Introduction

The German public in general has a positive attitude towards renewable energy. Nevertheless, public sentiment became more and more mixed in light of soaring electricity costs. The discussion quickly focused on the increase of the renewable energy surcharge in recent years. As often with the political discussion of complex matters, the debate was emotional; the actual reasons for the increase of the surcharge were rarely explained to the public. 

The German government captured this mood and promised to reform the Renewable Energies Act (“EEG”). It adopted its proposal for reform on 8 April 2014. In light of the public discussion that lead to this proposal, it does not come as a surprise that the proposal is not all rosy for the renewable energy industry. It is the subject of a political compromise with the German Länder and it has seen several changes in its relatively short legislative development before its adoption by the German government. Some of these prior drafts contained rules that would have caused much greater upheaval. The general sentiment is that the worst has been avoided, and the stakeholders in onshore/offshore wind and solar generally state that this is a proposal they can live with (albeit with some grinding of teeth).

The core goal of the EEG reform for the German government is to find a balance between cost effectiveness, environmental compatibility and security of supplies in the so-called energy policy triangle. In particular, the issue of cost effectiveness features prominently in the public discussion after the renewables surcharge has increased substantially in the past years. This is an interesting shift in focus as the primary objective in the past was to increase renewable energy production capacity. With the proposed overhaul of the EEG, the government seeks to adopt measures aimed at cost control. The government also wants to control the amount of newly built capacity more closely. The new expansion path for onshore wind is one result from this development. However, the overall goal of a long term switch to renewables has not changed: the share of renewable energy is meant to rise to 80 per cent of electricity production by 2050.

The adoption of the proposal by the German government is the first main step in the parliamentary process. The German government wants to get the new EEG adopted by the parliament (Bundestag and Bundesrat) before the parliamentary summer break. It wants the EEG to enter into force on 1 August 2014.

Below, we highlight the most important issues of the new EEG. The first part illustrates general aspects that apply to all energy sources and the second part focusses on issues that affect specific energy types.

In this context, we would like to inform you about our events on the topic "Energiewende - EEG - Kehrtwende?" taking place on 16 April in Hamburg, 23 April in Munich and 30 April in Frankfurt. 

Key aspects of the EEG 2014: General issues applying to all energy sources

a) Compulsory direct marketing

One of the main changes brought about by the EEG 2014 will be the introduction of compulsory direct marketing. Voluntary direct marketing already exists and today it is widely used by plant operators. The current system makes direct marketing a nearly foolproof tool for reaping extra benefits above the tariff level. The days of such an easy system may be numbered. For plants with a capacity of more than 500 kW which are commissioned from 1 August 2014 a switch back into the tariff will mean that the operator will only receive 80 per cent of the statutory tariff as an emergency compensation. It may also be that the tariff will only be available in special circumstances (e.g. insolvency of the direct marketer). The statutory wording does not set forth such restrictions, but the government made statements into this direction. The tariff as such will in reality not be available anymore and will primarily function as the benchmark for calculating the market premium that the plant operator receives on top to the contractually agreed energy price. The very interesting issue will be whether a switch back into the tariff will be permissible if the plant operator merely has not found a direct marketer that is willing to pay a price high enough for the plant operator. If such a switch back for economic reasons is not possible, it is likely that the market risk for producers of renewable energy will increase. Another issue that was of minor importance so far and that will get more attention due to compulsory direct marketing in the future is the reliability of the direct marketer. Banks already now state that they will focus much more on the rating/creditworthiness of the direct marketer. It is a fair guess that this will be advantageous for the direct marketing entities of larger players and that some of the smaller direct marketers will disappear.

b) Introduction of tendering

Until now the grid operators were obliged to take off, transmit and distribute the entire available quantity of electricity and to pay the producer on the basis of statutory tariffs. This system was highly effective in creating new capacity and it has been copied widely abroad. For the first time the German government is looking to change this system. It is fair to assume that the intention of the European Commission to establish tendering as the main tool for determining the price for renewable energy is an important motive for this new development A first step in this direction is the introduction of tendering for pv-plants on open land. Based on the experience gained by such an tendering system the government intends to establish tendering at latest by 2017 for all renewable energy sources.

The EEG does not specify the details of the planned tendering system for pv-plants and, until secondary legislation is in place, the traditional remuneration system will continue to operate. The tariff-based system will end 6 months after the publication of the first round of tenders. Some knowledge of the future tendering system can be derived from the section in the new EEG dealing with the adoption of such secondary legislation. The German federal grid agency (Bundesnetzagentur) will be responsible for organizing the tendering procedure. It is likely that developers must enter the tendering procedure with a specific project. Should this be the case, it will be interesting to see how far the development needs to have advanced in order for a project to be considered suitable. It may also be that the Bundesnetzagentur will require a certain track record, proof of financial stability and introduce a system of fines for late developments. The German developer scene for pv-plants consists of many small- to mid-scale companies. It remains to be seen whether they are willing to accept/able to take the risk of stranded development costs and at the same time an increase in development costs due to a potentially complicated tender procedures or whether we will see a switch to developments from larger entities such as utilities. This will depend very much on the details of the tendering requirements.

The majority of the international experience with tendering models has been mixed at best. In any case, one of the key lessons learned is that the tender procedure has to be clear to everyone as early as possible in order to allow for a detailed planning and project calculation. Hopefully this aspect will be recognized while drafting the ordinance.

