Wednesday, June 17, 2015

The German Feed-in Tariff is a Revenue-Raising Instrument, not a Subsidy

The German feed-in tariff for renewable electricity is a revenue-raising instrument, not a subsidy.  As part of the Energiewende suite of policies, it stimulates the development of renewable-energy industries for solar energy, wind power, biomass and bioenergy, and geothermal energy worth over 40 billion Euros in annual turnover, employing just under 400,000.  The businesses and their employees pay taxes and social security contributions, earning the German federal government, the Länder (states) governments and municipalities billions in Euros annually in fiscal revenue.  That is the opposite of what a subsidy does.
The feed-in tariff, or "FiT", is financed through a levy on the electricity bills of households and small enterprises.  It is not paid out of public budgets, nor does it diminish fiscal revenue. By its nature, the feed-in tariff is thus not a subsidy.  It should be noted that large industrial users of electricity – if they are exposed to international competition – enjoy very large discounts on the levy.  These reductions, constituting de-facto exemptions, may be considered subsidies.  In its routine application of state-aid disciplines to ensure that no distortions in competition unduly disturb the functioning of the European Union‘s internal market, the European Commission found these reductions to be acceptable practice in the circumstances.

The FiT does stimulate and support the generation of renewable electricity as a commercial activity on German territory, carried out by businesses largely based or registered in Germany, with staff that for the most part lives and pays taxes in Germany. By stimulating domestic production and thus reducing the reliance of fossil fuel imports, the policy strengthens the balances of trade and payment.  The increased fiscal revenue is a logical consequence of the growth of domestic value generation.

This simple set of facts is often denied by distractors of the Energiewende, either out of ignorance or in cynical misrepresentation of the German green power shift away from nuclear and fossil energy towards safe, clean, sustainable and cheaper renewable power.  They may thus seek to present the Energiewende falsely as expensive, economically irresponsible and the outcome of an irrational "knee-jerk" policy response to the tragic nuclear catastrophe in Fukushima on 11 March 2011.  Their purpose is to send the message that only a rich country like Germany could possibly afford such a policy, as they seek to stop the Gerrman Energiewende from inspiring other nations.  It should be obvious to any neutral observer that feed-in tariffs in similar institutional settings would help those countries in the Eurozone that suffer from high deficits and debt.

Why is the planned "Contract for Difference" (CfD) designed as a financial aid for the construction and operation of the proposed new nuclear power plant at Hinkley Point in the UK considered a subsidy when appears to be similar to the German FiT?  The answer lies in the detail, which make the CfD very unlike the FiT.  The differences lie in the natures of the technologies supported, the level, duration and future evolution of the payments, their effect on business risk (and borrowing cost), in how they are embedded in the wider regulatory framework which includes far-reaching guarantees, the nature of the contracting party for the builder and operator of the proposed plant, and other aspects.  The CfD will come under renewed scrutiny in the European Court of Justice as well as the European Commission, where it is most likely to be found to be in law what it is meant to be in practice: a subsidy.


This entry is my response to a comment to a letter to the Financial Times entitled "Reality is that new nuclear carries significant economic risk".  For your convenience, here is the version published on 4 June 2015:

Sir, Nick Butler’s Comment article “Germany’s decision on coal brings a clash of wills” (May 24) on the German Energiewende (energy turnround) seems to play on a number of dominant but misleading narratives. It is simply not the case that Germany subsidises renewables — rather, the Energiewende works with feed-in-tariffs which set incentives and give support, but no subsidies. Furthermore, domestic consumer energy prices have risen less than for other energy products, and it is just untrue to say that there have been increases in energy prices for German industry. 

It could be helpful to reflect that Germany uses 20 per cent of all European electricity, and its decision to go nuclear-free by 2020, hitting power and CO2 targets by investing in renewables and energy efficiency, grid network infrastructure, and planning for trans-boundary pumped storage hydroelectricity, with CHP gas and some coal as interim measures, may prove significant. Key to the Energiewende is the planned reduction in primary energy, a reduction in electricity consumption, and a continuing and substantive reduction in carbon emissions — including a wholesale reduction in coal. 
Decisions on nuclear power cannot be separated from prior energy policy choices, and Germany has demonstrated a very strong commitment to the renewable evolution. Innovative German practice includes the first implementation of a fixed price feed-in-tariff, and huge purchases of solar photo voltaics (PV), which have driven down the world price of modules. Energy futures have also devolved to the local level, with communities securing political agreements under which the Bundesländer (federal states) are enabled to set goals and locations for renewable generation. This ensures that local energy resources benefit not only the energy companies but also the local people, with profits and employment kept in the region. Germany’s non-nuclear energy policy is framed in the context of national pride and scientific-technological achievement, twinned with economic expansion.

The reality is that new nuclear carries significant economic risk. The UK plans to guarantee the French government nuclear corporation EDF an index-linked contract price of £92.50 for each megawatt-hour — twice the current market price of electricity — over a 35-year locked-in contract period. UK nuclear subsidies will be funded through levies on all consumer energy bills, and the Treasury has offered a credit guarantee to underwrite up to £10bn of debt on the project. Given the risk profile of new nuclear, the fees for guarantees being offered to EDF by the UK government are well below the commercial rates — especially in the light of current experience of quite startling nuclear construction cost and time overruns in Finland and France.

Paul Dorfman
Honorary Senior Research Associate,
Energy Institute, University College London, UK
R Andreas Kraemer
Founder and Director Emeritus,
Ecologic Institute, Berlin, Germany

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