renewable energy subsidy policies and investments in china the usa and germany a critical and...

Renewable Energy Subsidy Policies and Investments

in China, the USA and Germany

Renewable Energy Subsidy Policies and Investments in China, the USA and Germany:

A Critical and Comparative Analysis

Osama Abdeltawab

Alvierweg 16, 9490 Vaduz, Liechtenstein

+41762126256

[email protected]

FS130212

Effrosyni Panagakou

Fürst-Franz-Josef-Strasse 15, 9490 Vaduz, Liechtenstein

+41766037422

[email protected]

FS120284

Seminar Paper

University of Liechtenstein

Graduate School

Programme: MSc in Banking and Financial Management

Course: Seminar in Renewable Energy Finance (Erasmus IP)

Module: International Corporate Finance

Assessor: Prof. Dr. Marco J. Menichetti

Working Period: 20.02.2014 to 01.06.2014

Date of Submission: 01.06.2014



Table of Contents

Abstract 3

1 Introduction 4

2 Overview in Subsidy Policies and Investments 7

2.1 China 7

2.1.1 Subsidy Policies ........................................................................................................................... 7

2.1.2 Investments ................................................................................................................................. 10

2.2 USA 12

2.2.1 Subsidy Policies ......................................................................................................................... 12

2.2.2 Investments ................................................................................................................................. 15

2.3 Germany 17

2.3.1 Subsidy Policies ......................................................................................................................... 17

2.3.2 Investments ................................................................................................................................. 20

3 China, the USA and Germany: A Comparative Analysis 22

4 Conclusion 24

Reference List 25

List of Abbreviations 28

Annex 29

Affidavit 31

2



Abstract

This paper presents an overview of renewable energy subsidy policies in China, the USA and Ger-

many. It further presents the investments in renewable energy properties in these countries for the past

decade (2004-2013) and establishes a connection between the subsidy and supporting government

policies on the one hand, and the level of investments they trigger, on the other hand. In addition, the

subsidy policies and investments between the three countries are examined under a comparative per-

spective. It is concluded that government subsidy policies substantially influence the level of invest-

ments in renewable energy, which brings in the importance of careful government planning of such

policies.

3



1 Introduction

Over the past decade renewable energy markets, industries and policies have evolved tremendously

leading towards a more sustainable economic growth. Governments have realized the importance of

establishing a viable development and in many countries, they have supported renewable energy pro-

duction through subsidy incentives. Well-designed subsidies for renewable energy can result in long-

term economic and environmental benefits, including improved health, employment opportunities,

energy access and security.1

The definition of “subsidy” is quite elusive as it is rarely defined or usually defined in a restrictive way

that does not ecompass all the different forms of subsidies.2 According to the World Trade Organiza-

tion (WTO) Subsidies and Countervailing Measures Agreement (SCM), to define something as subsi-

dy “there must be a financial contribution by a government or any public body” directly or indirectly

by making a payment to a funding mechanism, or entrusting or directing a private body to carry out a

financial contribution. The different forms of financial transfer are listed explicitly including direct

transfer of funds, including potential transfer such as loan guarantees, foregone revenues that are oth-

erwise due, goods and services provided by the government other than general infrastructure. In addi-

tion to financial contributions by a government, it is mentioned that as a subsidy can be classified any

form of income or price support which operates directly or indirectly to increase exports of any prod-

uct or reduce imports into a Member’s territory, provided that it confers a benefit to the recipient.3

The substantial development of government policies and subsidies for renewable energy during the

past decade, gave a boost to investments in this field. However, in 2013 global investments in renewa-

ble energy were $254 billon, 12% less than the $289 billon recorded in 2012. The investment record

for renewable energy remains $318 billon in 2011. During the past three years global investments

decreased reflecting two main influences: a continued sharp reduction in the cost of photovoltaic (PV)

systems, impact on investor confidence of shifts in policy towards renewable power, government aus-

terity policy and decreasing subsidies and incentives in Europe and the USA. Other major factors re-

sponsible for the decline in investments were the recent technologies in oil industry, which resulted in

the redirection of investments towards the traditional energy sources.4 This decline in investments in

the last three years is to be observed in Figure 1 below.

1 REN21, 2013, p.67. 2 WTO, 2006, p.47. 3 WTO, 2006, p.53. 4 The Pew Charitable Trusts, 2014, p.6.

4



Figure 1: Global Annual Total Renewable Energy Investments 2004-2013 (Source: Bloomberg New

Energy Finance & The Pew Charitable Trusts).

According to the NGO PEW Charitable Trusts and Bloomberg New Energy Finance, China was the

country with the highest investments in renewable energy for both 2013 and 2012 with a total amount

of $54.2 billion in 2013 and $57.9 billion in 2012, followed by the USA with a corresponding invest-

ment of $36.7 billion in 2013 and $ 40.3 billion in 2012. As for the EU countries Germany was ranked

first in 2012 with a total investment of $22.4 billion, while in 2013 it is the second in rank over-

whelmed by U.K. due to its significant reduction in renewable energy investments to only $10.1 bil-

lion.5 The total renewable energy investments by country for 2013 can be observed in Figure 2.

5 The Pew Charitable Trusts, 2014, Figure 8, p.16.

5



Figure 2: Investment by Country and Sector, 2013 (in $ billions) (Source: Bloomberg New Energy

Finance & The Pew Charitable Trusts).

Each of the following three chapters focuses on each of the examined countries of this paper-China,

USA and Germany. Each chapter includes an overview of the renewable energy subsidy policies and

finally establishes a link between these policies and the corresponding investments. In the fifth chapter

a comparative analysis between the three countries has been set forth, while the final chapter summa-

rizes the conclusions of this paper.

