SOLAR FEED-IN TARIFFS IN GERMANY AND CALIFORNIA

ANTONIO PACHECOPO 132 & EV 301

DR. DAVID DOWNIE

One of the biggest challenges for human society in the 21st century is the

dangers brought about by a change in global climate patterns. Large concentrations

of greenhouse gases in the atmosphere are increasing the temperature of the earth,

leading some ecological systems we depend on to approach their tipping points, at

which point it will be too late to do anything to save them. Solar photovoltaic

technology is one way in which governments can reduce their emissions while

creating jobs and strengthening the local economy. Examining the various policies

and market mechanisms designed to induce investments in the solar PV industry will

give us a better picture of the impacts that these policies have on homeowners,

businesses, and electric utilities. California and Germany are both at the forefront of

the transition to low-carbon energy sources, and examining these markets will give

us a better picture of the effectiveness and impacts that these policies can have. In

this paper we will examine how feed-in tariffs and renewable portfolio standards

have been proven to be effective policy tools in Germany and California that achieve

higher rates of penetration for solar and create jobs that are local and non-

outsourceable.   

There are a number of policies available to governments that want to increase

the share of renewable energy in their grid. Renewable portfolio standards and feed-

in tariffs are in place in both Germany and California and have emerged as

compelling  policy tools that achieve high renewable market penetration rates. A

renewable portfolio standard (RPS)is

“a policy designed to increase generation of electricity from renewable

resources by requiring electricity producers within a given jurisdiction to

supply a certain minimum share of their electricity from designated renewable

resources” (US EIA).  

One of the advantages of having a RPS is that the government sets the quantity

desired and lets the market establish the price. This is a very efficient approach in

the sense that it lowers costs for the government because companies have to go

through competitive bidding and negotiations to set the price of the electricity they

are supplying. A disadvantage of RPS is that it favors experienced developers over

normal citizens who want to go green because of the time-and resource-intensive

nature of the competitive bidding and contract negotiations. It also favors large

projects over small, distributed installations because of the economic efficiency that

can be achieved through economies of scale. Developers can get a lower price if

they buy solar panels in bulk and build them where the best solar resources are

located. Renewable portfolio standards are common in the United States, with 30

states and the District of Columbia having enforceable RPS policies (CPUC RPS).

California established a RPS in 2002 when it passed Senate Bill 1078, requiring the

state to get 20% renewable energy by 2017(CPUC RPS). Over the years, this target

goal has been increased, culminating in Senate Bill 2 codifying a 33% requirement

by 2020 into law.

While Germany does not have a RPS, this country pioneered the feed-in tariff

in 1991, when they passed the Greed Feed-in Law[v]. According to the United

State’s Energy Information Administration, a feed-in tariff is

“a policy measure used to encourage deployment of renewable electricity

technologies…which guarantees that customers who own a FIT-eligible

renewable electricity generation facility will receive a set price from their utility

for all the electricity they generate and provide to the grid” (US EIA).

The main advantages of a feed-in tariff are that it provides financial certainty, lowers

transaction costs, and encourages distributed generation over centralized power

plants.  Whereas a RPS sets the quantity desired and lets the market establish the

price, a feed-in tariff sets the price and lets the market determine the quantity

supplied. Since the price is determined by law, there is no need for the negotiations

or bidding processes that would have to occur with the RPS. All you have to do as a

consumer is sign a contract and you are guaranteed a set price for the electricity you

produce for a number of years after construction, in most cases 20. However, a feed-

in tariff generally results in higher electricity prices because the price is set before

projects are financed, and that production efficiency is therefore ignored.

The Renewable Energy Sources Act, or EEG for its German initials, replaced

Germany’s Greed Feed-in Law in the year 2000, and its purpose is:

“facilitate the sustainable development of energy supply, particularly for the

sake of protecting the climate and the environment, to reduce the costs of

energy supply to the national economy, to conserve fossil fuels and to

promote the further development of technologies for the generation of

electricity from renewable energy sources (Lang & Mutschler).

To achieve these objectives, the law gives priority access to renewable energy to the

power grid, as well as priority transmission and distribution. Grid operators are

required to purchase the electricity produced from renewable energy sources and

power plants owners are guaranteed a fixed price for every kilowatt-hour produced

for 20 years after construction. Over time the law has been amended to take

technological innovations and price drops for renewable energy technologies into

account, but the price paid to power plant owners is fixed to the year the plant went

into operation.

        EEG also establishes renewable energy targets for the future. These are also

amended and modified depending on the rate at which renewable energy

installations occur and the targets are met (or not). For our purposes, we will use the

targets set in EEG 2014, which are 40% to 45% of the share in the gross electricity

consumption by 2025, 55% to 60% by 2035, and 80% by 2050.

