Solar Energy Support In Germany - SEIA

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Solar Energy Support in GermanyA Closer LookPREPARED FORSolar Energy Industries AssociationPREPARED BYJurgen Weiss, PhDJuly 2014

This report was prepared for the Solar Energy Industries Association (SEIA). All results and anyerrors are the responsibility of the author and do not represent the opinion of The Brattle Group,Inc. or its clients.Acknowledgement: We acknowledge the valuable contributions of many individuals to thisreport and to the underlying analysis, including Daniel Stetter and members of the Brattle Groupfor peer review.Copyright 2014 The Brattle Group, Inc.

Table of ContentsExecutive Summary . 1I.Introduction . 6II.The Cost of Solar PV and Germany’s FIT Program . 9III.The impact of the German solar PV generation on retail prices . 11A.Renewable Support Represents a Moderate Portion of Rates . 11B.Renewable Support Not Equally Split Across Rate Classes . 15C.Renewable Support Increase Not Linear And Will Begin to Decline Soon. 19D.Renewable Energy Contributes to Declining Wholesale Prices . 22IV.The impact on German competitiveness . 25V.The impact of German solar PV support on greenhouse gas emissions . 27VI.The impact of German solar PV support on system reliability . 30VII. Renewable and solar PV support in Perspective . 37VIII. Conclusions . 39IX.(Re)sources . 4313i brattle.com

Executive SummaryThe Solar Energy Industries Association (“SEIA”) asked The Brattle Group to prepare a reportoutlining the major lessons learned from the past decade of solar PV energy support in Germany.Recent reports about the rising cost of Germany’s feed-in tariffs (FITs) for solar PV and aboutresulting reform efforts have led some to view the German solar support programs as having beentoo expensive, resulting in oversupply of solar PV, having led to an unreliable electric system,having hurt the competitiveness of the German economy, or all of the above, and hence as beinga poor role model for other countries to follow.The costs of Germany’s renewable support (including solar PV) program have indeed beensignificant – and higher than expected - and the success of those programs have led topenetration levels of renewable energy sources high enough to require modifications to both therenewable program itself and to overall electricity market design. However, a closer look at theGerman solar support program and its impacts shows that those programs, while having hadsome flaws (now in need of correction), have proven relatively successful, especially givenGermany’s overall commitment to significantly and rapidly expanding renewable energyproduction.The core of Germany’s solar PV program consists of a set of FITs for solar PV installations ofvarious sizes ranging from residential rooftop installations to utility-scale projects. FITs guaranteea fixed compensation for electricity produced from solar PV facilities for a period of 20 years. Theprogram requires that transmission system operators (TSOs) purchase all the power producedfrom these PV systems. TSOs in turn sell the power on wholesale markets and are made wholethrough a renewables levy (“EEG-Umlage” in German), which is collected from most customers.Heavy electricity users in trade-sensitive areas are (partially) exempt from this renewables levy.Under the program, solar PV installations have increased dramatically, reaching a total installedcapacity in excess of 35 GW by year-end 2013.Over the years and in response to unexpected growth in installations above expectations, theprogram has undergone several reforms, the most recent of which is currently awaiting finallegislative approval. Previous reforms included a cap on aggregate solar PV capacity of 52 GW,after which support in excess of market revenues is supposed to end. At that point, electricityproduction from solar PV would represent about 7% of total German wholesale generation. The1 brattle.com

35 GW of solar PV capacity installed at year-end 2013 represent about 2/3 of that target. Withannual installations exceeding 7 GW in several of the past few years, the current reforms alsointroduce a narrower corridor of annually targeted solar PV additions between 2,500 MW and3,500 MW1 and automatic and frequent adjustments to the FIT downward, more strongly so ifthose target corridor levels are exceeded. Currently installed solar PV represents close to 20% oftotal installed capacity and close to 50% of peak demand2 and has begun to have significantimpacts on grid operations during periods of low demand and high generation from solar PV,such as during sunny spring weekend days. The current reforms therefore also include a numberof measures gradually moving solar PV and other renewables towards being more tightlyintegrated with electricity markets. Finally, the increasing levels of renewable power generationhave put downward pressure on wholesale prices received by existing fossil generators, whichhighlight both shortcomings of existing market rules – in terms of adequately incentivizing thoseplants needed to ensure reliability of supply – and the need to further adjust market mechanismsto ensure reliable supply in a system with a significant portion of intermittent power generation.The primary lessons from the German experience are that a system of FITs such as the one usedin Germany can be highly effective in promoting the growth of solar PV, that the impact ontrade-exposed heavy electricity users can and perhaps should be mitigated, but that FITs for newinstallations should be adjusted regularly and perhaps automatically in response to observedrelative to targeted deployment levels so as to avoid undue increases of electricity rates for retailcustomers.In hindsight the German FITs for solar PV did not adjust quickly enough to rates of installationsfar in excess of what had been expected, even though reforms to the renewables law in responseto those installations ultimately did introduce much more frequent and steeper reductions inthose FITs, which allowed Germany to avoid a complete crash of PV installations along whathappened in Spain and Italy. Several important lessons can be learned from the Germanexperience.1The annual additions between 2009 and 2013 exceeded this corridor: 4,446 MW in 2009; 6,988 MW in2010; 7,485 MW in 2011; 7,604 MW in 2012 and estimated 3,600 MW in 2013.2Peak Demand is approximately 81.7 GW. See Bundesnetzagentur, Feststellung desReservekraftwerksbedarfs für den Winter 2013/14 und zugleich Bericht über die Ergebnisse derPrüfung der Systemanalyse, September 16, 2013, page 14.2 brattle.com

