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Germany will dilute – not abandon – its Energiewende plan

September 22nd, 2013 by Andrew McKillop, Former Expert-Policy & Programming, DG XVII Energy, European Commission

In Germany’s election campaign the attention going to the national energy transition plan is bafflingly low. Official Environment ministry reports however suggest that total costs of Energiewende could or might rise to 1000 billion euros by the late 2030’s if the program is maintained as present, and its targets are not cut back or shifted further into the future. Despite this, most German political parties have tacitly agreed to limit discussion of Energiewende and backpedal their criticism of this free-spending plan, for reasons that are much more than simply political.

TOSSING THE HOT POTATO
One reason is stark. The plan itself has reached the limits of its credibility or “best before date”. Its costs are extreme, its benefits are not as high as hoped or expected. The plan has lost its internal coherence and is itself mutating, but it however provides “comfort therapy”, generating national pride and approval. It also provides a clear, total, Germanic answer to the lurking fear of nuclear power.

When Japan’s Fukushima nuclear disaster struck on March 11, 2011, and Japan started slowly clearing away the radioactive rubble, Germany got busy reshaping its entire energy system. Within a month, Chancellor Angela Merkel made a 180-degree turn on her own decision, six months before, to make a very very slow phase-out of nuclear power. Merkel suddenly became No Nuclear Now, in public. By June 2011, the German parliament had voted to abolish all the country’s nuclear power by 2021.

Nuclear power is now a dead letter in Germany, but even so it still accounted for 16% of total power supply in 2012. Its share will however fall on a continuous basis, already creating a series of unanticipated or under-estimated costs. Seven reactors were shut down immediately as a result of Merkel’s announcement in 2011 – and all remaining reactors must be shut down within 8 years from now. Costs of the early shutdown program, which at some date and time has to be followed by reactor decommissioning, are so political that again by “gentleman’s agreement” (ladies in the case of Merkel) the very hot potato is treated as “technical” or “long term” and kept out of the political debate. Costs could or might run at around 8 – 10 billion euros for each of the 17 civil reactors to close and decommission, at a politically-decided date.

RAMP UP THE RENEWABLES
As nuclear’s share of power falls, the renewables are ramped up. The pace has been terrific, in fact terrifying as shown by literally stepwise increases in output from the “new renewables”- windpower and solar power – producing a host of network and power system integration challenges. For 2012, solar PV electricity output increased by about 40%, to 27.5 TWh (terawatt hours), and wind output hit 46 Twh. Including other renewables, such as wood biomass and hydro, about 23% of all electricity used in Germany was “green” by end-2012.

Germany’s promotion of renewable power generation has morphed, several times since Energiewende became a mega-program, from 2008. Market expansion policies (like FITs or feed-in tariffs), have shifted to industrial promotion policies, including federal government “guided evolution” of industrial groups and consortiums — as operated in China, and in previous phases of industrial development, by Japan and South Korea. Both of these strategies however have limits. German pride in having the world’s largest installed capacity of wind power and, until recently the world’s largest solar power market, has been diluted and moderated as it became clear that any race with China to dominate world “green” energy industry was doomed to failure. This failure starts with huge over-capacities of production, needing heavy or extreme subsidies to force the market expansion needed to absorb the industrial output. Germany is now focused on building a slower-growing, more sustainable renewable energy industry for both domestic economic goals and political reasons, and as a platform for exports, in the same way as China which has also been forced to backpedal.

The present restructuring and moderation of German “green” energy industry and marketing was imposed by sheer energy-economic realities, and is proceeding with several hiccups. One is a major political embarassment: more coal and brown coal (lignite) have to be burned, releasing more CO2, during what is called “interim power bridging”. This is because even the giddy pace of renewables expansion cannot supply enough electricity – to a power market that is at best stagnant – and gas-fired power production is now totally uneconomic and has dramatically shrunk, mainly due to the collapse of European ETS emissions credits prices. As a result, lignite power increased a full percentage point to 25.6% of total electricity output in 2012, as hard coal’s supply of power rose by close to 1% to cover 19.1% of total output.

Coal now supplies close to 45% of German power, but no new coal-fired plants are programmed and the country’s lignite-fired power plants may be completely phased out by the 2030’s – again depending on political decisions. Given the extreme political sensitivity of natural gas – summarised by the two words Gazprom and fracking – only the renewables can cover the emerging “power gap”, although German hopes of importing power as Europe-wide electric power transport and trading increase remain relatively high, but only for the longer-term.

In Germany, natural gas has been radically forced out of the electricity market because of high gas prices and low ETS emissions credits prices, aggravated by the “fracking revolution” being so delayed and politically unsure it can be treated almost as a rumour. This again is in no way a stable situation, for example due to the rash of new, high-technology, low emission, high capital cost natural gas power plants built in the 2009-2011 period – which are now mothballed.

