Agile Energy Systems: Global Distributed On-Site and Central Grid Power [2 ed.] 008101760X, 9780081017609

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AGILE ENERGY SYSTEMS

AGILE ENERGY SYSTEMS Global Distributed On-Site and Central Grid Power Second Edition

WOODROW W. CLARK II

Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, Netherlands The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, United Kingdom 50 Hampshire Street, 5th Floor, Cambridge, MA 02139, United States © 2017, 2004 Elsevier Ltd. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-08-101760-9 For information on all Elsevier publications visit our website at https://www.elsevier.com/books-and-journals

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CONTRIBUTORS Samantha Bobo Independent writer Ted Bradshaw* Woodrow W. Clark II Managing Director, Qualitative Economist, Clark Strategic Partners Melody Rong Independent writer Tor Zipkin Independent writer

*Deceased

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OVERVIEW In 2004 this book first came out with Ted Bradshaw and I as the coauthors. It was just after the recall of California Governor Gray Davis in the fall of 2003. Then Arnold Schwarzenegger was elected California Governor in early Oct. 2003 and took office the next month (Nov. 2003). Professor Ted Bradshaw, my coauthor and I had already started and written an analysis of what happened to California from the deregulation of the state’s central plant power systems from two terms of Republican governors for 16 years before Democrat Davis, who strongly believed that power plants need to be private companies whose supply and demand of energy would be based on classical neoclassic economics (Clark, 2002, 2003, 2004). The results were a disastrous energy crisis that started at the turn of the 21st century in 2000. Throughout the State, there were brownouts and even unforeseen blackouts. Now Elsevier Press wanted us to do an updated version. But Ted passed away at 61 years old in 2006, 2 years after the first edition of Agile Energy Systems came out. He was jogging in Berkeley near where he lived. Ted is survived by his wife Betty Lou and their two boys, Niels and Liam. Clark and Bradshaw met in early 2003 and worked on the book then until Dec. 2003 as they saw it as the review of what California went through due to the change in the state’s energy programs. They were correct. And the book, now over a decade later, remains the best and most accurate account of what California went through with its energy crisis that led to some innovative solutions which have set a new standard for energy and power systems there in California and around the world. The deregulation of the central energy plants resulted in energy problems for California in the last year of the two prior Republican Governors (1998) for 2 terms each of 8 years for a total of 16 years. In 1999 Democratic Governor Davis inherited a series of power outages and problems through 2000– 01. Upon review then, and soon after Clark took office as one of the five Governor Davis’ Energy Advisors, the problem was addressed and solved in the next 3 years. Clark defined his position just after starting in late December, to be Renewable Energy, Emerging Technologies and Economics Advisor. From Feb. through Jun. 2000, Clark got companies that supplied renewable energy in solar and wind power to come to California and help resolve the state’s energy crisis. There were numerous meetings in xi

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Sacramento for wind, solar, geothermal, bioenergy, and others in order to set state standards for these systems throughout the state. The problem for solar and wind, particularly is that they are “intermittent” energy sources, meaning that the sun is not always shinning; nor is the wind always blowing. Hence the ability to secure funding for these systems was difficult. After less than a year of intense meetings with companies supplying both wind and solar energy, changes in getting data on the power generated were done within an hour of the time needed to calculate energy costs and hence funding for the systems. The results were new “tariffs” to measure solar and wind that the CAL ISO (California Independent System Operators) could then use for funding and costs as well as securing California and Federal tax incentives. The results for California and then the other western states led to large solar and wind farms being installed and to the Federal Energy Regulatory Commission (FERC) to use the CA ISO standards for all the 50 states (Clark and Morris, 2002). The Green Industrial Revolution had started (Clark and Cooke, 2015). But there were other issues and concerns that arose. One was the “illegal” behavior of some of the new market-based energy companies that came to California (e.g., CA) in the late 1990s. Many of these companies provided questionable data and information about their energy power generation and systems. When Clark and then others saw data from firms and confirmed as valid by CPA firms for number like 1 + 1 ¼ 7 we were disturbed and started a legal investigation. One of those companies was ERON. But there were others too. Today, far more oversight and supervision of these and other companies resulted. However, the main issue remained: how can CA have central power plants, but also on-site or distributed power systems too for solar, wind, and other renewable energy sources? The issue was to provide economic and technological support. Yet the reality of it was (and still is) opposition from central power companies that their income levels would be diminished if on-site power is allowed. Hence a number of regulatory decisions had to be made and implemented. The issue for CA and other US states is now the same for other nations around the world: both central power and on-site energy systems need to be the key to providing energy, especially replacing power from nonfossil fuel sources. Why? The future of the earth depends upon what the UN COP21 nations decided in Dec. 2015. Stop global climate change through the use of renewable energy sources which need to be both central power and on-site sources

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of energy. For the world today and its future for our children and grandchildren, climate change must be stopped. This is what Prof Bradshaw and Clark sought to do over a decade ago. And what Cooke and Clark with their books on sustainability and the two last books on The Green Industrial Revolution and then Smart Green Cities with theory, practice, and cases from around the world. The future is already here NOW—2017.

REFERENCES Clark, W.W., 2002. The California Challenge: energy and environmental consequences for public utilities. Util. Policy Elsevier, UK. Clark, W.W., 2003. Distributed generation public policy. Energy Policy Elsevier, London, UK, fall. Clark, W.W., 2004. Distributed generation public policy. Energy Policy Elsevier, London, UK, fall. Clark, W.W., Cooke,G., 伍德罗•克拉克,格兰特 with Jin, A.J., Lin, C.-F. 库克,金安君, 林清富, 2015. Green Industrial Revolution in China (Mandarin). Ashgate and China Electric Power Press. Clark, W.W., Morris, G., 2002. Policy Making and Implementation Process: The Case of Intermittent Power. International Energy Electrical Engineers (IEEE), August 2002. http://grouper.ieee.org/groups/scc21/1547/index.html.

