Risky Investments  Berlin Wants To Cap Renewables Subsidies

Environment Minister Peter Altmaier wants to limit the cost of Germany's green energy revolution by capping subsidies for renewable energy. The plan, aimed at halting a recent surge in electricity prices, faces likely rejection from a political opposition that views the move as a clever ploy to win votes in the next election.
German renewable energy investments may be about to get riskier.

German renewable energy investments may be about to get riskier.

Foto: Bernd März/ dpa

German Environment Minister Peter Altmaier, a close ally of Chancellor Angela Merkel, has landed a coup that could score points for the conservatives in the September general election -- at the cost of slowing down the country's switch to renewable energy.

In a surprise announcement on Monday, he said he would draft legislation to cap subsidies to renewable energy producers in order to stop the recent sharp increase in electricity bills caused by those subsidies -- a potentially popular move in an election year.

"It is not acceptable that electricity consumers should keep bearing all the risk of the future costs on their own," Altmaier told a news conference.

The current system works like this: Germany wants to boost its power generation from wind, solar and biogas plants, but the electricity they produce remains more expensive than coal and nuclear power. To encourage investment in renewables, the government allows operators of such plants to sell their electricity at a guaranteed fixed price or feed-in tariff that is above the market price. Energy consumers pay the difference via a renewable power surcharge on their electricity bills. To date, there has been no upper limit on Germany's subsidies for renewables, which means that the more solar panels and wind turbines that go into operation, the higher the surcharge that consumers have to pay.

The guaranteed high return has led to a boom in investment in renewable energy in recent years. This has boosted the surcharge to a record 5.28 cents per kilowatt hour of electricity this year, up almost 50 percent from 2012 and up from just 0.88 cents in 2006. An average German household currently pays €180 ($242) per year to subsidize renewable energy.

Controversial Power Price Hikes

The rising electricity costs risk undermining public support for Merkel's energy revolution,  a bold program to wean Europe's largest economy off fossil fuels and nuclear power. The government, which announced a rapid exit from nuclear power in 2011, aims to boost renewables to 40 percent of power generation by 2020 from around 25 percent at present.

Controversy over the sharp rise in power prices resulting from the green energy plans has been compounded by exemptions allowing power-intensive companies  such as steelmakers, paper manufacturers and chemical firms to pay lower surcharges on their electricity bills.

Altmaier said he wants to cap the surcharge at 5.28 cents through 2014 and to limit its rise to 2.5 percent per year from 2015. "We've reached a limit," he said, adding that the plan amounted to a "paradigm shift."

"Before, the subsidies determined the revenues, now the revenues will determine the subsidies," he said. His plan includes a number of measures that could unsettle investors in renewable power plants:

• Feed-in tariffs could be suspended by a certain number of months for newly installed systems, saving a potential €500 million per year.

• An "energy solidarity tax" would seek contributions from owners of existing renewable installations and generate up to €300 million per year.

• Exemptions for power-intensive industries, which currently amount to €4.3 billion, would be curbed, potentially saving a further €500 million.

• Households and firms that generate their own power would be required to pay the surcharge in future. At present, they are exempt from it.

Legislation Faces Big Hurdles

Altmaier wants the legislation to be passed by Aug. 1. However, it has yet to be approved by Economics Minister Philipp Rösler, chairman of the pro-business Free Democratic Party (FDP), junior partner to Merkel's conservatives in the center-right coalition. Rösler praised the plan on Monday but stopped short of giving it his blessing. And even if Altmaier gets the go-ahead from the FDP, the law could be blocked by the opposition Social Democrats and Greens who have a majority in the Bundesrat, Germany's upper legislative chamber.

Industry and environmental lobby groups criticized the plan, saying it would undermine investor confidence. "We mustn't endanger the competitiveness of the energy-intensive companies," said the president of Germany's DIHK federation of chambers of commerce, Heinrich Driftmann.

Meanwhile, environmental group BUND said Altmaier was putting investment at risk by making the returns more uncertain. The Federation of Renewable Energies (BEE) agreed, saying the move would "massively unsettle" investors.

The SPD and Greens also rejected the proposals, in a sign that Altmaier will have a tough time getting them through parliament. "It's a transparent maneuver," said SPD chairman Sigmar Gabriel. "It will have massive consequences for the green revolution, it hasn't been thought through."

Political Coup

In terms of campaign tactics, Altmaier's plan is a clever move because it could wrongfoot its various opponents. For example, despite their criticism, the Greens will find it hard to argue against cutting privileges for the big energy-hungry industries.

By cutting those privileges, he will deprive the Greens of an election issue. He also outflanks the FDP on one of their pet issues, consumer protection, by defending the interests of households.

In the likely event that the legislation will be rejected in parliament, Altmaier will be able to tell voters: "I tried. But the FDP, SPD and Greens didn't let me."

Politically canny though his proposals might be, they have a number of flaws in terms of their impact on the energy sector.

The plan for an energy solidarity tax and for a temporary suspension of the feed-in tariffs for new plants could put a serious brake on the expansion of renewable energies, or at least make it more expensive, because banks would be likely to add a risk premium to the interest they charge for credit.

So the money that electricity consumers save in the process will end up being paid by investors and project managers. It might make more sense just to cut the subsidies outright rather than doing in it a roundabout way that could open the government up to lawsuits from investors who had put up plants expecting a stable return.

German commentators said the plan is risky. "In the future, the investor in a wind farm will be in the same position as a landlord who is only entitled to receive rent from his tenants once they have a job, wrote the center-left Süddeutsche Zeitung newspaper on Tuesday. "Investment security: zero. The initiative could end up stopping the expansion of renewables."

Even if parliament blocks the law, Altmaier will benefit politically, the newspaper said. "If the renewable power surcharge rises again in autumn, shortly before the election, it would be easy to identify the culprits -- the people who blocked his law."

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