6



2 Overview in Subsidy Policies and Investments

2.1 China

The severe air pollution problem in China was the driving force that pushed the country to direct to-

wards more sustainable ways to generate energy. The rapid developments in China do not only have

an impact on the country itself, but also on the whole world. With the adoption of the Renewable En-

ergy Law by the Centre of Renewable Energy Development (CRED) in 2005, China has made great

achievements in the promotion of renewable energy, which gradually placed it on the top worldwide

as far as clean energy investments are concerned. The goal of the law is to meet the short term energy

needs while enabling a sustainable development in the long term. The law aims to reduce the air pollu-

tion, protect human health and environment and provide power to rural and remote areas. Through its

Five-Year Plans (FYP), China designs its renewable energy strategies. Financial incentive policies are

introduced to encourage the development of renewable energy technologies and provide opportunities

for renewable energy companies so that local governments, energy firms and the public can promote

and utilize renewable energy.6

2.1.1 Subsidy Policies

China changed its energy strategies over time to develop the sources of power and meet the shortage

in energy. Table 1 indicates the main energy strategies included in the FYPs since 1990 and the con-

text under which the strategies were made. It can be observed that the energy strategies of China shift-

ed from increasing and diversifying energy supplies to strategies directed to address energy shortages

and to pursue green development, as well as establish a resource efficient and environmentally friend-

ly society. This shift in the energy strategy took place in the context of serious environmental pollution

because of coal consumption, rapid increases in dependence on imported oil, and the accumulating

international pressure on China to mitigate climate change.7

6 NREL, 2004, p.1. 7 Zhu, Zhuang, & Xiong, 2013, pp.3-4.

7



Table 1: Development of Renewable Energy Strategies over Time according to Consecutive FYPs

(Source: Zhu, Zhuang, & Xiong, 2013).

Strategies Background

8th FYP (1991–1995)

Increase investments in coal mining and hydropower, rely on oil imports to fill the gap between domestic pro-duction and demand

Energy shortage became a constraint to economic development

9th FYP (1996–2000) Further eliminate the constraints of energy shortage on national economy development

Increase in energy production capacity, reduced problems with energy shortage

10th FYP (2001–2005)

Optimize energy mix, improve ener-gy utilization efficiency, intensify environmental protection

Shortage of petroleum and deterioration of the environment in some regions, serious electricity shortage in 2004

11th FYP (2006–2010)

Optimize energy industry develop-ment, build a resource saving, and environmentally friendly society

Rapid increase and expansion of heavy industry, In 2003 and 2004 energy con-sumption grew much faster than GDP, further deterioration in environmental pollution

12th FYP (2011-2015)

Pursue green development, build a resource efficient and environmental-ly friendly society

International financial crisis and eco-nomic recession, energy security, cli-mate change and food security become prominent global issues

China’s renewable energy policy is interest-driven, which means that renewable energy development

is stimulated by offering subsidies and concessions in prices and taxes. Tax incentives include a lot of

advantages and benefits for renewable energy equipments and productions as for example low custom

fees for importing renewable energy equipment, 50% reduction in the VAT for renewable energy pro-

duction enterprises, 6% reduction in the VAT for small hydro power enterprises. These tax incentives

need to be used to develop new and innovative products and to incorporate wind power and solar pho-

tovoltaic (PV) operation into high and new technology areas.8

Secondly, interest-discount loans is one of the most important method that is used by the central gov-

ernment for large and medium-sized biogas projects, solar energy projects and wind power technology

extension especially in rural areas. When a demonstrative project is put into operation and reaches the

8 Shi, 2009, pp.100-101.

8



prescribed standards, the operators will receive a government award in the form of an interest dis-

count.

Then, direct subsidies are mainly used in R&D, demonstrative projects and for grid-connected elec-

tricity prices. The first 50MW wind power generating units of an enterprise receive a 600 Yuan/KW

subsidy.

Finally, the Central Finance Department of China offers funds to support the research into the devel-

opment and utilization of renewable energy, formulation of standards and demonstrative projects, re-

newable energy utilization projects in the rural and livestock breeding areas, building of off-grid pow-

er systems in remote areas and offshore islands, survey, assessment and related information systems

concerning renewable energy sources and the promotion of localization in the utilization and devel-

opment of renewable energy equipment.9

The Chinese government supports the usage of renewable energy by subsidizing the excess cost

between the lower cost of non-renewable energy and the higher cost of renewable energy. The excess

cost is collected through adding the difference of the higher and lower cost to the cost of electricity of

the final consumer. In 2011, these surcharges are increased from $0.006 per kWh to $0.012 per kWh,

creating a total subsidy around $8 billion to encourage the use of renewable energy.10

Although the Chinese government has introduced a lot of strategies and policies since 2005, more

renewable energy developments are still needed for the future. The main current policy measures are

Renewable Portfolio Standards (RPS), feed-in tariffs (FITs), and direct subsidies as indicated in Table

2:11

Table 2: Subsidy Policies and Targets in China (Source: Zhu, Zhuang, & Xiong, 2013).