        Other additions to EEG that are important to note are the introduction of direct

marketing, expansion corridors, and breathing caps. Direct marketing was introduced

in 2012 as an option for plant operators that allowed them to offer and sell their

energy directly on the power market instead of receiving the feed-in tariff rate

(energy2market). In EEG 2014, direct marketing was made mandatory, which means

that new plant operators are required to market their generated electricity directly,

either independently or through a direct marketer (Herbold). There are two ways of

direct marketing: subsidized direct marketing and unsubsidized direct marketing.

Subsidized direct marketing is done with the purpose of receiving a market premium,

which requires “that the grid operator is allowed to label the energy as energy

generated by renewable energy sources” (Herbold). Moreover, the market premium

“consists of the fixed statutory tariff of the respective renewable energy plant minus

its technology-specific monthly value” (Herbold), which is calculated based on the

monthly average of the hourly contracts at the European Power Exchange. For solar,

the fixed statutory tariff in EEG 2014 is 9.23 ct/kWh for installations with a nominal

output of up to 10 MW.

        Under EEG 2014 there are two exceptions to the direct marketing rule. The

first is for small renewable power plants, in particular “plants commissioned before 1

January 2016 with an installed capacity of less than 500kW” and “plants

commissioned after 31 December 2015 with an installed capacity of less than

100kW” (Lang Mutschler). The second exception applies when direct marketing is

not possible, in which case “the operator receives a tariff in the amount of 80% of the

fixed statutory tariff from the grid operator” (Herbold). By providing 80% of the fixed

statutory tariff to operators, the government ensures investment and planning

security for new plants while simultaneously providing an incentive for operators to

return to direct marketing because they are not receiving 100% of the tariff.

Expansion corridors are simply specific growth targets for different renewable

energy technologies. Under EEG 2014, solar power’s growth corridor target is 2,500

MW. The breathing cap concept was introduced to ensure compliance with the

growth corridors by adjusting “the feed-in tariff depending on the extent to which

newly installed capacity is in line with the corridors” (Lang Mutschler). This way,

financial support for solar can increase or decrease depending on whether or not the

corridor targets are exceeded.

        California’s renewable portfolio standard also establishes a feed-in tariff,

authorized by section 399.20 of the public utilities code. The feed-in tariff is available

to renewable generators sized up to 3 MW in size. To participate, “developers have

to submit a program participation request form with the investor owned utility (IOU) in

whose service territory the developer intends to site its project” (FAQ RPS

CACPUC). Once deemed eligible to participate in the program, the developer will be

able to execute a feed-in tariff contract and will be placed in the queue for the

renewable market adjusting tariff, or ReMAT for short. Each IOU has a prescribed

allocation of capacity for each program period, which lasts two months in duration.

Payment for the renewable energy generators is set at $89.23/MWh, but the ReMAT

mechanism is designed to adjust the price offered every period based on market

interest at the previously offered price. If there are a large number of subscriptions at

the offered price, the ReMAT is designed to lower the offered price and vice-versa.

The ReMAT is the equivalent of the fixed statutory tariff offered in Germany and

payment is fixed for the duration of the generator’s contract, which can be 10, 15, or

20 years.

        Although feed-in tariffs and renewable portfolio standards are certainly

effective policy tools to encourage the development of solar energy, the

implementation of a net metering policy can advance the adoption of solar by

providing an additional incentive to solar photovoltaic system owners. According to

the Solar Energy Industries Association, net metering “allows electricity customers

who wish to supply their own electricity from on-site generation to pay only for the

net energy they obtain from the utility” (SEIA NEM). This policy allows PV system

owners to get credited for the full amount of electricity they produce, making it more

economically attractive to go solar. If a customer produces more electricity than they

consume they get credited for that excess generation according to the policies of the

utilities or state in their service territory.

        The main difference between a feed-in tariff and net metering is that with net

metering, PV system owners will consume the electricity produced by their solar

panels and get credited for the electricity they don’t use. In some cases, plant

owners may not get credited for the excess electricity but they may be able to carry

forward the excess electricity they produced so that they can draw down on it during

periods of low production (greenbugenergy). If they consume more electricity than

they produce, they are supplied electricity from the grid and get billed the difference.

For a feed-in tariff, PV system owners get paid for all the electricity they produce

over a long contract period, normally 15 to 20 years, but have to pay the market rate

for the electricity they consume. Essentially, they may be selling the electricity they

produce back to the grid at one price and buying it back at another, usually higher,

price.

