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Navigating the German Energiewende: The Good and Bad Example

The German "Energiewende" (energy turnaround) and its energy law developments are frequently quoted around the world. Often the same circumstances are presented as a shining example by some – and as a striking failure by others. One thing is clear: German energy law can indeed serve as an example, be it good or bad. And the assessment what side we are on is likely to change over time.

By 2016, the Energiewende ship has travelled quite far already. But it continues to sail in still at least partly uncharted waters, very much influenced by the weather, technological progress and also some ideology. Trial and error continue to play an important role in charting the course, as do engineering and financial skills as well as political ambitions.

A key challenge on this course it keeping track of what German energy law actually says, to make sure the energy turnaround hasn't turned against you at any given time. German energy law has become similar to tax law: complex, frequently changing, commercially relevant and driven by particular, often conflicting interests. The disruptive changes that the Energiewende has brought about can be seen everywhere. Some energy companies have had difficulties finding the right response. Despite claims to the contrary, nobody has a fully worked out and proven map how to get to the really bright energy future.

Below, we will briefly outline some of the rocks, vortexes, and bright intervals that are currently attracting attention on the Energiewende course.

1. Electricity Market Act

In the past 15 years, the share of renewable energy in gross electricity consumption increased from just 6 to a staggering 33 % in 2015. EEG transfer payments amounted to EUR 21.5 billion in 2015 alone. It is only a few years until the use of nuclear energy in Germany will end in 2022. Reducing power generation from lignite and hard coal is moving upwards on the political agenda. A big question is what the energy market should look like to deal with this, and this question has been discussed in Germany under the heading "Electricity Market 2.0".

The proposed electricity market 2.0 will be shaped by the Electricity Market Act, which at the time of writing is in the parliamentary process. It is expected to come into force in 2016. The Act tries to regulate key issues regarding security of supply. The aim is ensuring a market that is able to guarantee a secure, low-cost and environmentally compatible electricity supply with an ever increasing share of renewable energy.

Key decisions in the Electricity Market Act include the decision not to establish a separate capacity market, but to rely on a revised capacity mechanism regime. In addition to the existing reserve power and network reserve scheme, a new capacity reserve shall be established. It contains a capacity element and a climate reserve element for lignite power plants.

An initial power capacity of 1.8 GW shall primarily fulfil the reserve function and shall ensure security of supply. With regard to reducing CO2 emissions the climate reserve shall apply to particularly CO2-intensive power plants. As it covers only lignite-fired plants, it also has been called lignite reserve.

A further key principle of the Electricity Market Act shall be greater reliance on market mechanisms. The price for electricity shall in principle be based on market forces, based on supply and demand, allowing for scarcity pricing.

2. Renewable Energy Sources Act (EEG 2016)

The Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz – EEG) continues to be a cornerstone of supporting renewable energy in Germany. The 2014 version of the EEG was the first renewable support act that was heavily influenced by the European Commission's new state aid approach. With its guidelines on state aid for environmental protection and energy for 2014 to 2020, the Commission substantially increased its influence on national support schemes. In fact, the Commission's clearance of the EEG 2014 was limited in time and necessitated a revision of the EEG in 2016.

In line with requests from the Commission, integrating renewable energy into the market and fostering competition shall play a bigger role in the EEG 2016. Auctioning shall be expanded from freestanding PV systems and shall be the standard system to establish support levels for renewable energy, starting in 2017. Controlling the rise in renewable power to achieve (and not to exceed) the expansion corridor of 40% to 45% by 2025 is part of the plan.

Auctions are to cover 80% of electricity generated in new renewable energy installations. The auction design shall be adapted to each of the different technologies and market conditions.

3. Financing the Nuclear Power Phase-Out

With the end of nuclear power generation drawing near, securing funding for the cost for nuclear waste disposal, decommissioning and dismantling has attracted growing attention.

As with other sensitive topics, the Government set up a commission. It was asked to draw up recommendations on how to organise the financing for the decommissioning and dismantling of nuclear power plants and for the disposal of nuclear waste. The plan was to make sure that financing will be ensured forever. The commission suggested a two-step concept: Financing of nuclear waste disposal shall be done through a newly established public law fund, using (capped) financing from the nuclear power operators amounting to EUR 23.3 billion. Decommissioning and dismantling costs shall remain to be paid directly by the nuclear power plant operators.

4. Digitisation - Energy 4.0

The German government identified digitisation as a key driver of change also for the energy sector and included it in its digital agenda 2014-2017. The subject is increasingly discussed under the heading "Energy 4.0". It involves numerous legislative procedures including information and communication technology, interoperability of systems and data security. Energy 4.0 may turn out to be as disruptive as the Energiewende.

The new Act on the Digitisation of the Energy Turnaround shall contain a framework for the electricity sector to become one of the first fully digitised sectors in Germany's economy. It mainly deals with the installation and operation of smart metering systems in distribution grids and aims to put in place certain technical preconditions and data protection rules.

5. Good or Bad Example?

The German Energiewende continues to be disruptive, providing many challenges and just as many opportunities for those who understand the legal, commercial and political framework. Time will tell whether various Energiewende aspects will ultimately fall in the good or bad example category – and whether individual assessments will have to be revised.