Policies Targets

Renewable

Portfolio

Standard

(RPS)

- Introduced in China in 2007 by the National Development and Reform Commission

(NDRC) in the Mid- and Long-Term Development Plan for Renewable Energy which

is a long-term up to 2020 strategic planning document for renewable energy

- 1% non-hydro renewable power by 2010, 3% by 2020 and generators

- 3% non-hydro renewable power by 2010, and 8% by 2020

Feed-in - Guarantees renewable electricity generators a price that is above market value

9 Shi, 2009, p.101. 10 Solidiance, 2013, p.14. 11 Lo, 2014, pp.509-510.

9



Tariffs

(FITs)

- 0.51-0.61 RMB/kWh for wind power FIT

- 1.00 RMB/kWh for solar power FIT

Direct

Subsidies

- Introduced in 2009 to promote renewable energy

- The Solar Roofs Program supports distributed photovoltaic projects including rooftop

systems and building integrated photovoltaic (BIPV) systems - 9 RMB/W for BIPV

and 7.5 RMB/W for rooftop systems

- The Golden Sun Demonstration Project supports BIPV systems, rural electrification

projects, and large-scale photovoltaic power projects. It provides 50% of the total

cost for on-grid systems and 70% for off-grid systems in rural areas -on-grid systems

received 5.5 RMB/W, and off-grid systems received 7.0 RMB/W

2.1.2 Investments

China’s investments in renewable energy are of great importance due to the high demand for electrici-

ty and rapid increase of urban population. At the same time, investments in renewable energy are re-

quired to push the economy and GDP growth to a higher level because non-renewable energy sources

are not adequate for this. The China Renewable Energy Law of 2005 contributed not only to increase

the usage of renewable energy, but also to motivate the providers of electricity to use the renewable

energy.12

In Figure 3, it can be seen that renewable energy investments have increased rapidly from $2.4 bil-

lion in 2004 to $37.1 billion in 2009. After the decline of 2010, the investments increased again in

2011 and in 2012 they reached the record high of $59.6 billion. Although investments declined by

5.5% in 2013, China established a strong global leadership position by attracting approximately $56.3

billion. China is poised to be a leader in the world’s renewable energy marketplace for many years to

come.13 In 2013, wind energy investments represented $28 billion of the total investments, while the

solar energy sector attracted $22.6 billion of the total investments.14

In 2009, China rolled out two national solar subsidy programs: the BIPV subsidy program and the

Golden Sun program to promote the renewable energy generation and create a domestic market for its

solar cell and panel manufacturers for the period 2009-2011. These programs contributed to the solar

energy sector by allowing 140 MW installations in 2011 and around 1GW installations in 2012 that

12 Solidiance, 2013, p.4. 13 Frankfurt School UNEP Centre/BNEF, 2013, p.40. 14 The Pew Charitable Trusts, 2014, p.37.

10



subsequently increased the solar energy investments up to $22.6 billion in 2013 and increased cumula-

tive installed solar capacity from 68 MW in 2005 to 3093 MW in 2011. 15

The Chinese government set tariffs for wind power plants to help the operators realize profits, for ex-

ample the windy areas of Inner Mongolia and Xinjiang received RMB 0.51/kWh, other parts of Inner

Mongolia and Hebei received RMB 0.54/kWh, Jilin, Heilongjiang, Gansu, Ningxia and remaining

parts of Xinjiang received 0.58/ kWh and all other areas received RMB 0.61/kWh. As a result, the

cumulative installed wind capacity increased from 1.26 MW in 2005 to 62.7 MW in 2011 subse-

quently wind energy investments increased up to $28 billion in 2013.16

Figure 3: Chinese Annual Total Renewable Energy Investments 2004-2013 (Source: Frankfurt School

UNEP Centre/BNEF).

The 12th Five-Year Plan (2011-2015) seeks for sustainability as a key for development of the econo-

my by increasing the investments in renewable energy through focus on clean energy, energy conser-

vation and clean-energy cars. Investments in power industry are targeted to increase approximately by

$830 billion by 2015 by developing the traditional energy and renewable energies including hydro

power, wind, solar and biomass. The use of non-fossil fuels is expected to increase to 11.4% of the

total energy use by 2015 and to 15% of the total energy use by 2020.17

15 Solidiance, 2013, pp.41-42. 16 Solidiance, 2013, pp.27-29. 17 Solidiance, 2013, p.15.

11



Although, there are a lot of incentives and subsidies for increasing the renewable energy share to 15%

by 2020, it is not clear that the government able to achieve this goal because the government should

increase the rate for FITs which requires an increase in renewable energy surcharge and this increase

may lay too much pressure on the cost of living for Chinese people.18

2.2 USA

The USA is the world’s second largest emitter of harmful greenhouse gases and at the same time the

second in the rank according to the renewable energy investments. This is to be attributed to the fact

that the country lacks the initiative of establishing a systematic and consistent plan for carbon dioxide

reduction or clean energy generation addition goals that are present in Europe, Australia, and other

countries. Yet the USA made more clean energy financial stimulus available than any other nation

from 2009 through 2012.19


The financial incentives for renewable energy implementation programs in the USA according to the

Database of State Incentives for Renewables & Efficiency (DSIRE) sum up to the following categories:

Corporate Deduction, Corporate Depreciation, Corporate Exemption, Corporate Tax Credit, Federal

Grant Program, Federal Loan Program, Industry Recruitment/Support, Personal Exemption and Per-

sonal Tax Credit.20

Each of these categories and the individual programs pertaining to them are presented in brief below:

The Corporate Deduction Program includes tax reduction of $1.80/square foot for energy-efficient

commercial buildings that reduce the building’s total energy and power cost by 50% or more as com-

pared to the minimum requirements.21

The Corporate Depreciation Program includes the Modified Accelerated Cost-Recovery System

(MACRS).Under this system, businesses may recover investments in certain renewable energy instal-

18 Lo, 2014, pp.514-515. 19 Frankfurt School UNEP Centre/BNEF, 2013, p.40. 20 http://www.dsireusa.org/incentives/index.cfm?state=us 21 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US40F&re=1&ee=1

