1. The German Electricity Market in the European context Bocconi University 21.1.2014 Karsten Neuhoff German Institute for Economic Research / Technical University Berlin

2. The cost of German energy transition 0 Housholds 2,5% of consumption expenditure for power, 1986 2,3% Poor households spend 4.5% -> can be addressed with tailored policies Industry Ongoing discussion on structure of special provisions Share of power in household expenditure Total consumption by households

3. Financing costs determine competitiveness of solar&wind Karsten Neuhoff, 3 1 Assumptions: 2% Inflation, Fossil conversion losses 50%, 66% of energy from on-shore Wind and 33% Solar, no infrastructure or further system cost considered

4. No need to shift risks for investors – avoid them! Karsten Neuhoff, 4 2 Costs Performance/operation Regulatory uncertainty Future market evolution Costs Performance/operation Regulatory uncertainty Future market evolution Risk from: Revenue requirement (Financing costs) Project risk and developers margin Feed-in Policy design TGC TGC market price Green Certificates Energy price risk Balancing costs Transmission constraints Premium Floating Fixed

5. Why the fuzz about RE targets? 3 Reference scenario Policy scenarios % of EU Power from RE National Renewable Energy Action Plans EU Roadmap 2050 Network Planning Permitting Construction Supply chain Innovation Capacity expansion Project pipeline Guidance for policy design Credibility of LT Carbon Targets 2030 RE targets: Reduce policy uncertainty Facilitate coordination Enhance innovation & reduce costs 2030 RE targets: Reduce policy uncertainty Facilitate coordination Enhance innovation & reduce costs

6. Why feed-in tariffs did struggle … 6 Weekly PV installations and feed-in tariff levels for systems of up to 30 kW in Germany Installations based on data from the German Federal Network Agency (Bundesnetzagentur), feed-in tariff based on 900 full-load hours per year and 4.5% interest. 4

7. .. and why deployment responsive adjustment now works 7 Advanced model: Evolution of weekly PV installations for systems up to 30 kW 5 Installations are modeled based on profitability and project duration. Source: Grau, Thilo (2012), Responsive adjustment of feed-in tariffs to dynamic PV technology development, DIW Berlin Discussion Paper No. 1189.

8. Is there a case for continued technology differentiation? 8 6 Wind/solar Fossil Generation, (Link to demand side/mobility/heat) Capital costs80%30% Main strategic choices New investments and location (Re-)investments Closure Fuel contracting Capacity for government to decide High (homogeneous technology, competition for entry) Low (inhomogeneous assets, large players, limited information) Other aspectsRE trajectory required: -for grid investment -supply chain/planning Government choices politically contentious Private sector determined (financed on balance sheet) Policy driven deployment Strategic choices

9. Conclusion Karsten Neuhoff, 29.3.2012 9 Focus on reducing financing costs for renewables Use financing capacity of sector for (re-)investment in conventional generation (difficult to regulate) For Renewable Energy: short-term market essential Short-term sales efficient – independent of actor Basis for long-term remuneration (feed-in, tender) For Conventional Generation: short-term market essential Remunerate full value provided to system Provide reference price for mid-term contracting 9