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Background Papers

Promoting Renewable Energy Sources

On April 1, 2000, legislation aimed at developing renewable sources of energy into an important part of Germany’s energy supply went into effect. The "Act on Granting Priority to Renewable Energy Sources" and amendments to the "Energy Industry Act" and the "Law on Excise Tax on Oil and Oil Products" are intended to help improve climate and environmental protection by doubling the share that renewable energy sources represent out of the total amount of electricity generated by the year 2010.

Renewable sources of energy - solar energy, water energy, geothermal heat and biomass - currently make up five percent of Germany's total energy production. Increasing this share has been complicated in recent years with the liberalization of the German electricity market: greater competition among utilities has pushed electricity prices down below a viable level for producers employing renewable energy sources. The newly implemented legislation therefore provides for price supports to enable electricity generation from renewable energy sources on an economically viable basis. This support is also intended to stimulate demand for renewable energy technologies, which will, in turn, spur technological innovation, job-creation and new export opportunities.

Fostering increased use of renewable energy sources does not come free. It involves marginal additional costs for all electricity consumers. These additional costs currently amount to approximately 0.1 Pfennig (two-tenths of a cent) per kilowatt hour and will not have any significant impact on the price of electricity.

The new legislation on renewable energy builds upon the "Act on the Sale of Electricity to the Grid" passed by all parties in the Bundestag in 1990. That law obliged operators of high-voltage grids to buy electricity generated from renewable sources of energy at a minimum price. Under the new legislation, grid operators will continue to be obliged to buy electricity from producers employing renewable energy sources, but, in contrast to past practice established in 1990, the minimum price will no longer be calculated as a percentage of the average electricity price. There will instead be set, cost-oriented rates that differentiate among energy sources. The new legislation also does away with the so-called five percent ceiling on support for renewable energy sources. The 1990 Act on the Sale of Electricity to the Grid stipulated that the special minimum price would no longer apply once renewable sources of energy accounted for more than five percent of total energy production.

The new Renewable Energy Sources Act provides a considerable incentive to encourage greater use of solar energy. Local power companies will now pay at least 99 Pfennig for every kilowatt hour of solar-generated electricity that is fed into their grid. Previously, the minimum price for solar electricity was only 17 Pfennig. Experts expect this new arrangement will provide a tremendous boost to Germany’s up-and-coming solar energy industry. Solar generating facilities are now beginning to be produced on a large scale, and costs are likely to drop steadily. For this reason, the rate of 99 Pfennig per kilowatt hour will apply only to those plants that go on-line in the year 2000. This rate will fall by five percent per year for plants that are built after this time. A cap has been placed on the financial assistance provided for solar energy: the Renewable Energy Sources Act is to be revised once the combined capacity of Germany’s solar power plants reaches 350 MW - nearly six times the current level.

Under the Renewable Energy Sources Act, producers of electricity by wind power are to receive 17.8 Pfennig per kilowatt hour during the first five years the act is in force. Depending on the quality of the location, this rate will subsequently be reduced somewhat and could fall to 12.1 Pfennig per kilowatt hour for well-situated producers. The rate to be paid for power from typical wind plants located along the coast will average 16.4 Pfennig per kilowatt hour during their operating lives. For the typical inland wind energy producer, the will average 17.3 Pfennig. This differentiation takes into account the objections raised by the European Commission which would otherwise have issued a warning that the more favorable sites were receiving too much assistance.

By providing greater assistance for the use of biomass, the Renewable Energy Sources Act improves the economic prospects of the farm and forestry sectors. Farmers who ferment slurry into biogas and then generate electricity from it will receive up to 20 Pfennig per kilowatt hour; previously, the minimum price for biomass electricity was just under 15 Pfennig per kilowatt hour. This higher rate will also apply to power plants that use solid biomass, most commonly wood. .

The new legislation adds methane to its list of renewable energy sources. Harnessing methane that would otherwise escape into atmosphere will help significantly in cutting greenhouse gas emissions and thus contribute toward protecting the climate. The rate to be paid for methane-generated electricity will range up to 15 Pfennig per kilowatt hour.

Financial assistance is now being provided for the first time for the use of geothermal heat. Producers operating generation plants with a capacity of 20 MW or less will receive 17.5 Pfenning per kilowatt hour, operators of larger plants 14 Pfennig per kilowatt hour.