12



lations and equipment through increased depreciation deductions and consequently low tax pay-

ments. 22

According to the Corporate Exemption as described in the USA Code, energy conservation subsidies

provided to customers by public utilities are non-taxable. Energy conservation includes installations or

modifications designed to reduce consumption of electricity or natural gas or to improve the manage-

ment of energy demand.23

The Corporate Tax Credit Program includes the Business Energy Investment Tax Credit (ITC) as per

which there is a credit that amounts to 30% for solar energy property, fuel cells and small wind tur-

bines to 10% for geothermal systems, microturbines and Combined Heat and Power (CHP),24 the En-

ergy –Efficient New Homes Tax Credit for home builders, according to which, site-built homes quali-

fy for a $2000 credit if they are certified to reduce energy consumption by 50%25 and finally the Re-

newable Electricity Production Tax Credit (PTC) that offers a tax credit amount of 1.1₵/kWh or

2.3₵/kWh according to the renewable energy type.26

The Federal Grant Program includes the Tribal Energy Program Grant for Tribal Government that

offers financial assistance, technical assistance, education and training to tribes for the evaluation and

development of renewable energy resources,27 the USA Department of Agriculture (USDA)-High

Energy Cost Grant Program that offers a grant of $20’000-$3’000’000 for the improvement of energy

generation, transmission and distribution facilities in rural communities,28 the USDA-Repowering

Assistance Biorefinery Program that provides payments up to 50% of the total project costs to eligible

biorefineries so as to replace fossil fuels in biorefineries with renewable biomass29 and finally the

USDA-Rural Energy for America Program (REAP) Grants, which offers individual grants for renew-

able energy installations from $2500 to $500’000 and up to 25% of the eligible project costs.30

The Federal Loan Program includes six individual programs. First, it encompasses the Clean Renew-

able Energy Bonds (CREBS) that may be used by certain entities -primarily to finance renewable en-

ergy projects. The renewable energy bond holder receives federal tax credits in lieu of a portion of the

22 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US06F&re=1&ee=1 23 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US31F&re=1&ee=1 24 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US02F&re=1&ee=1 25 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US41F&re=1&ee=1 26 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US13F&re=1&ee=1 27 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US07F&re=1&ee=1 28 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US56F&re=1&ee=1 29 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US58F&re=1&ee=1 30 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US05F&re=1&ee=1

13



traditional bond interest, resulting in a lower effective interest rate for the borrower.31 Moreover, there

are the Energy-Efficient Mortgages that assist borrowers to pursue energy efficiency by financing

renewable energy technologies for the esidential sector. These loans are insured through Federal Hous-

ing Authority (FHA) or Veterans Affairs (VA) programs.32 In addition, there are the Qualified Energy

Conservation Bonds (QECBs) as per which issuers can recoup up to 70% of the full rate on a qualified

bond through a direct subsidy from the Department of Treasury.33 The USA Department of Energy-

Loan Programs issue loan guarantees for projects that "avoid, reduce or sequester air pollutants

or anthropogenic emissions of greenhouse gases and employ new or significantly improved

technologies". This program has been authorized to offer more than $10 billion in loan guar-

antees for energy efficiency and renewable energy.34 Then, the USDA-Biorefinery Assistance is a

program under which the USDA Rural Development offers loan guarantees for the development, con-

struction, and retrofitting of commercial-scale biorefineries. Financed entities must provide at least

20% of the financing for eligible project costs. Finally, the USDA-Rural Energy for America Program

(REAP) offers loan guarantees for renewable energy systems, as well as renewable energy develop-

ment assistance to agricultural producers and rural small businesses.35

As far as the Industry Recruitment/Support is concerned, it includes two programs. First, the Energy-

Efficient Appliance Manufacturing Tax Credit established tax credits for manufacturers of high-

efficiency residential equipment. Each manufacturer is limited to a total of $25 million in credits for

2011, 2012 and 2013 combined.36 Secondly, the Qualifying Advanced Energy Manufacturing Invest-

ment Tax Credit according to which the investment tax credit is equal to 30% of the qualified invest-

ment required for an advanced energy project that establishes re-equips or expands a renewable energy

manufacturing facility.37

According to the Personal Exemption as included in Section 136 of the USA Code, energy conserva-

tion subsidies provided (directly or indirectly) to customers by public utilities are non-taxable.38

31 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US45F&re=1&ee=1 32 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US36F&re=1&ee=1 33 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US51F&re=1&ee=1 34 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US48F&re=1&ee=1 35 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US46F&re=1&ee=1 36 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US42F&re=1&ee=1 37 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US52F&re=1&ee=1 38 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US03F&re=1&ee=1

14



The Personal Tax Credit includes the Residential Energy Efficiency Tax Credit that applies to energy

efficiency improvements in the building envelope of existing homes and for the purchase of high-

efficiency energy equipment. Efficiency improvements or equipment must serve a dwelling in the

USA that is owned and used by the taxpayer as a primary residence.39 Finally, the Residential Renew-

able Energy Tax Credit legitimizes the taxpayer to claim a credit of 30% of qualified expenditures for

a system that serves a residence unit located in the USA.40

2.2.2 Investments

The renewable energy subsidies and policies as presented in the previous section constituted the incen-

tive for many private investors to orientate towards renewable energy industry investments. In the

USA over $300 billion was invested in renewable energy sector from 2004 to 2013.41 In 2013 alone

$36 billion was invested in USA in renewable energy, while the global clean energy investment in the

same year amounted to $214 billion worldwide, meaning 16.8% of the global renewable energy in-

vestments was generated in the USA!42

If the past five years are to be examined, investments exhibit an increasing tendency from 2009 up to

2011, while they decrease from 2011 over 2013. In 2009 the total annual new investments amounted

to only $23.5 billion undergoing a substantial decline from previous year mainly explained by the

financial crisis outburst. In 2010 the investments increased to $34.7 billion, while in 2011 there was a

significant increase up to $53.4 billion, which was the highest annual investment amount throughout

the past decade. In 2012 the investments declined down to $39.7 billion. The reason lies within the

fact that two incentives for renewable energy projects-the Treasury Grant and the Federal Loan Guar-

antee program expired in late 2011 and also the PTC for wind was expected to expire at the end of

2012. The Congress extended the PTC for one more year, but the financing of wind projects had al-

ready slowed down. The impact of the loss of the other two incentives was also explicit in solar energy

sector, where asset finance fell from $26.7 billion to $6.9 billion. There were several financings of

large solar thermal, or concentrated solar power (CSP), projects in the USA in 2011 under the Loan

Guarantee Program – but there were no significant projects financed using these technologies in 2012.

