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Comparing the Alternative Energy Experiences of California and Germany

Updated July 20, 2021
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Comparing the Alternative Energy Experiences of California and Germany essay

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Introduction

In the midst of growing global distress about the importance of greenhouse gas reduction, there is increasing value in the assessment and valuation of renewable energy policies and their outcomes. While there is an overwhelming consensus that the world of energy is changing (and necessarily so), it is less clear the exact path the transition will take. Successful policies could provide increased energy and political security, jumpstart domestic industries, and mitigate environmental destruction. Conversely, ill-conceived or poorly implemented decisions could lead to skyrocketing energy prices, economic stagnation in certain sectors, and public dissatisfaction. This paper examines two distinct renewable energy experiences: that of Germany and California, USA. Both actors represent environmental leaders and have been amongst the most active in developing energy policies to increase renewables deployment.

While the drivers behind both models are undoubtedly their distinct policy mechanisms, this paper takes a broad lens that attempts to integrate the cultural, institutional, and social contexts unique to each state in its comparison. From a technology perspective, this paper focuses primarily on on-shore wind and solar photovoltaic (PV) technologies as both have recently exhibited the highest growth rates and present intermittency challenges to successful grid integration.

The comparative analysis proceeds in three parts. First, I compare the economy, renewable resource availability, electricity markets, and renewable energy deployment to date in both jurisdictions. This background information sets the stage for a discussion of the specific policy drivers chosen by each state and the varying socioeconomic factors that led their enactment. The outcomes of these policies are compared across three measures: electricity rates, grid stability, and job creation. Finally, I conclude with an analysis of any insights that can be gleaned from these experiences.

Background

In terms of GDP, both Germany and California (were it to be considered its own country) rank relatively close to one another as the fourth and fifth largest economies in the world respectively. Less comparable is their population size: with 40 million residents, California’s population size is roughly half that of Germany million, in spite of being approximately 15 percent larger in area.

By a smaller margin, California also beats Germany in terms of onshore wind resource quality. Average onshore speeds in California range from 4-10 m/s and 5-8 m/s in Germany.

Both states have electricity markets that began liberalizing in the late 1990s, albeit to different degrees. Germany began moving towards unbundling its electricity market by separating generation from transmission and distribution assets. Around the same time, following the Federal Energy Regulatory Commission’s (FERC) Order No. 888 aimed at removing impediments to competition in the wholesale bulk power marketplace, California followed suit by unbundling transmission assets in 1998 to create the CAISO. The degree of liberalization varies in that California’s distribution network continues to be owned by state utilities and retail electricity rates in the state are still subject to regulation by the California Public Utilities Commission.

Germany’s relative resource scarcity has not stopped it from pursuing record shattering build outs of solar PV and onshore wind power. In January 2018, a combination of strong winds and low demand meant that wind power alone produced about 85 percent of Germany’s power consumption. The remaining 15 percent was covered by a combination of hydropower and biomass, providing for nearly 100 percent coverage from renewables alone. At the end of 2018, Germany’s installed wind capacity totaled 52.7 GW, while its solar PV capacity amounted to 45.3 GW. Onshore wind generators delivered nearly 15 percent and solar PV provided 7 percent of the country’s total 2018 electricity output of 620,000 GWh. The difference in generation between the two sources in spite of almost identical capacity numbers reflects the relatively low quality of the Germany solar resource.

California has likewise moved towards greater market penetration of both solar PV and onshore wind in recent years. In April 2018, the state hit a new record for the instantaneous portion of demand met by renewables at 73 percent with solar and wind energy accounting for 64 percent of the demand. This was made possible due to 5.4 GW of onshore wind generation capacity and 10.8 GW of solar PV generation capacity, accounting for 9 percent and 11 percent respectively of the state’s total electricity generation capacity of 80 GW. In 2017, on-shore wind contributed 12,800 GWh or 6 percent and solar PV 21,868 GWh or 10 percent to California’s total in-state generation of 206,000 GWh. The remainder of the electricity generation mix is primarily natural gas at 49 percent, large hydro at 14.5 percent and nuclear at 9 percent.

California Renewable Energy Policy

Both Germany and California have taken distinctive paths, informed by their unique institutional, cultural and political contexts, in order to achieve their respective energy transitions. California’s coastal geography, its vulnerability to the effects of climate change, and its strong environmental interest groups have all pushed the state further than its U.S. counterparts in the build out of renewables.