ABOUT THE AUTHOR

WOODROW W. CLARK II MA3, PhD Clark is an internationally recognized and respected expert, author, lecturer, public speaker, and consultant on global and local solutions to climate change. His core advocacy is in the economics for smart green communities. During the 1990s, he was Manager of Strategic Planning for Technology Transfer at Lawrence Livermore National Laboratory (LLNL) with the University of California and the U.S. Department of Energy. While at LLNL, he served as one of the contributing scientists and experts for the United Nations Intergovernmental Panel on Climate Change (IPCC), which was awarded the 2007 Nobel Peace Prize. He chaired the first Research Team for the UN FCCC. From 2000 to 2003, Clark was Advisor, Renewable Energy, Emerging Technologies & Finance to California Governor Gray Davis. In 2004 Clark founded, and manages Clark Strategic Partners (CSP), a global environmental and renewable energy consulting firm using his political-economic expertise to guide, advise, and implement public and private projects advancing sustainable, smart green communities as well as colleges, universities, shopping malls, office buildings, retirement centers, hotels, as well as resorts and film studios. From 2015 to 2017, Clark teaches courses at University of International Relations (UIR) in Beijing. And was appointed (Jul. 2016) to be a member of the Editorial Board for the Energy review journal in China. Dr. Clark was selected to be a member of the UN B20 Finance Task Force supported in

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2016 by China. Then in 2017, asked to continue on the UN B20 Task Force now retitled Finance and Infrastructure and supported by Germany. Clark has published eleven books and over 70 peer-reviewed articles, which reflect his concern for global sustainable communities. Recent authored and edited books are The Next Economics (Springer, 2012) and Global Sustainable Communities Handbook (Elsevier, 2014). In addition, his latest coauthored books, with Grant Cooke, are The Green Industrial Revolution (Elsevier, 2014), China’s Green Industrial Revolution (in Mandarin, 2015), and Smart Green Cities (Routledge, Feb. 2016). In 2014, building on his mass media background (Clark Communications, 1980s), he founded Clark Mass Media Company (CM2C), which specializes in documentary; education; and dramatic series on economic, political, global climate, and social issues. Clark earned three separate masters degrees from different universities in Illinois and his PhD, University of California, Berkeley. He lives with his family in Southern California.

INTRODUCTION This book is organized in three sections. The first section looks at the California energy crisis of 2000–01 in the context of global restructuring of the electricity industry. Five core concepts explain what changed leading to the problems that disrupted the electrical system in California (and to some degree in other states and nations) and that set the perspective on alternatives for crisis resolution. The second section develops these strategies for a sustainable future by setting out the criteria for a sustainable energy system and by showing how the network of suppliers, transmitters, and distributors can create a viable alternative system that relies on renewable and dispersed technologies. The theme of this book is that the electrical power systems in advanced countries are in transition. We would argue that these transitional energy systems foretell the future for developed as well as developing countries. Furthermore, the problems with power systems are also the problems for social and financial institutions who are asked to support the people and organizations or companies responsible for the reliable distribution of power to all citizens. Multinational banks and organizations must create policies and programs for energy systems in developing and third world nations which are based upon the learned successes of the industrial nations. For ease of analysis, consider the transition in the energy sector to three stages: 1. Vertically integrated utility systems. The model electrical utility that evolved from the first development of electrical systems around the end of the 19th century until the first major energy crises of the early 1970s was self-contained, vertically integrated systems that included generation, transmission, and final distribution to consumers. In this system the larger producers had efficiencies of scale that led to consolidations, and longdistance transmission grids were established to balance loads and sources of energy in large regions. In the traditional vertically integrated utility, demand continued to grow, and technological improvements meant that new larger power plants were more efficient and cost effective than the average installed capacity of the utility. The system was controlled and planned within a single company which had responsibility for assuring adequate supply for all needs in its service area, and it was subject to state regulation on a “return on investment” basis which assured private investors reasonable returns with relatively small risk. xvii

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2. The transition phase. Beginning in the early 1970s the vertically integrated system started to meet its limits and a new model started unfolding in an uncertain manner. For a number of reasons during the 1970s, costs of generation no longer were lower on new power plants, fuel costs rose, and alternative generation technologies including conservation became more competitive. During this period, environmental regulations more strongly determined technology, cost, and location of power plants. The system became more complex and out of control, with deregulation coming as an experiment to manage the uncertainty. We are currently in the transition phase in the United States while the EU and now Asia, with their old central power systems are being dismantled to different degrees depending on local conditions, economics, and policy directions such are more renewable energy from nonfossil fuels and nuclear power. 3. Agile Energy System. The third stage is what we are calling Agile Energy because it responds to the challenges of the new economy in both a sustainable and civic-minded way. The agile energy stage is emerging, though it is not fully developed nor understood. Neither is its implementation likely to proceed quickly, in spite of its logical validity and its inevitability in the long run. The foundations of the emerging system are technological and economic, and supported by a growing political and civic concern for more accountability of the power system. The components of agile energy systems are greater reliance on dispersed and renewable sources of energy, using new technologies, and recognizing the civic role in promoting them. It is based on conservation and power management, with greater options for closer linkages of producers and consumers, with open access through a regulated grid. Complexity of the system is seen as an asset rather than a limitation, and neoclassical economic models are replaced with new models that look at community markets and impacts. In the agile energy model, environmental and economic development agendas are consistent with efficient power production, not a cost. The Chapter 1 looks at the roots of the California power crisis in order to show how the traditional model ended and to show that what went wrong as an example of what is challenging electricity systems elsewhere (Clark, 2003a,b, 2004). Chapters 2–6 examine these same problems in the United States, EU, Asia, BRIC (Clark, 2008; Clark and Isherwood, 2009, 2010) nations, and developing areas of the world in order to show how traditional energy utility structures in other places are experiencing the end of the traditional central plant power system model that depended primarily upon fossil fuels (e.g., oil, coal, natural gas, and nuclear power). The purpose of these chapters is not to point blame (there is plenty to go around), but to

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learn the lessons of the past and to put in perspective the fact that while predictable, the current global energy crisis: (a) has deep economic ideological roots and (b) has resulted in a rapidly changing energy infrastructure system. The five overlapping core ideas that will be introduced in these chapters get interwoven as both an explanation of what went wrong, a framework for understanding the complexities of one of the largest and most critical technical systems developed by any society, and a policy economic roadmap to the future. The first core idea presented documents the concentrated energy infrastructure to a dispersed or distributed on-site power system. California’s early experiments with dispersed energy production (solar and others) got overtaken by policy decisions to create a concentrated system (solar and wind “farms”) tightly tied together by a centralized energy grid have created a high level of vulnerability (energy brown and black outs) that made an energy crisis nearly inevitable and system security nearly impossible to assure. Hence further chapters such as Chapters 3 and 10 document interdependent roles of public regulation and private economies, and how the misguided efforts at deregulation led to the violation of the public trust. These chapters are critical because the new structure set up by deregulation was the precipitating cause of the energy crisis. Actually deregulation was a faulty response to pressures on the electrical power systems from changing technology and markets that got manipulated into an unworkable system. Chapter 7 provides technologies from over a decade ago and now even more that provide cost-effective “green” technologies, which are significant for a growing economic and business sector in CA and now other states and nations (Clark, 2007a,b, 2008). Hence, a comparison with the municipal utilities in CA, which did not deregulate provides an appropriate perspective. In Chapter 9, the limitations are shown due to the conventional neoclassical western economic model. This Adam Smith-based ideology is not only a limited economic theory but is only theoretical and never been implemented. The narrow set of economic values dominated the policy process that blind corporate officials and government leaders to an accurate assessment of their actions as well as causing them to miss obvious positive opportunities. The core idea in Chapter 9 draws on complexity theory to help us understand how information was vulnerable to unprecedented misinterpretation; such as how rapid swings in energy availability and price caused large effects from small changes, how undeterminable forces led to surprising outcomes, and how rapidly changing political agendas aggravated the conditions they were supposed to stabilize. Finally in Chapter 9 and then Chapter 10, we build on the economic critiques that undermined the neoclassical analysis of the energy system

