What is the role of renewable energy in Germany?

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Germany’s efforts to increase the share of renewables in its power mix began with the 1990 Electricity Feed-in Law, the world’s first national feed-in tariff. This law made it possible for projects using wind, solar, biomass or hydropower to feed power into the grid and receive payments tied to a percentage of the prevailing residential electricity retail price. 

In 2000, the Renewable Energy Sources Act replaced and improved upon the Electricity Feed-in Law in four principal ways: 

1. It granted priority grid access for renewable energy projects, enabling them to connect to the system more quickly and easily. 

2. Feed-in tariff rates were recalibrated to better reflect the actual cost of generation from different technologies, with rates specific to the technology or even project size. Rates declined periodically to account for technological learning curves. 

3. Investments in renewable energy projects were further de-risked through long-term 20-year contracts. 

4. Priority dispatch was introduced, ensuring all renewable electricity received precedence in the grid, irrespective of technology. 

These reforms helped de-risk investments in renewable energy technologies, unleashing a wave of investments that propelled Germany to the forefront of the global renewable energy industry. By the late 2000s and early 2010s, Germany’s annual solar installations represented roughly 30% of global installed capacity, with its rapid solar development widely credited for significant cost reductions in solar technology worldwide.

Over time, Germany has introduced periodic adjustments to its feed-in tariffs, moving many technologies and projects size ranges to competitive auctions from 2015 onwards. Currently, smaller-scale installations still qualify for feed-in tariffs, while larger projects have to participate in competitive auctions or rely on bilateral off-take agreements, for example in the form of corporate power purchase agreements (PPAs). 

Germany is implementing a range of parallel policy instruments targeting different market segments to incentivise the multi-gigawatt annual deployment of renewable energy sources. Current plans envisage an average of 19 GW of solar PV installations every year until 2030. For wind, the target is 12 GW (9 GW onshore and 3 GW offshore). 

The diversity of support policies is most apparent in the case of solar PV. Large-scale solar PV systems are increasingly developed without financial support, simply by selling electricity on wholesale markets (typically via aggregators). Both medium- and large-scale systems can also negotiate corporate PPAs with larger-scale electricity consumers. Additionally, they can secure subsidies in the form of a market premium through competitive auctions, paid over 20 years to cover the difference between the bid price and the average market price (one-sided Contract for Difference (CfD). Based on EU legislation, two-sided CfDs or a similar system must be introduced by 2027, which includes a claw-back mechanism. The state guarantees a minimum market price, but in return, investors are required to pay back a portion of their revenues when market prices reach very high levels. The precise implementation of this system is still under discussion. Medium-sized community-owned PV projects up to 6 MW can receive feed-in tariffs based on previous auction outcomes. Rooftop solar PV systems have two options: the “100% feed-in” model, offering higher remuneration without self-consumption, or the “partial feed-in” model, which allows for self-consumption but with slightly lower export remuneration. This variety of investment options is crucial for reaching the ambitious annual expansion targets and achieving the overall target of 215 GW of solar PV by 2030. 

Similarly, significant efforts are underway to ramp up wind energy production. Since February 2023, all federal states in Germany are required by the “Wind Energy Area Requirements Act” (WindBG) to allocate on average 2% of their land for wind energy onshore. In recent years, the focus has shifted to promoting greater sector coupling, adjusting the spacing requirements for onshore wind turbines, streamlining planning and permitting procedures, and reducing bureaucracy. Battery storage also plays an increasingly important role.

Germany uses auctions to expand offshore wind capacity. The Federal Network Agency has awarded contracts for offshore wind farm areas in the North Sea through dynamic bidding and pre-investigated site auctions​. ^5,6 To achieve at least 30 GW of offshore wind capacity by 2030 and 70 GW by 2045, the federal government is committed to stronger cooperation with neighbouring countries. This cooperation aims to optimise potential areas in the North and Baltic Seas. For example, Denmark has around 15 GW of capacity in the North Sea and around 5 GW of ​​capacity in the Baltic Sea on tendered areas that it does not need to meet its national demand. ^7,8,9

Underpinning Germany’s successful deployment of renewables has been the supportive role played by banks and state-backed lenders such as the KfW, which provide low-interest loans for a number of renewable energy projects.

Historically, the German power system operated as a “one-way-street”, with electricity being transported from a few large-scale power plants to the final consumer. In contrast, the German energy system now emerging, based on renewable energy sources, is characterised by increased decentralisation (see, Agora (2017)). Key features will include:

• A large share of renewables, often small-scale and connected to the distribution grid: More than three million residential rooftop solar PV systems are already in place in Germany. Distributed generation needs to be integrated into the electricity system, with system operators able to remote-control their output.
• Distributed battery storage: Today, over 80% (6 GW) of Germany’s installed battery storage is owned by private homes. When managed smartly, distributed batteries can facilitate system integration of solar PV and other distributed generation technologies.
• Electrification of the heating and cooling sector: 1.9 million heat pumps were installed in Germany in 2024. Germany is planning to install 500,000 heat pumps every year, with a cumulative target over 6 million by 2030. Operating these heat pumps in a system-friendly manner will help minimise costs for distribution grid upgrades.
• Electrification of the transport sector: By 2030, Germany plans to have 15 million electric vehicles on its roads, compared to 1.6 million in 2024. Integrating these vehicles in the power sector requires the development of smart charging and vehicle-to-grid solutions (using the electriv vehicles as aggregated battery storage capacity).
• Markets for distributed generation: Currently, distributed generation is incentivised via specific support mechanisms that are part of the overall German electricity market. Additional mechanisms for decentralisation, such as peer-to-peer energy trading and local energy markets, could still be established in Germany.
• Flexible industrial demand response: Industrial consumers represent a significant share of electricity demand. Through demand response programmes, industries can shift their electricity usage to periods of high renewable generation or lower grid demand to reduce strain on the grid, minimise curtailment of renewables and lower system costs. Germany will need to expand the range of incentives and technologies available to enable flexible industrial demand response at scale.
• Smart grid infrastructure: Advanced metering infrastructure and the roll-out of smart meters are pre-requisites for more decentralisation. Germany is still lagging behind in this area.

There is an emerging consensus that renewables-based (“green”) hydrogen is crucial for climate neutrality but secondary to direct electrification.¹⁰ The bulk of the German decarbonisation challenge can be met by means of energy efficiency measures and renewable electricity. However, there are several sectors, particularly heavy industries such as cement and steel production and certain branches of the chemicals industry, which cannot be electrified. These sectors will likely need to be decarbonised via green hydrogen production and storage, or via other molecules such as green ammonia.¹¹

The most relevant applications for green hydrogen use in Germany are for industrial ones such as steelmaking and basic chemicals. In the electricity sector, green hydrogen is also expected to play an important role, particularly as a seasonal storage solution for “hydrogen-ready” gas-fired power plants, with green hydrogen replacing fossil gas as fuel during the 2030s. While Germany is expected to be able to meet some of its demand for green hydrogen domestically, based on current estimates about two-thirds of demand will need to be imported from other European countries via pipeline or as hydrogen derivatives from over-seas markets via ships.