California has accomplished this by using a Renewable Portfolio Standard (RPS). An RPS requires electric utility companies to source a certain share of the electricity they sell to end-users from solar, wind, and other renewable sources. Utilities prove compliance with these requirements through Renewable Energy Credits (RECs). Eligible power plant operators receive one such REC for every Megawatt hour (MWh) of electricity generated from renewable resources. Power producers can then sell these RECs to utilities. As an alternative to buying RECs, utilities can also invest in their own renewable power generation assets to earn RECs for the electricity they produce. These associated costs eventually pass on to consumers.

On September 10, 2018, California passed SB100, a bill that makes the state the first in the nation with a deadline to move to 100 percent zero carbon electricity.[footnoteRef:25] The bill amends the state’s current RPS (codified into state law under the Clean Energy and Pollution Reduction Act of 2015), by accelerating its target from 50 percent zero carbon electricity by 2030, to 60 percent. The bill also stipulates that the state aspires to be fully dependent on renewables for electricity by 2045.

In order to achieve this ambitious target, California employs a number of policy mechanisms, in addition to RECs, to increase the diversity and nuance of its policies and renewables portfolio. The California Renewable Auction Mechanism (RAM) is one such mechanism. The RAM is an auction in which developers bid on the lowest levelized cost of energy (LCOE) price they can afford.[ The program is intended to increase installed capacity through power purchase agreements with larger investor owned utilities. Supporters of the mechanism tend to appreciate it for its market driven, competitive nature and that it rewards developers who demonstrate viable, cost-effective project models.

One criticism of the policy has been that it favors larger developers who can afford the lower bid costs and larger deposits. California also employs a feed-in-tariff (FIT) policy for smaller renewable power generators (less than 3 MW in size) to sell their output to local utilities for a period of 10, 15, or 20 years. The FIT rate is based on a renewable market adjusting tariff (Re-MAT) mechanism designed to adjust the rate based on market interest. The program’s future remains uncertain however, as a recent District Court found the policy to be unconstitutional. As of December 2017, each of the utilities implementing Re-MAT has been instructed not to execute any new contracts or accept any new applications. The directive issued from the Public Utilities Commission also specified that the order does not affect the validity of already executed and existing Re-MAT contracts which are instructed to continue with full force.

Lastly, California also requires its utilities to offer net energy metering (NEM) for electricity customers with on-site generators of up to 1 MW from solar PV, onshore wind, and other renewable energy technologies with an overall program cap at 5% of aggregate customer peak demand. The program allows customers who generate their own energy to serve their energy needs directly onsite and to receive a financial credit on their electric bills for any surplus energy fed back to their utility.

California Renewable Energy Policy History

California’s particular blend of policy mechanisms was chosen by virtue of a number of different factors. Promoting and expanding the RPS with the passage of SB100 was a top priority for environmental interest groups in the state. The state’s air pollution, frequent wildfires, and consistent droughts also instilled a sense of urgency in its residents. Economically, the RPS was attractive to businesses in that it was seen as a more market-based approach; FITs, by contrast, were viewed as incompatible with de-regulated retail electricity markets. Rather than specify a price (as FIT does) and allow the market to determine the correct quantity, the RPS determines a quantity and allows market competition to settle on a price. Moreover, its flexibility as a policy tool allows for the exceptions and loopholes necessary in the US system. Business interests for instance, insisted on waivers and exemptions for utilities unable or unwilling to reach the targets set out in the amended legislation.

California’s renewable energy policy decisions have also been influenced by federal institutional framework. The Public Utilities Regulatory Policy Act (PURPA) enacted as part of the National Energy Act of 1978, established a preliminary FIT model in response to the energy crisis of the 1970s. It required public utilities to purchase power from small scale renewable energy producers, dubbed “qualifying facilities” at a rate that is equivalent to the utility’s own “avoided cost” i.e. the price the utility would have to pay otherwise. Problems arose because the avoided cost rates were set when energy prices were exceedingly high.

When energy prices dipped in the 1980s, utilities ended up paying significantly higher than market rates due to power purchase obligations that extended for up to thirty years. This historical legacy and its perceived shortcomings ultimately contributed to the state’s decision to avoid an aggressive FIT. Additionally, the “avoided costs” in PURPA were consistently upheld as the cost of any available fuel type. Legislators in the early 2000s were concerned a state policy designed to explicitly remunerate developers at levels higher than those set by the avoided costs clause of PURPA would be at odds with federal law.

Renewed interest in a California FIT and its eventual enactment began as a result of its popularity abroad, particularly, in Germany. In 2007 for instance, Commissioner John Geesman of the California Energy Commission (CEC) noted that “Germany’s renewable feed-in tariff has revolutionized the market for wind and solar energy…Those are things that California is directly looking at.”FERC’s 2010 ruling on the interpretation of avoided costs excluded “non-renewables,” giving states a window of opportunity to enact an FIT and still comply with avoided cost requirements. As noted earlier however, a recent 2017 district court ruling has once again threatened the future of California’s FIT (it remains to be seen if the decision will be appealed to the 9th circuit), finding aspects of the Re-MAT to be in conflict with PURPA.