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and replace that model with a new understanding of interactionism and its role in the flexible energy system of the future. The last of the core ideas is then revisited where we look at the economic development implications of the future development of an agile power system. To conclude the book we consolidate some of the potential of the hydrogen economy and provide a roadmap to a hydrogen future. We end the book, presenting a philosophical argument for taking action now to achieve the sustainable future. The outline of the book is represented by the following chapter matrix (see later) where we outline not only the themes discussed in each chapter but also the core ideas. We see a significant link between these themes and core ideas. Our purpose is diagramming the book in this manner is to both exhibit to the reader a very straightforward way in which to understand our approach, but even more importantly to demonstrate the way in which a future energy market can be created that on the supply side has diverse clean fuel, environmentally sound, robust systems, distributed networks, and economically profitable. To accomplish the transformation of the energy systems in any society requires public and private competitive collaborations. The entire volume is dedicated to that end.

Matrix of Chapters: The Core Concepts of an Agile Energy System Chapter 1. The End of the Old Order: The Roots of Reorganization Chapter 2. The Green Industrial Revolution (GIR) Vertically integrated (1900–72)

Transition and deregulation (1973–2001)

Flexible or Agile Energy System 2002—future

On-site distributed energy Technological factors The GIR means systems: the cases in EU, leading the change from “Green” German and Nordic Nations. centralized generation Technologies and How the on-site and central with transmission to the businesses power gird are agile and breaking up the system integrated (Chapter 4) (Chapters 3, 7, and 8) From return on investment New frameworks for finance, Global Public business development, and regulation to the Government oversight to replace old deregulation debacle; Policy and regulatory scheme; focus on myths, experimentation Regulations investment for public good (Chapters 4 and 5) and civic choice (Chapters 9 and 10) Continued

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Matrix of Chapters: The Core Concepts of an Agile Energy System—cont’d Chapter 1. The End of the Old Order: The Roots of Reorganization Chapter 2. The Green Industrial Revolution (GIR) Vertically integrated (1900–72)

Transition and deregulation (1973–2001)

Flexible or Agile Energy System 2002—future

The problem of neoclassical Global energy interconnections. How the UN and G-20 economic models in have send (via B-20 Task energy systems, which Force Commissions) the give rise to market interconnection of global manipulation; the role of energy, smart, and other economic thinking in the infrastructures (Chapters 3 California deregulation and 10) scheme (Chapter 9) System analysis and Planning complexity The impact of growing state planning based on system complexity and better understanding of the problem of mistakes complexity of system; and lack of knowledge in state goals for renewable making trend forecasts. energy, advanced Includes considerations integrated technologies of environment and most make flexible power of story of what happened realistic. Case of China during the crisis. with 5-Year Plans and (Chapters 7–9) economic support (Chapter 4 and Appendix) Economic Understanding the role of Partnership between economy and energy systems. These development electrical systems in the chapters look at the benefits economy and the way to the economy from large users manage policy. flexible energy systems in The deepening the future and ideas about understanding of how this will benefit economic development nations that are developed, implications of the energy BRIC and developing system, conservation, nations (Chapters 3–6) new technologies, and energy crisis (Chapter 9) Economic basis

Chapter 10. Conclusions: Implementing the Smart Green Development Revolution Appendix. AES: Green technology case for on-site and central grid systems

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REFERENCES Clark II, W.W., 2003a. California energy challenge: solutions for the future. Energy Pulse: Insight, Analysis and Commentary on the Global Power Industry. January. Clark II, W.W., 2003b. Point and counter-point: de-regulation in America. Util. Policy. Elsevier, Fall. Clark II, W.W., 2004. Distributed generation: renewable energy in local communities. Energy Policy. Elsevier: London, UK, Fall. Clark II, W.W., 2007a. The green paradigm shift. Co-Gener. Distrib. Gener. J. 22 (2), 6–38. Clark II, W.W., 2007b. Eco-efficient Energy Infrastructure Initiative Paradigm. UNESCAP, Economic Social Council, Asia, Bangkok, Thailand. Clark II, W.W., 2008. The green hydrogen paradigm shift: energy generation for stations to vehicles. Util. Policy J. Elsevier Press. Clark II, W.W., Isherwood, W., 2009. Creating an energy base for inner Mongolia, China: “the leapfrog into the climate neutral future”. Util. Policy J. Clark II, W.W., Isherwood, W., 2010. Leapfrogging energy infrastructure mistakes for inner Mongolia. Util. Policies J. (special issue).

FURTHER READING Anderson, D.V., 1985. Illusions of Power: A History of the Washington Public Power Supply System. Praeger, New York, NY. California Energy Commission, 2000. The role of energy efficiency and distributed generation in grid planning. Sacramento: State of California, report P300 00 003. Clark II, W.W., 2002. The California Challenge: energy and environmental consequences for public utilities. Util. Policy. Elsevier, UK. Clark II, W.W., Cooke, G., 2014. The Green Industrial Revolution. Elsevier Press. December. Clark II, W.W., Cooke, G., 2016. Smart Green Cities. Routlege Press. Clark, W., Lund, H., Clark, W., Lund, H., 2008. Integrated technologies for sustainable stationary and mobile energy infrastructures. Util. Policy 16 (2), 130–140. Faruqui, A., Chao, H.-p., Niemeyer, V., Platt, J., Stahlkopf, K., 2001. California syndrome. Power Econ., 24–27. Governor Pete Wilson, 1996. De-regulation press release, Sacramento, CA, September 23. LaPorte, T. (Ed.), 1991. Responding to Large Technical Systems: Control or Anticipation. Kluwer Academic Publishers, Boston, MA. Lovins, A.B., 1976. Energy strategy: the road not taken. Foreign Aff., 65–96. Munroe, T., Baroody, L., 2001. Lessons From California’s Electricity Crisis. Occasional paper, 34th ed. International Research Center for Energy and Economic Development, Boulder, CO. Summerton, J., 1994. Changing Large Technical Systems. Westview, Boulder, CO. Summerton, J., Bradshaw, T.K., 1991. Toward a dispersed electrical system: challenges to the grid. Energy Policy, 24–34. Williams, J.C., 1997. Energy and the Making of Modern California. Akron University Press, Akron. Woo, C.-K., 2001. What went wrong in California’s electricity market? Energy 26 (8), 747–758. Yucca Mountain, Wikipedia, 2017.

