Cut support for renewables? Sure, but why not start with fossil fuel subsidies that amounted to US$ 544 billion in 2012? While the German Renewable Energy Act will need to be reformed, the fundamental issue of creating a level playing field for renewables remains challenging in an environment where fossil fuels are highly subsidized, argues Matthias Ruchser.

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The new Federal Government, made up off the CDU/CSU and SPD, has been in office in Germany since December 2013. With their bundling of energy responsibilities into a newly created Federal Ministry for Economic Affairs and Energy, and the taking over of the ministry by the Chair of the SPD, Sigmar Gabriel, the grand coalition is signalling the great significance it gives to the energy transition (or in German: Energiewende). The energy transition “protects the environment and climate” and makes Germany “less dependent on imports; it secures jobs and creates value”, as stated in the coalition agreement. Furthermore, the partners in government want “to consistently and tactically continue the development towards energy supply without using atomic energy and with a continually growing proportion of renewable energy sources”. The necessary reform of the Renewable Energy Act (EEG) should be presented by Easter 2014.

The need for action on the EEG was underlined in October 2013 on announcing the EEG-surcharge that electricity consumers would have to pay this year: 6.24 cents per kilowatt-hour instead of the previous 5.277 cents. There was an enormous outcry in the media and various stakeholders immediately demanded a reform of the EEG. Their argument was that support of renewable energies in this form could no longer be financed.

At the same time, the bosses of Germany’s two largest energy suppliers, Eon and RWE, demanded a price guarantee for them to hold available their fossil-fuel power-station capacities, even if there is no demand for it in the market. Thus the demand, on the one hand, is that the generators of renewable electricity should behave like normal participants in the market, whilst the operators of fossil-fuel power stations, on the other hand, consider the introduction of a new subsidy to be necessary. This demand was picked up on – albeit in a coded manner – in the coalition agreement. The Federal Network Agency must now check the establishment of new power-station capacities and, if necessary, guarantee it.

Indeed, as long as traditional energies are made artificially cheap through subsidies, renewable energies will find it difficult to succeed in the market. Those who want to reduce the costs for renewable energies must consider energy subsidies across the board. But this is not in the interest of the traditional energy economy.

For example, in 2011 the 27 countries of the European Union spent 35 billion euros on nuclear energy and 26 billion euros on fossil- fuel power stations. In comparison, there was 30 billion euros for supporting renewable energies. Seen globally, the discrepancy in support of traditional and renewable energies is even more dramatic. In spite of the G20 resolution of 2009 to reduce inefficient fossil-fuel energy subsidies, these rose to a record level of US$ 544 billion in 2012, according to the International Energy Agency.

It is continually asserted that fossil-fuel energy subsidies help improve the living conditions of the poorer in society, as they can access a basic supply of energy. But this argument has been sufficiently refuted, primarily in developing and emerging countries. It is mainly the middle classes and upper classes that benefit from subsidized energy, as they consume more energy in general.

The most successful tools in the world for introducing renewable energies are guaranteed feed-in tariffs on the model of the German EEG. Nevertheless, there is still a need to reform the EEG, particularly regarding the distribution of costs, as the EEG-surcharge has risen continually in recent years: from 0.63 cents in 2005, when Angela Merkel was first elected Chancellor, to 1.30 cents in 2009, when the CDU/CSU-FDP Federal Government took up its work, to 6.24 cents now. Due to the increased feed-in of electricity from renewable energies, electricity prices on the stock market have actually fallen, but private consumers and small and medium-sized businesses have not profited from this.

There are two aspects that should not be forgotten in a reform of the EEG. Firstly, extending the exemption from the EEG-surcharge in the last legislative period to 2,300 electricity extraction points has also contributed to increases in recent years. The intention of the “Special Equivalency Rule” was to maintain the international competitiveness of energy-intensive companies in the manufacturing trades in Germany. Indeed, the CDU/CSU-FDP Federal Government allowed massive misuse of this rule. Just one example of this are the six open-cast lignite mines of Vattenfall Europe Mining AG, which are not competing internationally as the lignite obtained is burned in the German Vattenfall power stations.

Since then, the political insignificance at Federal level of the FDP after the elections in September 2013 has had an effect: at the industrial trade union of mining, chemicals and energy in October 2013, Chancellor Merkel declared herself in favour of only freeing companies from the EEG contribution that are really up against international competition. Much less ambitiously, the coalition agreement states that the equalisation rule should be maintained and developed to become future-proof; privileges should be checked and safeguarded under European law. That this is a matter of urgency can be seen in the opening of an in-depth investigation by the European Commission at the end of 2013. Unlike the guaranteed feed-in tariffs in the EEG, which are not a subsidy, the Commission is now investigating whether the reduction granted to energy-intensive companies on the EEG-surcharge is compatible with EU state aid rules.

Secondly, those in Germany who demand the abolition of the Renewable Energy Act, or, seen globally, demand the abolition of support for renewable energies, must accept the abolition of subsidies many times higher for nuclear and fossil energies – instead of demanding new fossil-fuel energy subsidies. Those who want to create fair competitive conditions between traditional and renewable energies cannot get out of this discussion.

But even if energy subsidies for fossil fuels are reduced or abolished, the necessary transformation of energy systems as demanded by the Wissenschaftliche Beirat der Bundesregierung Globale Umweltveränderungen (WBGU) (German Advisory Council on Global Change) will not automatically be successful – neither in Germany nor globally. On the one hand, the existing coal-fired power stations will remain in the network for forty to fifty years. On the other hand, we have seen a renaissance of coal since the start of the 21st century.

The demand to abolish energy subsidies remains correct but can only be achieved in the medium- to long-term. The respective economic interests of the stakeholders involved are too large. The following applies for Germany and Europe: Whoever wants to reduce the support of renewable energies must be prepared to reform both the system of fossil-fuel energy subsidies and the European Union Emissions Trading System. With less ambitious reduction targets and/or the over-allocation of emission entitlements, certificate prices are at rock-bottom, so there is no incentive for energy-carriers to convert from traditional to renewable energies. On the contrary, fossil- fuel energy production has expanded, even in Germany. This has had negative effects on Germany’s climate-protection balance sheet – CO₂ emissions are rising.

By Matthias Ruchser, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). The article was first published on the website of Diplomatisches Magazin.