Forcing the adoption of renewable energy through mandates, taxes, and fees creates many unintended consequences, and Germany’s Energiewende or “energy transformation” is an example of the problems these policies can create. The transformation began in earnest with the passage of the Renewable Energy Act in 2000, which introduced feed-in tariffs and priority grid access for renewables, and has continued since then with multiple modifications to the act. Again, the key point is not that renewable energy sources are inherently harmful or expensive but rather that using government mandates to speed up their adoption, instead of allowing the market to dictate their price and rate of adoption, distorts electricity markets and harms electricity consumers by raising prices and reducing reliability.

First, let’s consider the economic effects of Germany’s initiatives. According to Eurostat, retail electricity rates for an average German household rose from 20.6 to 30.5 Euro cents per kWh from 2007 to 2017 [1], and 8.5 Euro cents of this increase went to taxes and levies. Average retail prices for U.S. households were 12.9 cents per kWh in 2017 [2]. Nonresidential customers in Germany saw rates rise from 13.3 to 19.9 Euro cents per kWh [1]. Germany is more transparent than most countries in that it applies a levy to support payments to renewable energy producers directly to electricity bills. In 2017, this tax was 6.88 Euro cents per kWh, costing German consumers an estimated €24 billion [3]. IHS estimated that Germany’s net export losses due to high electricity prices were €52 billion from 2008 to 2013 [4].

Sources: Eurostat [1], Energy Information Administration [2], and EDGAR [4].

The stated goal of Germany’s renewable energy mandates is to reduce emissions of carbon dioxide (CO2), and, setting aside the question of whether this goal should be pursued in the first place, its program of mandates and subsidies is failing to meet the goal. Despite hundreds of billions of Euros in taxes and subsidies, CO2 emissions in Germany only fell by 9% from 2003 to 2016 [5]. Because Germany is forcing out nuclear generation, the only practical means to achieve zero carbon electricity generation, they are still relying on coal, often subsidizing coal plants to stay online, to back up renewable resources that experience large fluctuations in electricity output.

Other countries are already facing a backlash against the high costs of energy subsidies and carbon taxes. The U.K. has had the most success at cutting CO2 emissions among large countries, reducing them by 33% since 2003 [5] primarily because it retained its nuclear and natural gas generation and used renewables to displace coal. However, investment in renewables declined 56% in 2017 as government support waned [6], and further emissions reductions will be more difficult to achieve as the U.K. runs into the same reliability problems as Germany. In 2014, Australia repealed its carbon tax, which took effect in 2012 and was recognized by the International Energy Agency as model legislation, after voters protested rising electricity bills and voted several backers of the tax out of office [7]. High renewable penetration and hot summers have also contributed to a host of reliability issues in South Australia.

Even as the cost of installing renewable generation declines and in many places falls below that of fossil fuels [8], integrating renewable generation into the grid is an enormous challenge, requiring expensive transmission upgrades, backup power, and energy storage. As Germany is proving, those costs are hampering the deployment of renewables in countries that continue to subsidize them. In a competitive electricity market that employs a wide range of energy generation technologies, renewable energy, with its free fuel and low capital costs, can contribute to lower, more stable electricity prices. However, forcing the deployment of wind and solar farms through government mandates brings few benefits and creates enormous secondary costs and reliability issues that harm electricity consumers.

[1] Eurostat. 19 September 2018. “Electricity prices for household consumers – bi-annual data (from 2007 onwards).” Accessed 21 September 2018.

[2] EIA (Energy Information Administration). “Electricity Data Browser.” Accessed 21 September 2018.

[3] Agora Energiewende and Renewable Energy Institute. March 2017. “10 Q & A on the German Energiewende.” p. 12.

[4] IHS Inc. 27 February 2014. “A More Competitive Energiewende Would Increase German Jobs and Economic Competitiveness with Limited Impact to Emissions Levels, IHS Study Finds.”

[5] Janssens-Maenhout, G., Crippa, M., Guizzardi, D., Muntean, M., Schaaf, E., Olivier, J.G.J., Peters, J.A.H.W., and Schure, K.M. 2017. “Fossil CO2 & GHG emissions of all world countries, 2017.” Publications Office of the European Union.

[6] AG Energiebilanzen e.V. “Power Generation by Energy.” Accessed 21 September 2018.

[7] Bloomberg New Energy Finance. 16 January 2018. “Runaway 53GW Solar Boom in China Pushed Global Clean Energy Investment Ahead in 2017.”

[8] Taylor, Rob and Rihannon Hoyle. 17 July 2014. “Australia Becomes First Developed Nation to Repeal Carbon Tax.” Wall Street Journal.

[9] Lazard. November 2017. “Lazard’s Levelized Cost of Energy Analysis – Version 11.0.” p. 11-15.