        California passed senate bill AB 920 in 2009, which requires “California

utilities to compensate Net Energy Metering customers for electricity produced in

excess of on-site load over a 12-month period” (CA CPUS NEM). The law

establishes a capacity limit for participation in the program of 1 MW, and the net

excess generation is credited to the customers’ next monthly bill at retail rate unless

they choose to have their excess electricity roll over indefinitely (freeingthegrid). At

the time of this writing, there were over 120,000 residential and non-residential

customers enrolled in the net energy metering program.

        In Germany, net energy metering works differently in that customers who

have installed a solar PV system are credited the feed-in tariff rate instead of the

retail rate. Since EEG was introduced in 2000, the feed-in tariff rate has been

reduced as targets have been met and solar PV systems and installation costs have

significantly decreased. At the moment, the retail residential electricity rate is higher

than the feed-in tariff rate. This creates an incentive for solar PV owners to self-

consume the electricity they produce because each kilowatt-hour produced gets

special treatment depending on where it is used. According to the Rocky Mountain

Institute, “if you use solar energy from your PV system in your home or business,

you’re effectively credited at the retail electricity rate since that’s energy that you’re

simply not using from the utility” (Morris). If you produce more than you consume,

that electricity feeds back into the grid and you get credited at the feed-in tariff rate,

which is lower than the retail in Germany. When your system is not producing

electricity at all or you are consuming more than you are producing, you buy

electricity from the utility at the standard retail rate.

        Although going solar is an undeniably worthy investment because of the

savings and even revenue generated from owning a PV system, the large upfront

costs are still a barrier to the large-scale proliferation of this power source. The

actual costs of buying a solar array vary greatly by location and depend on the

availability of good solar resources, tax exemptions, system size and regulatory

incentives that support this technology. To better understand the factors that affect

solar PV system prices, we must look into hardware and soft costs. Hardware costs

refer to the price of buying the actual solar panels, and these costs have decreased

greatly over the past few years. According to a report released by the International

Renewable Energy Agency, “prices for solar PV modules declined by 65% to 70%

between 2009 and 2013” (Meza). The report also found that the technology costs

reductions have been driven by 3 factors: efficiency improvements, economies of

scale, and production optimization (Meza). Scientific American estimates that

averaged over the last 30 years, the cost reduction trend has been an annual 7%,

and if this trend continues over the next 20 years we may reach a cost per watt of PV

cells of just over 50 cents (compared to $22 in 1980 and $3 today)[xxiv]. According

to the National Renewable Energy Laboratory (NREL), soft costs include financing

and other non-hardware costs such as permit fees, installation costs, and transaction

costs “now comprise up to 64% of the total price of residential solar energy systems”

in the United States (Naam).  As hardware costs continue to decline in the future and

soft costs cover an ever greater share of the price to go solar, pressure will mount on

federal and state governments to decrease the bureaucratic red tape holding back

the installation of even more solar.

        California embarked on a “Go Solar California” campaign in 2006 with a goal

of installing 3,000 MW of solar energy on homes and businesses by 2016 (About Go

Solar California). This campaign is a joint effort of the California Energy Commission

and the California Public Utilities Commission and is divided into three different

programs: the California Solar Initiative (CSI), the New Solar Homes Partnership

(NSHP), and a separate set of programs for publicly owned utilities.

        The CSI is the solar rebate program for consumers that are in the service

territory of any of the three investor owned utilities, which are: Pacific Gas and

Electric (PG&E), Southern California Edison (SCE), and San Diego Gas and Electric

(SDG&E). CSI has a budget of $2,167 million for PV systems between 2007 and

2016 and $250 million for solar thermal water heaters between 2010 and 2017

(About CSI). Its goal is to install 1,940 MW of solar PV and 200,000 solar water

heaters. Through their general market program they “fund solar on existing homes,

existing or new commercial, agricultural, government, and non-profit buildings”

(About CSI). The initiative also includes options for low-income households wanting

to go solar through its Single Family Affordable Solar Homes Program, which

provides a “fully subsidized 1 kW system to households that meet the legal definition

of very low-income described as 50% or below the area median income” (About

SFAHP).  For low-income households living in a multifamily dwelling, the Multifamily

Affordable Housing program provides building owners with the opportunity to install

solar PV systems and receive a high rebate for the clean energy they provide to their

tenants.  Finally, for those customers who want to switch from gas to solar thermal

for water heating there is the CSI-Thermal program, which offers cash rebates of up

to $2,719 for single-family homes and up to 500,000 for multifamily and commercial

properties.

        The NSHP “provides financial incentives and other support to home builders,

encouraging the construction of new, energy efficient solar homes that save

homeowners money on their electric bills and protect the environment” (About

NSHP). It has a budget of $400 million and a goal of 360 MW, and customers who

buy a solar home qualify for an additional $2,000 in federal tax credits. This program

provides an incentive for developers to build sustainably from the start, resulting in

savings for the residents and the county or municipality where the property is built.

