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Tuesday, September 8, 2009

German FIT system - Brilliant

You have to admire the German government* and its Tax Department. Not only do they not themselves financially support the introduction of small scale renewable energy in Germany, they manage to tax it 6 or 7 times. This may seem a little surprising to you considering how the German FIT (feed in tariff) system is always held up as an example of how to increase the uptake of small scale solar-electric systems. And, don't misunderstand me. It has been tremendously successful. The generation from small solar electric systems in Germany is now almost equivalent to five large coal powered generating units and is increasing day by day. Lets have a closer look at how it work.

*I have started with the German system as it is the most insidious.  At the bottom there is a link to our New Zealand system.  There are almost an infinitely varied number of systems which can be used in terms of the regulatory framewrod that surrounds it.  Each one has it's own fish hooks.

The German government is not involved in financing solar-electric systems. The money to pay the small generator for every kWh he produces* is raised by the German Power companies charging all its customers a little more for the power they buy. Here is the first level of taxation. German VAT (sales tax) is just under a fifth so when you pay your power bill, a fifth is added to the charge and this goes to the German government. Toooo clever!! Remember, the power company is allowed to charge a little extra to all its customers to pay the FITs so all its customers pay a fifth of this little bit extra as Sales tax. It is only a little per customer but remember that in total it is equal to a fifth of the sale price of the power generated by 5 large coal powered generating stations.

*For the early adopter of a solar electric system, it is fantastic, at least for the first 20 years.  The FIT is over 50c for the first 20 years since installation.  At each year later that you install your panels, the amount you get per kWh over the first 20 years is less.

Then the government insists on double metering. All the power that the small generator/customer produces goes through one meter and everything he uses through the second meter. This seems at first glance to be very beneficial to the small generator. Since he receives approximately three times the rate for the power he produces than for the power he buys he is very pleased that all the power he produces is measured rather than the excess above what he uses. This way he gets the maximum return??? Are you ever suspicious when something seems too good to be true?

Since the small generator/customer is earning revenue from his solar panels and the amount is recorded by the power company, it is visible to the tax office and this amount is added to the income of the small generator. He is than taxed on this revenue at his marginal income tax rate*.  For a really well off German, and with the reunification tax,  this is over 50%. In other words, if a high salaried German earns 200euro per month from his power generation, he gets to keep only 100euro.

In most countries you are taxed at a certain rate for the first part of your income, a larger rate on the next portion and a higher rate on the rest of your income.  Let's say for the sake of the argument that it is 20% on the first thousand, 30% on the next thousand and 40% on anything above 2000 per month.  40% is your marginal tax rate and any additional income you acquire will be taxed at this rate.

Then the tax office looks at how much power the owner of solar panels buys. Remember, this is all the power he uses. Not just the extra he needs to make up his shortfall. Whatever you buy in Germany, including power, has sales tax attached to it and sales tax, as we said, in Germany it is just under a fifth. Suppose our same well off German buys 200euro of power. Once you have added VAT, he has to pay 240euro for it. The 40euro goes to the tax office. So far we are up to 3 taxations on the power produced. Now we come to the power company.

The power company earns money by selling power. The power it buys from the small generator, it sells on to its other customers. This increases its revenue and it pays tax on this added revenue at its marginal tax rate. It also pays sales tax on power it buys.  The power is taxed once more and since the power company has to make a profit, it passes on this added expense to its customers.  This added cost is also taxed.  We now have a tax on a tax.  (or is it a tax on a tax on a tax.  I am loosing track of all the compounding going on)

As I said, you have to admire the system. At a time when the world is desperate to replace fossil fuel power generation with renewables, the German government has come up with a way to increase the uptake of renewable energy, have a sixtiple dipping system of taxing every kWh of renewable power produced and gain the gratitude of its citizens and the admiration of the world. Machiavelli would be all a twitter. Imagine how much less expensive it would be for the installer of small generation equipment if it wasn't taxed this way; how much more worthwhile it would be to install such a system and how much less expensive power would be for  German consumers that don't have solar panels.  Imagine how much better if the German Government simply put in a system for the benefit of the German citizen.

One wonders what all this extra revenue is used for. If the German government ear-marks (ring fences) this money for installing wind turbines, making home solar equipment less expensive, subsidising house insulation etc. etc. the system would be justified in terms of the big picture of replacing fossil fuel generation by renewables. I wonder. That would be another story.

In another blog, I calculated that the small customer who installs solar panels would have to install a system between 1.7 to 4 times as big as he actually needs  to generate the power he uses if he wanted to end up paying nothing for his electricity.  This is, of course, only if double metering is the law of the land.  The wide range depends to a large extent on your tax status and the tax laws of your country.  Guess what extra you pay when you buy your solar system.  That's right.  GST.  So you pay even more tax to the government in order to buy a system which is far bigger than you actually need.  How many taxations are we up to now.  I have lost track.

Note that in New Zeland we have double metering but it only measures the excess and shorfall after you use your own generated power.  For a look at this system, click here.


el_cagón said...

hi again.
first of all i have to admit that i am not a specialist in german taxation but i do know quite a lot about the feed-in tariff. germany is famous for its highly complicated laws and tax system. a tax consultant told me about a decade ago that about 80% of the world's literature on tax and financial law is written in german language. if that fact is really correct the reason for it definitely is: you can hardly declare any private tax on your own as it is all so damn complicated. so if electricity is taxed 3 or in the end 25 times, i don't know!
but one thing that in the end counts is that the quite simple feed-in tariff work as the percentage of the share of renewables in electricity production shows. end of the 90's a predicted share of renewables by 2010 was 6%. Thanks to the feed-in tariff we are now at 14%.
i totally agree that the whole system could be made a lot easier just by different taxation and i would love the system to change this direction. but if we were waiting for the taxation system to be simplified till we step ahead in the energy sector then we would probably end up never changing anything...

Daniel said...

I fail to see how power is taxed differently than any other good or service in Germany. You make it sound like a diabolical conspiracy to tax the solar producers. Yet I'm sure you could draw the same picture for any industry in germany.

For example doesn't that same "really well off German" pay the same 50% tax no matter what his source of income?

If so, what is the point of this goofy piece? If not, please enlighten.

William Hughes-Games said...

Hi Daniel
Many thanks for your comment. Reading over my blog on the German FIT system, I see that I assumed without explaining. My fault. Underlying this and other blogs is the thought that taxation has two functions. One is revenue collection, the other, directing a society. In the case of German FIT's, the whole system is made hugely expensive by the German government skimming off money at every turn. Fortunately for the success of the system, most German participators only see as far as the fact that they are getting three times the money for power they sell as power they buy (even this is not the case after you put on the tax). Our need, if you believe the climate change scientists, for a massive shift to renewables is accute and governments should be setting up the tax system to enable this. For instance, if you think as I do that electric cars are a vital part of this mix, governments should wave all taxes around the purchase and running of electric cars. This would ensure a huge uptake of this technology

benkepes said...


Great post, but your criticisms shouldn't be directed at net reverse metering (or FIT as you call it) per se, rather they should be directed at a taxation system that is... over zealous.

Net reverse metering is a really good thing, multiple taxation is not - but the two are seperate and divisible topics.

benkepes said...

William - just read your other post which is a criticism of net reverse versus double metering systems. On that one I wholeheartedly agree!