CHAPTER ONE

The End of the Fossil Fuel Industrial Revolutions: The Case of California in the United States Woodrow W. Clark II, Ted Bradshaw* Managing Director, Qualitative Economist, Clark Strategic Partners

THE VERTICALLY INTEGRATED UTILITY Several basic structural features of the California energy system distinguish it from other state and national systems. First, California has a combination of three major investor-owned utilities that supply most of the state, including Pacific Gas and Electric and Southern California Edison, both among the nation’s largest utilities, and the smaller San Diego Gas and Electric. Several smaller private utilities serve some rural parts of the state. In addition, the state is served by 33 public or municipal utilities, mostly owned by small- and medium-sizes cities, but also including two very large municipal utilities in Los Angeles and Sacramento. The private utilities are regulated by the California Public Utilities Commission (CPUC), which does not have jurisdiction over all the public utilities in the state. Prior to the mid-1980s the utilities were governmentregulated monopolies with fully integrated services—they generated most of their own power, had long-distance transmission lines to link their service area to production sources, and controlled final distribution to customers. With the exception of Southern California Edison, the public utilities also supplied gas for generation (and residential and industrial consumption) within their service area. California was an early participant in the growing electricity industry shortly after systems were first developed in the late 1800s on the east coast in New Jersey and New York City, especially by Thomas Edison. At that time a number of innovators and entrepreneurs demonstrated electricity to an amazed population. One of the first demonstrations of electricity was a single electric light bulb Father Neri of San Francisco’s Saint Ignatius College placed *Deceased Agile Energy Systems http://dx.doi.org/10.1016/B978-0-08-101760-9.00001-5

© 2017 Elsevier Ltd. All rights reserved.

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in his office window in 1871. A decade later San Jose built a 237-foot tall light tower with six arc lamps in order to light the entire community. While it was a failure as a lighting project, it succeeded in publicizing the potential of electricity and cities rapidly followed with increasingly large and sophisticated demonstration systems (Williams, 1997, p. 170). The first real commercialization of electricity in California, however, grew out of gold mining that started before the American Civil War in the 1860s. Initially gold mining was in northern California, where large hydro works were then built to conduct hydraulic mining, dams, and to process timber. As the goldfields became depleted, entrepreneurs tapped the water flows throughout the Sierra mountains to generate electricity, first for nearby towns and remaining mining operations. With the invention of alternating power and the construction of high-voltage power lines that minimized transmission losses, electricity from the mountains was brought to cities along the coast, at distances of up to 100 miles or more. These projects were virtually all investor owned and succeeded because of the high cost of alternative fuels for boilers, as California had no local coal. The key at this time was that the early systems were privately owned and firms rapidly merged or were bought up so that the remaining large utilities achieved economies of scale. A few cities either had access to cheap hydropower via dams or sought to eliminate corruption, and became municipal utilities. State regulation of utilities was initiated early to prevent abuse of monopoly power, but the utilities pursued strategies of consolidation and growth in an era with rapidly growing generation efficiencies and declining real prices. By the 1930s Pacific Gas and Electric and Southern California Edison dominated in the state and they were well-established vertically integrated utilities with generation, transmission, and distribution tightly coordinated to serve the state. Los Angeles, with access to hydropower from tapping the eastern Sierra water flowing into Owens Valley built its municipally owned electrical system as part of its water project (Brigham, 1998). This system, privately owned, large, and vertically integrated, is a prototype traditional utility for the mid-20th century. For the most part, it worked well, especially considering the growth pressures California was having after World War II. California electricity systems expanded rapidly during a period of unprecedented population and economic growth. For example, from just after statehood until 1970 when the population in the state reached 20 million persons, the state’s long-term population growth was the fastest sustained population growth in the world. The population doubled every 20 years for a 120-year period, with the consequence that during each 20 years there were twice as many people, twice as many houses, and more than twice as many jobs.

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A doubling of the electrical infrastructure every 20 years could be expected simply on the basis of population, and more could be expected due to increasing per capita demand. New plants could be built with little risk since the population and economy were growing so fast, and due to the technological advances in this period, new plants were larger and more economical than older ones, which were reserved as peaking plants to be run only on hottest summer days. After 1970, the rate of growth decreased but the people continued to come to the “Golden State” due to the Beach Boys in Southern California and the “Hippies” to Northern California. The population grew by 10 million persons in the next two decades to reach 30 million by 1990, largely migrants from other states and around the world, especially Mexico. At the start of the 1970s most electricity in the state was generated from hydro and oil combustion, and many utilities were proposing construction of large nuclear power plants because of supposed cost savings. Williams (1997) describes the background and history of the California power industry. There is no need to review that background herein. Instead, it is far more productive to think of the energy sector in later part of the 20th century. But oil shortages due to the OPEC embargo necessitated conversion of the oil plants to natural gas and a growing interest in renewable sources began in the 1980s. While blackouts were not experienced then, the “first” energy crisis set the context for the current crisis. Like the current situation, the perception in the mid-1970s was that there was a significant undersupply of electricity generation capacity, and expansion was limited by regulation. Expanding the supply of electricity through the 1970s was perceived as a regulatory problem, with sitting delays slowing construction of needed power plants. The era of the concentrated vertically integrated utility was well established into the 21st century. The significance of the oil embargoes in the early 1970s and 1980s was felt in California as elsewhere.