Moreover, small-scale photovoltaics (PV) did not perform exceptionally either – investments rised

from $4.5 billion in 2011 to $7.3 billion in 2012. Among the largest utility-scale projects financed in

the USA in 2012 were the 419 MW Flat Ridge Wind Farm Phase II in Kansas, at $885 million, and the

39 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US43F&re=1&ee=1 40 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F&re=1&ee=1 41 US PREF, 2014, p.2. 42 US PREF, 2014, p.2.

15



200 MW LS Power Centinela PV Plant in California, at $800 million.43 Finally, in 2013 there was a

further decline to $35.8 billion.44 The decline in renewable energy investments was only around 10%

in comparison to the significant decline of 2012. In this year, the USA was leading worldwide in the

investments for biofuels and low carbon technologies, second for wind and third for solar. Installations

in the wind sector dropped by more than 90% as a result of last-minute changes to the production of

tax credit.45

Figure 4: USA Annual Total Renewable Energy Investments 2004-2013 (Source: Frankfurt School-

UNEP Centre/BNEF).

The PTC program contributed to innovation and deployment, particularly in the wind production and

subsequently resulted in a 90% reduction in the cost of wind power since 1980. Only in the last four

years the wind energy costs decreased by 43% due to stable policies and technological advancements.

The estimates for the future include increase in the new wind installations in 2014 and 2015, but also

significant decrease in 2016 due to the expiry of the PTC program. 46

The extension of the residential and solar ITC program contributed to the increase of solar installations

by more than 3000% since its introduction in 2006. The ITC resulted in cost decreases in the solar PV

system price on average from $7.50 per watt in 2009 to $4.75 per watt in 2011, and finally down to

43 Frankfurt School UNEP Centre/BNEF, 2013, pp.24-25. 44 US PREF, 2014, p.2. 45 The PEW Charitable Trusts 2013, 2014, p.50. 46 US PREF, 2014, p.3.

16



$3.63 per watt in 2012.47

The MACRS program played a significant role in increasing the private renewable energy investments

by enabling developers of renewable energy technologies to initiate more projects and reduce the cost

for themselves, as well as the final consumers. The USA installed 4.751 MW of solar PV in 2013, up

41% over 2012 and nearly 15 times the amount installed in 2008. The forecasts for 2014 estimate a

26% overall growth in the USA solar market, with installations reaching nearly 6 GW.48

2.3 Germany

In Germany, the substantial growth in the renewable energy sector was enforced by the extensive use

of feed-in tariffs during the past decade. Particularly, the feed-in tariffs drove significantly the solar

and wind technologies. However, recently the government’s austerity together with the pressure from

consumers and industry regarding the impact of high electricity prices, made the government initiate

policy changes in 2013 and curtail clean energy incentives. Investment fell 55% from 2012 levels, to

$10 billion in 2013, and Germany dropped from third to sixth place among the G-20 nations. Wind

investments decreased by 16% down to $5.1 billion (still fourth highest in the G-20), but solar financ-

ing declined by more than $10 billion down to $4.8 billion, far off the pace of world leaders’ Japan,

China, and the USA. The recalibration of German clean energy policies also affected annual deploy-

ment levels, which had previously been among the world’s greatest. Wind capacity additions remained

above 3 GW in 2013, but new solar generating capacity additions were down more than 50%, to 3.3

GW, after a record addition of almost 8 GW in 2012.49


The main driving force in the rapid development of renewable energy in Germany was the German

Renewable Energy Act, the so-called “Erneubare-Energien-Gesetz” (EEG), which was enforced in

April 2000. EEG seeks to support renewable energy by providing the renewable energy investments

for electricity production with guaranteed feed-in tariffs for a period of 20 years. Every kWh generated

from renewable energy installations receives from the grid operator a fixed feed-in tariff for electricity

exported to the grid.50 Thereafter, the EEG has been revised many times with the most recent one in

April 2012. This latest amendment aims to increase the share of renewable energy sources in electric-

47 US PREF, 2014, p.4. 48 US PREF, 2014, p.5. 49 The PEW Charitable Trusts, 2013, p.19. 50 http://www.eeg-aktuell.de/das-eeg/

17



ity supply to at least 35% by no later than 2010, 50% by no later than 2030, 65% by no later than 2040

and 80% by no later than 2050 and to integrate these quantities in the electricity supply system. 51

According to the EEG for electricity production, the parties involved in the process are the plant op-

erator, the grid operator, the transmission system operator, the utility companies and the final consum-

ers. The grid operator is obliged to purchase all electricity generated by the plant operator and pay the

tariff set out by the law, then he/she has to transfer the electricity received to the transmission system

operator, who is obliged to purchase the quantity of electricity the grid operator has paid the tariff for.

The transmission operators divide the costs resulting from the EEG equally among themselves. Then,

the utility companies are obliged to pay the transmission system operators for their incurred costs.

Finally, the costs are included in the electricity price and passed on to the final consumers.52 Below, in

Figure 5, a schematic interpretation of the feed-in tariff process is presented.