Assuming that the German government succeeds in establishing a working tender mechanism for pv-plants, this would by no means automatically assure that such a system can be extended to any energy source without major changes. The government stated that the photovoltaic sector has been chosen for its short planning and licensing processes and comparatively low investment costs at an early planning stage. Therefore and even if the pilot project is successful, it is not automatically repeatable. For example onshore wind farms have a longer project planning period (possibly 5 years in comparison to 12 – 18 months for pv-plants) and the development cost are also much higher due to a more complicated licensing process. If it cannot be assured during the planning period that a future wind farm will profit from an adequate energy price developers will become very cautious. Again we may see a move to large-scale developers.

Key aspects of the EEG 2014: Aspects regarding different energy sources

a) Wind onshore

The tariff system for wind onshore is an area that will see considerable change as a consequence of the new EEG. Even while the changes are profound, the general feeling so far is that they are manageable. It is generally expected that we will experience a race for commissioning in 2014 and then a somewhat slower year in 2015, but by no means a severe slump. Last year saw the largest ever amount of newly built onshore wind capacity in Germany (about 3,000 MW). The figures were on the rise for the last few years. The government feels that it needs to control growth in this area somewhat. In order to regulate the expansion of onshore wind capacity, the EEG now contains an expansion target of net 2,400-2,600 MW/year for onshore wind power plants for the first time. In the future the tariff for newly commissioned onshore wind will decrease every quarter by 0.4 per cent in comparison to the tariff applicable in the previous quarter. This rate of decrease is applicable as long as expansion stays within the targeted corridor of 2.400 - 2.600 MW/year. The tariffs will decrease at a faster rate if the capacity expansion is above the corridor ceiling. If the capacity expansion is lower than the corridor floor it works the other way around. The actual tariff amount for any quarter will be known at the earliest five months before it becomes effective. This automatically leads to a prolonged period of uncertainty for developers, investors and banks as they cannot predict revenue as securely as they can now. If banks are prepared to commit themselves to financing for an onshore wind farm as early as they do now, we may well see an increase in interest rates to compensate for this new tariff insecurity.

The second important change to the tariff for onshore wind is the modification of the reference yield model (Referenzertragsmodell). The tariff for onshore wind sets forth a higher tariff for an initial period of time and a lower rate for the remainder of the 20 years (plus year of commissioning) that the EEG is applicable. The reference yield model is the tool to calculate the duration of the increased tariff phase for each individual wind turbine generator (WTG). Under the current version of the reference yield model the period in which a WTG profits from the higher increased tariff rate is normally long enough that it will only run after all debt has been repaid. Initial drafts of the new EEG included changes to the reference yield model that would have shortened the period of the higher initial tariff massively. Long term financing in its current and quite simple structure would not have worked under such a radically modified reference yield structure. And it was feared that the government would actually provide an incentive for investment in old and less productive plants on poorer sites as they would fare better under the reformed reference yield model. Upon intervention of the Länder this drastic change has been averted. The shortening of the period in which the higher tariff is available is less severe and it is likely that no drastic changes to the financing structures will be necessary.

The current EEG tariff rules will be applicable to plants commissioned before 1 August 2014. They will also be applicable to plants with a commissioning date between 1 August 2014 and 31 December 2014 if the developer obtained the licence under the Federal Emission Control Act (Bundesimmissionsschutzgesetz) until 22 January 2014. Otherwise the new EEG tariff rules will apply. Irrespective of these grandfathering rules the new rules for calculating the tariff decrease set out in the new EEG will apply to plants commissioned from 1 January 2016 onwards.

b) Wind offshore

Regarding the rules for offshore wind, the new EEG does also include some changes in detail, but they are not as significant as the ones for onshore wind. The structure of the initial tariff remains unchanged and the availability of the successful acceleration model (Stauchungsmodell) with an increased tariff for the first eight years has been extended to plants commissioned prior to 1 January 2020. This is definitely positive news for offshore wind as long term planning is now possible.

The government wants to control newly built offshore wind capacity not so much through reforming the tariff structure, but by controlling grid connection capacity. For this purpose the government has introduced a new mechanism for the allocation of grid connection capacity into the German Energy Industry Act (Energiewirtschaftsgesetz). In general, the allocation of grid connection capacity will become even more complicated than it is already. Due to its complexity, the successful management of the grid allocation issue will become even more important for the realization of German offshore wind projects.
The maximum grid connection capacity available for allocation in this new procedure will be 6.5 GW until 31 December 2020. From 1 January 2021 onwards, the grid connection available for allocation capacity will increase by 800 MW/year. If there is excess demand, the grid connection capacity will be allocated by an auction procedure. It is also remarkable that the German Federal Maritime and Hydrographic Office under certain circumstances is entitled to revoke allocated grid connection capacity as far as such a revocation ensures an effective use of the grid connection. How this process will be handled in practice is not entirely clear.

c) PV

Apart from the general changes illustrated above, there are no significant structural changes directly affecting the solar sector. In 2012 the remuneration system for solar saw substantial changes. The new EEG now only sets out some changes in detail to the existing remuneration structure, but apart from the general changes to the remuneration system (compulsory direct marketing, tendering) the specific tariff rules for pv-plants remain largely unchanged. As before, the tariff will be adjusted monthly depending on the rate of newly built capacity. The new capacity expansion target is to reach newly built capacity of 2,400-2,600 MW/year. The slightly changed tariff structure for pv-plants will be applicable to plants commissioned from 1 September 2014 onwards.