The merit order effect of wind and photovoltaic electricity generation in Germany 2008–2016: Estimation and distributional implications

Generation from renewable energy sources in Germany has experienced a considerable uptake in recent years. Mainly responsible for this development is the German Renewable Energy Sources Act (Erneuerbare Energien Gesetz, EEG). This paper considers redistributive implications of the EEG for different electricity consumers. Using time-series regression analysis, we show that electricity generation by wind and PV has reduced spot market prices considerably by 6 €/MWh in 2010 rising to 10 €/MWh in 2012. We use these results to build a near-term forecasting tool for merit order effects, projected to reach 14-16 €/MWh in 2016. On the other hand, the costs of the EEG are passed forward to consumers in the form of a surcharge. Our findings highlight significant redistributive transfers under the current design of the EEG. In particular, some energy-intensive industries are benefiting from lower wholesale electricity prices whilst being largely exempted from contributing to the costs of the scheme. We also highlight implications of our results for other areas for reform of the EEG, such as adequate remuneration mechanisms that ensure efficient operation and investment decisions are made under the scheme. More generally, these findings suggest that policy makers need to integrate distributional assessments into policy design and implementation. - Highlights: • The German Renewable Energy Sources Act (EEG) has important distributional impacts on different electricity consumers. • Likely wealth transfers from households and small business to energy-intensive industry. • Merit order effects of around 10 €/MWh in 2012 are set to rise to 14–16 €/MWh in 2016. • These effects likely overcompensate exempt industry for contribution to cost of the EEG. • Implications for short- and long-term reform of the EEG and the design of renewable energy policy in general