Cabinet decision on EEG reform in 2014 - what will change?

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Prof. Dr. Joachim Scherer, LL.M.
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Dr. Janet Kerstin Butler
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German government approves sweeping reform of the Renewable Energy Sources Act
On April 8, 2014, the German Federal government approved a legislative bill for the fundamental reform of the German Renewable Energy Sources Act (“EEG”).1 The bill, which must still pass through the German parliament, is scheduled to enter into force on August 1, 2014.
The proposed reform will have a substantial impact on the future development of renewables projects in Germany. The following provides an overview over the most important amendments:
Global system changes
(1) Statutory expansion targets / caps. In order to prevent an uncontrolled expansion of renewable power generation in Germany, the bill introduces expansion targets or “corridors” for the various renewable energy technologies, which in effect are caps. The proposed statutory targets place a clear focus on onshore and offshore wind as well as photovoltaic (PV) electricity.
(2) Mandatory direct marketing. The government plans to promote the integration of electricity produced from renewable sources in the power market by requiring all operators of new plants with an installed capacity of at least 100 kilowatts (kW) to market their electricity directly. As under the current system of voluntary direct marketing, the income from the sale of electricity on the market will be supplemented by market premiums paid under the EEG. The market premiums cover the difference between the average monthly reference market value and the respective tariff guaranteed by the EEG. However, due to the system change from feed-in tariffs to mandatory direct marketing, the bill uses the term “reference amounts” in place of “feed-in tariffs”.
The direct marketing requirements will be introduced in stages: Upon entry into force of the new EEG 2014, direct marketing will be mandatory for all new plants with an installed capacity of at least 500 kW, from 2016 onwards for new plants with an installed capacity of at least 250 kW and finally from 2017 onwards for all new plants with an installed capacity of at least 100 kW. This allows operators of smaller plants to adjust to the new system gradually. The so-called management premium, which is currently paid in addition to the market premium and is intended to cover marketing costs, will be abolished. Instead, the marketing costs will be taken into account in determining the
1 The document is available in German at: http://www.bmwi.de/BMWi/Redaktion/PDF/Gesetz/entwurf-eines-gesetzes-zur-grundlegenden-reform-des-erneuerbare-energien-gesetzes-und-zur-aenderung-weiterer-bestimmungen-des-energiewirtschaftsrechts,property=pdf,bereich=bmwi2012,sprache=de,rwb=true.pdf.
Reform of the Renewable Energy Sources Act
Energy, Germany
Client Alert
April 2014
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statutory reference amounts. In order to protect plant operators in situations where they are temporarily unable to effectively market the electricity generated in their plant, e.g. due to the direct marketing services provider becoming insolvent, plant operators will be able to opt for an alternative reduced feed-in tariff as a fallback solution. The reduced feed-in tariff in this case is limited to 80 percent of the respective reference amount.
(3) Transition to competitive bidding processes. The established system of statutory feed-in tariffs and market premiums will be replaced by bidding processes at the latest by 2017. Therefore, the reference amounts set out in the draft bill have only very limited significance. However, the statutory rates will remain applicable to installations that are issued an operational license prior to January 1, 2017 and are commissioned by December 31, 2018 at the latest. For offshore wind installations, an extended transitional period ending on December 31, 2020 applies. In contrast, all funding for new freestanding PV plants will be determined by bidding processes immediately upon entry into force of the new EEG 2014, subject to the general transitional provisions.
(4) Grandfather rights / transitional provisions. The new EEG 2014 rules will, in principle, apply to all installations commissioned after the entry into force of the reform. However, the rules of the EEG 2012 will continue to apply to installations commissioned by 31 December 2014, provided that the respective installation is subject to licensing requirements and was issued an operating license before 23 January 2014. Existing installations are grandfathered, i.e. they will continue to receive funding in accordance with the provisions of the EEG in force at the time of their commissioning over the entire funding period.
Onshore wind power
The draft bill sets out a target corridor between 2.4 and 2.6 gigawatts (GW) per year for the net expansion of onshore wind power. The “net expansion” is determined by subtracting the sum of decommissioned installed capacity from the sum of newly commissioned installed capacity, thereby taking into account the common practice of repowering older wind turbines. If the net expansion remains within the target corridor, a general degression rate of 0.4 percent per quarter-yearly period (1.59 percent per year) applies, i.e. for plants commissioned at a later point in time, the statutory reference amount is reduced accordingly. If the net expansion exceeds or falls below the target corridor for a respective reference period, a higher or lower degression rate applies, thereby providing an incentive for project developers to install more or less new capacities. This instrument was first introduced in 2012 for steering the further expansion of PV capacities and is meanwhile well established. The degression will first apply on January 1, 2016.
In the draft bill, the reference amounts for onshore wind are 4.95 Eurocents per kilowatt hour (basic amount) and 8.9 Eurocents per kilowatt hour (initial amount), reflecting an increase of the tariffs currently in place by 0.4 Eurocents, in order to take into account the additional direct marketing costs. The bonuses currently granted for the repowering of existing installations and for system services will be discontinued. Aiming to avoid over-funding, the rules governing the extended application of the higher initial amount will be modified so as to reduce the total funding for wind power plants in locations with a high wind yield by roughly 10 to 20
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percent in comparison to the funding level available in 2013. In contrast, the funding available for less windy locations was adjusted so as to ensure that these sites remain attractive for future investors.