While the federal system exerts a clear influence on the scope and style of California’s policymaking, it is important to note that California’s policies are increasingly gaining momentum and being viewed as prototypes for possible emulation for other states as well. Former Senate Speaker Pro Tempore Kevin De Leon, responsible for sponsoring and introducing SB 100, echoed this sentiment upon the bill’s passage stating, “Today send a powerful message to the nation and the world. Regardless of who occupies the White House, California will always lead.”

German Renewable Energy Policy

Germany’s role as a leader in renewable energy has been driven by a number of factors as well. Unlike California’s relatively isolated status in the United States, Germany has enjoyed broader support of its climate change goals from its European counterparts. Germany, a signatory of the Kyoto Protocol, has continued to use EU goals to inform its own domestic greenhouse gas mitigation strategies. This consensus of purpose has enabled Germany policymakers to implement far more aggressive measures than would be conceivable for a U.S. State like California.

The major piece of domestic legislation driving the German approach thus far has been the Renewable Energy Sources Act of 2000 (EEG) and its predecessor the Electricity Feed-in Law of 1990. FITs have two prongs: the “feed-in” element guarantees renewable electricity generators the right to connect to the power grid. The “tariff” element requires local utilities to purchase the power that these generators feed into the grid at above-market rates for an extended period of time. The above market prices are eventually borne by ratepayers, usually in the form of a levy or surcharge.

The EEG of 2000 established over thirty different FITs custom tailored to address the needs of over ten distinct renewable energy technologies. The policy’s diversity ensured significant deployment of both solar PV and onshore in spite of the technological and cost differences between them. In order to ensure that renewables actually penetrated the market, the FIT system specifies that grid operators cannot refuse the 20 year-long contracts. Without this mechanism in place, most utilities would have rejected offers outright arguing that these third party investments conflict with existing assets. It also spurred development by decoupling the feed-in rates for renewables from retail rates as prescribed by the FIT of the 1990s.

The new rates were calculated based on the generation costs of renewable energy technologies, aiming to provide return rates of 5 to 7 percent over the 20 years of guaranteed tariff payments. These rates were designed to have built in “degression rates” that reduce the tariff by a set percentage in order to respond to the rapid advancement of technology and resulting price drops. Nonetheless, FIT rates remained a point of contention and repeatedly catalyzed clashes between the Economics and Environment Ministries. The controversy stemmed from the FITs inefficiencies: if the rate was too high, overdevelopment occurs and excess costs are inefficiently passed on to ratepayers, if the rate was too low, no development occurs and the policy is ineffective. Largely in response to this, in August 2014, German government took steps to fundamentally reform the EEG of 2000.

Citing data that supported wind and solar as cheap energy sources that could now “generate electricity at the same overall costs as new coal-fired or gas-fired power stations,” as well as consistent concern at the high costs of electricity, the government designed its new EEG to shift from government determined FIT rates to market determined rates via auctions. The new auction system (implemented in 2017) covers more than 80 percent of new renewable energy capacity with only small to medium (under 750 kW) solar PV and wind projects exempt from the process. Proponents of the change argue that it is necessary to limit renewable development to allow lagging grid development to keep pace, and that renewables no longer need pre-determined FITs when they are the largest player in the power market. Critics on the other hand view the legislation as a step backwards–jeopardizing not only Germany’s climate targets, but thousands of jobs based in the renewables industry, and “sound[ing] a death knell for citizen owned energy,” arguing the auction will necessarily advantage corporate projects over small scaled cooperative ones.

Germany has been measuring its success with renewables and these changing policies with the use of several ambitious national climate targets integrated into Energiewende. Currently, the country aims to cut its greenhouse gas emissions by 40 percent by 2020, by 55 percent by 2030, and up to 95 percent in 2050, compared to 1990 levels. Renewables are to make up a minimum of 80 percent of the country’s gross power consumption by 2050. In a leaked paper, it’s been revealed that the 2020 goal has most recently been watered down to mean “the early 2020s,” while the country simultaneously begins to implement its coal exit plan (coal and lignite might be considered the country’s Achilles heel, comprising a combined 35 percent of power production).

