Germany’s Renewable Energy Sources Act (EEG) reduces the tariffs for new projects each year. This “degression” rate varies with technology. The degression for new wind contracts is 2% per year. The degression is intended to account for lower costs as production volumes increase and the technology moves down the learning curve.
The degression mechanism was chosen in part as a means for gradually eliminating the premium paid to renewables relative to the so-called market price. It was believed at the time this measure was necessary to circumvent the European Union’s prohibition against state aid.
The previous stromeinspeisungsgesetz, or feed law, had been challenged by Germany’s electric utilities on grounds the grounds of state aid, or subsidy, to renewables. Though European courts upheld the feed law, drafters of the EEG thought it best to include a provision making it harder to challenge on grounds of state aid. Changes in EU policy since 2000 suggest that this provision is no longer required.
Degression reduces both the T1 and T2 tariff for wind energy, the tariff in the first five years and the tariff in the remainder of the contract period, by 2% every year. The degression can and should vary by technology. For example, in Germany the degression for wind is 2% and for solar PV it is 5%. German developers feel the degression for wind is too steep. Since the degression was implemented, annual installation of wind capacity has decreased steadily by 30% per year from a high of 3,250 MW in 2002 to 1,800 MW in 2005.
Rather than experiencing lower costs in 2005, wind turbine prices have increased substantially, some observers say as much as 20%. The high price for steel, the tight supply of wind turbines due to the tax-credit driven boom in the American market, and the lag in turbine supply has resulted in increasing turbine costs. Even before these costs had worked their way through the system in 2005, some Canadian developers who have actual experience building and operating wind projects were publicly complaining that many of their costs were rising.(1)
Similarly, costs for PV have also increased in 2005 as world demand has boomed and solar manufacturers have encountered a shortage of silicon feedstock.
Renewable Tariff programs using degression must have sufficient adaptability to reduce or eliminate the regression when it no longer applies. The two-year program review in the German and French system should provide this flexibility.
The Renewable Tariffs proposed in Ontario do not include a degression, though this could be added during the periodic two-year program reviews.
1. Presentations by Jason Edworthy, VisionQuest Windelectric (a division of TransAlta), Canadian Wind Energy Association annual conference, Montreal (2004), and Toronto (2005).