Nuclear Power Energy Plants Nuclear plants were widely considered to be cost-effective sources of power during the postoil crisis period. However, in California sitting plants ran into a number of regulatory barriers, starting in 1961 with a proposed nuclear power plant on Bodega Head, just north of San Francisco (Williams, 1997, pp. 305–307). Unfortunately for PG&E this site was just off the San Andreas Fault and posed unknown seismic problems. By 1976 the Nuclear Regulatory Commission ordered PG&E’s small power plant on

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Humboldt Bay closed over nuclear safety issues, and earthquake concerns were responsible for rejection of applications to build three additional plants. In the mid-1970s an active fault was also discovered just off shore from the PG&E Diablo Canyon nuclear plant, which was nearing completion. These problems were serious setbacks for nuclear power and diverted much planning by utilities for expanded supply. Concerns over nuclear safety at plants and unresolved issues with the disposal of nuclear waste led a number of environmental organizations to place Proposition #15 on the statewide ballot in 1976 that would increase safety standards and require a safe disposal of nuclear wastes. The standards were strong enough that if it passed it would have effectively stopped nuclear plant construction for some time. This proposition was hotly debated and raised issues of cost, safety, need, and alternatives, in what was an emotional but highly educative campaign. In the end, the proposition lost by a two-to-one margin, but the debate (and preemptive state laws) effectively raised the bar on nuclear plant construction, without banning it directly. The major policy impact happened prior to the election when the legislature, with support from all sides, passed three nuclear safety bills that were “less draconian,” placing a moratorium on state approval of nuclear plants until there was a federal solution to the nuclear waste disposal problem. As of today (2016), there is no such solution, and consequently the state law had the same effect as if the proposition passed, effectively barring new nuclear power plant construction (Williams, 1997, p. 307). Today (2016), all three of the nuclear power plants have been closed by the State of California governors and legislative offices. The problem with nuclear power was and always has been both safety and waste storage from the nuclear power generated. Even the Lawrence Livermore National Laboratory (LLNL) that had been supporting nuclear power starting in World War II along with Los Alamos National Laboratory had found a safe and secure place for nuclear waste since 1957. The Yucca Mountain in Nevada as the storage area for nuclear waste but was authorized by the Nuclear Waste Policy Act (1982) to store nuclear active waste. Then over the next two decades it was discovered to have water running under the nuclear waste area but the US Congress continued to support it until 2008 when the management and operating contractor were changed and over 800 employees were laid off. While the management has changed, growing opposition to the site has resulted in lawsuits with no resolution. The site by 2008 was one of the most studied pieces of geology in the world (Yucca Mountain, Wikipedia, 2017).

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Energy Growth Issues The scrutiny initiated by the nuclear power plans opened other parts of the vertically integrated utility to public information and concern. It is impossible to identify one event that triggered the breakdown of the traditional utility model, a transformation that is still ongoing. But during this period, the problems of the size and scale of the electrical system led to both further growth and increasing conflicts within a growing affluent and environmentally conscious population. As a consequence of increasing regulation for environmental impacts of power plant construction, utilities resorted to innovative solutions that linked utilities into joint ventures to construct plants where regulations were weaker, typically out of state. The utilities during the 1970s took advantage of new higher voltage transmission technologies that allowed longer distances between supply and final demand. The large utilities expanded interconnections with other utilities within California and out of state in order to achieve some economies by transferring power north and south depending on season, weather, and emergencies. Transfers with the Pacific-Northwest (Bonneville Power primarily) occurred for the same reasons. But as environmental regulations were becoming more strict during the 1970s, all utilities in California looked to obtain larger shares of power from plants sited out of state, often Nevada and Arizona, but also as far away as the Four Corners region (where the four states of Utah, New Mexico, Arizona, and Colorado connect). The utilities would purchase shares in new coal and nuclear power plants able to be built in these areas, and they would collaborate on building transmission lines to bring the power to urban areas where it was needed. Transmission became a more significant part of each utility’s operations. At the same time, utilities continued trying to speed their sitting of power plants which were being held up by regulatory barriers. Utilities complained that they had to get over 30 permits from different agencies to build a plant, and they were looking to consolidate and simplify regulatory approvals. On the other hand, the environmental movement was fortified by successful legislation such as the California Environmental Quality Act (CEQA) which was passed in response to the Santa Barbara oil spill (an offshore drilling catastrophe). Environmentalists were seeking stronger legislative and regulatory control over power plants, especially nuclear, as well as plants that would reduce dependence on fossil fuels.

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Between 1970 and 1973 legislative action around power plants reflected these tensions and generated a number of important studies, plans, and commissions. Based on one study, the California Public Utilities Commission (CPUC) urged rapid expansion of the state’s generating capacity, especially through nuclear plants. Eleven proposed sites had state approval by the early 1970s and others were being proposed by the utilities. The CPUC generally approved utility for long-range generation need forecasts that would increase generating capacity from 35,000 MW to about 105,000 MW by 1993, nearly a tripling of capacity, and the CPUC assumed that half would come from nuclear. On the other side, a Rand study (Mooz et al., 1972 as quoted in Williams, 1997, p. 429) showed that steps could be taken to reduce the rate of electricity demand growth and that conservation measures would reduce the need for more power plants. Moreover, the Rand study advocated renewable resources such as geothermal and solar. With energy as an increasing concern in the state, Senator Alfred Alquist and Assemblyman Charles Warren proposed legislation to resolve the conflict between energy development and environmental protection (Williams, 1997, p. 310). However, their initial bills, which passed through their respective state legislative houses, were sharply divided along utilityenvironmental lines. Eventually, Alquist changed his bill to the environmentalist friendly version sponsored by Warren, and in the process created the California Energy Resources Conservation and Development Commission (CEC) with responsibility for sitting, forecasting, conservation, and development of alternative electricity technologies. The Arab oil embargo added pressure for a solution as this bill was being negotiated, but it did little to assure that it had a clear mandate. Thus the CEC was born with conflicting agendas. Warren wanted the CEC to slow the growth in state energy consumption while utilities hoped it would be the one-stop power plant sitting authority they wanted. During its first few years, the CEC was involved in issues over nuclear power and Proposition #15, but gradually started focusing on supply and demand forecasts. Williams concludes that this leadership quickly altered the regulatory environment. A new energy paradigm began to emerge in California. Energy industries found themselves confronted and embarrassed by a dedicated and organized activist population. With the prodding of environmental organizations, the regulatory persuasion of the CPUC and CEC, and legislative insistence from the state and federal governments, California energy providers began to respond to the interrelationship between energy and the environment in

The End of the Fossil Fuel Industrial Revolutions

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new ways. The integration of energy conservation techniques and alternative energy resources into the existing energy systems began to alter California’s energy landscape in earnest during the 1980s, revealing radial new possibilities for meeting energy needs (Williams, 1997, p. 319).

