Green energy reform could hit sector

A CHP station in Hanover-Linden. New reforms to Germany’s energy laws will have implications for the cogeneration sector Credit: Christian Schröder

Reforms now underway to Germany’s renewable energy policy could potentially impact the nation’s cogeneration sector. Concern is growing that German CHP producers could suffer, Jonathan Dyson reports.

Concerns are growing over the potential impact of reforms to Germany’s Renewable Energy Sources Act (Erneuerbare Energien Gesetz – EEG) on the country’s cogen sector.

On 8 April, the government proposed a bill amending the EEG, following the tabling of an initial plan about potential reforms in January. The draft bill is to receive a first reading by the Bundesrat (Germany’s upper house or federal council, which represents the interests of the 16 German states) by May. Then in May or June there will be readings of the bill in the lower house, the Bundestag, with approval expected by 27 June, followed by approval by the Bundesrat on 11 July. If all goes well, the entry into force of the amended EEG is scheduled for 1 August.

Matthias Held, a consultant at the Bundesverband Kraft-Wärme-Kopplung (BKWK), the German cogeneration association, believes German CHP producers may suffer as a result of the reforms because they will be required to contribute more towards the financing of the EEG. He says this could especially affect smaller CHP producers.

‘Given the role CHP plays in integrating variable renewables, supporting the grid and delivering primary energy savings,’ he emphasises, ‘it is important that this technology is better recognised for its benefits rather than being penalised.’

Changes to the EEG

The ‘grand coalition’ government of the Christian democrats (CDU/CSU) and social democrats (SPD), which came into office in December 2013, has made EEG reform one of its main priorities. The controversial law was designed to provide support to eco-friendly energy production through feed-in tariff (FiT) and surcharge subsidies that take into account the additional costs involved in generating energy from renewable sources. However, there have been growing calls to reform the law following rising energy prices in Germany, and also to bring it line with European Union (EU) competition law.

The new draft bill contains three key changes. Firstly, in order to control the growth of renewable power generation in Germany, it introduces expansion targets on the different renewable technologies, avoiding creating excess capacity and, of course, potentially reducing the number of renewables-based cogen projects that might otherwise have come online.

Secondly, a new system of mandatory direct marketing for renewables is to be introduced. Currently, companies selling electricity have the choice of selling to the grid operators – and receiving a FiT – or directly to customers. Here they receive a market price, plus a marketing premium from the grid operator accounting for the difference between an average monthly reference market value and the FiT guaranteed by the EEG, and a management fee covering transactional costs, such as those incurred listing at the energy exchange

But in order to help boost renewables’ integration into the power market, it will be obligatory under the new system for all operators of new plants with an installed capacity of at least 100 kW to market their electricity directly.

This might dissuade small cogen operators from selling power, although to help smaller plants adjust to the new system, the new requirements will be introduced in stages. From the point at which the new bill comes into force, direct marketing would be mandatory for all new plants with an installed capacity of at least 500 kW; from 2016 for new plants with an installed capacity of at least 250 kW; and from 2017 for all new plants with an installed capacity of at least 100 kW.

Thirdly, the government plans to replace the current system of statutory FiTs and marketing premiums with an auctioning process by 2017. Details are to be worked out at a later stage.

The new rules will apply to all installations commissioned after the bill takes effect. However, the current EEG will continue to apply to CHP installations commissioned by 31 December, 2014, as long as the operational licence for the plant was issued before 23 January, 2014. This is a reflection of Germany’s strong ‘grandfathering’ traditions, with the government wanting to protect companies that calculated their investments according to the previously applicable financing system.

Potential impact on cogenerationt

Of particular note for Germany’s cogeneration sector is that the bill changes the system of surcharges paid by consumers to help utilities fund the FiTs. Under the current system, consumers are not required to pay EEG surcharges for electricity produced in ‘self-owned’ power plants, run by companies producing their own electricity. Under the new bill, all electricity produced in new self-owned power plants (commissioned after the entry into force of the new EEG) will be subject to the surcharges. There will be very few exceptions, such as for self-owned power used to operate power plants.

Matthias Held, consultant at BKWK, the German CHP association

However, the draft bill makes a clear distinction between power produced in self-owned conventional power plants; power produced in self-owned renewable or CHP installations; and self-owned power used by so-called ‘privileged’ manufacturing companies in energy-intensive sectors.

So while most consumers will continue to pay the full surcharge, it will be reduced to 50% for power produced in CHP installations. Furthermore, ‘privileged’ energy-intensive companies will pay just 15%. In addition, following a change from previous drafts, the current bill grandfathers the rights of existing self-owned plants: the electricity they sell will not attract a surcharge.

Regardless, Dr Helmut Edelmann, director of utilities at EY (formerly Ernst & Young) in Germany, believes that these subsidy reductions for off-grid and private power producers could have a significant impact on the cogeneration sector’s current expansion plans. ‘In 2013 we expected the highest increase for CHP, micro-CHP and biomass,’ he says, but notes that ‘due to the EEG reform the increase in biomass will decline significantly.’

An EY study found that nearly 50% of all privately-owned non-utilities that generate power for their own consumption or for sale in Germany are producing their electricity (partly) by themselves, and that a further 25% are planning to engage in self-production within the next three to five years. The activities cover conventional (CHP, micro-CHP, etc.) as well as renewable energy (solar PV, wind, biomass, etc.) sources.

BKWK’s Held says the surcharge amendments are ‘especially worrying as they may represent an increased burden on smaller-sized CHPs.’ He fears under the new terms ‘installations as small as 10 kWe or generating more than 10 MWh per year would have to contribute towards half of the EEG levy. This would significantly affect the emerging market for micro-CHP in Germany.’

