11. March 2022 By Stephen Lorenzen, Georg Benhöfer and Lars Zimmermann
The levy under the German Renewable Energy Sources Act has been abolished – so now what?
For several weeks now, the issue of rising energy prices has been a constant presence in the media. The attack on Ukraine by Russian troops has now added to the urgency of the issue. In light of this, the German federal government has announced that it will abolish the levy under the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG) as of 1 July 2022 in order to relieve the financial burden on electricity customers. German Federal Finance Minister Christian Lindner estimates this relief will amount to €6.6 billion. That sounds like a lot. We’ll shed some light on what this figure means for individual households and what other consequences abolishing the levy under the German Renewable Energy Sources Act might have.
What was the levy under the German Renewable Energy Source Act?
Since its introduction in 2000, the levy under the German Renewable Energy Sources Act has financed the expansion of renewable energies in Germany. This is based on the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG), the main aim of which is to promote the expansion of renewable energies (as well as to set things in motion in the first place when it came into force back in 2000). If you cast your mind back to any drives you’ve gone on down country roads, any hikes you’ve been on or any time you’ve taken a longer train journey in the past 20 years, you can see that the legislation has been a huge success. We have largely become accustomed to seeing solar panels on the roofs of our residential areas, wind farms along motorways and biogas plants in villages. The principle of a guaranteed payment for electricity from renewable energy plants made all of these possible in the first place. Operators of renewable energy plants are guaranteed a fixed payment for each kWh of electricity over a period of 20 years. This creates investment security and has made the upswing in renewables possible in the first place. The transmission system operators (TSOs) are obliged to purchase the electricity from the plant operators at this fixed rate, even if the actual market price is lower than the fixed rate and therefore more expensive for the TSOs. To ensure that the TSOs are not left to bear these costs themselves, they are reimbursed the difference from the legislative account. This legislative account is essentially covered by payments from the levy under the German Renewable Energy Sources Act.
An amendment to the German Renewable Energy Sources Act in 2014 saw the fixed rate model supplemented by a market premium model. Plant operators who are not in the fixed rate scheme but instead supply their electricity to the market via direct marketing are eligible to receive this market premium. The market premium then compensates for the difference between the market price and the fixed subsidy level of the plant. The market premium is also financed by the legislative account.
This means that the levy plays a major role in the financing of renewable energies.
What does the abolition of the levy mean?
The abolition of the levy means that electricity customers will soon find one item fewer on their bill. This has three main effects:
- 1. Electricity customers no longer have to pay the levy.
- 2. Electricity could become cheaper compared to other final energies.
- 3. Bills must be adjusted.
Electricity customers will therefore no longer have to pay the levy in future. The government wants to relieve the financial burden on electricity customers. The levy is currently €0.037/kWh. If we assume that a four-person household consumes 3,500 kWh of electricity per year, then abolishing the levy will save €129.50 per year. This is by no means a drop in the ocean, but it will probably not be enough to compensate for rising electricity prices, so it’s questionable as to what extent electricity customers will actually feel the benefit.
In other areas, however, the impact of abolishing the levy could be somewhat clearer to see – namely anywhere electricity competes as a substitute with other final energies. Heat pumps, in particular, come to mind here. Operating costs are a decisive factor for many building owners when choosing their heating system. If the levy is abolished in the future and the operating costs of heat pumps fall compared to oil and gas heating systems as a result, this could refinance higher investment costs.
Abolishing the levy payment for electricity customers will also of course mean that electricity bills have to be adjusted, which, in turn, will mean that energy suppliers will have to spend time and money adjusting their billing systems.
A controversial star of the energy transition takes its final bow
The levy under the German Renewable Energy Sources Act will be abolished from 1 July, six months earlier than planned. Households will no longer have to bear the cost, as promised, but it still seems likely that they will have to pay more money for their electricity at the end of the year than last year. In the competition between final energies, on the other hand, the €0.037/kWh may well have a somewhat more noticeable impact and persuade one or two homeowners of the benefits of a heat pump. The most tangible and immediate consequence in the short term is energy suppliers will have to adjust their bills.
The levy is taking its final bow after about 22 years. It has stimulated the energy transition and has always been the subject of critical discussions. We bid it farewell and are curious to see what else is in store for the energy industry this year.
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