Over the last decade, well-intentioned policymakers in Germany and other European countries created renewable energy policies with generous subsidies that have slowly revealed themselves to be unsustainable, resulting in profound, unintended consequences for all industry stakeholders. While these policies have created an impressive roll-out of renewable energy resources, they have also clearly generated disequilibrium in the power markets, resulting in significant increases in energy prices to most users, as well as value destruction for all stakeholders: consumers, renewable companies, electric utilities, financial institutions, and investors.
Accordingly, the United States and other countries should carefully assess the lessons learned in Germany, with respect to generous subsidy programs and relatively rapid, large-scale deployment and integration of renewable energy into the power system. This white paper is meant to provide further insight into the German market, present an objective analysis of its renewable policies, and identify lessons learned from Germany, and to a lesser degree, other European countries.
The rapid growth of renewable energy in Germany and other European countries during the 2000’s was due to proactive European and national policies aimed at directly increasing the share of renewable production in their energy mixes through a variety of generous subsidy programs. Two main types of subsidy programs for renewable power developed in Europe include feed-in tariffs (FITs), which very quickly became the policy of choice for Germany and many other European countries, and quota obligation systems.
FITs are incentives to increase production of renewable energy. This type of subsidy guarantees long-term (usually for 20 years) fixed tariffs per unit of renewable power produced. These fixed tariffs normally are independent of market prices and are usually set by the government, but can be structured to be reduced periodically to account for technology cost decreases. The level of the tariffs normally depends on the technology used and the size of the production facility. Because of their generosity, FITs proved capable of quickly increasing the share of renewable power, but since the FITs are set administratively, it is difficult to meet renewable energy goals in the most cost-effective way possible.
The quota system is the European equivalent to the Renewable Portfolio Standard used in the United States. Whereas FIT programs set the price for the resources and let the market achieve whatever level it can at that price, the quota system is a market based system that sets the desired amount of renewable resources and lets the market determine its price. Under the quota system, compliance is proven through renewable certificates that can usually be traded. Germany used FITs to help finance its energy policy, “Energiewende” (the energy transformation), that calls for a nuclear-free and carbon-reduced economy through a vast deployment of renewable technologies.
Because FITs levels were administratively driven and slow to adapt to the evolution of the solar market, the incentive became excessively generous, which initiated an uncontrolled development of renewables, which, in turn, created unsustainable growth with a myriad of unintended consequences and lessons learned. Accordingly, this analysis will focus on Germany, whose FIT policies allowed it to realize the highest production of non-hydro renewable electricity (wind and solar) in Europe.
Legislators and regulators should use the lessons learned from large scale integration of renewables in Germany and elsewhere in Europe to ensure a stable transition of renewables as part of the overall power portfolio while ensuring high reliability of power, stability of pricing to all users, as well as minimal value destruction to both utilities and renewable companies.
Finally, consumers must be made aware of the tradeoffs to a large portfolio of renewables and the necessary requirement for a smooth transition as part of the overall power portfolio.
In conclusion, the lessons learned in Europe prove that the large-scale integration of renewable power does not provide net savings to consumers, but rather a net increase in costs to consumers and other stakeholders. Moreover, when not properly assessed in advance, the rapid, large scale integration of renewables into the power system will ultimately lead to disequilibrium in power markets, as well as value destruction to renewable companies, utilities, and their respective investors. The U.S. has the opportunity to incorporate these lessons learned to ensure the sustainable growth of renewable energy over the long-term, for the benefit of all customers