Letter from Germany: “Energiewende”

The “Energiewende” (energy transformation) has been in the news again here. The basic problem is the rising cost of energy for consumers, both private and industrial, who are already paying among the highest prices in Europe. It is a particularly German problem and is an unfortunate reward for the heroic efforts to shift Europe’s largest population and largest economy on to a renewables trajectory.

Renewables now account for 25% of German energy
Renewables now account for 25% of German energy
Since 2000 the share of power generation from renewable sources has increased from just over 5% to nearly 25% of the total. Germany invented the feed-in tariff which created stable returns for the necessarily long term investment in generating assets, usually at least 20 years.

The purpose of the payment mechanism was to kick-start the sector until grid parity was achieved ie non-subsidised renewable energy would be competitive with energy derived from fossil fuels. Now 50% of new renewable projects in Germany are competitive at least in theory but the problem is the mostly intermittent nature of their electricity production. So the impact of renewables on the German energy market is now disruptive – but not in a good way.

Germany is not suffering a recession as elsewhere in Europe and it is only this current comfortable economic position which has kept the natives quiet. A system which has allowed large energy users to claim exemption from paying their share of the renewable energy subsidy has not met with the public opposition that you would expect. However, as retail energy prices continue to rise, it is inconceivable that that there will be no backlash as prices are already much higher than in the UK.

Energy crisis for Bavaria? (The Breakthrough Institute)
Energy crisis for Bavaria?
(The Breakthrough Institute)
In 2011 the Energiewende was extended to include the complete shutdown of nuclear generation by 2022. This is an astounding commitment given that, for example, in Bavaria nuclear contributes over 40% of the state’s energy mix. To replace nuclear energy the large utilities which want to provide the baseload for the grid by investing in efficient gas turbines cannot see the prospect of sufficient returns on their investment in an unpredictable market. With an imminent prospect of shortages and blackouts it is not difficult to imagine the nervousness in the boardrooms of the huge industrial groups such as Siemens, BMW and MAN which all have large manufacturing plants here. The pressure on local politicians is intense and there is a potential risk that the anti-nuclear policy will be rejected or delayed.

A further complication is that the German CO2 emissions have increased to 1990’s levels as coal-fired power stations are boosted to compensate for the 8 nuclear facilities which have already been closed. Unfortunately lignite, which is mined in Germany and is cheap, is one of the dirtiest fossil fuels. The German government’s ambition to achieve a 40% reduction in carbon emissions by 2020 is under threat.

The situation is certainly difficult but Germans do tend to put a negative spin on things. Looking on the bright side the last decades of commitment to renewable energy and energy efficiency improvements has created a huge competitive advantage for German companies in these fields. Most of the big wind turbine manufacturers are German and there is a host of mid-sized (“Mittelstand”) companies which are exporting their expertise in these areas to international markets. For example, in the field of industrial energy efficiency manufacturers are 10 years ahead of the global competition.

The Energiewende has created over 500,000 new jobs and secured many more. At the same time the feed-in tariff model has been “exported” to over 60 countries worldwide including the UK and is driving the renewable energy revolution in overseas markets. Germany has provided a great example of what can be achieved by long term commitment to policies to combat climate change. And, given the success story of the rebuilding and revitalizing of eastern Germany over the last 25 years, the chances are that the challenges of the energy transformation will be overcome.