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Germany

Germany

In two directions

Germany and Britain both intend to secure a stable market for the growth of renewable energy with different approaches. Germany continues its path of stimulating a market by mandating contracts at fixed prices, while Britain's route is to oblige a fixed volume of electricity from renewables, backed by a mechanism for trading the environmental value of that power. Nobody in Germany seems to be seriously asking what the cost to the consumer will be of its basically opened ended support system. While the British energy minister is hell bent on making renewables "lean and mean" and asking consumers for permission to add pennies to their bills, the Germans seem unconcerned. This is hardly surprising.

The year has started well for wind. A new law in Germany and a new policy in Britain (pages 20-21), both with the serious intention of securing a stable market for the growth of renewable energy. The approaches taken by the two countries are very different. Germany continues its path of stimulating a market for technology suppliers by mandating bi-lateral contracts at fixed prices between renewable energy producers and the country's grid operators -- the big utilities. Britain's route is to create a market for sales and trade of green power by obliging suppliers to include a fixed volume of electricity from renewables in their supply portfolios, backed by a mechanism for pricing and trading the environmental value of that power. Significantly, the main driving force behind both the German and British initiatives is one and the same: to speed up what is becoming a race against time, particularly for Germany, to meet emissions reduction targets agreed to under the Kyoto protocol.

It is not difficult to understand why Germany and Britain have chosen such different routes to the same end. Both countries are committed to full participation in Europe's Internal Energy Market, but Britain is way ahead. In its fully liberalised electricity market, tariffs fixed by government are out. Germany, though, is still in the process of liberalisation and an interim law to secure the continued and dynamic growth of renewables is essential. That law is now in place and it will be up to the wind lobby to throw all its weight behind protecting the wind tariff. This remains vulnerable to utility attack, especially when the law permits the government to tinker with it every two years. Cutting a few percent from a tariff is easier for a government to get away with than the entire reversal of environmental policy that it would take to shake Britain's renewables mandate, once this is in place.

The regulatory details of Britain's policy are still being worked out, but so far it is looking good -- and a deal better than the Non Fossil Fuel Obligation which it replaces. Prices for wind power in Britain are likely to improve, opening up opportunities for developing lower wind speed sites and inviting community investment in local wind projects. Under Germany's new law, however, payment for kilowatt hours from wind turbines will go down. Investment returns are likely to be reduced unless capital costs fall, though this could well happen. The reduced profitability is mainly due to the steep drop in payments after the first five years. Typically, installed costs will need to fall by about 10% if today's profit levels are to be maintained. Cleverly, the new payment mechanism cuts the potential for windfall profits at windy coastal sites, while it improves the financial viability of relatively low wind sites.

Interestingly, nobody in Germany seems to be seriously asking what the cost to the consumer will be of this basically opened ended support system. While British energy minister Helen Liddell is hell bent on making renewables "lean and mean" and asking consumers for permission to add pennies to their bills, the Germans seem unconcerned. This is hardly surprising. Subsidies to German coal are currently running at DEM 8.5 billion a year. Tax free interest on reserves of DEM 55-74 billion for nuclear decommissioning and waste storage is also earning utilities a healthy income. At even the claimed DEM 4 billion that the economy ministry reportedly says the renewables law will cost, we're talking peanuts in comparison. Our calculations, however, put the cost far lower. Including the coal subsidy of DEM 0.064/kWh, the price of electricity from plant using German coal is about DEM 0.109/kWh. Wind's payment in the first five fat years is DEM 0.178/kWh or DEM 0.069/kWh more than the cost of coal. At today's 6.2 TWh of wind generation each year, the cost of the German wind tariff would be DEM 500 million, or DEM 0.001/kWh to each consumer, less than a handful of Marks a year. No wonder parliament waved through the law without any serious reservations.

The bigger picture

Indeed, Germany is to be praised to the skies for its far sighted commitment and full credit must go to the wind and renewables associations for a stupendous victory. Having said that, however, nobody is seriously pretending that liberalisation will be stopped in its tracks and the Internal Energy Market will not happen. Markets are places where commodities are traded between buyers and sellers at a price they agree between them, not a price, or wind tariff, fixed by governments.

Renewables are a tricky commodity, though. As well as providing a product, they also prevent pollution. Putting a price on that invisible environmental value -- and making sure there is a demand for it -- is what market regulation for renewables must achieve. Just this kind of regulation is what the EU Commission was asked to devise by Europe's governments, including that of Germany, nearly a year ago. But Commission efforts to draw up an EU Directive on renewable energy have so far amounted to zero. Much of the blame for the slow progress can be laid squarely on the shoulders of Germany's renewables lobby. Fearing that a European regulation for renewables would be forced upon Germany before time, the lobby has consistently campaigned against it. But in countries further along the road towards a fully functioning Internal Energy Market, a mechanism for ensuring the inclusion of renewables is vital.

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