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All fundamental provisions on the generation and export to the grid of electricity from renewable energy sources and the compensation for it have been codified in the Renewable Energy Act [Erneuerbare-Energien-Gesetz, or EEG]. Moreover, the German energy industry is shaped by a comprehensive regulatory framework imposing numerous charges in the form of taxes, duties and EEG levies which have a major impact on the profitability of power plants using renewable energy sources. The guaranteed, statutory feed-in tariff is the dominant market model for renewable energy producers in Germany in the segment of small-scale installations and has been replaced with market premium models (§20 EEG)1 following the introduction of incentives for direct marketing. With the enactment of the EEG 2014 law, the guaranteed, statutorily fixed incentive for larger power plants has been replaced with an auction system where rates of incentives are determined in a competitive bidding procedure. According to the provisions of the EEG, producers of electricity from renewable resources are supported over a period of 20 years (§ 21 (1) and (2) EEG 2017) plus the year of commissioning of the power plant. The rate of the compensation depends on the commissioning date. The applicable rates of the compensation depend on the type of technology and are determined in line with §§ 40 et seq. EEG 2017. Funding under the EEG is financed from the EEG levy paid by electricity consumers.
The auction system has led to considerable competition for the auctioned capacities (see the results of the last auctions). Additional factors that hinder the implementation of renewable energy projects include the classification of eligible land, which strongly limits the area available in particular for PV power plants, and, in some places, the lack of acceptance among society as regards new projects. Other issues include federal state-specific restrictions on the eligibility of land for installing onshore wind turbines, such as the "10-H-regulation" in Bavaria, which currently practically hinders the construction of any new wind farms. As for photovoltaics (PV), the existing 52 GW limit will probably start to apply in the first or the second quarter 2020 (if it is not repealed by the Climate Protection Package), which will lead to the suspension of the feed-in tariffs for new power plants of up to 750 kWp (EEG).
The Federal Government has set itself the goal where 60% of the German electricity should be generated from renewable energy sources by 2030. Due to increasing electricity consumption following the electrification of the industry, and heat and mobility sectors, demand for electricity from renewable resources continues to grow even more. Due to the limits on the incentivised renewable production by way of feed-in tariffs, it should generally be expected that this form of funding will decline in importance. Finally, the question remains, whether, the legislator will provide a similar incentive mechanism afterwards.
1 EEG quote
In addition to feed-in tariffs, the self-consumption model is another important element of the EEG. Electricity produced for self-consumption is, basically, subject to the full amount of the EEG levy. But power produced for self-consumption from installations of less than 10 kWp (up to 10 MWh per year) is exempt from the EEG levy over a period of 20 years, whilst power plants of over 10 kWp pay 40% of the EEG levy. Self-consumption is of great economic significance in particular to operators of small and medium-sized rooftop installations because the replacement of power purchasing with self-consumption helps create a greater value added for self-consumption in financial terms.
Last but not least, self-consumption is attractive in terms of profitability because no power is purchased and, thus, no grid charges must be paid. It remains to be seen whether this “exemption” from grid charges will be upheld or whether fundamental changes in the system of charges will follow.The exemption from grid charges also carries an element of financial risk as this privilege might be abolished in the future. Where several companies or several private consumers reside in one building/use one self-consumption facility correct measuring and billing of the self-produced electricity should be ensured.
The potential of the direct marketing model is and will remain enormous in the medium and long term:
Unlike in the USA or in Scandinavia, the market volume of PPAs in Germany is still very small (approx. 1%). PPAs are attractive only to large and relatively energy-intensive companies. This is because renewable power plant operators or project developers are not urged by the current regulatory framework to look for offtake opportunities as offtake and prices are secured by the EEG.
At present, the concept of a PPA is still rather unknown to the electricity market players in Germany. In addition, there are various types of PPAs (Utility/ Corporate, on-/ offsite, non-/sleeved, synthetic…), which are structured in different ways. Thus, it is often challenging to choose the appropriate type of the PPA. These factors translate into relatively high transaction costs.
The Federal Government has committed itself to a more market-oriented incentivisation of renewable energy systems. Therefore, feed-in tariffs will continue to decrease in the future. Selling through PPAs/OTC is particularly important also for power plants whose funding periods based on the guaranteed, statutorily fixed feed-in tariff will expire in 2021. PPAs offer here great yet unlocked potential as they hedge the price risk. Moreover, banks are increasingly following this trend. Germany's Umweltbank, for example, already offers standardised financing for PPAs. In Germany, the interest in PPAs will further increase. Experts expect that from 20302 , renewables will expand nearly entirely based on PPAs. The model is particularly suitable for companies that are 100% oriented at green electricity and want to increase the stability of prices for this type of electricity.
2 Köpke, Ralf: Viel Traffic bei PPA bereits jetzt zu spüren, in: Energie & Management, 1 June 2019. p.6f.
The lease model is oriented mainly at smaller and medium companies and private investors. Lease models are common in photovoltaics (PV) and block-type thermal power stations (BTTPs). Lessees can lease PV power plants from a supplier on the market or from a utility. The investor is thus the operator and the beneficial owner of the power plant. In Germany, electricity is used mostly for self-consumption and for export into the grid, both being regulated in the EEG (see 2.2).
The legally required feature of the self-consumption model where the producer and the final consumer must be the same person is a challenge when structuring the lease agreement. Because this model is less profitable than the pure self-consumption model, it is suitable for projects where the operator of the PV power plant is not able to finance the power plant by himself.
As long as power plants to be operated for self-consumption can be financed based on EEG guarantees, lease models will rather be of lower importance on the German market. But if the market model is changed in the future, especially if the feed-in tariff regulations change, the lease model can immensely increase in importance. For example, large utilities could act as investors under the lease model and assume the offtake and price risk as they would off-take the residual electricity.
Decentralised tenant supply models (EEG 23b et seq.) and other local direct marketing solutions are also commonplace. The decentralised tenant supply model is a model where the electricity is generated on a real property and sold to the residents of the property. In the case of PV power plants with a capacity of up to 100 kWp mounted on residential buildings, these electricity volumes are remunerated according to the EEG, but also other requirements apply when structuring prices in their case. The residual electricity volumes must also be supplied by the operator of the power plant.Local direct marketing opportunities include the sale of excess electricity generated by the operator's power plant to customers in geographical proximity to the power plant. Although the EEG levy (6.405 ct/kWh, as of 2019) applies to the electricity supplied to the final consumer, diverse privileges are offered:
Due to regulatory barriers and its complexity, the decentralised tenant supply model has not met expectations of the Federal Government. The end customer handling costs should not be underestimated and are currently too high to make this model financially attractive, especially in smaller projects.
Generally, it is believed that the decentralised tenant supply model has great potential due to the vast number of rented apartments in urban areas. It has already been announced that terms of the decentralised tenant supply model will be improved and simplified. It should also be expected that local electricity supply models will increase in importance in addition to self-consumption. Decisive here will be the development of the feed-in tariffs and the electricity price for end customers. Local marketing is believed to have great potential, provided that, as a peer-to-peer market model using blockchain, it will also enable C2C trading on a national scale.
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Kai Imolauer
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