German EEG to face scrutiny after elections

The new German government elected in next month's general elections is likely to implement significant reforms to or replace the renewable energy act (EEG) within the next four years, extend support for combined heat and power (CHP) generation and pave the way for the electrification of the transport and heating sectors.

The future of Germany's lignite and coal-fired plants is less certain as only a coalition government including the Green Party is likely to result in any significant and rapid legally mandated closures while other parties would seek different approaches to meeting the country's ambition greenhouse gas (GHG) reduction targets for 2020 and beyond.

The present government, a coalition between Chancellor Angela Merkel's CDU/CSU union and the SPD party, in 2013-17 passed the most wide ranging power market reform package since market liberalisation in the late 1990s, and decided against the introduction of a capacity market and in favour of several reserve solutions to ensure grid stability and security of supply. Other energy policy milestones included reforms to the EEG which introduced auctions for new renewable installations and reforms to the CHP law which geared subsidies towards gas-fired units and introduced auctions for new units with a capacity of 1-50MW.

Major tasks lie ahead for the next government to implement Germany's energy transition as energy policy moves on from the power market design debate to future decarbonisation strategies as the ambitious GHG reduction target for 2020 — a 40pc reduction relative to a 1990 base line — approaches while other challenges include the increasing decentralisation and digitalisation of the German and the European power system.

Based on an analysis of election manifestos, recent position papers and statements by party officials, Germany is likely to ease into the next phase of the energy transition rather than implement radical changes within the next four years.

The EEG, Germany's flagship renewable energy act, is likely to face the most significant changes.

A repeat of the grand coalition could bring about the end of the EEG by 2021 as both the CDU/CSU and the SPD consider an alternative funding system for subsidies for new renewable power facilities. The FPD party goes one step further and wants to end subsidies for new installations altogether. Merkel would prefer a CDU/CSU coalition with the FDP over another partnership with the FDP. Polls put Merkel firmly on track to secure a fourth term in office in September while a majority for a CDU/CSU –FDP coalition looks shaky, albeit not impossible.

A less likely but possible coalition could be a first in German politics on a national level — a CDU/CSU link up with the FPD and the Green Party. This would bring about significant debate over the future of the EEG as the Green Party wants to keep and develop the scheme and significantly increase annual renewable expansion targets.

The Green Party has stressed that progress in reducing Germany's dependency on coal and lignite power generation would be a prerequisite for a three-party coalition. Green Party leader Cem Ozdemir recently said that a manifesto pledge of closing Germany's 20 dirtiest power plants within the next four years would be a red line in coalition negotiations. The Green party's plans for a legally enforced gradual exit from coal and lignite generation within the next 20 years could take a backseat to that pledge.

Of the four mainstream parties, the Green Party is the only one to support a national floor price for CO2 while the SPD would initiate talks at an EU level if reforms to the EU Emission Trading Scheme (EU ETS) fail to deliver GHG reduction targets. This makes any major changes to Germany's position on CO2 pricing unlikely as the CDU/CSU and the FDP do not support a floor price.

But a likely win for the CDU/CSU does not mean that operators of coal and lignite plants can rest easy. Merkel said last month that she will launch talks on additional measures across several sectors to meet Germany's 2020 GHG targets next year, should she be re-elected, and that her party will confirm ambitious sector goals for GHG reductions by 2030 set by last year's 2050 climate protection road map following the elections. The latter indicates headwinds for coal and lignite generation in the medium-term, although not within the next four years.

Consensus is emerging on individual policies ahead of the election. The next government is likely to reduce the power tax, which now stands at €20.50/MWh, to €0.50MWh, in an attempt to reduce costs for electricity consumers and help incentivise the electrification of the transport and heating sectors. And mainstream parties back expanding support for highly efficient combined heat and power (CHP) generation, which would end in 2022 for next plants as it stands now.

Germany holds general election one month from now, on 24 September.