Energy Policy: Why German's EEG Works

In the the case of energy reform, there is plenty of room for improvement from a legislative angle. Since I am more familiar with Germany's Erneuerbar Energie Gesetz (EEG), or Renewable Energy Law, I am going to continue to examine it as a reference to energy policy. This will also help tie up loose ends from my previous post on the bill as a whole.

What makes good policy good? I don't think that our leaders need to be the heroic writers like Thomas Jefferson or Thomas Paine were to produce effect legislation. I will be arguing that it is the little things that count when writing effective legislation.

Let's look at the EEG.

Taken at face value, Germany’s EEG encourages investment in renewable energy sources. Individuals who purchase, say a solar panel, know that they will earn a guaranteed rate of 42 €cents per kWh for a certain year when they sell to the utility (and remember, the utility must pay, at least, the guaranteed price). In a sentence, the EEG creates a market for renewable technologies. However, this in itself does not give the EEG its strength, as there are several other factors included in the legislation that do just as much, if not more at making the EEG successful.

1.) The EEG provided Feed-in Tariffs of scale.
A solar panel owner that produces up to 30 kW/h can earn more money/kW than a corporate solar farm that produces 5 MW/h. This promotes decentralized energy production. The benefits of decentralized energy production are invaluable and something very new to modern society. The biggest benefit is that it turns individuals into energy producers. It has a very Web 2.0 effect, in that suddenly anyone has the opportunity to transform from a consumer to a producer. The effect, in essence, is a more democratic production of energy.

Maybe this sounds like empty rhetoric and neglects the idea of efficiency from a centralized production method, but there is a phenomena that takes place when ordinary citizens start becoming energy producers. They start consuming less.

2.) The EEG is short and to the point.
The English edition that I found online was only 27 pages. 27 pages! For some reference, our Energy Independence and Security Act of 2007 (H.R.6) was 310 pages in length. While this sounds simple, and perhaps even reckless because of the risk of incomplete policy, the fact that the EEG was short and sweet enabled ordinary citizens to become beneficiaries of the bill and prospective renewable energy producers.

Together with the first point, the EEG secures a unique market for renewable energy. When average citizens are engaged by legislation and provided with legislation that is easy to read, they are more likely to take advantage of the policy and thus more likely to make the policy successful.

These measures enabled the first pioneers of wind energy to be German farmers, and some of the first pioneers of solar energy to be German homeowners.

3.) The EEG planned for the long term.
That is, the bill specified that all renewable energy providers would have a guaranteed buyer (the utility) and a guaranteed price for a 20 year period. This creates a number of benefits.

First, it decreases the risk for initial customers by providing them a 20 year time table to profit from their investment. Customers avoid the risk that comes with purchasing a new technology. Just look at who bought the apple iphone on the first day or the price for DVD players when they were first introduced, and you'll start to get the picture.

A second benefit of the twenty year plan favors renewable energy start-ups. With a 20 year guaranteed market, it suddenly makes sense for entrepreneurs to take the next step without the added risk. This will enable them to develop their industry when it wouldn't have previously been able to do so.

The third benefit occurs after the 20 year time period. Even when the bill expires, there will be a well established industry for renewable technologies, which creates a competitive energy market. By thinking in the long term, legislators can have a very positive impact on the domestic economy.

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These are important policy writing lessons, and they should be applied to every bill that wants to be successful.

Address the problem in the policy: if the problem is consumption, address consumption on the most familiar level (individual consumption).

Keep it simple, stupid: We don't want legislation to resembles a Rube Goldberg sense of logic. If the bill is written well and kept to the point, it will be easier to advertise.

Make the most out of the bill: Think long term and reap the benefits from doing so.

Proactive Energy Policy: Germany's EEG

Whether Sen. John McCain or Sen. Barack Obama becomes our nations next president, the issue of environmental policy and domestic energy production is going to play a dynamic role in our nation’s future. The question that these two candidates will have to answer during their campaigns is, “How will your energy policy create a better future for Americans and the environment?”

So far, McCain has suggested adhering to free market principles with clean energy except for government subsidies for nuclear power and clean coal. He has also promised a $300 Million incentive to the producer of a high achieving car battery. Obama, on the other hand, has promised money. In his proposed budget, Obama is allotting $150 billion over 10 years to clean energy initiatives compared with McCain’s $2 billion annual promise to clean coal production (only number available on McCain’s Lexington Project site). Maybe the promise of free market principles or a lot of money can solve our energy crisis, but then again, maybe they won’t. For this sake, I am promoting specific energy policies that act proactively instead of reactively. My model is Germany’s EEG, Erneuerbar Energie Gesetz, or Renewable Energy Law.