The Go Solar California campaign also provides support to customers of publicly

owned utilities that want to go solar to the tune of $784 million and a goal of installing

700 MW. The program requirements for this section vary depending on the utility

under whose service territory you are located.

        In addition to the Go Solar California campaign, there is funding available for

residential and commercial property owners that wish to go solar through the

Property Assessed Clean Energy (PACE) Program. A report by the California Center

for Sustainable Energy explains that PACE allows “property owners to finance

energy efficiency, water efficiency, and renewable energy projects on existing

residential and commercial structures through a special tax assessment on the

property” (Kaatz). By financing the project through a reevaluation of their property

tax, program participants can install solar PV panels with little to no upfront. This

program is backed by a $10 million fund set up by Governor Brown designed to

cover any potential losses to the mortgage market. Tying the loan to the property

allows property owners to sell the house before they have repaid their entire system

costs, and the new property owner simply continues paying the loan (and enjoying

the savings).  

        Another financing option for residential and commercial solar that has

emerged in the United States as a very popular option is third-party solar financing.

According to the Solar Energy Industries Association, third-party financing is

primarily based on one of two models: a power purchase agreement (PPA) or a solar

lease. In the PPA model, a solar developer installs solar panels on a property and

“sells the power generated to the customer at a fixed rate, typically lower than the

local utility” (SEIA). At the end of the contract, customers have the option of buying

the solar system from the developer or simply extending the contract for a number of

years. In the lease model, customers sign a contract with the developer over a

period of time (usually 15-20 years) and pay for the solar energy system itself rather

than for the electricity produced by it. The primary benefit of third-party solar

financing is that in most cases, customers pay little to no upfront cost for their solar

PV systems. This basically removes the main barrier to transition to solar energy and

provides low and medium income households with alternatives to lower their

electricity bills and protect the environment.

        High levels of awareness of the dangers of a warmer climate and a long-term

commitment to support renewables by the government have combined to place

Germany in a leadership position in the renewable energy field. Germany accounts

for more than 30% of installed PV capacity in the world (Chabot 27). Some argue

that the success of the German energy transition has been due to the high

percentage of local ownership of renewable energy assets in the country. According

to a report released by German renewables organization AEE, private individuals

own more than half of the renewable energy generating capacity in Germany (Morris

Energy Transition). This promotion of energy democracy, the idea that private

individuals should be decision-makers on how to use and create energy that is local

and renewable, strengthens the energy transition by reinvesting energy spending

back into the local economy.

Renewable energy cooperatives have been crucial to the energy transition,

comprising over 130,000 members, 90% of whom are private citizens (Morris

Renewables International). A cooperative is an “autonomous association of people

who join voluntarily to meet their common economic, social, and cultural needs and

aspirations through jointly owned and democratically controlled businesses” (Viardot

758). Cooperatives are different from normal businesses in that outside investors are

not allowed to join. They are democratically controlled, meaning that all members

have an equal voice regardless of their equity share. By providing legal and

economic expertise, they facilitate the transition to renewable energy for private

individuals without the means to do it themselves. Cooperatives are essential to the

renewable energy market in Germany because they help dissolve the main barriers

to the adoption of renewable energy.

The first one of these barriers is the free-rider effect that is “associated with

the belief that a programme will be implemented with or without one’s support”

(Viardot 758). Individuals might reason that it is more economically beneficial for

them to simply wait for the government to act because they will gain all the public

benefits without inquiring any personal costs. Cost is also a major financial barrier

that discourages people from going green. The upfront expenditure of buying solar

panels, for instance, is sometimes seen as too high in the short-term to justify the

investment. There is also a risk factor associated with renewable energies. Some

individuals might think lower electricity costs in the long-run do not justify the large

investment over a 10 to 20 year period before their principal is recovered. This

barrier is magnified when comparing their investment to traditional investment

vehicles that have been proven to offer higher returns in a lower time frame. Another

potential obstacle is “the worry about the resale potential of a house or property

where a RE system has been installed” (Viardot 758). The third major barrier is the

fact that not everyone owns a suitable location to place their renewable energy

systems. Germany’s home ownership rate is one of the lowest among developed

nations. Only 43% of the population owns their houses, compared to around 68% in

the United States. This is due to the housing policies implemented after the Second

World War, when Germany had a severe housing shortage. A lack of funds from the

mortgage market combined with renter-friendly policies, such as a law that “allows

state government to cap rent increases at no more than 15% over a three-year

period”, to make Germany’s homeownership rate what it is today (Phillips Quartz).

