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Germany

Germany

MARKET WOBBLES UNEASILY

Germany's electricity utility association, VDEW, claims the Electricity Feed Law (EFL) is unconstitutional and is already preparing the ground for demanding that all renewables operators pay back the money they have received for sales of electricity under the law. The accusation is based on a report commissioned by the VDEW itself. The EFL has from 1991 secured a kilowatt hour payment for renewable energy at a fixed percentage of the electricity price to end customers. The Federal Economy Ministry stresses that the law complies with the German constitution and that the government will continue to strengthen efforts for the market introduction and use of renewables.

When it comes to finding a way around the law, there appears to be no limit to the inventiveness of Germany's electricity utility association, VDEW. With a minimum of effort, the utilities' umbrella organisation has found a way of hindering the development of renewable energy, while blithely skirting along the fringes of the law. On the strength of the findings of a single expert report, which the VDEW itself commissioned from Professor Hans-Wolfgang Arndt, the association not only claims that Germany's Electricity Feed Law (EFL) is unconstitutional, but is already preparing the ground for demanding that all renewables operators pay back the money they have received for sales of electricity under the law.

The VDEW has advised its over 700 member utilities that payments made for renewable energy under the EFL -- which sets rates and conditions for the purchase of renewables power in Germany -- should be regarded as merely provisional. VDEW's members are asked to pass this information on to all operators of renewable energy plant, including the owners of the over 2500 wind turbines in the country. Furthermore, VDEW states that the portion of the EFL payment which exceeds the sum normally paid to independent generators on the basis of long term avoided cost might have to be returned to utilities once the Federal Constitutional Court declares the EFL illegal.

The EFL came into force at the beginning of 1991 and guarantees a kilowatt hour payment for renewable energy at a fixed percentage of the electricity price to end customers -- in the case of wind, 90%, or DEM 0.1728/kWh in 1995. When passed the law received broad political support across all parliamentary parties and has been largely responsible for the rapid expansion of German wind energy. With around 644 MW of wind power at the end of 1994, Germany now has more wind power than any country in the world, barring the US.

The VDEW's advisory letter to its members has fallen on fertile ground. Already a number of wind operators have been informed, mainly by east German utilities, that from the beginning of 1995 their kWh payments under the Electricity Feed Law are merely provisional. Up to nearly 60% of the EFL payment could be demanded back if the German Federal Constitutional Court should declare the EFL illegal.

Shaking the foundations

Wind plant operators have reacted with horror, visualising the collapse of the economics of current wind turbines and a sudden halt to financing of new plant as banks set about reassessing the viability of all new project financing. If the aim of the utilities was to undermine confidence in wind investments, they seem to have had considerable success.

The Commerzbank is a case in point. Hugo Denker from the Brunsbüttel branch has provided financing for 400 wind turbines on the conviction that wind projects can provide a good return. But even Denker admits that applications for financing projects in areas where utilities are quibbling over pay will have to be treated "restrictively." Existing financing plans and those recently agreed will, however, be honoured. On a cynical note, he comments: "In view of the VDEW opposition to the EFL, I'm surprised it's taken them so long to hit on using the credit institutes as a way of hindering the renewables industry."

How sure of their ground the utilities are remains an open question. Not one has yet taken the step of challenging the EFL in its local court room. This is the first step in the process of having a law brought before the Federal Constitutional Court in a procedure which could take years to reach a judgement. This lack of concrete action could be a very deliberate ploy, though. By doing no more than distributing doubt, they have undermined confidence in the EFL -- and thus confidence in renewables' investment, too.

So far the attack on EFL payments is restricted to a few relatively new utilities in eastern Germany, such as Wemag in Schwerin, Esag of Dresden, and Wesag of Markleeberg, and small utilities in western Germany such as Pesag of Paderborn. With only the smaller utilities responding to VDEW's call, its seems that larger west Germany utilities may be sceptical over the recommendation, while the smaller, low profile and poorer companies in eastern Germany have taken the VDEW at its word. The larger utilities are possibly more aware of their image, too, making them reluctant to wield a big stick against renewable energies so openly when these enjoy wide public support.

Waiting for the politicians

If the political response to VDEW's stick wielding is particularly acid, then the damage to renewable energy is likely to be restricted, with only a few twigs being waved by a handful of relatively unknown utilities. Their big brothers -- heavyweights of the utility world such as RWE-Energie, Bayernwerk and HEW -- will have been spared any embarrassment because they are now just waiting in the wings. But if VDEW's threats are treated seriously, then the big utilities may pick up their cudgels.

As is often the case in legal disputes, the arguments for and against the EFL are far from clear cut. The Arndt report first takes great pains to argue that the fixing of renewables remuneration under the EFL is a subsidy and then says (twice) that a "subsidy" in the form of state price-fixing between two private parties (the utility and the renewables operator) is new "in the history of the federal republic of Germany" and that there is no pool of legal literature or court judgements on which to draw for guidance.

