in 2000. Despite the relatively frequent changes to the system, Germany has managed to maintain investor confidence and minimise the perceived political risks. This has kept financing cost relatively low and avoided the devastating effects of the boom-bust cycles that have characterised many markets in the past. No other market in the world has displayed such stability. Perhaps one reason for the success is that development did not happen too fast.
Denmark increased its share of wind energy from 1.9% to 8.7% of electricity consumption during the 1990s while Germany modestly went from zero to 1% by 1999. But while Germany comfortably installed its average 2,000 MW per year in the first decade of the century, Denmark went from a peak of 637 MW in 2000 to practically nothing in the five-year period 2004 to 2008.
In Spain, wind energy met 23.2% of total demand in the first half of 2014, beating all other technologies, but in terms of new installations, Spain is entering into a gloomy period that could be as long as the Danish one from a decade ago. According to Spanish Wind Energy Association AEE, the country installed only one 80 kW turbine on commercial terms in the first half of the year.
Naturally, these country examples do not compare one-to-one. In Denmark the rapid built-up was caused by falling technology cost and a feed-in tariff that was too slow to react, combined with a shift in government. In Spain, the wind energy boom coincided with a massive built-out of gas power plants just prior to the decline in energy demand, caused by the economic downturn, which eventually killed both markets. The United States is another curious case: It has had the same, almost unchanged federal policy in place since 1992 â€“ the 2.3 UScents/kWh Production Tax Credit (PTC). Here the problem has not been policy changes but the US Congressâ€™ inability to extend the measure in good time before it expired.
What makes Germany different? How has the country been able to maintain stability for 15 years? Well, the Spanish and the Danes might suggest that we should wait until Germany reaches a quarter of its power from wind energy before applauding it. They would have a point. However, a recent analysis by the German Association of Energy and Water Industries (BDEW) estimates that Germany reached 28.5% renewable electricity consumption in the first half of 2014, of which more than 18% was variable renewables (11.6% wind energy and 6.8% PV).
Over a long period of time, Germany has been better than any other country at adjusting what is inherently a relatively inflexible support mechanism to changed circumstances in the marketplace. Nevertheless, even the German government proved unable to keep up with the rapid cost reductions and the resulting exponential growth in PV installations in recent years. The country added 7.5 GW of solar power annually in the three-year period from 2010 to 2012.
In a recent study, Fraunhofer ISI estimates that realized onshore wind energy profits in Germany were â‚¬750 million in 2012. Realized PV profits were almost three times higher at â‚¬2.7 billion, although almost twice as much wind power was produced compared to PV. Consequently, the 1 August revision of the EEG contained steep cuts to the PV sector. Allowing excess profits over a short period of time, prevents many future investors from making decent returns for a long period of time and does nothing good to any sectorâ€™s long-term prosperity.
Had the German government lost its touch of keeping technology cost in reasonable sync with remuneration? Probably not, but the changes in conditions simply came to fast and at too large a scale for timely intervention, which inherently is the challenge of the feed-in tariff model.
The great thing about feed-in tariffs is that they are predicable and lowers the cost of capital and thereby the cost to consumers of developing a cleaner and smarter energy system based on capital-intensive renewables. The problem with them is that the political risk inherent in the system adds a premium and that cost can spiral out of control in the well-intended efforts of avoiding retroactive measures at (almost) all cost, as Germany has insisted.
Germanyâ€™s energy transition – the Energiewende – is the most ambitious attempt of any large industrialised nation to replace nuclear energy completely, and fossil fuels more gradually, with renewables and efficiency. Shifting German governments have, time and time again, insisted on maintaining a low political risk-premium through a coherent and consistent policy approach. The problem facing Germany going forward is that factors out of the governmentâ€™s control are increasingly affecting the perceived risk of investing in German renewables, including the effects of EU regulation on the EEG.
Another external factor is that political risk is on the rise in many markets these years and that the risks spill over into other markets. It is not that long ago that the political risk-premium of investing in Spanish renewables was at a similar low level to that of Germany. If Spain could change overnight, many investors worry, what prevents Germany from doing the same? Therefore, the German government can no longer automatically assume that political risk can be contained as long as it continues its consistent approach to policy.
There must be a smart way to square the future renewable energy policy circle. If there is, my bet is that Germany will be the first to propose it.