Are high power prices really the problem? The EEG Fund shows how inexpensive renewables have become. Instead of reducing the EEG surcharge, it should be used to speed up growth. Dr. Patrick Matschoss (IASS Potsdam) weighs in on the EEG debate.

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Once again, the political discussion is focusing on a state fund to finance renewables in Germany instead of using a surcharge on power consumption. This time, Bavarian state premier Horst Seehofer is calling for it. At first glance, it seems to be a good idea. For a long time, Germany’s Renewable Energy Act (EEG) provided renewable technologies with support similar to that given to other technologies, such as nuclear power, by means of taxes. An “EEG Fund” would thus help ensure a level playing field between energy sources.

Are power prices too high?

Over the past two years, the idea of switching from the EEG surcharge to a fund faded into the background, but it is now being talked about again. Politicians are only partly using the line of reasoning above, however. Their main focus is on “ensuring stable power prices” during the election campaign, as they openly state. But are high power prices really the problem? This question can be answered from the perspective of politicians and the energy sector.

Politically, power prices are too high when citizens no longer accept them, and this fact threatens to undermine the entire Energiewende project. When politicians use power prices as campaign issues, they blatantly take advantage of these supposed “concerns” either to rescue the Energiewende or to position themselves via-à-vis competing politicians (or both). And citizens? A survey of some 1,000 people in Germany conducted for German utility umbrella group BDEW found that 69% expected power prices to increase. Nonetheless, 93% of those surveyed said the Energiewende was important or very important, and for 55% renewables were not growing quickly enough. Apparently, the German public is more ambitious than its politicians. Of course, rising power prices are a problem for the poor, but is that a reason to limit prices for everyone – including the middle class? Certainly not. Indeed, energy poverty is a subset of general poverty, which unfortunately exists even in prosperous Germany. Combating poverty, however, is the domain of social policy (such as welfare).

From the perspective of the energy sector, the answer to the question of whether power prices are too high is more likely no than yes. Greater energy efficiency will be a decisive factor towards the success of the Energiewende. Yet, there is hardly a field in which less progress has been made in the past few decades than in energy efficiency policy (and where progress was made, greater consumption elsewhere clawed back these gains). The policies themselves are not always the problem; the government’s recent large-scale efficiency campaign is therefore welcome. But an old rule of economics holds that people waste things that are cheap – and vice versa. After all, a successful efficiency policy saves people money, which they can then spend on other things – including more energy consumption. This rebound effect has been long understood; true progress in efficiency requires high energy prices. Now, the Germany Ministry of Economics and Energy (BMWi) seems to want to deepen the societal discussion with its new strategy paper and Green Book (announcement at the Berliner Energietage, 13.4.16). If the latter aims to be honest, it cannot avoid stating that long-term efficiency is only possible with higher power prices – a poisonous truth for politicians. These higher prices do not even require new taxes; it would be enough merely to abolish the existing subsidies that keep the prices of power from fossil resources down.

Which fund concept? Restructuring technology development costs rather than lowering power prices

What does all that have to do with the proposed EEG Fund? There are different concepts. In cooperation with the Sustainable Development Council and based on studies done by Öko-Institut, the IASS investigated various options. In line with the aforementioned motivation, the model currently favored by policymakers limits the EEG surcharge, and the fund grows over time (the IASS papers speak of a “surcharge cap”). In contrast, the recommended focus on technology costs (called “payment cap” or “payment split” in the IASS papers) would divide coverage of EEG payments to generators of renewable power. Anything above 9 cents per kWh would be defined as a technology promotion cost and paid for from the fund, which would then drop to a certain base level over time. Biomass would not be included because no cost reductions are expected, so no technology advances would be promoted. Specifically, only PV and offshore wind would be covered by the fund (onshore is already completely below 9 cents), making it accordingly smaller.

The main benefit of the latter EEG Fund is thus not lower power prices. Rather, it shows that onshore wind and PV are already competitive with new conventional power plants, and offshore wind stands a good chance of becoming the third option. In addition to the aforementioned level playing field, this fund would then serve as an important communication tool by highlighting the competiveness of renewables. It would also clearly show that the legacy high costs are visible from renewables but not from other energy technologies because the latter were always covered by taxes.

For foreign onlookers, this signal would also be useful; it is often held that only rich countries like Germany can afford an energy transition. But technology development costs only occur at the outset. The world can now benefit from the mature technologies whose development Germany helped finance.

Since lower prices are not the actual goal anyway, the surcharge should not be reduced for a number of reasons. Instead, it should be frozen at the current level until the “bonus” has been used up. Then, energy efficiency would continue to benefit from the reliable incentive (see above). In addition, the fund could be smaller and not burden the public budget. Finally, a price increase – despite voter realism – is always a harder sell than a reduction; the latter could quickly be forgotten. If there is not a reduction in the beginning, this “bonus” would help forestall price increases for 20 years (based on the growth path in the EEG of 2014, which served as the basis for the study).

EEG Fund & the Paris Climate Agreement: fast growth need for renewables, with the fund absorbing cost increases.

The COP21 agreement showed that the current growth rate for renewables is too slow. Furthermore, the current growth rates for the heat sector and electric mobility will not lead to decarbonization in time. The growth of renewable energy should have been ramped up already; the discussion for the EEG amendments in 2016 points in the wrong direction. As mentioned above, the German public is ready to speed up the transition. The only other option is an increase in energy efficiency not only above the status quo, but adjusted by a “Paris factor” – an unlikely outcome, for the reasons discussed above.

If technology development costs are paid for separately and the surcharge is kept at the current level, it can remain stable for some time even as renewables are ramped up. The “bonus” would be used up more quickly than under the old growth path, but the impact on power consumers would be reduced, and the EEG fund would help support the Paris Agreement.

Conclusion: (i) The EEG Fund shows how inexpensive renewables have become. (ii) Instead of reducing the surcharge, it should be used to speed up growth. (iii) The German public is ready to speed up the transition.

An EEG Fund that reallocates technology development costs (defined as FITs above 9 cents per kWh) and leaves the surcharge unchanged not only helps create a level playing field between renewables and conventional energy, but also shows German power consumers and foreign onlookers that renewables – especially PV and onshore wind – have become competitive. Against the backdrop of the Paris Agreement, the EEG Fund should be used to shield power consumers from the costs of faster renewable energy growth.

The transparency that a properly designed EEG fund offers would allow politicians to use the German public’s willingness to speed up the transition. Consumers expect prices to rise anyway. In contrast, a failure meet the expectation of Paris would be devastating.

Dr. Patrick Matschoss is a research scientist on the Transdisciplinary Panel on Energy Change (TPEC) at the Institute for Advanced Sustainability Studies e.V. (IASS). This article was first published on the IASS blog and is reposted with permission.