The EEG began with roots in the 1990s where wind power alone was benefited, but the law really developed during its actual birth in 2000 to include almost every source of renewable energy. The policy is based on the principle of Feed-In Tariffs, which work by guaranteeing the sale of renewable energy by its producer to the utility. The catch is that the RE producer is guaranteed to sell the energy at above market rates determined by the law, which it then distributes evenly across its customers. In the end an average family pays an additional 2-3 euro on the monthly bill. This way, the tariffs don't punish the utility, and the higher cost is distributed among all of the consumers based on their consumption. These tariffs regress in amount in fixed increments that are specified by the EEG and specific to the type of renewable energy technology used. Therefore, more affordable renewable energy sources see a lower tariff than a more expensive RE technology.

Examples of these Feed-In Tariffs:

Both on- and offshore Wind Turbines are guaranteed a feed in tarif of 8.96 €cents for every kWh produced in 2002, which regresses to 8.83 €cents in 2003, and then 8.70 €cents in 2004. Similarly, Biomass (up to 500 kW) earn a feed in tariff of 10.13, 10.03, and 9.93 €cents/kWh for 2002 to 2004 respectively. From Geothermal to Hydropower to Landfill gas, each Feed-in Tariff is in the 6 to 10 €cents/kWh with one exception; Solar PV. For Solar PV panels (5 MW), the Feed-in Tariff is 48.09 €cents for '02, 45.68 €cents for '03, and 43.40 €cents for'04.

*It is important to note that the EEG takes measures to benefit smaller energy producers with high respective FiTs. So while a Solar PV producer of 5 MW earns a tariff of 43.40 €cents/kWh in 2004, a homeowner with a PV panel capable of producing 30kW/h can earn a tariff of 57.4 €cents/kWh. The difference is substantial enough to promote small ventures and private investment in renewable energy.

**Also, The EEG is guarantees these FiTs for 20 years, thus providing the security that entrepreneurs need to set up shop in a new industry. This long term legislation is part of the reason why Germany in experiencing surprising economic growth despite the global credit crunch. The first quarter of 2008 was the best in the past 12 years, expanding their economy by 1.5 % for the quarter (compared to the 0.6% GDP first quarter growth of the US).

The tremendous difference in the FiT for Solar PV is mostly because of the expensive price of a Photo-Voltaic panel. A fraction of it might just be to provide incentive to create the strongest solar industry, which brings me to my next point.

While the EEG provides a proactive policy for the benefit of all renewable energies, it doesn't mean that similar Feed-in Tariff legislation needs to be conducted in this same manner. While it is ideal to promote a number of RE technologies, this is impartiality is expected on a national level. In order to expect the same here in the US, this would mean waiting around for our federal government to pass a FiT policy. I am advocating that states, specifically Michigan and Ohio, beat the federal government to the punch. We should be viewing a proactive policy like the Feed-in Tariff as an impetus for economic growth.

Here is my proposal: Because of the hurting state of Michigan and Ohio's economies, the state legislators should be picky with which types of RE technology benefit from a FiT policy. For example, Ohio could choose to only promote a FiT for wind turbines, and guarantee is for 15 or 20 years, long enough to convince start-ups to choose Ohio. Why should Ohio choose wind and not solar or geo thermal? First of all, Ohio isn't exactly the sunniest state in the US, and I don't know of any existing infrastructure that could really take off given a friendly market. On the other hand, Ohio, specifically southwestern Ohio, more specifically Dayton, is home to one of the nation's best aerospace infrastructures in Wright Patterson Air Force Base. We are also home to what is possibly the nation's preeminent composite industry, a composite valley.

Michigan could probably also benefit from a wind focused FiT policy, but just in other ways. While we lack the aerospace and composite infrastructure that southwestern Ohio has, we have lake effect winds on the west coast of the state.

Okay, I'm no economic developer or legislator, so I'm sure that there are holes in my idea. Commenters, have at it. I want to know what everyone thinks. Bring your best criticisms, especially if you are an economist or legislator. Will FiTs work on a state level?