Revised Electricity Demand Estimates The shortages and fuel changes necessitated by the oil embargo led to some technological changes, but the most significant thing to come out of the oil embargo period was new state roles in oversight of the energy industry and especially electricity. The creation of the California Energy Commission (CEC) supplemented the California Public Utilities Commission (CPUC) in regulating energy in the state, and the presence of the two organizations in dynamic tension led to results that were not predictable. Unlike the Public Utilities Commission, the new Energy Commission was not limited in its oversight to just investor-owned utilities; it looked at municipal utilities as well. But its powers were significantly different as it did not have authority over prices, profits, or business operation as did the CPUC or the municipal governments which ran public utilities. What the Energy Commission was established to do included four things: First, to regulate of power plants, including simplifying the multiple permits required to build a plant, promoting and locating plants where they are needed, and coordinating the sitting of multiple plants. Second, the CEC was to get better estimates of the demand forecasts of the different utilities and to develop a consistent methodology so that demand estimates of the different utilities could be reconciled. Third, the CEC was to evaluate and promote to the extent feasible alternative technologies such as wind and geothermal, including mapping the availability of resources. Finally, the CEC handled conservation and demand management. At the time the CEC was founded, the regulated utilities operated on a return-on-investment basis, with their rates being set to assure investors a fair (and not excessive) profit. Power generation efficiencies were increasing dramatically during this period, with new plants generating electricity at a much lower cost than old plants. For the most part, utilities earnings were calculated on the basis of their investment in generation, transmission, and distribution, so increased profit came from expanding their system and selling more electricity. Since demand had historically been increasing rapidly, they looked to expanding their production as a given, and not expanding rapidly enough as a business liability. This model more or less characterized

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the operation of private utilities throughout the United States and most of Europe. Consequently, few questioned utility projections of rapidly increasing demand. However, utilities in the late 1970s and early 1980s failed to recognize that demand was not increasing along the geometrical curve that they had been assuming. Instead, demand was flattening and would continue to do so. Self-interest and a failure to observe a break in trends led to too high estimates of demand and the proposal at this time to construct at least 12 major nuclear power plants at an investment cost of billions of dollars. The CEC in one of its first significant contributions undertook a biennial energy report that included questions about the continuation of this demand curve, and they developed a consistent methodology for forecasting electrical demand. Gradually the utilities accepted the methodology and the much lower estimated demand forecast by the new methodologies. The utilities as a consequence of the new forecasting methodology relaxed pressure to get permits for and complete installation of new power plants, including the nuclear plants on the drawing board. The overestimation of demand in the late 1970s was perhaps the most serious of the essential information miscalculations that threatened the viability of the utilities. The fact that the overestimation of demand was “caught” is an enormous public policy success for the new CEC and it can be credited with saving the state huge supply excesses. However, the old demand forecast methodology still had long-run consequences for California leading to the current crisis because throughout the rest of the nation plants were being constructed based on inflated demand estimates that were not caught. This led to eventual financial disaster for many utilities, especially WPPSS in Washington state that embarked on a program to construct five nuclear power plants. Only one of these plants was completed, with a default of $2.5 billion, and the admission that the Pacific Northwest had such a sizeable surplus of power to last for 10 years (Anderson, 1985, p. 138). This surplus actually ended in 2001, after supplying California for the intervening period. Around the country nuclear plants were abandoned, including Portland’s Pebble Springs plant. Others produced power that essentially had no market. Thus in the 1970s the CEC rethinking of the utility electricity demand led to reductions in the estimated need for new power plants. Ironically, state creation of the Energy Commission was designed to help facilitate the sitting of power plants but its largest accomplishment was to help the utilities to realize that investment in any power plants was unnecessary and to abandon plans for at least 12 nuclear plants. These reduced demand forecasts turned

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out to be right, saving California utilities from billions of investment in unnecessary power plants through the late 1970s and early 1980s. The size of the investment avoided by the revised demand forecasts would also prove significant because of escalating nuclear plant construction costs, as illustrated by the Diablo Canyon nuclear power plant on the coast near the southern end of the PGE service area. This plant, initially estimated to cost $300 million, ended up costing $5.6 billion after the discovery of an earthquake fault undersea a few miles from the plant. Mistakes in retrofitting the plant also escalated costs, but the whole experience showed that nuclear facilities were greatly more expensive than initially believed. However, lucky California utilities were that they aborted construction on their 12 plants, other utilities throughout the nation forged ahead with construction at this time. Throughout the 1980s, then, plants were being built to meet demand that did not materialize, especially Bonneville and other western state utilities. The same happened throughout the east. Several utilities went bankrupt over these plants and others were in weak financial shape. The result of these mistakes was that a huge surplus of electricity was available through the 1990s at very low rates.

PURPA History and Contracts Another development during the 1980s contributed to the background for the 2001 electric power crisis in California, this time involving the federal government. In 1978 the Federal government passed legislation known as the Public Utilities Regulatory Policies Act (PURPA), as part of President Carter’s energy plan. A small part of this legislation became big in California (Summerton and Bradshaw, 1991, p. 26). The overall plan aimed to reduce dependence on fossil fuels by stimulating conservation and promoting new technologies for electricity generation. PURPA guidelines set favorable conditions for new suppliers, especially small producers, to enter utility markets with new technologies. Under PURPA the utilities were required to (a) purchase available power from small ( 5 MW Plants 500 kW–5 MW Plants < 500 kW

500

1.200

400 900 300 600

200

300

100 0

EEG 2000

EEG 2004

EEG 2009

2012*

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

0

Installed electrical capacity (MW)

German Biomass Support for biomass utilization was included in the EEG with the Renewable Energy Heat Act (EEW€armeG), with the goal of achieving 8.9% of Germany’s electricity consumption coming from biomass by 2020. Under the 2004 and 2009 EEG schemes, a premium was given to solid fuel biomass technologies, this changed in 2012 with the creation of a feed-in tariff vs premium. Feed-in tariffs (FiT) have varied depending on the capacity of the power plant and the type of biomass used, with higher subsidies available to power plants of lower capacity, helping incentive distributed systems (Sauter et al., 2013).

EEG 2012

Number and installed electrical capacity of biomass power plants using solid biomass larger that 10 kW in Germany from 1999 to 2011 (2012 was a forecast) (Reproduced with permission from Sauter, P., Witt, J., Billig, E., Thra€n, D., 2013. Impact of the Renewable Energy Sources Act in Germany on electricity produced with solid biofuels—lessons learned by monitoring the market development. Biomass Bioenergy 53, 162–171).