The Federal Economy Ministry, largely responsible for the EFL, still stresses that the law complies with the constitution. But its line of argument takes an odd turn, revealing some uncertainty. The ministry first stresses that there is a strong political will to support renewable energies. The coalition government, re-elected last year, expressly states that greater use of renewable energy is necessary for reasons of energy, environment, industrial and development policy. Secondly, it points out that the EFL is under a searching review, with an evaluation report followed by a recommendation to parliament due to be made by the middle of the year. The report will be written "based on the assumption that the EFL is constitutional." But finally the ministry says: "Regardless of the individual instruments used, the government's promise to strengthen efforts for the market introduction and use of renewable energies remains as valid as ever."

This looks very much like a broad hint to renewables operators that it cannot guarantee the survival of the law, but will step in with other means of support if the EFL succumbs. This hint, though, is not enough for the credit institutes. For them, the utilities' action implies an increase in investment risk which in turn means wind projects will have to fight harder for adequate financing terms.

Condemnation

While the Federal Economy Ministry is hedging its response to the VDEW recommendation, others are much more forthright. Social Democrat MP and chairman of Eurosolar, Hermann Scheer, has condemned the actions of the Wemag utility in no uncertain terms. He attacks the utility for wrongly informing wind plant operators that the EFL has already been dragged before the constitutional court. Scheer also criticises the assumption that a ruling against the EFL would require renewables operators to return money they have already been paid. He describes this as a concrete attempt "to intimidate the operator and his creditor [as] the information has no legal basis."

Scheer points out that in the extremely unlikely event of the court declaring the EFL invalid, no retroactive steps can be taken as they would contravene an elementary principle of German law. In other words, all wind plant operators dependent on the EFL have the right to EFL payments for the lifetime of their projects. Pressing his point home Scheer comments: "After all, we are not living in a banana republic." He now plans an official parliamentary question for a confirmation of his views.

In sharp contrast to Scheer's view, the VDEW claims the Federal Constitutional Court could declare that the EFL was invalid from its inception, but acknowledges that politicians may apply their influence to soften the outcome. This happened last year after the infamous "kohlepfennig" -- a levy on electricity prices introduced in 1980 to support the production of coal -- was declared illegal. To avoid the financial chaos of paying back tens of billions of mark to electricity consumers, the court declared the system could continue until the end of 1995, when it was due to expire anyway. On a much smaller scale the same could apply to the EFL. Small renewable operators are unlikely to have spare cash on hand for repaying utilities, though the VDEW cheekily suggests they should start saving money from their current payments.

The Commerzbank's Denker says this suggestion is outlandish. If a utility successfully won a case against the EFL and was told it could demand repayment, most wind projects would be light years away from being an economic proposition. A 500-600 kW turbine costing DEM 1 million and producing one million kilowatt hours a year, now earns 17.28% on invested capital during the first ten years under the EFL, but pays annuities of some 15.5%. This leaves a margin of just 1.78% from which operating costs must be paid such as rent, insurance, maintenance, and so on, leaving precious little from which to put aside a risk reserve.

Fighting back

In response to the VDEW's Arndt report, the German renewables lobby is now producing its own. The wind plant operators federation, DGW, has approached legal expert Rupert Scholtz to carry out the task. Meanwhile, ways out of the immediate problem -- the sudden lack of confidence in the economic framework of the renewables market in Germany -- are being explored. Although the coal industry learned to live with its kohlepfennig cliff-hanger for about a decade, the renewables industry does not have thick ramparts of economic protection to shield it from the threat of impending disaster.

The obvious answer would be for government to require the utilities to withdraw their announcements that EFL payments are only provisional. Christian Democrat MP Dietrich Austermann is among those who believe that Wemag and the other utilities are directly flouting the law. Failing this, a resolution may be found through the national energy consensus talks. The VDEW appears to have timed its attack on the EFL to coincide with the reopening of these talks on nuclear power, coal, energy saving and renewables after they ground to a halt without result in late 1993 .

The talks kicked off again last month and may eventually come up with a new source of support for renewables, possibly in a package of support which includes German steam coal and will be effective from 1996. The EFL could then be rescinded and the utilities -- which claim they are not against renewables but only against the EFL -- would then be appeased. The weakness of this course of action is that the government is doing its best to cut public spending -- it would like to see subsidies to coal (enormous) and renewables (tiny) kept well out of the budget.

Others argue that in legal terms there is nothing wrong with the EFL and that it should be retained and even improved upon. The law simply forces utilities to clean up their act just a little bit by purchasing and distributing electricity produced from clean renewables. So far, the EFL has been the most successful instrument in the world for achieving just that.

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