In order to reduce all the barriers previously mentioned, renewable energy

cooperatives engage in educational campaigns through social marketing using four

different educational tools: websites, seminars and lectures, educational tours, and

exhibitions and festivals. Websites are used to provide the public with information on

the different renewable energy technologies available, their effectiveness, and even

step-by-step instructions on how to install solar PV system. The seminars and

lectures provide a similar educational function as the websites, but by engaging

directly with the public, there is an increased chance that the information will reach a

wider audience through social diffusion techniques like word of mouth and

networking. Educational tours that visit operational sites help dispel the fears many

have regarding the reliability and usability of the technology. They also help “reduce

the free-riding behavior as they show how any character can contribute effectively to

improve the natural environment with the use of renewable energy” (Viardot 760).

To lower the cost and location barriers, cooperatives develop local projects in

which community members can buy preferential shares “with a minimum investment

between $100 to $500” (VIardot 760). This allows low and medium income families

to participate and benefit from the revenues generated by the systems. Cooperatives

also develop partnerships with strategic players to help lower project costs. A good

example of a partnership would be a cooperative associating itself with a system

provider in order to get volume discounts or with a community developer that can

provide its services to the cooperative in exchange of a number of shares in the

project being built. Other services provided by cooperatives are feasibility studies on

potential sites, which send “testers” to measure the potential output of the site and

do environmental impact assessments to assuage any public concerns on the

impacts of these technologies on their local environment.

        The Renewable Energy Sources Act contains a provision that exempts certain

industries from paying the EEG surcharge used to finance renewable electricity

projects across the country. These exemptions have been a controversial issue and

were placed under review by the European Commission for constituting illegal state

aid under European Union state aid rules. The current rules on industry exemptions

under EEG 2014 apply to “industrial companies with an electricity consumption of

more than 1 gigawatt hour per year” and companies whose ratio of electricity costs

to gross added value is at least 14% (Graichen Agora). Companies consuming over

100 gigawatt hours per year pay a surcharge of .05 cents per kilowatt-hours, while

those between 10 and 100 gigawatt-hours pay 1% of the standard EEG rate, and

those between 1 and 10 gigawatt hours pay 10% of the standard EEG rate

(Graichen Agora). Rail operators that consume more than 10 gigawatt hours per

year “pay an EEG surcharge of .05 cent per kilowatt hour for 90% of their electricity

consumption” (Graichen Agora). Although these exemptions are seen as critical to

the German industrial complex and their comparative advantage with the rest of the

world, the commission argues that these reductions “seem to give the beneficiaries a

selective advantage that is likely to distort competition within the EU internal market”

(Lang Mutschler). On April 9, 2014, the European Commission published new

guidelines on what constitutes legal state aid, and the German government reformed

EEG to exempt companies with a ratio of electricity to gross added value of 16 to

20% (Weiss 16).

In addition to these exemptions on industries with high electricity

consumption, EEG 2014 contains a Green Electricity Privilege that reduces the EEG

surcharge to “suppliers only if 50% of their electricity portfolio is sourced from

domestic renewable electricity produced in plants that are not already more than 20

years in operation” (Lang Mutschler). In this case, the commission argues that the

provision discriminates between domestic plants and other similar plants in the EU

that produce energy from renewable sources.

        The share of electricity consumption in the country covered by the industry

exemptions alone has been increasing over the last 10 years, going from 7% in 2004

to 20% in 2014. When we add the Green Electricity Privilege, that share increases to

30% of electricity consumption in 2014. The original purpose of these exemptions

was to shield electricity-intensive firms, such as iron, aluminum, and chemical

industries, from international competitors and keep manufacturing jobs in Germany.

Unfortunately, there have been some unintended consequences that will have to be

dealt with in the upcoming revisions of EEG. One of these is the impact on small and

medium sized businesses that do not consume enough electricity to qualify for the

exemptions but still have to compete with large companies in their sector that do.

This blatant disadvantage is exacerbated by the fact that exempt corporations have

no incentive to reduce their electricity consumption, which results in higher emissions

that would otherwise occur without the exemptions. Another consequence of the

exemption to companies whose ratio of electricity costs to gross added value is at

least 14% has been that many sectors are “increasingly employing fewer personnel

of their own and instead using third-party contracts” (Graichen Agora). In reality the

company maintains the same amount of workers, but statistically speaking becomes

more electricity intensive and therefore qualifies for the exemptions.

