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.

Feed In Tariffs - how to structure

For anyone not familiar with the term, Feed in Tariff  (FIT not surprisingly) is the money the electrical company pays you per unit (kWh) that you generate and send down their wires.
 
A most interesting system of feed in tariffs exists in Germany today. The government has legislated a feed in tariff equal to about 3 times what the same customer pays for electricity. The electrical company charges a little more to all customers and uses this money to subsidise the owners of home generation systems. Houses and businesses have two metres. One metre records the amount they use, the other how much they produce. You don't get the three-times rate for the difference between what you use and what you produce but on the whole amount you produce. The German government has guaranteed that this situation will continue for 20 years from the date of installation. To induce people to get in early, the small generator gets the rate for his power generation that is extant in the year he installs his solar unit and this rate decreases from year to year. Thus people who installed solar in 2004 are getting 55c per unit until 2024 while people installing their unit this year (2008) will get 45c per unit until 2028. By 2011, the rate may be around 35c per kWh (kilowatt hour)

The system is obviously not sustainable. A company can't be buying a product and selling it for a third as much. Moreover, as more and more people put solar panels on their roves or wind turbines in their garden, the power company will have to charge the conventional customers more to pay off the generating customers. However, you have to hand it to Germany. What they aimed at has worked and at a bargain price when compared with building coal fired power stations.  Best of all it is  without any involvement of the always inefficient government tax system. (well, maybe in Germany it is not inefficient.  In fact in this link you will see just how clever the German Tax Department is.)

Germany has clearly recognized that in the not too distant future, the cost of power from fossil fuels will start to increase exponentially, due to demand exceeding supply and due to increasing compliance costs. With the German scheme of feed in tariffs, they have created a renewable solar-electric generating capacity equal to the output of about 4 large coal fired generating stations (over 13 GW as of the end of 2007) and growing day by day. With energy being a large part of the cost of any product, when the rest of the world is trying to play catch up, Germany will have megawatts of stably priced, renewable energy for her industries.  This in a country with less that 2 peak hours of sunshine per day.

Here in New Zealand, I suspect, (and hope) we won't go for the subsidy model that Germany is using. Part of this is philosophical-historical. Not so many years ago, our agriculture was one of the most heavily subsidized in the world. People didn't farm crops, they farmed subsidies. With great foresight and more than a little courage, the government of the day decided to scrap all agricultural subsidies. We went cold turkey and it worked. After some admittedly hard times, our farmers have become lean and mean and of most importance, their decisions are now based on economic reality rather than how to play the system. They now compete all over the world against subsidized agricultures and compete very successfully. (or would if the Americans would pay more than lip service to their professed free trade policy)

I would like to see a much different system. It is simpler, more easily understood and sustainable. Keeping in mind the law of unexpected consequences, as a first suggestion, it would be structured as follows.

There would be only one meter in your house or business and the electricity you generate would simply turn the meter backwards.  The two meter system is a scam. The electrical company would structure its charges (as they do at present) with a fixed charge and a charge per unit (kWh) used. There have been many names for this fixed charge but for the sake of this discussion lets call it a line charge. This is the amount you pay for the privilege of being connected to the grid. This is reasonable as the electrical distribution company had to build the distribution system and has to maintain it. Now here is where we have to be a bit careful. The electric company could structure this differently for people just using electricity and for people using and generating electricity. For the generators, they could have a very large fixed cost and a very low power rate for power used or generated. For the non-generating customer the reverse. This is where the government must step in and block this possibility. They must simply legislate that whatever the charge structure the power company decides on, it must be the same whether you are generating or not. Then if the generating company tried to charge a huge line charge and a small per-unit charge, the ordinary customer could use huge amounts of power for almost a fixed cost. If they charged a very small fixed charge and a large per-unit charge, the generating customer would make lots of money. Structured so that the system is the same for both types of customer, the system is reasonably self regulating since it is in the interest of the power company to maximize its profits by a middle of the road approach.



There is also no need for the power company to send out bills every month (or payments for that matter) to the user-generator.  The amounts either way will be small and a financial reconciliation can occur once each year.  Ordinary  customers get billed as usual. So what are the implications of such a system.

Firstly, there is no need for the installation of any extra meters by the power company which they will charge to the customer. This also eliminates the VAT you would have to pay on the extra meter.

Secondly, the power company doesn't have to service a developmental loan for installing new power stations. All the capital costs fall on the private individual. The only extra wiring needed is the wiring associated with the power generating unit. The customer must have in place all the equipment that makes his system compatible with the electric company and that is the end of it.

Thirdly, this system is sustainable and good for the power company. The power company is "buying" power during the day when they charge the greatest amount for their power and the power, on average, is being generated closer to the end user than is the case with remote, high output power stations. Getting power when the demand is greatest and reducing their line losses increases their profits.

Fourth, the system can be left in place for ever and doesn't have to be changed at some time in the future as with the German system. Stability of system allows for long term business planning and is greatly encouraging to businesses.

Fifth, the power company also gains on the Internet effect. Diffuse power generation is less vulnerable to line outages than high-power point-sources.

Sixth, the power company still makes money on their line charge commensurate with the cost of maintaining the lines.

New Zealand is an innovator in so many ways. Hopefully we will also be innovative with Feed In Tariffs.

One thing we must guard against at all costs is double metering. In Germany, even, now when the government is trying to encourage as much uptake of solar electric as possible, they are adding the revenue made by the small generator to his income for income tax purposes. For someone with a high salary, the marginal rate is 46% and there is a further 5.5% Unification surcharge. They are also charging GST (VAT/sales tax) at 19% on every unit of electricity the customer uses. Note that these charges are  not on the difference between what you use and what you produce but on ever kWh you use and every kWh you produce.   When the unrealistic FIT system ends, the small generators are going to find they are still paying quite a bit for their power even if they are generating as much as they use. In fact, depending on their tax bracket, the small German generator would have to produce 2 to 3 times as much power as they use in order to reduce their net power bill to zero. Think about the cost of servicing the loan they have to take out to buy this extra large system. Think about the GST they pay the government for this larger-than-needed system.   If someone does decide to put in a system which is larger than they need for their own use, they should be allowed a fair return. For the sake of argument, let's say 80% of what the power company charges for power at the time of generation.

The correct system of metering and Feed In Tariffs which is fair to both power company and customer and which is sustainable will be a great encouragement for the uptake of renewable energy by the small generator and won't have the customer wake up one morning and realizing he has been scammed.