And from a Europe-wide perspective, this could matter. Dr Matthias Lang, a partner at law firm Bird & Bird and an expert on Germany energy policy, notes that Germany is currently the largest European market for CHP.

According to government data, installed capacity was 26.6 GWe in 2012, up from 20.8 GWe in 2005. Generated electricity from CHP has been gradually increasing, reaching around 91 TWh in 2011. According to BKWK data, in 2010 CHP’s share in Germany electricity production was 15.4%, rising to approximately 17% in 2012.

An additional concern for co-generators is that Germany’s 2012 CHP law is to be reviewed this year – taking into account the EEG changes as well as Germany’s progress in growing its cogeneration sector. The current law includes a binding target for CHP of a 25% share in total electricity production by 2020.

Held adds: ‘What should also be considered is that the main driver for the CHP sector is the commitment in Germany to support energy efficiency, while reaching a high renewables share and phasing out nuclear energy. As the CHP law and the progress towards attaining its objective are being reviewed this year, the impact of the new EEG provisions along with recent energy market developments should be considered and addressed.’

Managing director of European industry association COGEN Europe Dr Fiona Riddoch agrees, noting that the German policy thus far had been a useful indicator to other EU Member States that they should look to cogeneration as a way of fulfilling their commitments under the EU Energy Efficiency Directive. The law, she says ‘equips Member States with the right tools to take an integrated view of the energy sector and promote cogeneration as a way to achieve further primary energy savings in industry, commercial and residential sectors alike’.

‘By re-affirming its CHP target in the CHP Law in 2012, Germany sent an important signal that cogeneration can make a significant contribution to ensure a low-carbon, high-renewables and reliable energy system. This process is not yet complete. Appropriate adjustment to policies should not detract from the overall goal.’

However, the German energy ministry is standing its ground. In a statement, it said that it is amending the surcharge system to ensure that the financing of the EEG is shared more fairly. ‘The expansion of renewable energies is a societal responsibility,’ it said. ‘It is therefore only right that the funding is distributed on as many shoulders as possible, including self-owned power plants such as combined heat and power plants and systems for the generation of electricity from renewable energy sources.’

EY’s Edelmann adds that the grandfathering of rights for older cogen plants would certainly help prevent a reduction in Germany’s CHP sector.

‘The removal of privileges for self-generation will definitely reduce the number of new-build cogeneration plants,’ he says. ‘It will probably not impact currently installed cogeneration capacity due to the fact that the EEG reform includes a right of continuity for old cogeneration plants.’

A biomass cogen plant in Siegen-Wittgenstein district, run by RWE Innogy. New biomass-fuelled CHP could lose out under the EEG reforms

That said, Lang stresses that cogenerators in Germany were in any case facing growing commercial challenges and were perhaps poorly placed to withstand a reduction in regulatory protection.

‘Wholesale electricity prices are being driven down by the way the price system works for generating renewable power,’ he says. ‘For example, if you are a generator and have cogeneration, you have two markets – heat and power, and both of these feed into the bottom line. If the electricity payments you get are driven down because of low electricity prices, this effects the viability of your business.’

He notes that German renewable electricity generation is driving down wholesale electricity prices. In March, the average exchange price for renewable electricity was down to 2.707 € cents/kWh. The average price for baseload CHP power was down to €33.5/MWh in the first quarter of 2014. ‘And this makes life a challenge for electricity generators,’ he says.

He adds: ‘The energy generators normally look at wholesale prices. Consuming companies’ prices include additional elements, in particular the EEG surcharge currently at 6.24 cents/kWh, unless you are exempted. So companies producing electricity don’t technically get a discount. Whether they can sell at a profit depends on where they stand on the scale. Obviously, the commercial effect is materially affected if you consume your own cogenerated power and do not have to pay the EEG surcharge.

‘If you’re heat-driven, you may have to sell your power at whatever price regardless of how low it is – it’s a matter of whether the price makes commercial sense. So the energy changes are being driven to a large extent by renewable energy – the impact is about market prices for electricity.’

And what about the potential impact of EEG reform on German cogeneration equipment manufacturers? Edelmann says: ‘At the moment, the general mood of manufacturers and service providers for the energy transition [Germany’s switch to renewables, or ‘Energiewende’] is neutral, but has been declining over the past few quarters.’ This has been monitored by a rolling EY survey of energy-related companies, which looks at the impact of Germany’s dash to green power.

The road ahead

Looking ahead, Lang notes that the EEG is only one element of the German government’s plans to reform its energy policy. He points out that the EEG does not cover the capacity market, although that could be covered by the planned auctioning reforms now under discussion. ‘All conventional power plants will be influenced by the capacity market and by real market prices,’ he says. ‘But the capacity market is the obvious next step of the reforms.’

Furthermore, the current rules saying which energy-intensive companies from certain industry sectors are eligible for a reduction of the surcharge are expected to be revised, probably through further amendments to the bill. These will take into account the new European Commission guidelines on environmental and energy state aid for environmental protection and energy for 2014–20, which were released in April.

Lang noted that German plans for energy policy reform had originally been put back because of last year’s federal elections, and then the new coalition government took time to lobby the Commission over its state aid guidelines. Now it will consider its response.

‘This was an important issue prior to the last elections,’ he says. ‘And then after the elections, and after the parties formed a coalition, the government visited Brussels to discuss energy policy, and there were very close discussions between the parties.’

He added: ‘Germany has always upheld its position that it complies with EU state aid law but it is happy to discuss improvements towards a working solution – so the EEG reforms are needed.’

Jonathan Dyson is a journalist focusing on energy matters.

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