Nº 19906/4/2017

INTERNATIONAL

The German Energiewende - a titanicbattle between policies and marketsProf. Graham Weale Honorary Professor of Energy Economics and Politics, Ruhr University Bochum, Germany(graham.weale@rub.de)

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Introduction

Much has been written about the German Energiewende* and therefore it can bedifficult to add to the plethora of material which exists on the subject. However, theherculean fight between policies and market and the contradictions to which thisleads has perhaps not been covered as thoroughly as it deserves.

What adds particular interest to the subject is the contrast between develop-ments in Germany and the US with respect to one of the major goals – reductionof greenhouse gas emission. Whereas, much to the embarrassment of the Germangovernment, emissions (including those from the power sector) have hardly fallenpartly because an important market factor – the relationship between the gas andcoal price – has been unfavourable, in the US, with much weaker policies and thatsame market factor operating in the reverse direction (relatively cheaper gas dueto the impact of shale gas), emissions have recently fallen significantly faster. Thisserves as a timely reminder that energy policies can struggle to meet all of theirgoals if the markets are stacked against them. But also, as will be seen in thepaper, powerful energy policies can substantially neutralise local markets andgreatly reduce their ability to achieve the normally intended benefit of welfare op-timisation.

Origins of the Energiewende

The Energiewende might have been much slower to get off the ground, had the so-cial government which was pushing nuclear power in the 1950s and 1960s han-dled the protests from a significant part of the voting community (especiallystudents) more sensitively. Instead of engaging with the protesters, the govern-ment simply sent them home and over the course of time they became thefounders of the Green Party. It was this party which even in the 1970s was askingthe question as to whether over some decades the majority of energy requirementscould be met from renewable sources and therefore displace fossil fuels and nu-clear energy in the power sector.

The first renewables support scheme was introduced in 1990, rather on a lab-oratory scale, but it was at the turn of this century that the Energiewende reallybegan, although only earning the title some eleven years later. The Red-Green coali-tion in power from 1998 wanted to accelerate the build-up of renewable energy

* The Energiewende (German for energy transition) is the transition by Germany to a low carbon, environ-mentally sound, reliable, and affordable energy supply. The new system will rely heavily on renewable energy(particularly wind, photovoltaics, and hydroelectricity), energy efficiency, and energy demand management.

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and also to phase out nuclear power. This was at exactly the time when the powermarkets were being liberalised following the European Commission decision. Therewas then no explicit intention to break up the large power generators or to intro-duce measures which were manifestly inconsistent with a well-functioning powermarket, although without anyone realising how the renewables programme wouldeffectively neuter the market, this is what progressively happened.

During the 2000s, the renewables provisions were progressively strengthenedand in 2009 the subsidy programme was already running out of control. It was theFukushima incident which almost overnight transformed the energy policy situa-tion in Germany and triggered the rapid and irreversible phase-out of nuclear power.2011 was the year in which the term “Energiewende” came into existence and theyear in which the government announced a hastily prepared and rather contradic-tory set of measures as tabulated below. By far, the two most important aims, andthe only two running to plan, are the phase out of nuclear power and the renew-ables share in gross electricity consumption. Almost all other aims could be con-sidered more as a wish list, especially the very ambitious CO2 emissions reduction

Powerful energy policies can substantially neutralise local marketsand greatly reduce their ability to achieve the normally intendedbenefit of welfare optimisation

Targets 2020 2030

1. Phase out nuclear power by 2022

2. CO2 gas emissions: reduce vs. 1990 by 40% 55%

3. Renewables (RES): increase in gross final energy consumption to 18% 30%

Increase RES share in gross elec. consumption to 35% 50%

Offshore wind capacity: increase to (in GW) 10 25

4. Primary energy consumption: reduce vs. 2008 to 20%

Electricity consumption: reduce vs. 2008 by 10%

5. Energy consumption in transport: reduce vs. 2008 by 10%

Electric vehicles: increase number to 1 millón 6 millones

6. Grid expansion (km) 1855

7. Supply security (minutes p.a. unavailability) 17 17

8. Renewables surcharge: limit to € cts 3.5/kWh

TABLE 1.Energiewende Aims - 2011

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target, given that the growth of renewables would broadly only compensate for theclosure of nuclear plants.