SUBSIDIZE AND SPEND
Outside Germany – but not inside – political irony on Energiewende “simply meaning that Germany burns more coal” can be heard, for example in neighboring coal dependent Poland. The emerging power supply gaps, both quantitative and temporal, have certainly triggered responses, all of them costly. Germany’s has launched a dramatic upgrade of its national power grid, which will enable it to accommodate higher and higher levels of intermittent and fluctuating renewable power. Official estimates place the annual costs of this at about 2 billion euros, or €20 billion by 2023.

Most surely complicating things, and able to dramatically raise total costs, current German plans are for three major north-south inter-connectors to be built first, with local urban smart grids fed by national 380-kV high-voltage lines. In theory, installing and equipping the smart grid network alongside the national grid project is the huge new commercial growth opportunity, but this ignores a lot of variables, several of them intensely political.

One is an unintended but real consequence of Energiewende, and in fact the years leading up to it, which is the almost complete destruction, and dislocation of Germany’s former power generation oligopoly. Over decades, four large firms dominated — E.On, RWE, EnBW and Sweden’s Vattenfall.

By 2011, these four once-mighty firms accounted for only about 6% of renewable electricity generated in Germany. They were supplanted by Germany’s stadtwerke or municipal energy, heat and water companies, by hundreds of local co-ops, and by smaller producers that sprung into existence. Described after the event as an unprecedented democratization of energy-economic power in the industrial world, it has left enduring traces.

Unleashed by the Energiewende plan, Germany has made a 15-year shift from a coal- and nuclear-power based industrial economy with four large, centralized power producers, to a decentralized system generating power from renewable sources all over the country. The process has what is called “high positive feedback”, forcing the previous alternate system to become the only possible system. In turn this means an unanticipated need for nationwide high power capacity grids, smart grids, IT power management, a continued extreme high pace of renewables development – and a “legacy power system” represented by the 4 previous giants, whose economic and financial future is at best unsure.

All of this also means one thing: continued heavy spending.

Of course, there are critics. These range from energy technologists and energy-economists, to neoliberal economists — but very few politicians, who shy away from defending the former semi-monopoly power producers and the coal/nuclear lobby. There is fierce debate over costs, to be sure, but also about the technical, technological and industrial feasibility of Energiewende’s long-term goals, which themselves are in no way cast in concrete but are extreme: a probable 100% non-fossil power system by around 2045-2050.

THE TRANSITION OF ENERGY TRANSITION
As noted above, opinion polls in Germany show the public is largely unmoved by Energiewende, while of course being concerned by rising power bills. Politicians in the coming election have kept away from the hot potato. Rhetorical flights of fancy – that the plan means a new nazi-type dictatorship taking over – have fallen flat, in part due to the complex and sometimes subtle shifting of goals and programs being executed under the banner of Energiewende.

Almost certainly however, FITs will continue to be cut back – requiring more industrial subsidy at the “front end” of renewable equipment producers, or their abandonment to company bankruptcy and closure, with inevitable loss of jobs. Conversely the heralded “cost tsunami” of many critics has at least for the short-term, certainly before the September elections, been parried for the simple reason that Germany’s power problems are now heavily bunched into the winter months.

Another major “transition of the transition” is the international domain, more precisely where Germany stands relative to its only two real rivals – China and the US. Germany and China are the two industrial nations which are farthest along in building a new energy system largely based on renewables, but the US has a potential role of providing an alternate strategy.

One major reason is that Germany and China both sprang out of the starting box with forceful and determined political and industrial commitments to “new energy”, while in Germany’s case, and extremely in the Chinese and US cases, they had a de facto commitment to a “black” energy economy heavily dependent on coal, and also extremely dependent on oil in the US case. In all three cases, not only due to green energy policy but also energy-economic realities, they must upgrade and transform their power grids, setting a powerful financial challenge as well as a certain and sure 20-30 year time horizon for meaningfully changing their grids. Who pays for that is the hottest potato of all, and heavyweight infrastructure spending is completely antipathetic or hostile to the prevailing image of energy transition encouraging a swarm of new and small entrepreneurial ventures operating in electricity supply, transmission and distribution.

All three coming champions of green energy have adopted, or been forced into new strategies. Well hidden in the Chinese case, less well hidden in Germany, and openly bitter in the US, political infighting and an absence of vision and determination have been the first response to the cost, technology and time challenges for energy transition. Certainly in the Chinese case and probable in Germany after the elections, state pressure has intensified, or will intensify on the banking sector. It will be forced to support the needed investment and allocate sufficient credit to bail-out struggling renewable energy industries and operating companies, as well power grid owners and operators saddled with huge investment needs.

This forced spending of course comes at a very difficult time for the global economy – and even for Germany and China, despite their trade surpluses. It however and further institutionalizes energy transition, and for Germany almost certainly saves Energiewende from any threat of simple and stark abandonment.

Andrew McKillop, Former Expert-Policy & Programming, DG XVII Energy, European Commission

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