Lessons to be learnt from the German Renewables Experience Prof. Christoph Weber HEPG 37 th plenary session December 13, 2013 CHAIR FOR MANAGEMENT SCIENCE
German Renewables Experience Overview 1. Key lessons learnt 2. Key drivers 3. Economic rationales for (no) Feed-In-Tariffs 4. Final remarks 2
Key lessons learnt Feed-in tariffs are effective 2012: 23 % of electricity consumption 1990: 3 % of electricity consumption Source: BMU (2013) 12/19/2013 3
Key lessons learnt Unlimited support is dangerous Austria also has renewable infeed tariffs, yet has always limited the financial support volume per year Source: r2b (2013) BMU (2013b) 5
Key lessons learnt CHAIR FOR MANAGEMENT SCIENCE Renewable support does not affect CO2 emissions given ETS [Mt CO2eq] 6
Key lessons learnt Heterogeneity is a challenge Hydropower Biomass (solid, liquid, gaseous) Landfill, sewage, mining gases Bandwidth for installations until 12/31/2011 Average remuneration 2011 Bandwidth installations in 2012 Source: BDEW (2013) 12/19/2013 7
Key lessons learnt Heterogeneity is a challenge not only status quo but also developments CHAIR FOR MANAGEMENT SCIENCE PV has seen cost decrease by more than factor 4 Wind has remained rather stable PV difficult to steer Source: BDEW (2013) 12/19/2013 8
Key drivers Public opinion drives public policy Current poll results: About 80 % of German citizens are in favor of a future expansion of renewable energies Willingness to pay more for renewables is much less pronounced Only between 20 % and 50 % of all citizens have a positive willingness to pay Concern about impact of renewables on electricity prices is rather recent A vast majority asks for more pressure on industry Inconsistent basis for public policy Sources: TNS infratest (2013), TNS emnid (2013), Forsa (2013) 9
Key drivers Reliable commitment by policy makers The German Renewable Feed-In-Tariff is not paid by taxpayers It is rather financed through a levy on the electricity bills There are various exemptions to the levy The exemptions have been extended especially since 2012 No direct budget pressure through increasing renewable support Self-binding of policy makers much easier Self-binding frequently requested as basis for a (time-)consistent policy Self-binding here rather through agreements at the expense of third parties (electricity customers) 10
Economic rationales for (no) Feed-In-Tariffs CHAIR FOR MANAGEMENT SCIENCE Common objectives of climate & renewable policies B1) Reduction of Greenhouse Gas emissions B2) Low overall economic cost (productive/allocative efficiency) First-best instrument: GHG certificate trading E1) Achievement of target deployment rates for renewables E2) Low costs for all electricity customers E3) Low costs for energy-intensive companies with global competitors S1) Development of decentralized Energy supply structures S2) Creation of jobs and industrial competences 11
Economic rationales for (no) Feed-In-Tariffs CHAIR FOR MANAGEMENT SCIENCE Ex-post reconstruction: Minimum set of objectives to make feed-in-tariffs a rational policy choice B1) Reduction of Greenhouse Gas emissions B2) Low overall economic cost (productive/allocative efficiency) E1) Achievement of target deployment rates for renewables E2) Low costs for all electricity customers Differentiated Support by technology classes Welfare economic rationale: Focus on consumer rent instead of sum of consumer and producer rent 12
Economic rationales for (no) Feed-In-Tariffs Efficiency incentives vs. Elimination of producer surpluses (objectives B2 vs. E2) cost /MWh Efficiency incentives Target Quantity Uniform certificate price Potential GWh Base price cost /MWh Differentiated Tariffs Efficiency incentives Base price Target Quantity Potential GWh
Economic rationales for (no) Feed-In-Tariffs Stable revenues Further reasons for Fixed Feed in Tariffs (FIT) vs. volatile certificate and electricity prices in a quota model Reduction of the economic risks for investors Along the entire value chain: manufacturers, installers, investors Low return on capital required by financing institutions cf. Butler & Neuhoff (2007), Ragwitz et al. (2008) Bankability of revenues higher share of debt lower weighted overall capital cost Higher cost effectiveness for transfer payments Risk transfer to government respectively to other market participants in the electricity market Adequacy at first sight questionable in an integrated economic perspective Yet lack of reliable self-binding of policy makers for other instruments 14
Economic rationales for No Feed-In-Tariffs The perfect storm for the German policy mix Consequences of the 2008 financial crisis: Economic recession (German GDP went down by -5.4 % in 2009) (extremely) low interest rates Demand for electricity declined CO 2 certificate prices also dropped Costs for raw materials and PV systems collapsed Opportunity costs for home solar investments shrank Huge investment into PV systems Huge increase in renewable subsidies Built-in in the fixed feed-in tariff without quantity limitations 15
Economic rationales for No Feed-In-Tariffs The perfect storm for the German policy mix CHAIR FOR MANAGEMENT SCIENCE 16
Conclusions Triple Challenge Achievement of long-term climate policy objectives impossible without renewables Renewables are relatively expensive Single first-best solutions for CO 2 abatement do not work for political reasons and are unlikely to work as conceived theoretically for reasons of political economy Renewable support schemes are not the economic first-best solution, but Well-designed schemes could be an interesting complement in climate policy strategies at least as long as no (inter-)nationally coordinated policies are in place 17
Conclusions Well-designed renewable support schemes strive for: Calculable investment risks Limited additional costs Bounds on quantities Political stability Locational incentives in case of a weak grid Feed-in tariffs may support renewable development in early stages For more evolved markets, support schemes with stronger market integration are advisable like premia (e.g. tax rebate) or quota systems provided the self-binding of policy makers is effective The combination of feed-in tariffs and carbon emission certificates has proven to be very vulnerable to the combination of economic recession and low interest rates Europe has experienced over the last years 18
Many thanks! Contact: Prof. Christoph Weber E-Mail: christoph.weber@uni-duisburg-essen.de Phone.: +49 201/183-2966 CHAIR FOR MANAGEMENT SCIENCE