What the table does not show, and what was never an explicit part of the policywas to largely destroy the working of the power market in respect of its ability tofinance new investments and even cover the fixed costs of system-critical plantsto keep them in operation. Expropriation of private property was of course a directresult of the decision to closure nuclear plants prematurely, but the extent to whichthe interference with the power market would deprive shareholders of value wasnever foreseen.

The results in terms of a 30% share of electricity generation by 2015 (and over33% for 2016) were impressive, but equally the subsidies required became veryhigh, as the two figures below show.

It was the Fukushima incident which almost overnight transformedthe energy policy situation in Germany and triggered the rapid andirreversible phase-out of nuclear power

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

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200

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400

500

600

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FIGURE 1.Power Generation in Germany since 2000

Source: German Ministry of Economics

Hard coal Brown coal Gas Nuclear Other Wind Water Biomass PV Waste

TWh

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Comprehensive expropriation of shareholder property

A singular irony of the Energiewende was the extent to which it frustrated the properfunctioning of the wholesale power market at exactly the same time when the Eu-ropean Commission was wanting to make a success of liberalisation. Originallythere were two instruments to achieve decarbonisation and to provide for a se-cure, competitive power supply – the Emissions Trading System (ETS) and thewholesale market. Theoretically (although the author has some major reservations),these instruments alone should have been sufficient to meet these objectives. ButGermany (and other countries) introduced its own renewables support policy as asupplement to those two instruments and then the European Commission broughtinto play similar policies with its famous 20-20-20 package, which were developedand voted upon between 2007 and 2009. The German ambitions regarding elec-trical renewables and CO2 targets were much higher than Europe's, which led to acorrespondingly greater infringement of the power market functioning.

The irony of the Energiewende was the extent to which it frustrated theproper functioning of the wholesale power market at exactly the sametime when the European Commission was wanting to make a successof liberalisation

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

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25

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FIGURE 2.Annual subsidies for renewable energy

2016

Other Wind offshore Wind onshore Biomass Solar energy

€ bn

Source: BDEW (German association for energy and water)

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Germany has some of the strongest laws protecting private property rights, butwhen another political issue rises to the top of the agenda, then even these canbe compromised, and this is playing out in three different ways.

First, the immediate closure of eight nuclear plants (all older than 30 years) inMarch 2011 deprived the owners of the net income resulting from the previouslyagreed production profile. Similarly, the accelerated closure of the remainingplants also destroyed shareholder value. The actions on the part of the govern-ment led to a series of court cases, but apart from one case which turned on alegal technicality and a second case which will be the subject of international ar-bitration (because the owner is Swedish rather than Germany), there will be nocompensation.

Second, the rapid build-up of renewables power has been one of four factorsleading to excessive generating capacity and therefore a total collapse of the powerprice. The other three factors of material but somewhat less significance are: (i)the global crisis, which still causes the level of demand to be several percent lowerthan what was expected (ii) the low coal price, which causes the typical price-set-ting plants to have a much lower variable cost than before 2011 (iii) excessive in-vestment on the part of the power companies. These factors have led in total tothe equity value of the utilities being reduced to less than one quarter of their pre-Energiewende value (2011).

Third, not content to rely on the ETS to do the job, and also because Germanyhas its own CO2 emission reduction target, the government is warming up to a coalphase-out plan. At least it recognises that the country cannot move out of nuclearpower and coal at the same time, but even so it raises the question as to why agovernment claiming to be in favour of market-based approaches is entertainingsuch a plan. Although the forward price for CO2 certificates in 2019 stops wellshort of € 10/ tonne, come the second half of the next decade with no nuclearpower left in Germany, and potentially closures elsewhere, the price may quickly riseto reach €30-40/tonne and then it will become much more potent, directly trig-gering the closure of a substantial amount of coal capacity.

