Highlights

  • The EEG surcharge for 2014 will be €64.2/MWh (~$88/MWh) - an amount almost double the wholesale electricity price.
  • The surcharge is influenced by numerous factors that can be interpreted differently depending on subjective viewpoints.
  • Ultimately, Germans pay about quadruple the actual market value for the ~25% renewable electricity on their grid.

Introduction

Germany is conducting a very daring experiment with a large-scale transformation to renewable energy. For everyone participating in the energy and climate debate, it offers an excellent real-world dataset about the implications of a sustained subsidized deployment of renewable energy. Currently, things seem to be on track towards the minimum 2020 target (shown below), but rapid rises in electricity costs combined with rises in CO2 emissions have given skeptics plenty to talk about.

German electricity from renewables 2012

The above-mentioned costs are primarily implemented through the EEG surcharge which is basically the difference between the electricity price and the fixed feed-in tariffs paid to renewable energy producers. This surcharge will rise to €64.2/MWh ($88.3/MWh) in 2014 and is the subject of ever-increasing amounts of scrutiny from various groups.

Interpretations of the EEG surcharge

Naturally, reactions to this large additional charge depends greatly on the affiliation of interested parties. For example, a background paper recently released from a German renewable energy industry group states that only €25.4/MWh of this surcharge is actually direct support for renewable energy. The rest of the surcharge is primarily due to falling electricity prices, industry exemptions and carry-over from the previous year. This breakdown is shown below.

Components of the EEG surcharge

The carry-over component ("equalization of negative balance from previous year") appears to be an interesting bit of accounting. To correct for this component, the 0.63 c/kWh in 2013 should have been charged in 2012, bringing the 2012 "pure support costs" up to 2.8 c/kWh. Similarly, the component in 2014 should have been charged in 2013, bringing the 2013 "pure support costs" up to 3.25 c/kWh. Chances are that this charge would again appear next year and again be marketed as having nothing to do with direct renewable energy subsidies.

The industry privileges component is a fairly contentious issue and is currently being investigated by the EU as potentially illegal state aid. It is true that industry exemptions place additional burden on retail electricity consumers, but this is done for a good reason. Scrapping these exemptions would imply that energy intensive German industries (those where electricity costs represent at least 14% of their gross added value) would jump from the current €143/MWh (which is already high) to about €206/MWh (which could send lots of German jobs abroad).

Finally, we come to the electricity price reduction issue. Renewable energy advocates like to point out that wholesale electricity prices dropped from almost €70/MWh in 2008 to just €37/MWh in 2013. As shown below, however, it is clear that most of this price drop was due to the recession (which is still lingering in Europe).

German electricity prices 2013

That being said, however, it is an indisputable fact that intermittent renewables enjoying dispatch priority reduce the wholesale electricity price simply because such bursts of must-take power reduces the demand for the existing fleet of dispatchable capacity. Contrary to the great positive that wind & solar advocates make this out to be, a previous article outlined why this effect actually makes intermittent renewables subsidy-dependent even after so-called grid parity is achieved. This effect was recently discussed in more detail using real-world data from Germany.

Ultimately, however, the best way to understand the EEG surcharge is to break it down to its foundation: the difference between the cost of feed-in tariffs and the revenues gained from the sale of renewable energy. The difference between these numbers is then socialized across the population by means of the EEG surcharge on retail electricity.

Fundamental breakdown of the 2014 EEG surcharge

It is easy to get lost in €/MWh metrics which can be difficult to put into perspective, but the difference between the costs of feed-in tariffs and the revenues from electricity sales is fairly easy to understand. This is given below based on the breakdown of the 2014 EEG surcharge (in German).

German EEG costs and revenues 2014

The above figure gives a pretty stark representation of the value/cost ratio of renewable electricity in Germany, but requires a little bit of additional explanation to understand correctly.

The most direct indication of the value/cost ratio of renewable energy in Germany can be gained by comparing the green and orange bars (a direct value/cost comparison). For the green bar, the monetary value was estimated by setting the market price of renewable electricity sales at €35/MWh which should be a conservatively high value given the falling value of intermittent renewables with increasing penetration. This metric shows that Germans paid quadruple the market value for the ~25% renewable electricity on their grid.

The small blue bar at the top is the estimated value of renewables that receive a fixed EEG subsidy instead of a premium above the market price. This value represents the revenue component in the calculation of the EEG surcharge. Finally, the large red bar at the bottom includes all additional charges (primarily the EEG account deficit from the previous year and a 10% liquidity reserve).

Future prospects

Contrary to the beliefs of solar and wind advocates, it is unlikely that this very poor 1/4 value/cost ratio will improve significantly over coming years. Yes, solar and wind technology costs are dropping with increasing deployment, but so is their value. Since the relatively easy gains from biomass and low-penetration onshore wind have already been exploited, progress is likely to become increasingly difficult as more expensive solar and offshore wind are utilized to drive the Energiewende forward (shown below).

Projected growth of renewable electricity generation in Germany

One has to commend the amazing German willingness to pay for the perceived environmental protection associated with solar and wind technology-forcing. Getting an entire nation to pay quadruple-price for a quarter of their electricity would seem like a political impossibility, but the Germans have actually pulled it off.

The increasing political wrangling driven by factors such as escalating costs, reports about serious impacts on the poor and EU investigations into the legality of industry exemptions is an ominous sign though. Germany is unique in Western world in terms of its commitment to produce great value for relatively low wages, but one has to wonder how long this hardworking nation can maintain the Energiewende in the face of gathering headwinds.