Until the end of the 1980s, the state exhibited little interest to promote small hydropower through the adoption of specific strategies or laws. It saw no reason to become active in adopting national legislation to regulate compensation for electricity from hydropower, for instance.
Permission to feed into the grid and the compensation for feed-in continued to be matters that individual operators had to negotiate under private law with the energy suppliers. Plant operators had a weak negotiating position and were frequently placed at a disadvantage. The energy suppliers paid less for one kilowatt hour from hydropower than it cost them to produce their own electricity (Berchem 2006). This unsatisfactory situation left hydropower operators with little means to pursue their claims for compensation. They were also unsuccessful at creating a political lobby strong enough to press for legal regulation.
It took some time for operators to establish an appropriate body to represent their interests. In the end, they sought support from among their own. Regional associations stepped up to negotiate what was called an “association agreement” with the energy supply companies. The compensation stipulated therein provided a reference figure for contracts with energy suppliers.
Actively supported by the Federal Government, the association agreement compensation model was renewed in 1988.13 Finally there was a model for feeding electricity into the grid that was binding for both sides, one based on voluntary contractual agreements between individual energy suppliers and those feeding into the grid. Once a long-term agreement was in place, small plant operators had some degree of security for investment. The compensation was based on the long-term average costs that could be avoided in the public supply.
co-generation of heat and electricity to which the electricity industry agreed (BT-Drs. 11/5025, 5).
The Federal Government believed that the association agreement compensation model had also considerably improved the general economic conditions of small hydropower (<1 MW). For many plant operators though, compensation under the association model often failed to even cover the costs of minor repairs, resulting in the closure of plants into the 1990s. Yet as the 1980s drew to a close, the Federal Government continued to see no reason for regulatory intervention in the compensation issue beyond the voluntary compensation model of the association agreement (BT-Drs. 11/5025, 6). Rather, it hoped that tax advantages for hydropower plants would provide incentives in particular to the operators of large-scale hydropower plants.[482] According to Heimerl (2009, pers. comm.), however, this did not play a key role in decisions on new construction or modernization.
One additional administrative incentive, though a selective one, came in the 1980s in the form of the Investment Allowance Act (Investitionszulagegesetz). Under that Act, commercial enterprises received a tax-free allowance of 7.5% of the amount invested in construction of run-of-river hydropower plants. Applications for an average of around 12 million German marks were submitted each year between 1975 and 1988.