German Renewable Energy Policy History

In spite of missing the mark for its 2020 aim, Germany’s status as a leader in renewables deployment remains incontrovertible. Achieving this has been a product of several competing sectoral forces that have all left indelible marks on the country’s energy transition. The particular features of EEG that resulted in an aggressive surcharge for residential ratepayers and broad exemptions for electricity intensive industries, for instance, can be seen as a compromise between the state’s corporatist political tradition and its sectoral industry interests.

In the late 1980s, trade unions, which recognized renewables as an important source of domestic manufacturing, and the agricultural lobby, which sought to increase profits from land for wind development, formed an alliance that paved the way for the country’s earliest feed-in-tariff model. The decision to advocate for an FIT rather than a quota system (popular in other parts of Europe at the time) was made to ensure sizable reduction in risk for producers by having a specified price for output. At the same time, Germany’s population grew increasingly concerned about environmental degradation as evidenced in the formation and election of the Social Democratic-Green Party coalition in 1998.

Structurally, Germany’s membership in the EU meant that it had to meet certain obligations, namely: The Renewables Directive of 2009 and the EU Emissions Trading System (ETS) launched in 2005. The Renewables Directive established a general policy for the promotion of renewables and specified national targets for each country, akin to the domestic agenda set by Germany’s Energiewende. The EU ETS established the world’s first and largest carbon market. Germany’s relationship to these two regional obligations factors into what it pursues domestically in an interesting way. For example, in spite of its strong stance against climate change, Germany insisted that the EU ETS use a system of freely allocated permits reflecting the interests of its domestic industries.

Opting for an allocation based system rather than an auction system rewards producers with carbon allowances based on the amount of economic output and the level of emissions. Auctioning in contrast is considered the most efficient economic system by avoiding subsidies for carbon emission production. This paradoxical stance can be seen as one way the country strikes a balance between the overarching interests of its industries and those of its trade alliances, and environmental groups. Germany similarly dictated terms of the Renewables Directive, pushing strongly against regulations on the automobile sector. As a result, the final product was watered down considerably, tying efficiency metrics to a sliding scale that “ensured the success of German luxury car manufacturers”. By leveraging its own influence over the relatively weak federal structures of the European Union, Germany has actively shaped EU legislative policies to ensure that its goals could be met on domestic terms.

Outcomes and Insights

California and Germany’s renewable energy policies have had a variety of outcomes all of which inform their overall success. In the following section, I examine some of the more prominent measures: electricity rates, grid stability, and job creation.

The most salient critique of Germany’s ambitious “Energiewende,” remains the high electricity costs borne by ratepayers. As of June 2018, retail rates for residential consumers averaged 29.42 cents/kWh. Electricity intensive industrial consumers that have been exempted from levies that go into the German electricity rate paid 5.6 cents/kWh. Residential consumers in California, by contrast, paid approximately half the cost of their German counterparts with an average rate of 15.34 cents/kWh. California industrial consumers paid twice as much as those in Germany however at 13.41 cents/kWh. It might seem surprising then that solar PV LCOE values are actually lower in Germany than in California, in spite of the poorer resource quality. LCOE is determined by dividing project’s total cost of operation by the energy generated. The explanation for this is in the difference in “soft costs” such as financing, permitting, installation and grid access. For instance, financing costs for solar PV projects in Germany range from 4-5 percent compared to 10 percent in the United States. The cost differential is not entirely explained by the FIT renewables surcharge either.

As of 2018, the FIT costs accounted for a little more than a fifth of the average residential rate. The remaining 80 percent of costs were split equally amongst energy procurement costs, applicable taxes, and grid-related charges. Germany’s energy procurement costs are driven largely by higher natural gas prices in Europe. Cheaper natural gas prices in the US (4.11 $/MBTU compared to 9.11 $/MBTU in Germany) has significantly reduced energy procurement costs in the United States. The magnitude of the FIT levy that is imposed on ratepayers moreover is primarily a product of “legacy costs” incurred early in the country’s energy transition when the tariff for solar PV was exceedingly high. Ratepayers are tied to such costs due to FIT durations of twenty years.

In some ways, Germany has been a victim of its own success. The country’s large scale build-out has contributed to global solar demand and promoted Chinese manufacturing capacities of solar PV technology that has in turn driven down prices. Another contributing factor into the high residential rates is the country’s deliberate decision to impose the FIT costs on residential ratepayers and exempt its electricity intensive industrial customers who pay only 2% of the overall cost of the FIT levy. This decision, aimed at maintaining international business competitiveness, has to be taken into consideration when evaluating the effectiveness of FITs generally as a policy mechanism for emulation. Another consideration to keep in mind when viewing the Germany electricity rates is how the policy has incentivized energy efficiency.