These policies are obviously leading to the death of traditional utilities. BothRWE and E.On, the two largest utilities, split themselves in different ways into a“utility of the future” covering renewables, networks and retail, and a “traditionalutility” with thermal and nuclear plants along with trading operations. The value ofthe traditional utilities, which were recently further encumbered with large paymentsin respect of their nuclear liability, have now very limited market value. As the daysof coal mining drew to a close (the last mine will be closed in 2018), the remain-ing companies were merged together into Ruhrkohle AG (RAG) and it is not incon-

ceivable that something similar may happen with respect to parts of the remain-ing fossil fuel plants.

Effective neutering of the market, but still expecting it to deliver

Whilst it is absolutely at the centre of German energy policy and has very strongpopular support, there is no economic reason to be introducing any renewablepower plants. On the one hand, there is neither the signal from the wholesale mar-ket that new capacity is needed, nor is there one from the ETS that decarbonisa-tion needs to be accelerated in order to meet the carbon caps. On the other hand,to introduce such capacity into a market through subsidy mechanisms is a flagrantbreach of the market concept, and to have introduced around 100 GW of suchplant (by the end of 2016) raises the very fair question of “what market?”.

What is astonishing is that politicians do not seem to realise what they havedone to the market and nonetheless harbour the expectation that this “market” willlead to an efficient and competitive power supply. They tacitly believe that the so-called Energy-Only market (with no capacity mechanism) can be relied upon to keepthe lights on, and even more optimistically should eventually be sufficient to fi-nance renewables. The key assumption to which the politicians cling is that assoon as capacity becomes tight, then scarcity-pricing will kick in and restore thewholesale price to the level needed to finance new plants. With the average mar-ginal price of plants declining in the future (due to the renewables contribution), onewould be dependent upon a very high average scarcity price, which for various rea-sons is never likely to materialise to the level required for investment decisions.

The German government has therefore effectively reduced the role of the whole-sale market to that of optimal dispatching of power plants, and it will remain inthis position as long as the renewables support programme continues in its cur-rent form. As mentioned, there is a medium-term plan to phase out coal, but tak-ing such action would only compound the damage being done to the wholesalemarket.

Therefore, one can reach the unavoidable conclusion that despite all the rheto-ric about market virtues, the German government has effectively supplanted the in-

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The Government is warming up to a coal phase-out plan, even thoughit recognises that the country cannot move out of nuclear power andcoal at the same time

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tended market with a comprehensive central-planning approach, the level of plan-ning not only determining the quantity of renewable capacity to be introduced eachyear, but also the division by type.

As against this, and as a result of EU requirements, a much more competitiveapproach to the procurement of renewables through competitive tendering hasbeen introduced and the requirement for direct marketing is a further attempt toincrease the integration of renewables into what remains of a market.

Achieving a high level of renewables integration but benefitting heavily from its nine neighbours

Although achieved at a very high cost, now running at nearly 1% of GDP, Germanyhas certainly been successful in achieving already 33% of power generation by theend of 2016, just 2 percentage points below of the 2020 target. At a basic level,this simply shows what can be achieved by throwing a great deal of money at anissue. But it has introduced completely different classes of investors and broughtabout a certain “democratisation” of energy supply, at the expense of the originalincumbents. Figure 3 below shows a forecast based on investments to date as of2012 and expected trends as to the generation by type undertaken by different in-vestor classes. One factor which has certainly inflamed renewables investment todate has been the very low interest rates: investors found better returns thanbanks were offering and were also able to borrow money at very low rates. With-out this factor it is unlikely that renewable capacity in Germany (and other coun-tries) would have developed at such a rate.

Around the turn of the century, the German utilities foolishly stated that at bestsome 3% of variable renewables could be integrated into the power system with-out serious stability problems – perhaps partly a warning shot across the Govern-ment’s bows not to accelerate the renewables programme. But only 15 years laterthe power system managed to accommodate no less than 10 times this level.Several factors contributed to the success:

• The substantial over-capacity of the system,

• Investments into both gas and coal plants to make them considerably moreflexible and able to operate efficiently at lower part loads,

What is astonishing is that politicians do not seem to realise what theyhave done to the market and nonetheless harbour the expectation thatthis “market” will lead to an efficient and competitive power supply

• Rapidly acquired skills of network operators and manufacturers of renewablesplants,

• The commanding advantage of being at the centre of Europe with nine differentneighbours to whom short-term surplus renewable power could be exported, nomatter what technical and economic difficulties it might create for them; andalso the ability to import power from countries who did not close their nuclearplants (France, Switzerland) at times of low renewables generation. Had Ger-many been an island, it would have been inconceivable to integrate such a highshare of nuclear power.