        The potential effects of a reduction or complete elimination of these

exemptions depend on industry type and a variety of other factors. The energy or

electricity productivity of a firm is the ratio of the gross value added to energy or

electricity consumption. This ratio is important because if electricity prices were to

rise, they would eat away at the company’s profit margins, decreasing their

comparative advantage. A report by German development bank KfW states that “the

effect on profit margins also depend on the extent to which higher electricity costs

can be passed on to end customers via price increases” (Dieckhoner KFW). Price

elasticity of demand is an economic term that measures how responsive consumers

are to changes in price, and by measuring this, a company can have a better idea of

how much of their electricity costs they can pass on to their customers. Companies

whose products have a low price elasticity of demand, meaning consumers are not

very responsive to changes in price, are able to pass on most of their costs to the

consumers.  Those with a high price elasticity of demand, on the other hand, have

no option but to absorb the increased electricity costs to avoid going out of business.

In reality, companies with a high price elasticity of demand will not be able to pass

the full amount of the cost increase to their customers. The only other option in this

case would be for the company to become more efficient by increasing its electricity

productivity by the amount of the price increase, leaving profit margins untouched.

To gain more insight on the effectiveness of these policies as job creators, we

must look at the solar industry job numbers in Germany and California. According to

the Solar Energy Industries Association, California is the leading market for solar

energy in the United States and has a total of 8.5 GW installed. They state that

“there are currently more than 2,063 solar companies at work throughout the value

chain in California, employing 47,223 people” (SEIA CA). In Germany the numbers

are even more startling. Germany has an installed capacity of 38 GW, which makes

it by far the biggest market in Europe and the world. The International Renewable

Energy Agency states that “solar PV employment in Germany grew from 38,000 jobs

in 2007 to 10,900 in 2011” (Ferroukhi IRENA). Although these numbers decreased

during 2012 due to the price decrease brought about by an increasing number of

solar manufacturing capacity being brought online in developing markets, the

prospects for future job growth in the industry are still very high. A report by the

Political Economy Research Institute at the University of Massachusetts estimates

that for every one million dollars invested in the solar industry, 14 jobs are created,

compared to 5 for natural gas and 7 for coal. Dollar for dollar, investments in

renewable energy create more jobs than conventional energy industries. These jobs

range from solar cell manufacturing jobs, to installation and maintenance as well as

other industries throughout the value chain that participate in the manufacturing and

installation process. Most of these installation and maintenance jobs are non-

outsourceable, which means that they cannot be lost to other countries with a

competitive advantage because they must be performed by local companies.

        To understand the impact that solar PV generation has had on German retail

prices, we must start by looking at the costs of buying and installing a solar PV

system. Installation costs have been falling steadily in Germany, declining by an

average of 16% per year from 2006 to 2013. This decrease in installation costs has

coincided with a reduction of the feed-in tariff and an increase in installed capacity.

According to a report by the Solar Energy Industries Association, solar PV costs

have fallen from $6,197/kWp in 2006 to $2,032/kWp in 2014. This cost decrease has

been achieved through a combination of learning and scaling effects as well as

technological innovations in the global market.

Another important factor that relates to retail prices is the cost of the German

FIT program. Opponents of the Renewable Energy Support Act like to point out that

retail rates in Germany are too expensive due to the increasing support of

renewables. While it is true that rates have gone up, “retail prices would be high

when compared to the US even without any support for renewable energy” (Weiss

SEIA). The EEG surcharge, used to finance the feed-in tariff payments, is broken

down into six categories, four of which represent about 95% of the $7.73/kWh levy

for 2014. The biggest and most important category is for renewable energy support,

meaning the direct feed-in tariff payments for renewable energy. This category

accounts for about 41% ($3.15) of the $7.73/kWh. The second largest category is

the reduction of wholesale price, and it accounts for about 24% of the levy.

Wholesale electricity markets are where “electricity is traded (bought and sold) prior

to its supply to the destination grid of the end customer (individual customer or

commercial)” (SEIA). This trading takes place at the European Power Exchange and

involves brokers buying electricity from the owners of generating stations and selling

it to the suppliers. Solar PV generates the most electricity when the sun is at its

highest point, creating a surplus of electricity and effective lowering the wholesale

electricity price for a period of time. The 24% figure represents

“extra payments under FITs that are necessary to make the transmission

system operators, who have to compensate renewable energy producers

under FITs, whole relative to the wholesale market value of the renewable

energy, when renewable energy actually reduces that wholesale market

value” (Weiss SEIA).

In other words, transmission system operators have to be compensated because

they lose money when they buy electricity from producers at the feed-in tariff price

and sell it at the wholesale market at a lower price, even though renewable energy

actually lowers wholesale prices. The third largest category is the industrial

exemption explained earlier, and it accounts for 20% of the levy. The last significant

category accounts for 9% of the levy and represents payments for renewable energy

capacity added in 2013 after the expected capacity addition targets were passed and

the funds from the 2013 EEG surcharge had run out.