Figure 5: The Distribution Mechanism of Renewable Energy Produced with Feed-In Tariffs in Ger-

many.

The EEG also introduced the market premium and flexibility premium for plant operators who directly

sell their electricity from renewable sources. As an alternative, plant operators may claim a market

premium for the electricity they sell directly. The amount of the market premium shall be calculated

each month. In general, plant operators are free to choose between the regular feed-in tariff and the

market premium for direct selling. Operators of biogas plants who sell their electricity directly may

claim a flexibility premium on top of the market premium. For a plant operator to be eligible for the

flexibility premium, he/she shall provide additional installed capacity that may only be used on de-

mand rather than on a regular basis.53

51 http://www.erneuerbare-energien.de/en/unser-service/mediathek/downloads/detailview/artikel/renewable-

energy-sources-act-eeg-2012/ 52 http://www.res-legal.eu/search-by-country/germany/single/s/res-e/t/promotion/aid/feed-in-tariff-eeg-feed-in-

tariff/lastp/135/ 53 http://www.res-legal.eu/search-by-country/germany/tools-list/c/germany/s/res-

e/t/promotion/sum/136/lpid/135/

18



In addition, the Renewable Energies Heat Act, which entered into force on 1st January 2009, requires

the owners of new buildings to cover part of their heat supply using renewable energy sources.54 As of

1st January 2009, owners of new buildings over 50 m² are obliged to cover a minimum share of their

heat needs with renewable energy sources.55

As for the existing buildings, the government supports renewable energy installations with the Market

Incentive Program (MAP), which was introduced in 2000. The MAP subsidizes part of the upfront

costs of biomass, geothermal energy and solar energy installations. In 2013 the MAP offered subsidies

of €321 million and stimulated investments of €1.23 billion, while the subsidies amounted to €301

million in 2012 and €229 million in 2011.56 The biomass installations may be granted a subsidy from

€1400 up to €3600, geothermal energy installations from €1300 up to €11’800 and the solar thermal

energy installations from €1500 up to €1800 according to their size, capacity and efficiency.57

In line with the MAP, low interest loans for renewable energy investments are provided by different

Kreditsanstalt für Wiederaufbau (KfW)-Programs. These are the KfW Renewable Energy Program-

Standard for investments in installations for electricity production from renewable energy sources,58

the KfW Program Offshore Wind Energy to support companies investing in offshore wind farms,59 the

KfW Renewable Energy Program Premium for electricity and heat generation in deep geothermal

installations,60 the KfW Program Geothermal Exploration Risk that covers investment costs up to 80%

connected to drilling activities including the required stimulation measures prescribed by KfW as part

of the project study.61

54 http://www.erneuerbare-energien.de/en/unser-service/mediathek/downloads/detailview/artikel/act-on-the-

promotion-of-renewable-energies-in-the-heat-sector-heat-act-eewaermeg/?tx_ttnews[backPid]=115 55The Economic Impact of the German Market Stimulation Programme, Renewable Energies Agency, 2010, p.5. 56 http://www.erneuerbare-energien.de/die-themen/foerderung/marktanreizprogramm/ 57 http://176.9.160.135/search-by-country/germany/single/s/res-hc/t/promotion/aid/subsidy-investment-

support/lastp/135/ 58 http://www.res-legal.eu/search-by-country/germany/single/s/res-e/t/promotion/aid/loan-kfw-financing-

initiative-energiewende/lastp/135/ 59 http://www.res-legal.eu/search-by-country/germany/single/s/res-e/t/promotion/aid/loan-kfw-programme-

offshore-wind-energy/lastp/135/ 60 http://www.res-legal.eu/search-by-country/germany/single/s/res-e/t/promotion/aid/loan-kfw-renewable-

energy-programme-premium/lastp/135/ 61 http://www.res-legal.eu/search-by-country/germany/single/s/res-e/t/promotion/aid/loan-kfw-programme-

geothermal-exploration-risk/lastp/135/

19



As far as the tax regulation mechanisms are concerned, The Energy Tax Act on mineral oil products

obliges companies producing, processing, holding, receiving or dispatching energy products to pay a

defined amount of tax. In this context, there is a tax relief for biofuels that varies depending on the

type of biofuel. The tax relief is only granted if the produced amount of biofuel is pure and not used to

fulfill the biofuels quota.62

Finally, Germany supports the research and development of new renewable energy technologies. For

the period 2011-2014, the 6th Energy Research Program in Germany provides €3.5 billion to projects

and research institutes to enhance the share of renewable energy and their competitiveness.63

2.3.2 Investments

Government policy changes in 2013 led to the curtailment of clean energy incentives. Renewable en-

ergy investments decreased down to $10 billion in 2013, and Germany dropped from third to sixth

place among the G-20 nations.

It can be seen in Figure 6 that renewable energy investments in Germany is doubled from €8.8 billion

in 2004 to €16.5 billion in 2008, and then increased rapidly to €26.4 billion in 2010. After the record

figure of €26.4 billion in 2010, investment in renewable energy declined for the second year in succes-

sion in 2012 to €19.5 billion, down by 16% from the year before. However, Germany still remained

the third largest investor worldwide, installing far more solar PV capacity than any other country, most

of it small-scale.64 The greater part of this drop in 2012 is not due to a decrease of capacity additions,

but it is rather attributed to the continuing decline in prices for photovoltaic systems. Other major fac-

tors responsible for the decline in investment were a drop in the number of additional solar thermal

installations and biomass installations for power generation.65

The German government changed its policy in renewable energy in 2013 due to the pressure of con-

sumers and producers in renewable energy industry because of the impact of higher electricity prices.