The most recent update to the EEG in 2014 again changed state support and regulation for biomass. This includes a goal of 100 MW increases in biomass capacity per year, compulsory direct marketing of electricity on the electricity market to ensure biomass production is available for flexible power generation, shifting revenues based on solely a feed-in tariff to the market electricity price plus a market premium (as will be explained later), flexibility premiums, and a shift from high subsidies for raw biomass materials to waste materials. Subsidies are given for plants up to 20 MW (Federal Ministry for Economic Affairs and Energy, 2014d).

Agile Energy Systems

80

Solid biomass consumption (Tg a-1)

9 8

Natural wood

7

Mixed assortments

6

Waste wood

5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EEG 2000

EEG 2004

EEG 2009

Types and amount of biomass used in Germany from 2000 to 2011 (Reproduced with permission from Sauter, P., Witt, J., Billig, E., Thra€n, D., 2013. Impact of the Renewable Energy Sources Act in Germany on electricity produced with solid biofuels—lessons learned by monitoring the market development. Biomass Bioenergy 53, 162–171).

CHP Utilization/German Heating/Renewable Heating Sector Germany currently has the goal of generating 25% of its thermal electricity production from CHP by 2020, with the CHP act (KWKG 2016) enacted to provide government support for the technology. The newest law of 2016 doubles the amount of annual support for CHP instillations, now 1.5 billion euros per year, for both existing and new installations (if noncoal consuming) (Gailfuss, 2016). CHP units are subsidized depending on size by a price/kWh for a specified amount of full load hours: 8 ct/kWh for capacity up to 50 kW, 5 ct/kWh for capacity over 50 kW up to 250 kW, 4.4 ct/kWh for capacity from 250 kW up to 2000 kW, 3.1 ct/kWh for capacity above 2000 kW (Lang and Lang, 2016). Due to low electricity prices seen in Germany’s electricity market, CHP plants no longer supported by the CHP act can receive supplementary funding if above 2 MWs for up to 16,000 full load hours (Gailfuss, 2016). Germany’s Renewable Energy Heat Act (EEW€armeG) was enacted in 2009 and set the goal of supplying 14% of Germany’s heating demand with renewable heat by 2020. This act requires all new buildings to utilize a certain percentage of renewable energy for their heating demands. New buildings can also supply at least 50% of their heating demand via CHP or utilize a district heating network that employs the use of renewable energy, waste heat, or CHP, as an alternative (International Energy Agency, 2015). The Market Incentive Program (MAP) further encourages the development of renewable heating. Under the MAP, private households and small companies can receive grants to install heat pumps, biomass boilers, and solar

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thermal heating systems, whereas commercial businesses and municipalities can receive low interest loans and small grants to install more large-scale renewable heating systems and construct local district heating networks (Federal Ministry for Economic Affairs and Energy, 2016g). German Electricity Grid Currently, Germany has a reliable power grid despite the large amounts of intermittent renewables supplying electricity. This is in part due to flexible gas and coal power plants being able to ramp up and down according to the amount of wind and solar electricity being generated, industrial electricity consumers being flexible with their electricity consumption, as well as an already well-developed electricity grid throughout the country with interconnectors with nine countries: Denmark, the Netherlands, Luxembourg, France, Switzerland, Austria, the Czech Republic, Poland, and Sweden. In 2015 Germany exported 83.1 billion kWh of electricity and imported 33 billion kWh (Federal Ministry for Economic Affairs and Energy, 2016b). However, to ensure the future of Germany has a steady supply of electricity based on even larger amounts of fluctuating renewable energy, many times far away from load centers, grid expansion has been recognized as a priority for the achievement of a successful energy transition. Four pieces of legislation were enacted to meet this goal: the Energy Industry Act (EnWG), the Grid Expansion Acceleration Act (NABEG), the Federal Requirement Plan (BBPIG), and the Power Grid Expansion Act (EnLAG) (Federal Ministry for Economic Affairs and Energy, 2016e). These policies have a variety of functions including prioritizing expansion projects on a state, federal, and cross border level and planning grid expansion on an annual level. In addition, the government enacted the Energy Grid Platform in 2011, bringing together grid operators, the central government, the various state agencies and associations, to work, research, and create proposals for expansion of Germany’s electricity grid. There are currently four working groups: A grid development plan working group focusing on speeding up the planning and approval procedures for grid expansion, a regulation working group focusing on “appraising the regulatory requirements for grid operators and proposing amendments where necessary,” a smart grids and meters working group focusing on development and implementation of a smart grid and updating distribution grids for a successful smart grid, and a systems security working group focusing and ensuring the successful future operation of the electricity grid (Federal Ministry for Economic Affairs and Energy, 2016f) Germany already has a number of planned high-voltage direct current lines throughout and out of the country in the form of interconnectors.

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German Electricity Market Electricity in Germany is currently traded on an exchange market or by “overthe-counter trades,” bilateral agreements between companies and electricity suppliers. The two markets Germany follows are the European Energy Exchange EEX in Leipzig and European Energy Exchange EPEX Spot in Paris. These two markets are day ahead, based on day-ahead bidding, and intraday markets, where bids for electricity production can be placed up to 45 min before generation. Like in Denmark, pricing of electricity is based on the merit order, where generators with the lowest marginal cost to produce and supply electricity; the exchange price corresponding to the most expensive marginal price to ensure electricity demand is met. When there is a disconnect between the predicted electricity supplied and demand in real time, perhaps due to wind forecast errors or unscheduled plant shutdowns, balancing markets are employed. Germany uses a single price zone, where electricity is priced the same throughout the country. Germany’s electricity market is coupled with neighboring countries due to the interconnectors between Germany and the countries physically surrounding it, allowing for international electricity trading (Federal Ministry for Economic Affairs and Energy, 2014b). There have however been some problems in Germany associated with the Energiewende and use of an electricity market, most notably overcapacity in the electricity system and power plants having difficulty making sufficient profits due to low electricity prices. To ensure a secure and costcompetitive supply of electricity based on an electricity system with high penetrations of renewable energy, Germany enacted the Electricity Market Act in 2015, updating the electricity market framework previously employed. This choice to update the electricity market was chosen after wide debate between this policy direction and the creation of a capacity market, which has since been abandoned (Federal Ministry for Economic Affairs and Energy, 2014b). The Electricity Market 2.0 is meant to further guarantee free electricity price formation based on market mechanisms, these being: long-term future markets, spot markets, balancing markets, as well as over-the-counter trades and bilateral contracts. This combination of market mechanisms is meant to ensure sufficient remuneration for capacities of all types, as well as allow for more price peaks. These aspects are to be strengthened by continuing to ensure free pricing of electricity, increasing supervision of the electricity market, and continuing to develop and regulate the balancing energy system and market. To ensure a continued security of electricity supply, the Electricity Market 2.0 will integrate itself deeper into the larger European electricity market, Germany working together with its interconnected neighbors in the