First, there is widespread acknowledgement that Germany’s solar PV support program has beeninstrumental in bringing down the cost of solar PV. Since 2007, average installation costs havefallen from close to 5 per Watt to between 1-2 per Watt. In that sense, earlier investments arepaying off in terms of much lower installation costs today.Second, associating the high residential retail prices of electricity in Germany purely with thesolar PV and other renewable support programs would be misleading. It is true that retail prices(for residential, commercial and small industrial customers) are among the highest in the world.However, while the renewables levy, now above 6 cents/kWh, represents a significant portionof those rates of approximately 30 cents/kWh, other tariff elements such as taxes and fees are ofcomparable magnitude and have increased at similar rates. Therefore, Germany’s residentialretail tariffs would be among the highest in the world even without paying for Germany’srenewable let alone solar program.Third, it is also true that payments for solar PV have increased substantially in the past few years.Until 2007, annual payments to solar PV installations under the FIT program remained below 2billion, but increased rapidly to close to 10 billion by 2013 and are expected to increase to about 11 billion per year before leveling off and ultimately decline. To put these payments intoperspective, assuming all power generation cleared at wholesale prices and given averagewholesale price levels of 50/MWh, the value of total power generation in Germany would beapproximately 30 billion per year. Total payments for solar PV generation therefore wouldrepresent almost 1/3 of these total costs for only about 5% of total power production. Measuredagainst retail rates, on the other hand, payments under solar PV FITs represent about 10% oftotal sales3, or roughly twice the share of PV production. Over the same timeframe, average FITspaid to new installations dropped from 47 cents/kWh to 12 cents/kWh. The increases in FITpayments were driven significantly by the large expansion of solar PV between 2009 and 2012.In hindsight, they can largely be attributed to downward adjustments to the FIT for newinstallations not being more rapid in response to installations exceeding targets. That being said,Germany’s FIT was designed to be adjusted over time as needed, and it ultimately did. In thatsense, Germany’s FIT program for solar PV did not lead to the boom-bust cycle undergone by3See Statistisches Bundesamt (German Statistical Office), which reports average final proceeds from thesale of electricity (excluding various taxes, but including network and renewable energy relatedcharges) to be 14.74 cents/kWh in 2012.3 brattle.com

other countries experiencing rapid solar PV expansion under FITs, such as Spain and Italy.4Nonetheless, it would have been preferable to have designed automatic adjustments to the FITsbased on known criteria at the outset rather than having to adjust the program on the go.Fourth, it is important to note that heavy electricity users in industrial sectors exposed tointernational trade have been exempt from a significant portion of the renewables levy andgenerally face electricity prices in line with or even below other European competitors. Inaddition to the exemptions for this group of customers, heavy electricity users also benefitdirectly from decreasing prices on wholesale markets, caused primarily by solar and otherrenewable energy production and hence a direct by-product of the renewable support program.As a result, there is little reason to expect that Germany’s solar PV support program has hurt thecompetitive position of German industry to date, including the relatively few remaining veryenergy intensive industrial sectors. While renewable energy policy likely remains a relativelyminor contributor to Germany’s overall economic performance, Germany is experiencing aneconomic boom with higher than ever exports and low unemployment rates when compared tomost EU countries and also when compared to the United States.Fifth, even if ex-post a somewhat optimized FIT design might have lowered the cost impact ofGermany’s solar PV program for retail customers (except the exempt industrial users), high costsincurred to-date are not a good reason to abandon the solar PV program now. Since PV costshave come down dramatically, at least partially as a result of the program, building the remainingroughly 16 GW of solar PV to reach the 52 GW target as part of Germany’s broadercommitments to lowering and ultimately essentially eliminating greenhouse gas emissions fromits power sector will lead to only a very small additional costs to customers.54For an in-depth discussion of the Spanish and Italian experience and a comparison with Germany, seePablo del Río and Pere Mir-Artigues, A cautionary tale: Spain’s solar PV Investment Bubble, February2014.5A full assessment of the incremental cost of additional solar PV to customers needs to go beyondestimating any incremental increases to the renewables levy, i.e. to the payment to compensate for thedifference between feed-in tariffs and wholesale prices. Additional solar PV will likely lead to furtherreductions in wholesale prices, which directly benefit some customer groups (large industrial) and alsoresult in customer savings partially offsetting higher any increases in the renewables levy. Also,incremental solar PV likely impacts investments at the transmission and distribution level and mayimpact other costs such as those for redispatch or for ancillary services.4 brattle.com

Finally, the reform efforts of the solar PV and renewable support programs in Germany shouldnot be interpreted as an acknowledgment of a broad failure of the Germany system of FITs.Rather, while the reforms are indeed an effort to improve the design of the FIT system, forexample by introducing more rapid adjustments of FITs to observed deviations of actual fromdesired installation levels, they are also a sign of the solar PV sector maturing. Germany is uniqueamong OECD countries in having managed to significantly increase the share of renewables in itselectricity mix – by now a power generation share of some 25% has been reached. There is broadpolitical support for a continued aggressive move towards an essentially carbon-free sector by2050 with a renewables share above 50% by 2030. Therefore, after