Economic impacts from the promotion of renewable energies: The German experience

Final report – October 2009

Project team: Dr. Manuel Frondel, Nolan Ritter, Prof. Colin Vance, Ph.D. (Project management)

The allure of an environmentally benign, abundant, and cost-effective energy source has led an increasing number of industrialized countries to back public financing of renewable energies. Germany’s experience with renewable energy promotion is often cited as a model to be replicated elsewhere, being based on a combination of far-reaching energy and environmental laws that stretch back nearly two decades. This paper critically reviews the current centerpiece of this effort, the Renewable Energy Sources Act (EEG), focusing on its costs and the associated implications for job creation and climate protection. We argue that German renewable energy policy, and in particular the adopted feed-in tariff scheme, has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into the country’s energy portfolio. To the contrary, the government’s support mechanisms have in many respects subverted these incentives, resulting in massive expenditures that show little long-term promise for

stimulating the economy, protecting the environment, or increasing energy security. In the case of photovoltaics, Germany’s subsidization regime has reached a level that by far exceeds average wages, with per-worker subsidies as high as 175,000 € (US $ 240,000)

Executive Summary

An aggressive policy of generously subsidizing and effectively mandating “renewable” electricity generation in Germany has led to a doubling of the renewable contribution to electricity generation in recent years. This preference came primarily in the form of a subsidy policy based on feed-in tariffs, established in 1991 by the Electricity Feed-in Law. A subsequent law passed in 2000 guaranteed continued support for 20 years. This requires utilities to accept the delivery of power from independent producers of renewable electricity into their own grid, paying technology-specific feed-in tariffs far above their production cost of 2 to 7 Euro-Cents (2.9-10.2 Cents US $) per kilowatt hour (kWh).

With a feed-in tariff of 43 Euro-Cents (59 Cents US $) per kWh in 2009, solar electricity generated from photovoltaics (PV) is guaranteed by far the largest financial support among all renewable energy technologies.

Currently, the feed-in tariff for PV is more than eight times higher than the wholesale electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Even on-shore wind, widely regarded as a mature technology, requires feed-in tariffs that exceed the per-kWh cost of  conventional electricity by up to 300% to remain competitive.

By 2008 this had led to Germany having the second-largest installed wind capacity in the world, behind the United States, and largest installed PV capacity in the world, ahead of Spain. This explains the claims that Germany’s feed-in tariff is a great success.

Installed capacity is not the same as production or contribution, however, and by 2008 the estimated share of wind power in Germany’s electricity production was 6.3%, followed by biomass-based electricity generation (3.6%) and water power (3.1%). The amount of electricity produced through solar photovoltaics was a negligible 0.6% despite being the most subsidized renewable energy, with a net cost of about 8.4 Bn € (US $12.4 Bn) for 2008. The total net cost of subsidizing electricity production by PV modules is estimated to reach 53.3 Bn € (US $73.2 Bn) for those modules installed between 2000 and 2010. While the promotion rules for wind power are more subtle than those for PV, we estimate that the wind power subsidies may total 20.5 Bn € (US $28.1 Bn) for wind converters installed between 2000 and 2010.

Consumers ultimately bear the cost of renewable energy promotion. In 2008, the price mark-up due to the subsidization of green electricity was about 1.5 Cent per kWh (2.2 Cents US $), meaning the subsidy accounts for about 7.5% of average household electricity prices. Given the net cost of 41.82 Cents/kWh for PV modules installed in 2008, and assuming that PV displaces conventional electricity generated from a mixture of gas and hard coal, abatement costs are as high as 716 € (US $1,050) per tonne. Using the same assumptions and a net cost for wind of 3.10 Cents/kWh, the abatement cost is approximately 54 € (US $80). While cheaper than PV, this cost is still nearly double the ceiling of the cost of a per-ton permit under Europe’s cap-and-trade scheme. Renewable energies are thus among the most expensive GHG reduction measures.

There are much cheaper ways to reduce carbon dioxide emissions than subsidizing renewable energies. CO2 abatement costs of PV are estimated to be as high as 716 € (US $1,050) per tonne, while those of wind power are estimated at 54 €

(US $80) per tonne. By contrast, the current price of emissions certificates on the European emissions trading scheme is only 13.4 Euro per tonne. Hence, the cost from emission reductions as determined by the market is about 53 times cheaper than employing PV and 4 times cheaper than using wind power.

Moreover, the prevailing coexistence of the EEG and emissions trading under the European Trading Scheme (ETS) means that the increased use of renewable energy technologies generally attains no additional emission reductions beyond those achieved by ETS alone. In fact, since the establishment of the ETS in 2005, the EEG’s net climate effect has been equal to zero. While employment projections in the renewable sector convey seemingly impressive prospects for gross job growth, they typically obscure the broader implications for economic welfare by omitting any accounting of off-setting impacts. These impacts include, but are not limited to, job losses from crowding out of cheaper forms of conventional energy generation, indirect impacts on upstream industries, additional job losses from the drain on economic activity precipitated by higher electricity prices, private consumers’ overall loss of purchasing power due to higher electricity prices, and diverting funds from other, possibly more beneficial investment.

Proponents of renewable energies often regard the requirement for more workers to produce a given amount of energy as a benefit, failing to recognize that this lowers the output potential of the economy and is hence counterproductive to net job creation. Significant research shows that initial employment benefits from renewable policies soon turn negative as additional costs are incurred. Trade- and other assumptions in those studies claiming positive employment turn out to be unsupportable.

In the end, Germany’s PV promotion has become a subsidization regime that, on a per-worker basis, has reached a level that far exceeds average wages, with per worker subsidies as high as 175,000 € (US $ 240,000).

It is most likely that whatever jobs are created by renewable energy promotion would vanish as soon as government support is terminated, leaving only Germany’s export sector to benefit from the possible continuation of renewables support in other countries such as the US.

Due to their backup energy requirements, it turns out that any increased energy security possibly afforded by installing large PV and wind capacity is undermined by reliance on fuel sources – principally gas – that must be imported to meet domestic demand. That much of this gas is imported from unreliable suppliers calls energy security claims further into question.

Claims about technological innovation benefits of Germany’s first-actor status are unsupportable. In fact, the regime appears to be counterproductive in that respect, stifling innovation by encouraging producers to lock into existing technologies. In conclusion, government policy has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into Germany’s energy portfolio. To the contrary, Germany’s principal mechanism of supporting renewable technologies through feed-in tariffs imposes high costs without any of the alleged positive impacts on emissions reductions, employment, energy security, or technological innovation. Policymakers should thus scrutinize Germany’s experience, including in the US, where there are currently nearly 400 federal and state programs in place that provide financial incentives for renewable energy.

 Although Germany’s promotion of renewable energies is commonly portrayed in the media as setting a “shining example in providing a harvest for the world” (The Guardian 2007), we would instead regard the country’s experience as a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits.

Read full detailed report here.

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