One of the most confusing facts about EEG is that support for renewables is

not linear and will soon begin to decline. Germany currently has an installed capacity

of 35 GW of solar PV with a goal of 55 GW by 2020. An uninformed observer would

incorrectly guess that these extra 25 GW would send retail and commercial

electricity rates soaring, putting German corporations out of business and decreasing

the purchasing power of German households. As explained earlier, EEG introduced

expansion corridors, which are targets that, when met, trigger a reduction of the

feed-in tariff. As more and more solar PV capacity comes online, feed-in tariffs will

continue declining, which is why the current feed-in tariff rate is lower than the retail

rate in Germany. The reason for the current high EEG surcharge is due to the fact

that Germans are still paying today for the feed-in tariff contracts signed 20 years

ago when the feed-in tariff rate needed to be higher than the retail rate to encourage

the adoption of solar. The Solar Energy Industries Association states that “total

payments under FITs for solar PV currently amount to approximately €10 billion per

year”[liii]. Given the sharp reductions in feed-in tariffs, the remaining 20 GW to reach

the 55 GW goal are estimated to cost another €1.4 billion per year.

Opponents of California’s Renewable Portfolio Standards claim that this

program has been responsible for an increase in retail electricity prices. California’s

average retail price for electricity is currently 13.5 cents/kWh (US EIA). There is no

consensus on the short and long-term impacts of a RPS on electricity prices, with

some studies claiming that prices have increased while others say it has decreased

or remained the same. A report released by Energy and Environmental Economics,

a consulting firm specializing in North American electricity markets, average retail

rates could increase from 14.4 cents/kWh in 2012 to 21.1 cents/kWh in 2030 (Arvizu

Borenstein). However, the study claims that of this 47% increase, only about 7% can

be attributed to California’s RPS policy, with the remaining 40% due to the need to

replace the aging infrastructure of the state’s transmission and distribution network.

Another report conducted by the Energy Efficiency Center of UC Davis concluded

that “achieving 33% renewable energy in California by 2020 show slightly higher

nominal average retail rate increases that are in the range of 4-5%” (Cook UC

Davis). The report also notes that the price increase results from “increasing

transmission and distribution costs along with higher fuel and operating costs for all

types of generation” (Cook UC Davis). While solar PV system costs are predicted to

continue to decrease exponentially in the future and installation costs are expected

to fall due to the learning and scaling effects, our ability to forecast these costs as

well as fossil fuel prices into the future remains minimal.

There are several issues surrounding renewable energy, particularly those

regarding their impact on the reliability of the electrical grid, that we must discuss in

order to better understand how more renewable energy can be safely integrated into

our grid. Renewable energy is intermittent by nature; the sun is not always shining

nor the wind blowing. Solar PV systems reach their peak generating capacity when

the sun is at its highest point. Overgeneration occurs when “must-run generation is

greater than loads plus exports” (Arvizu Borenstein). Examples of must-run

generation include nuclear power, combined-heat-and-power, and thermal electric

generation that must be maintained online to stabilize the grid. To avoid too much

energy flowing onto the grid and guarantee reliable electricity service, grid operators

are forced to curtail the renewable energy. They shut down solar PV power plants or

wind turbines to reduce supply and balance the load. Another issue that grid

operators could face is a shortage in ramping capability, or “the ability of the

generation fleet to accommodate large changes in the net load served over one or

more hours” (Arvizu Borenstein). Grid operators can also use curtailment as a

solution to this problem. They use forecasts on an hourly basis of energy demand

and supply and shut down renewable energy output to smooth out the grid load.

Another potential solution to the intermittency of renewables and the problems this

causes for grid operators is energy storage. Although there are a number of large-

scale battery installations in Germany and California, battery costs are currently too

high to justify a utility-scale investment in battery storage. This will certainly change

in the future, as technological breakthroughs take place and Elon Musk’s massive

gigafactory comes online, which is expected to double global production of lithium-

ion batteries and reduce costs through the achieved economies of scale. Finally,

pumped hydroelectric storage is a viable, cost effective option that is used in both

Germany and California but is constrained to the amount of available locations

suitable for a project of such scale.

When comparing grid reliability in both locations it is useful to look at the

system average interruption duration index (SAIDI). Germans suffer one of the

lowest rates of outages in the developed world, and they suffer “from merely 7% of

the outage minutes of average Americans, which is to say that high levels of

renewable penetration do not ensure an unreliable electricity supply. California’s

share of renewable energy has not yet reached the levels of penetration achieved in

the German market, and as such, grid operators can manage the load through

curtailments alone. In Germany’s more developed market, the effect of renewables

integration into the grid has led to the deterioration of the economics of its fossil fuel

generation fleet. This is due to the fact that renewables have priority on the grid and

may result in a significant portion of underperforming fossil fuel plants going offline.