It initiated an austerity policy by decreasing renewable energy incentives. As a result, the investments

in renewable energy fell by 62% from 2012 levels, to €7.2 billion and Germany dropped from the third

to the sixth place among G-20 nations.66 It can be observed in Figure 7 that the electricity consumers

62 http://www.res-legal.eu/search-by-country/germany/tools-list/c/germany/s/res-t/t/promotion/sum/136/lpid/135/ 63 http://www.res-legal.eu/search-by-country/germany/tools-list/c/germany/s/res-hc/t/policy/sum/136/lpid/135/ 64 REN21, 2013, p.58. 65 Federal Ministry for Environment, 2013, p.30. 66 The Pew Charitable Trusts, 2014, p.19.

20



in Germany have already paid €109 billion for renewable energies since 2000. Between 2000 and

2013, real German electricity prices for households have increased by 80%. The German government

drafted a new regulation to cut subsidies for renewable energy producers in order to decrease the re-

cent sharp increase in electricity bills caused due to these subsidies.67

Figure 6: German Annual Total Renewable Energy Investments 2004-2013 (Source: The Pew Chari-

table Trust-Federal Ministry for Environment of Nature Conservation and Nuclear Safety).

Figure 7: Electricity Price Development for Households in Germany 1978-2013 (Source:

http://www.linkedin.com/today/post/article/20140321133218-322580126-german-energy-policy-is-

failing-the-poor-while-being-a-poor-way-to-help-the-climate).

67 http://www.spiegel.de/international/germany/german-environment-ministry-plans-to-cap-subsidies-for-

renewables-a-880301.html

21

http://www.ft.com/intl/cms/s/03486cb0-3587-11e3-b539-00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F03486cb0-3587-11e3-b539-00144feab7de.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=%23axzz2hnfZi24l



3 China, the USA and Germany: A Comparative Analysis

Chinese economy is highly centralized, which means that the government has the command, control

and supervision of the enterprises. It further sets the goals for economic development through the

Five-Year Plans and the parties of the economic system are expected to comply with them. China has

set ambitious targets for developing its non-hydropower renewable energy resources with a major

push of laws, policies, and incentives in the last few years.68 What is more, most of the large industries

in China including the power generation are comprised of state-owned enterprises which are essential-

ly run by the national government.69 This means that it is less complicated for the government renewa-

ble energy policies and incentives to spill over in the power industry. This was also one of the driving

forces that facilitated the tremendous increase of renewable energy investments in China during the

past decade.

On the other hand, USA economy is market-driven and as far are the renewable energy policies and

subsidies are concerned, there is no comprehensive national policy for the deployment of renewables.

The USA was the world’s top destination for green energy investments in 2011, a position it lost to

China in 2012 and 2013.The main and most effective federal policies are those that provide corporate

tax incentives for renewable electricity such as the ITC program, but usually they are approved for

short time periods and subsequently reauthorized. Often the uncertainty about them results in substan-

tial decrease of investments. Moreover, the higher costs of renewable electricity constitute a herald for

increasing the amount of investments. As of now the deployment of renewable energy capacities are

rather to be attributed to state initiatives than to federal policies, which was a main reason why the

USA lost their once first place worldwide in renewables to China.70 To this direction, characteristic is

the phrase of President Barack Obama at Georgetown University on June 25, 2013: “Countries like

China and Germany are going all in the race for clean energy. I believe Americans build things better

than anybody else. I want America to win that race, but we cannot win it if we are not in it”.71

As far as Germany is concerned, its renewable energy policies lie somewhere in the middle between

those of China and the USA as per the level of centralization and government monitoring. Germany

has a fundamental long-term strategy to move towards a sustainable energy supply system. Currently,

the Energy Concept of 2010 sets forth a long-term strategy and goals for the period up to year 2050,

68 Campbell, 2010, p.1. 69 Campbell, 2010, p.2. 70 Campbell, 2010, pp.12-13. 71 http://www.americanprogress.org/issues/green/report/2014/04/03/87092/galvanizing-clean-energy-investment-

in-the-united-states/

22



when renewables are to account for the biggest share in the energy mix.72 In Germany over the past

decades there has been stability regarding the different governments’ renewable energy supporting

policies that created a sense of coherence and safety which further triggered investments.73 However,

the EEG has come recently under criticism because of the high costs for consumers owing to the fixed

feed-in tariffs payments to operators of renewable power plants and a decreasing amount of chargeable

energy consumption to which costs can be allocated. In February 2013, the Federal Minister of Eco-

nomics and Technology and the Federal Environment Minister presented a joint proposal for a short-

term amendment of the EEG.74 It remains to be seen what is going to be done with the renewable en-

ergy subsidies and to what extent the German government will continue to support renewable energy

investments.

72 Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, 2011, p.3. 73 http://www.bloomberg.com/news/2013-05-15/u-s-energy-policy-should-take-a-lesson-from-germany-s-

energiewende.html 74 OECD/IEA, 2013, p.11.

23



4 Conclusion

In all the three countries we examined -China, the USA and Germany- there is an explicit connection

between the subsidies and incentive intensity of the government on one hand, and the level of invest-

ments on the other hand. Although they all offer renewable energy subsidies to boost investments so

as to decrease the emissions and shift from traditional energy to green energy, the impact of subsides

and incentives is different from one country to another based on the individual mechanism of imple-

mentation.

China has introduced a lot of policies and financial incentives since 2005 so as to cope with the in-

creasing pollution problem. It sets long-term renewable energy goals which aims to achieve by 2020.

It relies on centralized planning and the renewable industries are controlled by the government bodies,

thus facilitating the fast and effective implementation of renewable energy policies. Through its subsi-

dy policies, it has managed to substantially increase its investments in one decade from only $2.4 bil-

lion in 2004 to $56.3 billion in 2013.