One valuable by-product of the Energiewende is that German engineers and net-work operators have accumulated highly valuable expertise in managing a high re-newables share which will certainly be valuable in other countries over time.

Energy Efficiency, and renewables shares of transport and heat markets are lagging behind

The international spotlight is focused on Germany’s replacement of nuclear powerby renewables, but the scope of the Energiewende and also the EU targets arewider than just the power sector. They also include a rising renewables share in thetransport and heating sectors and a certain efficiency target. In all these threeareas the country is making less impressive progresses and it can be fairly asked

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EVU0

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FIGURE 3.Forecast of power generation / expenditure by investor class 2012-2025

Wind offshore Wind onshore Biomass/biogas PV

TWh

Source: RWE AG and Duisburg-Essen University

SW Private investors

Farmers Insusancecompanies

IFF Real Statecompanies

Others

49 21 41 44 116 30 28 12Sum invested (€bn.)

whether some of the money spent on electrical renewables should not have beenapplied to these three areas.

Regarding renewables in transport, Germany is facing the same challenges asother countries in being able to increase the proportion of bio-fuels. It is makingsome progresses in the growth of renewables in the heating sector.

Improvements in Energy Efficiency are challenging Germany as it occurs in manyother countries. The planned renovation rates of buildings at around 1% p.a. isonly half of the target and shows no signs of rising.

Limited success as a global leader of transitions – running ahead of the EU policies

With its Energiewende, Germany set itself the ambition of leading the world in En-ergy Transitions. Other countries or states also share this ambition – the UK, Swe-den, and California. Whilst the high share of electrical renewables and theirsuccessful integration is impressive, overall Germany is far from achieving its tar-get as a world leader. Its hardly surprising failure to reduce its CO2 emissions sig-nificantly does little to recommend its policy, and the complete abandonment ofnuclear power, which many consider to be an indispensable component to achievedecarbonisation by 2050, does not suggest that this is a recipe for success. Theexorbitant cost is another factor considered very negatively, especially in the US.

But what is indisputable is that the PV subsidies and the enormous uptake vol-umes to which they contributed moved the world down the learning curve to a pointwhich could only have been dreamt of previously – perhaps one of the greatestcontributions to global energy transitions to date.

How sure is the goal and what will it achieve?

In the power sector alone, the Energiewende has already broken through a numberof barriers. The 35% electricity renewables target of 2020 will almost certainly bemet three years earlier and the target of 55-60% of 2035 does not seem unreal-istic, based on current levels of demand (ca. 600 TWh gross). Although not usingthe label “electrification”, the government recently outlined plans to decarbonise

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Germany is far from achieving its target as a world leader. Its hardlysurprising failure to reduce its CO2 emissions significantly does little to recommend its policy

the heating and transport sectors through, respectively, heat pumps and electricvehicles, which could then add another 200 TWh demand, making 800 TWh net intotal. Of this, optimistically, some 600 TWh could be generated from renewablesdepending on the time of day, and day of the year when the renewable power wouldbe generated. But some 200 TWh would have to be stored, most likely usingpower-to-gas technology which only has a cycle efficiency of 25%, meaning that notan incremental 200 TWh but 800 TWh would need to be generated. This wouldstretch the renewable resources of the country beyond its physical (let alone ac-ceptable) potential, which underlines the point that without a nuclear (or theoret-ically coal with CCS) component, the 2050 decarbonisation goals cannot beachieved.

Therefore, in this sense, whilst the electrical renewables dimension of the En-ergiewende is impressive, it is unlikely that this alone will be sufficient to reach theend game, and for this reason it is doubtful that the programme will prove to bethe international blueprint for energy transitions to which it lays claim.

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Whilst the electrical renewables dimension of the Energiewendeis impressive, it is doubtful that the programme will prove to be theinternational blueprint for energy transitions

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