After the nuclear meltdown in Fukushima, Germany also decided to retire its fleet of

nuclear power generation by 2022, potentially leaving Germany with a shortage of

base-load power capacity and a surplus of intermittent renewable energy. As a

result, the German parliament has reformed EEG to “require power plants planning

to retire to inform the relevant TSO and electricity regulator at least twelve months

prior to planned retirement” (Weiss SEIA). The law also gives the grid operators the

power to require plants to continue operating to ensure grid reliability. In the future,

more investments will need to be made into the transmission and distribution

infrastructure of both California and Germany to guarantee that new renewable

energy projects have access to the grid.

Germany’s EEG, although highly successful in spurring investment in

renewable energy technologies, has not been able to reduce greenhouse gas

emissions due to a variety of factors unrelated to the effectiveness of carbon-free

renewable energies like solar PV. The shale gas boom in the United States has

lowered prices for natural gas in that market, consequently lowering the price of

more polluting fossil fuels such as hard coal and lignite, of which Germany has large

reserves. Additionally, “several new coal-fired plants have either come online or are

in the process of coming online” (Weiss SEIA). The phasing out of nuclear power, a

zero-carbon energy source, is being replaced in part by coal-fired generation due to

its ability to provide base-load supply of electricity. In the future, a restructuring of the

European Union’s Emissions Trading System that raises the cost of carbon

allowances to account for negative externalities could help Germany achieve its

emissions reduction target of 80% by 2050.

California introduced Senate Bill AB 32, or the Global Warming Solutions Act,

in 2006 with a goal of reducing greenhouse gas emissions to 1990 levels by 2020.

The California Air Resources Board is in charge of administering this law and has

introduced a cap-and-trade program to complement the state’s RPS. The Air

Resources Board has released a report explaining that greenhouse gas emissions in

2012 increased by 1.7% since 2011, while per-capita emissions have decreased by

12% from 2000 to 2012, even though the population increased by 11.4% during the

same period. As with Germany, the increased emissions are caused by a variety of

external factors not directly related to California’s RPS or bill AB 32. Strong

economic growth, prevailing drought conditions in California that have decreased

electricity generation from hydroelectric dams, and the retirement of the San Onofre

Nuclear Generating Station are all reasons behind the increased emissions. It is still

too early to say whether or not the state will reach their emissions reduction targets

by 2020, but the future looks promising given the policies in place and the impact

they are having in the adoption of renewable energies.

Grid parity, which occurs when an alternative energy source can generate

electricity at a cost that is less than or equal to the price of purchasing power from

the electricity grid, is the holy grail for solar PV power. Reaching grid parity is

achieved through a combination of lowering hardware and soft costs and also

depends on the amount of solar resources available and the price of electricity for

the retail, commercial, and industrial sectors. In Germany, commercial “PV systems

for self-consumption represent a viable, cost-effective, and sustainable power

generation alternative”. This is calculated by using the levelized cost of energy,

which is the cost of purchasing and installing a solar PV system divided by the

amount of electricity produced over the system’s lifetime. If the calculated rate is

lower than the commercial electricity rate being paid, then grid parity has been

reached. At the moment, retail and utility grid parity have not been reached in

Germany. According to a report by Deutsche Bank, California has reached grid parity

at the residential and commercial level but not at the industrial level, where rates are

significantly lower. The report estimates that the levelized cost of energy for solar

systems in California are “between 11-15 ¢/kWh while the price of electricity is

between 11-37 ¢/kWh”. As soft costs continue to decrease further into the future,

industrial scale solar PV systems, which can achieve lower levelized cost of energy

due to economies of scale, will reach grid parity.

Transitioning to a future dominated by renewable energy will require that

governments implement renewable energy targets and support them with policy tools

like feed-in tariffs. Feed-in tariffs and renewable portfolio standards have been

proven to be successful in attracting investment in solar PV because they provide

homes and businesses with the financial certainty necessary to justify the large

upfront investment needed to go solar. The price reductions in both hardware costs

and installation costs due to the learning and scaling effect hold promise for the

future cost of solar PV energy in Germany and California. Battery prices are also

expected to decrease, which will solve the issue of intermittency that plagues

renewables today. As these costs continue to decrease, it will become increasingly

cheaper to support renewable energy and phase out feed-in tariffs completely. At

this point, renewable energy will be regarded as the go-to option because it will be

cheaper than conventional energy sources.

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