For and against a free market

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Competition is a must to achieve efficiency and low prices, but low energy prices, are perceived as poison for renewables. In the run-up to Germany's federal elections in October this dilemma is being highlighted by both the main political party groupings. But each has presented a contrasting energy programme for dealing with the problem.

The main aim of the ruling Conservative coalition is to introduce more competition. But little attention has been paid to the effects of competition on renewable energies and what measures should be taken to ensure a fair market. For this reason, renewables lobbyists have been thankful that the government's draft legislation for opening up the electricity market in Germany has not yet been put before parliament. This will now happen after the elections in October, if it happens at all. In the meantime a series of expert panels (see box) will have fed vital information on renewables into the debate in the hope that the draft law will be amended accordingly.

The major opposition party, the Social Democrats (SPD), has quite different aims. The SPD wants to totally reorient energy policy so that protection of the environment becomes paramount. Electricity prices would rise significantly. This course, however, would be unacceptable to German industry unless neighbouring European countries -- preferably with Japan and the US in tow -- go the same way. Germany cannot afford to take to the open road alone as an energy market pioneer, says big industry. With such massive opposition the pace of change under the SPD's policy could be slow indeed.

The government's view

The governing coalition of CDU, CSU and FDP has bundled its energy plans into a draft law combining amendments to cartel law with a new energy law. The main changes to cartel law are surprisingly radical. They would increase competition in the energy sector by banning protected supply areas and introducing negotiated Third Party Access -- referred to in America as "wholesale wheeling" and "retail wheeling" (Windpower Monthly, May 1994).

In a country which leads Europe in espousing market economy principles, the move to unleash the electricity market is generally welcomed. The country is embarrassed by its monopolistic energy markets, where, for example, one gas company controls 70% of the national gas supply. But an energy market where price is the driving force could leave renewables high and dry unless regulation aimed at protecting the environment is introduced. The German government has not yet understood this point. Although in the preamble to its draft legislation the government says energy technologies must be environmentally compatible, this is not followed up in the body of the text. As Rainer Kottkamp, wind expert at the Lower Saxony Economy Ministry, points out: "Not a single paragraph is included to define what environmentally compatible means."

The thinking behind the law is neatly summed up in the attitude of Martin Cronenburg, head of energy law at the Federal Economy Ministry. At a recent conference, he said that if the energy market is opened up to competition, the electricity industry will no longer be misused to carry all kinds of extra burdens and no longer be forced to carry out "excessive" environmental measures. Unsaid, but clearly implied, the feeling is that competition would create pressure not only to reduce massive support for German coal but also support for renewables, such as that inherent in the Electricity Feed Law which obliges utilities to take renewables produced electricity at a fixed price. For wind this is 90% of the consumer price.

This view of competition is also held by Peter Noack of the Federal Economy Ministry renewables department: "If competition in the electricity sector actually functioned this would be to the disadvantage of renewable energies," he says. "For the moment the Electricity Feed Law protects renewables and later other instruments can be brought into play, such as tax benefits or investment subsidies." The renewables department would prefer to subsidise the capital cost of a renewables plant instead of continuing the kilowatt hour subsidies paid under the Electricity Feed Law. It says that investment subsidies can be aimed more precisely at the recipients who need them while the feed law also benefits those in no need of subsidy, such as profitable large hydro plants. This, however, would leave civil servants in charge of "picking winners" for subsidy, not something they have proved to be good at in the past. Some fine tuning of the feed law to exclude large hydro might be the better option.

At the moment, though, legislation for commercialisation of the electricity market in Germany has not even been agreed by the Cabinet.

The Social Democrats' response

SPD energy expert Gert von der Groeben puts his party's policy succinctly: "The absolute priorities for the SPD are energy saving, environmental protection and promotion of renewable energies." These priorities are contained in a draft energy law drawn up in 1991. In it, environmental protection becomes an integral part of energy supply and renewable energies are given a much improved framework for development, mainly through better rates of pay for the electricity they generate. The SPD also intends to pay more attention to the details of the Federal Constitution which makes each communal authority an autarchy which is obliged to carry out activities for the common good. Energy, argues the SPD, is an essential part of the responsibilities of communal authorities and their position against the giant electricity and gas companies -- which currently call the shots in Germany -- should be strengthened.

At the same time the monopoly advantages of very large companies should be reduced. "We have not yet decided exactly how this should be done" says Von der Groeben. One idea is to introduce a pool system for electricity similar to the English system, but with a power station dispatchment merit order containing some environmental criteria. Interestingly, the Federal Environment Office is supporting research into the environmental issues relating to a pool system for electricity supply including a simulation of dispatchment rules and merit order of power stations.

The SPD does not support the government's aim to abolish protected supply areas. One of the main aims of deregulation is to put downward pressure on energy prices, but as energy costs sink, the temptation to waste energy grows, argues the SPD. And the lower the price of energy, the less inclination there is for power companies to invest in environmental measures. For this reason, and without any increase in competition, the SPD favours the introduction of a CO2 and energy tax on fossil fuels and nuclear energy throughout Europe, the harmonisation of energy saving measures throughout member countries of the European Union (EU) and a sharper reduction of CO2 emissions. All this before deregulation starts. The SPD also argues that dismantling of protected supply areas would destroy the structures which actually protect communal energy generation from being taken over by large utilities. And these large companies, unlike the communities they serve, have no interest in energy saving and rational energy use because this does not bring the same rate of return as sales of energy.

The core of the problem

The arguments for and against deregulation of electricity markets often become so clouded in detail that the central dilemma -- and its solution -- become hidden under a mountain of imponderables. But the core of the issue is not that complicated. The aim of breaking a monopoly and introducing competition is to bring down the price of electricity. A market which is regulated to reflect the full cost of energy generation, including environmental costs, will mean more expensive electricity, but that extra cost can be partially offset against the lower production price achieved through competition. Regulation could include, for example, an energy tax on nuclear and fossil fuels which takes account of the environmental damage they cause. "Within such a framework, renewables have nothing to fear," says Rainer Kottkamp.

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