Cablegate: German Energy Legislation Compromises

VZCZCBSO626
RR RUEHBS
DE RUEHRL #0959/01 2030524
ZNR UUUUU ZZH
R 210524Z JUL 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 1690
INFO RUCNFRG/FRG COLLECTIVE
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 BERLIN 000959

SENSITIVE
SIPDIS

FOR EEB U/S JEFFERY AND EUR/FO DAS BRYZA

E.O. 12958: N/A
TAGS: ENRG EINV PGOV EU SENV GM
SUBJECT: GERMAN ENERGY LEGISLATION COMPROMISES
COULD RESULT IN HIGHER PRICES AND MISSED CO2
REDUCTION TARGETS

REFTEL: 2007 BERLIN 2177

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION.

1. (SBU) SUMMARY: Six months after triumphantly
presenting draft energy laws to meet aggressive
global warming targets (reftel), coalition
harmony has dissolved, resulting in watered down
legislation that is likely to cost more and
deliver less than initially expected.
Parliamentary hearings were necessary to resolve
disputes so that the legislation could move
forward before the summer recess. In the end,
four laws on combined heat and power (CHP),
renewable energy (EEG), renewable heating and
liberalization of the electric metering market
received parliamentary approval on July 4 and
will enter into force January 1, 2009. The
Cabinet approved a second tranche of draft
legislation on June 19 which will be submitted to
Parliament after the summer recess. The lack of
fiscal discipline could lead Germany to fail to
meet its ambitious mid-term (2020) CO2 reduction
targets. END SUMMARY.

2. Two days after the opening of the UN Climate
Conference in Bali last December 3, an unusually
harmonious CDU/SPD Coalition Cabinet passed a
package of draft laws to combat global warming.
The measures are part of the Integrated Energy
and Climate Program (IECP) resolved by the
Cabinet at its retreat in August 2007 to reduce
Germany's CO2 emissions by 36.6 percent in
comparison to 1990 levels by 2020. The 3.3
billion euro package covers a range of measures
from tighter building insulation requirements to
a CO2-based vehicle tax to energy legislation.
Initiatives ranging from reducing power plant
emissions, introducing energy efficiency
standards for government procurement and
legislation allowing smart meters to enable
consumers to save energy have proved relatively
uncontroversial; political jockeying has centered
around legislation on combined heating and power
(CHP), renewable energy (EEG), and renewable
heating. The law on liberalizing the metering
market had a smooth passage. Following are
brief descriptions of controversial issues in the
CHP, EEG and renewable heating law.

CHP Law - Efficient but Expensive
---------------------------------

3. The update of the 2002 Combined Heating and
Power (CHP) Act aims to double the CHP share from
12% to 25% by 2020, saving 15 million metric tons
of CO2. The law allocates a maximum of 750
million euros per year to promote CHP technology,
which many believe to be unrealistically low.
The Upper House of Parliament failed to convince
the lower House to increase CHP funding to 950
million euro per year. Many experts believe the
lack of adequate funding will ensure that CHP
goals will not be met. In a compromise, the
government must review the efficacy of the
subsidy after two years.

EEG - Less Efficient But More Expensive
---------------------------------------

4. The revision of the existing Renewable
Energies Law (EEG) aims to increase the share of
renewable energy from just over 13% to between
25% and 30% by 2020, thereby saving 54.4 million
metric tons CO2. The EEG requires net operators
to give priority to renewable energy and to
guarantee prices considerably higher than those
for conventional energy; the costs are passed on
by net operators to consumers.

5. While solar energy accounts for only 3.5% of
renewable energy (0.6% of total power generated),
it cost the consumer 22.5% of total EEG costs in
2007. After a heated political debate, the
revised EEG reduced the kWh price by between 8
and 10% from 2009 onwards, about the same as had
been originally planned. RWI Essen, a leading
economic research institute close to industrial
consumers, calculated that the revised EEG
subsidies are still too high and would save
consumers only 1.3 billion euros by 2010. RWI
advocated reducing guaranteed prices for solar
energy by 30% in 2009, a move supported by many
within the CDU. In the resulting internal CDU
fight, advocates of the 30 percent reduction
failed to overcome opposition from CDU
environmentalists and the eastern German states,
where many solar firms are located. Coalition
discipline, however, prevailed in the
parliamentary vote and the subsidies remained
unchanged, which could ultimately prove to be an
opportunity lost to fund other energy saving
measures.

6. Wind is the oldest and largest renewable
energy generator in Germany; wind-generated power
grew by 28% in 2007. With more moderate
guaranteed prices to suppliers it cost the
consumer nearly 46% of total EEG costs while
generating 59% of total renewable power. The
original draft EEG reduced guaranteed rates;
however Parliament accepted a later proposal from
SPD Environment Minister Gabriel to raise rates
instead. The revised EEG improves compensation
for offshore wind generation going into operation
by 2013. While onshore wind capacity is
saturated, hopes have turned to offshore wind.
To date, however, no offshore sites have gone
into operation because of technological
challenges.

Renewable Heating Law
---------------------

7. The draft Renewable Heating Law aims to
increase the share of renewable energy in heating
from the current 6% to 14% in 2020, saving 9.2
million metric tons of CO2. Funding would amount
to 350 million euros in 2008 and rise to 500
million euros from 2009 onwards. New buildings
from 2009 onwards must include renewable energy
for heating. The controversial requirement for
heating systems in existing buildings to be
upgraded to meet these stipulations was
eliminated before the law even went for Cabinet
approval. However, the law permits states to
introduce their own requirements for investments
in existing buildings.

Second Tranche of IECP Legislation Passes the
Cabinet
--------------------------------------------- ----
----

8. On June 19 the Cabinet passed a second
tranche of draft legislation which will be
submitted for parliamentary approval following
the summer recess. Main drafts concern reducing
energy consumption in new buildings by 30% from
2009 onwards, increasing toll charges steeply to
penalize trucks with heavy emissions, requiring
tenants to pay a higher share of their heating
bill according to actual consumption and
accelerating the construction of long distance
power lines to transport offshore wind energy.
In some cases, the bills were watered down even
before they went to the Cabinet. Controversial
legislation to change the vehicle tax to a CO2
base has been postponed until 2010.

Comment: Quo Vadis?
--------------------

9. Independent experts assessed the original
August 2007 Meseberg CO2 reduction program as
able to achieve 37% of the planned 40% reduction
by 2020. However, the controversy surrounding
some of the most important energy legislation and
rising costs associated with implementation may
make these targets politically impossible to
achieve. A natural face-saving option lies in
the fact that the 40% pledge was tied to the EU's
agreement to reduce its own emissions by 30%,
which hasn't happened. The Parliamentary Second
Chamber chose not to delay the process further on
July 4 by calling for the mediation committee,
but has made further recommendations on some of
the legislation. That aside, what is most
striking about the debate over the current
legislative package is the disappearance of the
Grand Coalition's harmonious approach since
December 2007. It is symptomatic of the
increasing influence that the upcoming federal
elections are having on policy across all major
areas. END COMMENT.

TIMKEN, JR

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