The USA on the contrary relies on the market forces for the expansion of renewable energy policies,

which makes their implementation fragmatic and not well-coordinated. Although the USA was the top

destination for renewable energy investments for many years, it got overwhelmed by China in the past

five years and it lost its global leading position in terms of investments.

Finally, Germany has exhibited a long-term stable renewable energy strategy, with an aim to move

towards a more sustainable energy future. However, some dysfunctions of its renewable energy pro-

grams have triggered controversy recently and elicited subsidy curtailments, which subsequently

dropped substantially the investments in 2013 down to €7.3 billion.

All in all, government subsidy policies significantly affect the amount of investments and the growth

of the renewable energy sector. It is important for the governments to plan their subsidy and support

policies carefully. The higher cost of renewable energy often leads to controversy and disagreements,

thus the need to find more innovative ways to reduce the cost of renewable energy is deemed crucial.

24



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List of Abbreviations

BIPV Building Integrated Photovoltaic

CHP Combined Heat and Power

CREBS Clean Renewable Energy Bonds

CRED Centre of Renewable Energy Development

CSP Concentrated Solar Power

DSIRE Database of State Incentives for Renewables & Efficiency

EEG Erneubare Energien Gesetz (engl.Renewable Energy Act)

FHA Federal Housing Authority

FIT Feed-In Tarrif

FY Fiscal Year

FYP Five-Year Plan

ITC Investment Tax Credit

KfW Kreditsanstalt für Wiederaufbau (engl.Reconstruction Credit Institute)

MACRS Modified Accelerated Cost-Recovery System

MAP Market Incentive Program

NDRC National Development and Reform Commission

PTC Production Tax Credit

PV Photovoltaics

R&D Research and Development

RMB Renminbi

RPS Renewable Portfolio Standard

QECBs Qualified Energy Conservation Bond

REAP Rural Energy for America Program

SCM Subsidies and Countervailing Measures Agreement

USDA USA Department of Agriculture

VA Veterans Affairs

VAT Value-Added Tax

WTO World Trade Organization

28



Annex

USA Federal Renewable Energy Subsidy Programs

Federal Program Individual Program Brief Description

Corporate Deduction Energy Efficient Commercial

Buildings Tax Reduction

Tax reduction of $1.80/ft2 for energy-

efficient commercial buildings that re-

duce the total energy cost by 50%

Corporate Depreciation Modified Accelerated Cost-

Recovery System (MACRS)

Low tax payments through increased

depreciation deductions

Corporate Exemption Residential Energy Conservation

Subsidy Exclusion (Corporate)

Energy conversation subsidies provided

by public utilities are non-taxable

Corporate Tax Credit Business Energy Investment Tax

Credit (ITC)

A tax credit of 10-30%

Energy –Efficient New Homes Tax

Credit for Home Builders

Built homes qualify for a $2000 credit

for reducing heating and cooling energy

consumption by 50%

Renewable Electricity Production

Tax Credit (PTC)

Tax credit amount of 1.1₵/kWh or

2.3₵/kWh

Federal Grant Program Tribal Energy Program Grant for

Tribal Government

Financial/technical assistance and train-

ing to tribes for the development of

renewable energy

USDA-High Energy Cost Grant

Program

A grant of $20’000-$3’000’000 for the

improvement of energy generation and

distribution in rural communities

USDA-Repowering Assistance

Biorefinery Program

Payments up to 50% of the total project

costs to biorefineries to replace fossil

fuels by renewable biomass

USDA-Rural Energy for America

Program (REAP) Grants

Individual grants of $2’500-$500’000

Federal Loan Program Clean Renewable Energy Bonds

(CREBS)

The bond holder receives federal tax

credits in lieu of a portion of the tradi-

tional bond interest, resulting in a lower

effective interest rate for the borrower

Energy-Efficient Mortgages for the

residential sector

Home loans insured through FHA or

VA programs

Qualified Energy Conservation Issuers can recoup part of the interest

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Bonds (QECBs) they pay on a bond through a direct

subsidy

USA Department of Energy-Loans Issuance of loan guarantees for renewa-

ble energy projects

USDA-Biorefinery Assistance Loan guarantees for the development,

construction, and retrofitting of com-

mercial-scale biorefineries

USDA-Rural Energy for America

Program (REAP)

Loan guarantees for renewable energy

systems and grants for energy audits, as

well as renewable energy development

assistance to agricultural producers and

rural small businesses

Industry Recruit-

ment/Support

Energy-Efficient Appliance Manu-

facturing Tax Credit

Tax credit for high-efficiency industrial

and appliance manufacturers

Qualifying Advanced Energy

Manufacturing Investment Tax

Credit

Investment tax credit equal to 30% of

the qualified investment required for an

advanced renewable energy project

Personal Exemption

Residential Energy Conservation

Subsidy Exclusion (Personal)

Energy conservation subsidies provided

to customers by public utilities are non-

taxable

Personal Tax Credit Residential Energy Efficiency Tax

Credit

For energy efficiency improvements in

the building envelope of existing homes

and for the purchase of high-efficiency

heating, cooling and water-heating

equipment

Residential Renewable Energy Tax

Credit

A credit of 30% of qualified expendi-

tures for a system in a dwelling unit

30



Affidavit

Renewable Energy Subsidy Policies and Investments in China, the USA and Germany:

A Critical and Comparative Analysis

We hereby declare under penalty of perjury that the present paper has been prepared independently by

us and without unpermitted aid. Anything that has been taken verbatim or paraphrased from other

writings has been identified as such. This paper has hitherto been neither submitted to an examining

body in the same or similar form, nor published.

Vaduz, 01.06.2014

Signature:

Osama Abdeltawab Effrosyni Panagakou

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