German households typically consume under 260 kWh per month on average—less than half as much as the average California household (560 kWh/month) which translates to the effect that residents of both states pay nearly the same amount in for their monthly electricity bills. Finally, while Germany’s residential rates may seem astronomical in comparison to those in the US, the Germany electricity rates captures the full cost of its energy policies. The electricity rates paid by residents in the US however does not however. The federal tax incentives that have been a principal driver in renewables deployment is not funded in monthly electricity bills but rather by a larger set of taxpayers across the nation.

Another frequently raised concern about the high penetration levels of intermittent renewables is that it threatens the stability of the electrical grid. Recent studies however, observe that greater penetration of intermittent renewables may require greater grid management efforts but need not come at the expense of grid stability necessarily.The average service interruption time to customers in Germany supports this contention. Between 2006 and 2013, “Germany tripled the amount of electricity generated from solar and wind to a joint market of 26% while managing to reduce average annual outage times in its grid from an already impressive 22 minutes to 15 minutes.” California reported an average SAIDI of 90 minutes in comparison, but also showed a similar reduction in interruption time in the same years from 100 minutes.

In order to better manage intermittency, in 2013, CPUC required California’s IOUs to procure a total of 1,325 MW of grid-level energy storage by 2020. Other electricity providers in the state were required to procure storage capacity worth 1 percent of their annual peak load. Germany has relied on its electricity markets to help balance the intermittent output of solar and wind generators. Generators can earn over $15,000 for providing a single MW of balancing capacity for one hour in weekly balancing market auctions.[footnoteRef:108] Entrepreneurial innovation and greater competition among suppliers moreover has made it so that the aggregate cost of Germany’s grid management measures has gone down by 25 percent between 2009-2012, in spite the increase in balancing interventions.

In terms of job creation, Germany’s Ministry of Economic Affairs and Energy estimates that the renewables industry accounted for 371,400 jobs in 2013, in energy production and supply, the manufacturing of hardware, publicly funded research and administration, and the service and maintenance of renewable energy facilities Moreover, it is estimated that the number of jobs in the renewables sector is expected to rise to 500,000-600,000 by 2020. Critics, usually from sectors that are energy intensive but do not usually qualify for exemption from the renewable energy surcharge, point to reduced competitiveness in foreign markets.

The conventional energy sector in Germany estimates that employment has fallen from 500,000 to 215, 000 between 1991 and 2013. All in all, however, Germany’s Energiewende has been successful in creating domestic employment opportunities when secondary job sectors are taken into account. Energy efficiency, environmental protection, and green start-ups have all seen considerable boosts in job creation much of which can be attributed to renewables deployment. California has similarly enjoyed high levels of job creation in renewables. The state currently has more people employed in the solar energy industry than in traditional utilities. According to State Senator De Leon, clean energy “employs more than half a million Californians. That’s nearly ten times the number of coal mining jobs that exist in the entire nation.”

Final Thoughts

The German renewables experience depicts some of the strengths and pitfalls associated with being one of the first to enact such bold energy policies. The country’s endogenous political factors such as a strong environmental movement, checked by strong a corporatist culture and the convergence of agricultural and manufacturing interests paved the way for its initial FIT. This policy created a path dependency that ultimately manifested in Energiewende and German leadership in the realm of renewables. Germany has leveraged that title as well as its considerable influence to mold the EU policies to fit its own domestic needs, including those often at odds with the goal of mitigating climate change.

At the same time, being a leader in renewables has meant that its own successes (spurring the growth of cheaper solar hardware for instance) has resulted in some if its policy failures (a rigid FIT that has incurred considerable legacy costs). While the future of this position remains to be determined, especially in light of its 2011 decision to phase out nuclear power, there are a number of lessons that can be gleaned from the German experience regarding its FIT as a policy mechanism. The largest is the importance of flexibility and responsiveness to technology costs.

Across the Atlantic, California has worked within the confines of a federal system that often opposes renewable energy deployment measures, to find windows of opportunity for ambitious energy policy. In some ways, this bottom up approach has allowed the state to tailor its legislation better to its geography, and economy, and has cemented California’s status as an environmental leader amongst its peers especially with the passage of SB100. Arguably, this bottom up approach has more often hindered than helped the state in its goals however.

Even with the RPS, developers rely on federal incentives to maximize returns on their investments. Federal initiatives like the Renewable Energy Production Tax Credit (PTC), though effective in spurring renewable growth, leads to legislative uncertainty and higher risk for investors due to the PTC’s dependence on federal government for annual extension. The largest drawback of this framework is efficacy in reducing greenhouse gas emissions– California ultimately faces an uphill battle by bearing the brunt of the costs for what is a collective benefit.

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