Last month, I had the distinct pleasure of traveling to Germany as a member of the German-American Chamber of Commerce Transatlantic Program for Young Technology Leaders delegation. The program brought together young professionals and academics from across the U.S. to meet with German energy professionals and discuss our mutual energy challenges and opportunities in the areas of smart grids and energy storage.
During the visit, I had the opportunity to discuss the similarities and differences that exist between the German and U.S. energy strategies. Germany, with its cohesive and visionary “Energiewende” (energy transition), has pursued a top-down energy strategy that relies on government investment to transform the energy system. The German strategy stands in stark contrast with the United States, which has not established a major national energy policy since the Energy Independence and Security Act of 2007, but nevertheless has achieved significant gains in renewable energy and a marked decrease in carbon emissions.
Is the German or American approach superior? It’s hard to say. Regardless, there are numerous lessons the United States can learn from Germany’s experience—and vice versa. With this post, I’ll discuss two of the key lessons the United States can learn from Germany. In a follow up post, I’ll turn the lens towards Germany, and discuss lessons Germany could take away from the U.S. experience.
Lesson 1: Coherent government policy can transform an industry
A key component of Germany’s Energiewende is its landmark Renewable Energy Act or Erneuerbare-Energien-Gesetz (EEG), which established three main principles for renewable energy development in Germany. First, the law guarantees a technology-specific feed-in tariff, or fixed payment per kilowatt-hour of renewable energy produced, for 20 years. This guarantee removes the risk from investment in renewable energy. Second, the law raises funds to pay feed-in tariffs through an EEG surcharge (currently 6.24 cents per kilowatt-hour) on German electricity bills, so that the government does not incur debt from the energy transition. And third, the law steadily reduces feed-in tariffs over time to reflect economies of scale, and other cost-reducing technology improvements.
Germany’s first EEG was established in 2000, when the price of a photovoltaic module was over €5 per watt. Thanks to a generous and guaranteed feed-in tariff that promoted investment by ordinary Germans into an emerging technology, the German solar industry saw enormous growth in response to booming local demand, steadily reducing the price of solar modules. By 2006, Germany’s huge demand for solar panels attracted Chinese manufacturers, which effectively undercut many German panel manufacturers—further reducing the global price of solar. Between 2006 and 2014, the installed cost of a solar photovoltaic system in Germany fell an average of 13 percent annually. Today, the cost of a photovoltaic module is less than €0.70 per watt. The total installed cost of an entire residential-scale solar power system is just €1.75 per watt.
Germany’s visionary investment in solar energy helped make today’s “game-changing” solar energy projects like Austin Energy’s record-breaking 5 cent per kilowatt-hour solar power purchase agreement possible. Without enormous solar demand from Germany, global solar panel prices would almost certainly be higher than they are today. More than once during my visit to Germany, the dramatic drop in global photovoltaic prices was touted as “Germany’s gift to the world.” After my experience in Germany, it’s hard to disagree with that notion.
Lesson 2: It’s Possible to Blend Low-Risk Feed-In Tariffs with Market Price Signals
One issue that Germany has encountered with its rapid rise of renewable energy—especially photovoltaics—is events where there is a large spread between the real-time market price of electricity and the feed-in tariff promised for renewable energy by the government. When it is very sunny or windy in Germany and the demand for electricity is low, large amounts of wind energy or solar energy being pushed onto the grid can cause the real-time market price of electricity to become negative. This blog post describes the cause of negative German wholesale electricity prices in more detail.
The issue with negative wholesale electricity prices is that they force generators that aren’t renewable to pay for the right to send energy onto the grid. Meanwhile, the German EEG forces distribution system operators to pay a feed-in tariff rate for energy delivered to their system by renewable generators—even controllable biomass power plants that could turn down if incentivized to do so. This creates an economic conundrum that is unsustainable in the long term.
Despite the challenge posed by the phenomenon of negative electricity prices, Germany has already implemented a tweak to its feed-in tariff policy that creates a bridge between low-risk feed-in tariffs and the more-volatile wholesale power market.
New photovoltaic generators and biomass power plants with a rated power capacity over 500 kilowatts can no longer receive a fixed feed-in tariff for the energy they deliver to the grid. Instead, they must sell their energy directly to the wholesale electricity spot market at the real-time market price—which can be highly volatile. To compensate for the added risk of selling energy to the market, the German government offers a “market premium” bonus payment for renewable electricity delivered to the market. The premium is simply equal to the difference between the current fixed feed-in tariff rate and the average monthly market electricity price minus a fixed “management premium” corresponding to the cost of managing the flow of energy from a renewable energy generator into the electricity market.
The market premium mechanism is summarized well in this document from Deutsche Bank Research. The net effect of the market premium rate is that an intelligent, well-managed renewable energy generator receives more than the fixed feed-in tariff per unit of energy sold, while an unmanaged generator receives the fixed feed-in tariff, on average. Most importantly, the market premium rate incentivizes renewable energy to stop producing if the power price becomes too negative.
While the market premium rate is required for large photovoltaic and biomass generators, any renewable generator can opt in to the rate. In fact, it has become an attractive option for many existing wind farms due to the promise of greater returns for a well-managed system. It will be interesting to watch how German renewable energy becomes more market-facing as it becomes the norm in Germany’s electricity system and market.
Energy Lessons from the United States for Germany
While Germany’s cohesive and decisive vision for its energy transition has made it a global leader in renewable energy policy and technology, there are still numerous areas where Germany could learn from the U.S. experience. Next week, I’ll write a follow up post discussing a few of those key areas. In the mean time, I encourage you to scour the reference documents below and ask questions in the comments field. I learned far more during my eight days as an energy delegate in Germany than I could possibly fit into a blog post or two.
- Recent Facts about Photovoltaics in Germany, Fraunhofer Institute.
- The German Feed-In Tariff: Recent Policy Changes, Deutsche Bank.
- German Feed-In Tariffs 2014, German Energy Blog.
- German Power Prices Negative Over the Weekend, Energytransition.de.