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development of its new electricity market. Germany will no longer focus solely on its national supply output, but take greater consideration of the surrounding countries’ electricity supply as well in the operation of their future electricity market (Federal Ministry for Economic Affairs and Energy, 2016e). A variety of other regulatory and operational measures will be undertaken in the new electricity market, such as revising grid charges to increase demandside flexibility for large-scale electricity consumers, adjusting state taxes and surcharges such as the EEG and CHP surcharge, creating a same national grid charge and getting rid of avoided grid charges for new instillations, making regulation more clear for nonlarge-scale electricity consumers to get involved in the balancing market as well as gradually introduce smart meters to further their demand-side management potential, and requiring TSOs to practice renewable energy peak saving (curtailment) to reduce further grid expansion costs (Federal Ministry for Economic Affairs and Energy, 2014b). The Electricity Market 2.0 will also create a capacity reserve to further increase electricity security and extend the grid reserve. The capacity reserve consists of power suppliers that do not participate in the electricity market and will generate electricity if the electricity market fails to ensure a sufficient supply of electricity. Generators will participate in the capacity reserve if operation on the electricity market is no longer commercially viable, power stations remaining the property of the owners and being dispatched by the TSO should they need be. The grid reserve will be extended to 2023 vs 2017, this grid reserve serving as a way to secure the electricity grid due to regional bottlenecks. The grid reserve is similar to the capacity reserve in that it keeps in operation power plants to ensure electricity supply; however, the grid reserve serves a regional importance and can be shut down when grid expansion is completed and regional grid bottlenecks are no longer experienced (Federal Ministry for Economic Affairs and Energy, 2014b). The Electricity Market 2.0 will gradually shut down lignite coal power plants, comprising of a total capacity of 2.7 GW, starting 2016 (Federal Ministry for Economic Affairs and Energy, 2016e). German RE Policy Germany has supported renewable energy since the 1990s with the creation of a feed-in tariff for wind and solar energy; however, it was not until the 2000s that German renewable energy policy and development took off. The current driver of Germany’s energy policy is the Energiewende, translated energy transition, which began in Jun. 2011. The main target of this Energiewende is to reduce Germany’s CO2 emissions 40% by 2020 from 1990 levels, to phase

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out nuclear energy by the year 2022, and to continue a competitive and secure energy market. The two objectives employed to attain these goals are increasing the use of renewable energy sources, and reducing primary energy consumption and increase energy efficiency. This is to be done via the use of renewable sources and decreases of energy consumption in the electricity, heating, and transport sectors. The Energiewende is supported by a variety of acts, ordinances, funding measures, etc., in order to achieve this. Renewables growing fast Share of gross electricity consumption covered by renewable energy Percent 50 45 40%–45% 40 35 30

27.8 25.4

25

23.7 20.4

20 14.2

15 10

7.7 6.2 6.6

7.6

9.3

10.2

15.1

16.3 17.0

11.6

5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2025

This graph shows the growth of renewable energy in Germany since 2012 (Republished with permission from Federal Ministry for Economic Affairs and Energy, 2015. The energy transition—a great piece of work making a success of the energy transition on the road to a secure, clean and affordable energy supply. Available from: http://www.bmwi.de/English/ Redaktion/Pdf/making-a-success-of-the-energy-transition,property¼pdf,bereich¼bmwi2012, sprache¼en,rwb¼true.pdf.).

The Renewable Energy Sources act, or EEG (Erneuerbare-EnergienGesetz) act was first created in Apr. 2000 and was intended to support wind and solar energy via fixed tariffs, purchaser guarantees, and priority feed in to the electricity grid (Federal Ministry for Economic Affairs and Energy, 2016c) Under this original policy, generators of electricity from renewable energy sources were entitled to receive a fixed remuneration from the transmission system operators for each fed-in kilowatt-hour for a period of usually 20 years (Federal Ministry for Economic Affairs and Energy, 2016h) The act has been updated numerous times to reflect the landscape of renewable development at that specific time. An EEG surcharge on electricity was introduced to cover the costs connected to the funding of renewable energy in Germany. The total annual amount is calculated as the difference between the spending on

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remuneration and premium payments and the income from sales by the grid operators—known as the “differential costs.” The cost difference has to be paid by the consumers and is passed on automatically to their electricity bill (Federal Ministry for Economic Affairs and Energy, 2016h). This governmental support led to a large development of renewable energy that had unintended consequences including negative effects on grid stability and unwanted increases in EEG surcharges. This was a driving reason for the updating of The Renewable Energy Sources Act in 2014, to prevent further rising costs of the EEG while ensuring the competitiveness of energy-intensive industries (Federal Ministry for Economic Affairs and Energy, 2014a). Under the most recent update in 2014, new renewable energy generators will be compensated through the market price for electricity and a “market premium” made up of the difference between the previous fixed feed-in tariff and the average trading price for the specific type of electricity vs through a flat feed-in tariff as was seen before. This is meant to begin the phase out of governmental support for renewable energy, allowing competition to dictate future expansion and market-based pricing of electricity (Federal Ministry for Economic Affairs and Energy, 2016h). EEG surcharge in cent per kilowatt hour 7.0 6.24

6.17

6.0 5.28 5.0

4.0 3.53

3.59

3.0 2.05 2.0

1.0 0.19

0.25

0.36

0.37

0.54

0.70

0.89

1.03

1.16

1.32

0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Hydropower, gases and geothermal energy

Onshore wind power generation

Offshore wind power generation

Photovoltaics

Biomass

Compensation buffer in case of deviations from the forecast

A graph of the rising EEG surcharges since 2000 (Republished with permission from Federal Ministry for Economic Affairs and Energy, 2016d. EEG surcharge in cent per kilowatt hour. Available from: http://www.bmwi.de/EN/Topics/Energy/Renewable-Energy/ 2014-renewable-energy-sources-act,did¼677210.html.).

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Specifically, the reformed Renewable Energy Resources Act of 2014: – Includes an average reduction of renewable energy remuneration by 5 cents/kWh for projects coming online after 2015. Furthermore, for those installing new electricity generation capacity not connected to the grid for their own supply, i.e., self-suppliers will have to pay an EEG surcharge. Self-suppliers installing renewable energy will also pay this EEG surcharge, however it will be reduced 60% (Federal Ministry for Economic Affairs and Energy, 2014a). Solar producers who generate