Offshore wind power
The government has substantially reduced its previous targets for the expansion of offshore wind power. The draft bill states a target of 6.5 gigawatts total installed offshore wind capacity for 2020 and 15 gigawatts for 2030. In order to ensure that future expansion remains within the targets, the bill limits the total amount of grid connection capacities that may be allocated to offshore project developers. The allocation of sufficient grid connection capacities, which is determined by the Federal Network Agency, is essential for the realization of offshore projects. However, in light of past experience with failed projects, the Federal Network Agency is authorized to allocate higher total grid connection capacities, i.e. up to 7.7 gigawatts, until December 31, 2017. This buffer is intended to safeguard that the 6.5 gigawatts target is not undercut due to failed projects.
As for onshore wind power, the current funding rates will be increased by 0.4 cents per kilowatt hour, respectively, in order to take into account direct marketing costs. The so-called acceleration model, which allows operators to produce higher revenues over a shorter initial period2, will be extended until end of 2019. However, the draft bill replaces the current uniform degression rate of 7 percent annually (beginning in 2018) by distinct degression rates applicable to the basic model and the acceleration model. By reducing the degression rate for the basic model, the government aims to renew the basic model’s attractiveness for investors in comparison to the widely preferred acceleration model.
Revised privileges for energy-intensive companies
Under the current EEG, energy-intensive companies from certain industry sectors are eligible for a reduction of the so-called EEG-surcharge, i.e. the surcharge charged to electricity consumers for the financing of the EEG support scheme. On December 18, 2013, the European Commission opened an in-depth investigation to examine whether this reduction is compatible with EU state aid rules.3 Accordingly, the overhauling of these rules is a particularly sensitive issue. While it is clear that the privileges will remain in place in revised form, the final version of the draft bill approved by the Federal Cabinet does not yet contain details on the new eligibility criteria. These will be supplied later in the legislative process, taking into account the new European Commission guidelines on environmental and energy state aid. The guidelines were published on April 9 2014, one day after the German Federal government’s approval of the EEG reform.
However, the draft bill does contain several procedural amendments. The application deadline for EEG-surcharge reductions for 2015 will be extended to September 30, 2014. In the future, it will be sufficient to submit the application,
2 Under the acceleration model, an initial reference amount of 19.40 Eurocents per kilowatt hour is applied over a period of 8 years following commissioning. In contrast, the basic model provides an initial reference amount of 15.40 Eurocents per kilowatt hours over a period of 12 years following commissioning.
3 See our December Client Alert: http://www.bakermckenzie.com/ALGermanyRenewableEnergySurcharge_Dec2013/
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auditor certificate and confirmation of certification within the statutory deadline; all other documents may be submitted later. Furthermore, BAFA, the government agency that grants the reductions, will be obliged to revoke a reduction where it becomes apparent that the statutory requirements were not met. The companies concerned will not be able to evoke the principle of legitimate expectations to avoid a revocation. Finally, BAFA shall be entitled to review whether the statutory requirements were met even after having granted the reduction. For this purpose, BAFA officials will be granted extensive powers, allowing them e.g. to enter business premises and to request information and documents.
Self-owned power plants
Currently, consumers are not required to pay EEG-surcharges for electricity produced in self-owned power plants. Accordingly, self-owned power plants have become an attractive alternative particularly for energy-intensive companies. Aiming to ensure that the EEG financing burden is shared more fairly, the government has decided to include self-owned power consumption at least partially in the financing mechanism. With only narrow exceptions e.g. for self-owned power used in power plants, all electricity consumed that is produced in new self-owned power plants (i.e. commissioned after the entry into force of the EEG 2014) will be subject to EEG-surcharges. However, the draft bill distinguishes between power that is produced in self-owned conventional power plants, power that is produced in self-owned EEG or combined heat and power installations, and self-owned power that is used by privileged manufacturing companies. While in general the full EEG-surcharge is due, the surcharge is reduced to 50 percent for power produced in EEG and combined heat and power installations. Privileged manufacturing companies are only required to pay 15 percent of the full EEG-surcharge.
In contrast to previous drafts, the bill adopted by the Federal government does not extend the EEG-surcharge to power produced in existing self-owned power plants. Under the transitional provisions, power produced in self-owned power plants commissioned by December 31, 2014 will also remain exempt, provided that the operational license for the plant was issued before January 23, 2014.
Timeline and outlook
The Federal government plans to pass the legislative bill through the Federal Parliament within the next months. Although there are still a number of contentious points, we do not expect significant delays or amendments during the further process, in particular because the bill approved by the Federal government already reflects the preceding agreement in principle with the heads of the Federal States. Therefore, it seems likely that the government will be able to meet its ambitious timeline and reform will enter into force on August 1, 2014.
This client newsletter is prepared for information purposes only. The information contained therein should not be relied on as legal advice and should, therefore, not be regarded as a substitute for detailed legal advice in the individual case. The advice of a qualified lawyer should always be sought in such cases. In the publishing of this Newsletter, we do not accept any liability in individual cases.
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