Why do so few large solar and wind manufacturers support the most successful legislation for renewables? Because they want big, sexy deals with a small number of utilities, not endless discussions with a myriad of small investors.
When the German Renewable Energy Act (EEG) led to a wind and solar boom starting in 2000, many environmentalists abroad looked to Germany – including California. But the proposals in California in the mid aught years met with skepticism from large wind and PV manufacturers – of all people. Solar campaigners did not understand their reluctance; after all, such laws would only make the cake bigger for these companies. But the entrepreneurs were concerned only about the size of their piece of the cake, not the size of the whole cake. To understand why they may have been right, we need to dig a little deeper.
Toby Couture is a Canadian from the French speaking east coast. After studying philosophy, he turned to energy policy at the London School of Economics before the early 1990s. One particular policy stood out in a global comparison: feed-in tariffs, as in the German EEG of 2000.
“At that time, the global market was counted in tens of megawatts,” says Couture, who has since made Berlin his home. “But with the feed-in tariff, you suddenly counted the megawatts in 100s – or you went straight to gigawatts.”
“So I wondered,” Couture recalls, “what the secret formula for the feed-in tariff was. And I soon realized: it’s bankability.”
“Bankable” not synonymous with “profitable”
The feed-in tariff in the EEG has often been described as too generous. This claim was true around 2010 for solar power, but overall the profit margins for all types of green power over years are in single digits. “And what is rarely mentioned”, says independent energy expert Uwe Nestle, ” is that the profit is not guaranteed at all, only the price for the green electricity you produce. The law does not guarantee the wind and sunshine hours – nor that your turbine will not break down.”
So “bankability” does not mean that profit is guaranteed, but rather that your investment is predictable. The risks are not zero but minimized. And banks reward low risks with low interest rates (in banking jargon, this is called “de-risking”). Since almost all expenses are incurred right at the start of a wind or solar project (there are no ongoing fuel costs), the interest rate plays a greater role for wind and solar than for fossil or nuclear energy. In other words, de-risking makes solar and wind much cheaper.
The revolution began small
In the mid-90s, there was already a feed-in tariff for solar energy in small municipal projects such as in Hammelburg (Bavaria), where a physics and sports teacher had initiated the campaign: the city was to promote 15 kW of PV. “Today, this seems ridiculously small,” the former teacher recalls today, “and I couldn’t promise the donors any profit – the risks were still too great. Whoever participated was more a donor than an investor.
The teacher’s name was Hans-Josef Fell. In 1998, he was elected to the Bundestag, where he helped write the EEG of 2000. Like some years later in California, not every large wind or solar manufacturer in Germany was enthusiastic about the law, Fell remembers today.
The government set the prices for green electricity in the EEG. The law was groundbreaking in this respect; for the first time, nationwide remuneration was linked to actual investment costs. Thus, different tariffs were paid for solar and wind power. Before that, as in the Feed-in Act of 1991, remuneration was defined as a percentage of the household tariff (e.g. 90% of the household tariff from 1991-1999), which had nothing to do with the costs of wind and solar plants.
Ironically, this development towards prices set by the government began with an early attempt to liberalize the electricity sector. In 1978, the United States enacted the Public Utility Regulatory Policies Act (PURPA), which for the first time required utilities to purchase electricity from their customers. “But the level of compensation was not fixed; it was to be fairly negotiated between generators and suppliers,” says Couture. By “fair”, power suppliers understood their avoided fuel costs – which had nothing to do with the investment costs of third parties for green power plants.
“But the tariffs negotiated were not sufficient to advance renewables,” explains David Jacobs. The Berlin-based energy consultant wrote his dissertation on the development of the EEG. “That’s why the wind market only got off the ground when California issued Standard Offer Contract 4 in 1984.” SOC4 also linked remuneration to avoided fuel costs, “but they were projected into the future, and in 1984 it was assumed that oil prices would rise sharply,” says Jacobs. When oil prices suddenly dropped in the mid-80s, “California got cold feet and cancelled all contracts.” Almost 35 years ago, California nearly launched the global energy revolution. 15 gigawatts of wind power was in the project pipeline there alone – on a global market still counted in tens of megawatts.
It wasn’t until the German EEG of 2000 that a country remained committed to the promotion of wind and, above all, solar energy long enough for equipment prices on the world market to plummet. And yet, feed-in tariffs are increasingly disappearing. More and more countries are switching to auctions, and solar and wind growth often slows down in the process. Indeed, many countries switch from FITs to auctions specifically in order to get better control of solar and wind growth. But why do so many solar and wind companies support this change in policy – where is the rebellion?
One answer could be that companies see feed-in tariffs as a boom-and-bust policy; it’s great while you have it, but politicians eventually get cold feet. To which one might reply; yea, and the renewable energy industry doesn’t fight back, so it’s a self-fulfilling prophesy.
Another answer can be guessed at in another statement by Hans-Josef Fell: “By 2015, the four largest electricity suppliers in Germany accounted for only 10% of investments in renewables”. The other 90% were new investors: citizens, farmers, cooperatives, SMEs, etc. Citizen energy was born.
Big renewable energy firms understand that the electricity cake is finite. Within this consumption, there is a smaller cake for solar, wind, etc. Big companies want to compete with each other, not with countless households and small businesses, for these cake pieces. Citizens are to remain consumers, not become competitors. PURPA and the EEG have not made the cake – our power consumption – bigger, but these laws have created competition between David and Goliath. Auctions might do away with this competition.
Craig Morris (@PPchef) is coauthor of Energy Democracy, a history of Germany’s Energiewende. Along with Rebecca Freitag (@Freitag4Future), former UN Youth Delegate for Sustainable Development, he moderates the ten episodes of the Community Renewables Podcast available on Soundcloud, Spotify, and Apple.