Germany’s Energiewende: The End of Power Market Liberalization?

Germany’s Energiewende: The End of Power Market Liberalization?

          
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Germany’s Energiewende: The End of Power Market Liberalization?

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    In 2010, Germany’s government defined a bold vision for the country’s energy future, one heavily reliant on renewable-energy sources, distributed generation, and energy efficiency. (See Toward a New Balance of Power: Is Germany Pioneering a Global Transformation of the Energy Sector? BCG report, March 2013.) The government’s plan, spelled out in the Federal Ministry of Economics and Technology’s Energy Concept for an Environmentally Sound, Reliable, and Affordable Energy Supply, set aggressive targets for greenhouse gas emissions (a reduction of 80 percent from 1990 levels by 2050) and energy efficiency (an improvement of 50 percent by 2050). It also committed the country to a full phaseout of nuclear energy by 2022. The plan drew, and continues to draw, strong interest from well beyond Germany’s borders owing to the scope of its ambition and Germany’s prominent role in Europe’s interconnected energy markets.

    Fast-forward to today: Where does Germany stand in realizing its plan? Has progress met expectations? Does the country’s commitment to the plan remain strong? What are the implications of the ongoing energy transition (in German, Energiewende) for German society and industry, and especially for the country’s power sector? What are the implications for Europe’s power sector?

    This report seeks to answer these and related questions by assembling an objective fact base. One of the report’s key findings: Germany’s efforts may indeed transform the country’s energy profile as intended. But they will also likely lead to the end of power market liberalization in Germany and, very possibly, elsewhere in Europe.

    Policy Makers Confirm Ambitions

    German policy makers in general continue to endorse the Energiewende. This reflects strong public support for the plan’s aims and underlying rationale. Citizens remain firmly committed to renewable energy, with that commitment enhanced by the guaranteed financial returns provided by current policies that make decentralized wind and solar-­photovoltaic (PV) assets attractive investments for many voters. Citizens also remain strongly opposed to nuclear energy; indeed, for German policy makers, support for nuclear energy amounts to political suicide. German citizens also manifest trust in the state, some aversion to big utilities, and a general belief in the value of sustainability. And they express ongoing support for German industry, viewing it as the country’s key economic pillar, as well as support for how the interests of industry are reflected in current policy. German policy makers are responsive to these views.

    Such is the public and political support for the Energiewende, in fact, that when the topic arose in debates preceding the country’s federal election in 2013, there was little argument about whether the plan should be implemented. Rather, the talk centered on how to proceed—with a focus on how to limit soaring power prices while still pursuing the rest of the plan’s objectives. (Ongoing support for green measures, such as that found in Germany to date, is far from universal, it should be noted. Australia, for instance, which has the world’s highest carbon-dioxide emissions per capita, has decided to scrap its emissions-reduction plans.)

    Not surprisingly, the “grand coalition” government that took office after the election expressed strong backing for the Energiewende. It confirmed its commitment to, for example, achieving the original objectives of a phaseout of nuclear energy by 2022 and a 40 percent reduction of greenhouse gas emissions (from 1990 levels) by 2020. The government even slightly raised the bar on several other key targets, specifically the greenhouse gas reductions slated for 2050 and the share of renewable-energy sources in the country’s power-generation mix in 2025, 2035, and 2050. (See Exhibit 1.) The new government also declared that the general feed-in-tariff scheme supporting renewables would remain in place. (Subsequent adjustments to the feed-in-tariff scheme in the 2013 and 2014 policy update were limited to minor changes in subsidy conditions for some renewable technologies, with the aim of reducing the overall costs of subsidies.)

    exhibit

    Moreover, the government showed a willingness to further shield energy-intensive industries from sharply rising power prices by largely defending, over European Commission protests, the exemptions granted to power-hungry companies from the renewables levy. (The EC had originally argued that such exemptions constituted an illegal form of state aid.)

    A number of these considerations, it should be noted, lie outside the classic triangle of energy policy making—sustainability, affordability, and security of supply—making Germany’s policy seem perhaps a bit irrational from a classic policy perspective.
    Germany Today: Continued Emphasis on Renewables—but Emissions Are Rising

    So where does the country stand today vis-à-vis the Energiewende? Viewed through the lenses of sustainability, affordability, and security of supply, Germany’s progress has been mixed. (See Exhibit 2.)

    exhibit

    Look first at sustainability. Germany’s goal of expanding the role of renewables in its power scheme is very much on track. Renewables accounted for 24 percent of gross electricity consumption in 2013, placing the country slightly above the growth trajectory needed to reach its 2025 target of 40 to 45 percent. But greenhouse gas emissions have recently risen nevertheless. Emissions climbed from 2011 through 2013 owing to a strong increase in coal-based generation, driven by the ongoing phaseout of Germany’s nuclear capacity, a slight recovery in power demand following the 2008 financial crisis, increased power exports (spurred by increasing overcapacity and low domestic wholesale power prices), and low prices for CO2-emissions certificates. In fact, Germany’s power generation from carbon-intense lignite (a type of coal) reached an all-time high in 2013. Germany’s rate of progress to date thus suggests that the country will fall short of its longer-term emissions-reduction targets.

    Germany’s effort has also had mixed success in terms of affordability. Power prices for German households, at close to 30 eurocents per kilowatt hour (ct/kWh) on average in 2013, are the second highest in Europe, surpassed only by Danish prices. Industrial power prices for Germany’s energy-intensive large companies are close to the European average and actually declined slightly in 2012 and 2013 owing to a reduction in wholesale power prices and wide-ranging exemptions granted these companies from levies for renewables and grid use. But from the perspective of export-oriented German companies competing in global markets, there remains considerable room for improvement. Average industrial prices in Germany, at roughly 9 ct/kWh, are roughly twice those in the U.S., for example.

    To date, Germany has fared well in terms of security of supply. Still benefiting from a historic surplus of conventional generation capacity, and with several new large, hard-coal plants due to come online in 2014 and 2015, the country should have adequate total firm-generation capacity until about 2018. Simultaneously, grid stability is high: in terms of overall system stability (including grids), Germany’s power-supply system continues to rank among the world’s most reliable. Average annual downtime (approximately 16 minutes in 2013) remains among the lowest in Europe and globally; the country’s reserve margin (that is, available generation capacity beyond the level necessary to meet normal peak demand) currently handily exceeds policy makers’ targeted 5 percent.

    Germany will be challenged, however, to deliver the grid extension necessary to bridge the often considerable distances between areas of high power generation from renewables (for example, northern Germany, which generates ample wind power) and the major consumption centers (notably, the industrial centers in southern Germany). In fact, extension of the transmission system could become the Achilles’ heel of the country’s energy transformation, driven by ongoing “not in my backyard”-type resistance from residents (which already appears likely to lead to the rerouting of at least one planned critical line) and exacerbated by the postponement of the commissioning dates of several key grid-extension projects.

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