In March 2014, the German government presented the details of its plans for changes in the country’s renewable energy support scheme. The planned legislation (the “Draft”), which passed the cabinet on 8 April 2014, seeks to curb the increase of energy costs and to promote a stronger market integration of renewable energy production.

Under the Renewable Energies Act (“EEG”), renewable energy producers are entitled to fixed feed-in tariffs and to priority feed-in into the grids. The spread between the market price and the feed-in tariff is levied to electricity consumers by a renewable energy surcharge (“EEG Surcharge”) whereby energy-intensive industries benefit from a reduction.

Under the EEG support scheme, renewable energy sources have experienced a boom in Germany, now serving as a source for about 25 % of the country’s electricity consumption – four times as much as a decade ago. In turn, the system has increasingly been put under political pressure as energy costs (especially for households) continue to increase. In addition, the support scheme is held to produce a paradox effect: whereas consumer prices increase due to the EEG Surcharge that levies the feed-in tariffs, wholesale electricity prices plunge because the rapidly growing renewables are flooding the market. The effect of this price development is tangible: Germany’s second largest utility, RWE AG from Essen, whose core business is electricity delivery, has announced a net loss for the year 2013 of 2.8 billion Euros. It was RWE’s first loss-making year since the end of the Second World War.

The plan to reform Germany’s renewable energy law had been announced in December 2013 as part of the agreement between Christian Democrats and Social Democrats to form a coalition for a government majority and has been eagerly expected since. The draft is issued in a turbulent time for Germany’s energy law as the European Commission has opened a formal inquiry regarding the EEG. The Commission considers the fact that energy-intensive industries benefit from an EEG Surcharge to be an impermissible state aid.

The Draft will become law by 1 August 2014. Its key elements are:

(1) Caps on the Quantity of Supported Renewable Energy

The Draft provides for a stronger quantity control of renewable energies.

Currently, the EEG provides for a quantity control only with regard to solar energy by means of a so-called “breathing cap.” This scheme decreases the feed-in tariffs relative to the past capacity increase: if the annual capacity increase exceeds 2,600 MW, the rate by which the feed-in tariff will decrease will rise; but if the annual increase in solar capacity falls short of 2,400 MW, the amount by which feed-in tariff decreases will go down (it never has so far).

This breathing cap will be continued for solar energy and will be newly introduced for onshore wind energy; the annual capacity increase ranges at 2,400–2,600 MW.

Unlike this flexible “breathing” decrease, the rate by which feed-in tariffs for biomass decrease will in the future be permanently raised to a higher rate if annual capacity increase exceeds 100 MW.

Offshore wind energy will be subject to a direct quantity control. The Draft provides for an absolute cap on the amount of offshore wind energy which may be connected to the grid of 6.5 GW until 2020 (and an additional 800 MW annually after that).

Water power and geothermal energy would not be subjected to quantity control as current market developments do not require it.

(2) Reduction of Feed-in Tariffs

In addition to the abovementioned quantity control, feed-in tariffs for offshore and onshore wind energy would be additionally lowered. With regard to onshore wind, the Draft foresees a reduction of 10–20 % in areas with strong winds. Also, current existing bonuses for repowering and for system services are abolished.

(3) Market Integration

The Draft provides for the first steps to an entirely new system of renewable energies support. Whereas the current EEG is in principle a system of statutorily fixed feed-in tariffs, the Draft now initiates a gradual system change towards a system in which feed-in tariffs will be determined by an open bidding procedure.

The details of this bidding procedure are not yet determined and will be set out in an ordinance to follow the legislation. The Draft defines the bidding procedure to be an “objective, transparent, non-discriminatory, and competitive process for determining the level of financial support.”

As a start to this system change, all open area solar energy facilities will be subject to the bidding procedure as a “pilot project.”

As an additional measure to increase the market integration, the Draft provides for an obligation for renewable energy to be directly marketed (thus receiving a premium on the received price instead of a tariff for the feed-in). Only small facilities shall be exempted.

(4) More Changes to Come …

Two more important – and highly anticipated – changes are to come: the Draft announces that consumer production (i.e. renewable energy that is consumed by its producer) will also be subject to the EEG Surcharge. However, the Draft does not yet contain the details. The same is true for a cut of the privileges for energy-intensive industries. According to recent press reports, the EU Commission has agreed to accept a continuation of the privileges for certain selected industries to a certain degree. At the same time, the EU Competition Commissioner Joaquin Almunia has presented plans to phase out feed-in tariffs for renewables altogether until 2020 in favor of competitive bidding processes.