Is the « Energiewende » a threat to the German socio-economic model?

Jean-Pierre Schaeken Willemaers, Chairman of the Energy, Climate & Environment Department of the Thomas More Institute

February 2014 • Opinion •

The oil crisis of the 70s and the meltdown in Chernobyl lead, in Germany, to the energy transformation (Energiewende) policy whose implementation has been accelerated after the 2011 tsunami in Japan. The German Renewable Energy Act (Erneubare Energien Gesetz, EEG) which came into force in 2000, was designed, inter alia, to promote renewable energy. The law guarantees to the owners of solar and wind installations a fixed price for the electricity produced, far above the market price, whose financing is paid by the end users with some exemptions. It was the initial spark of a rapid deployment of renewable power. The EEG charges on household electric bills grew from EUR 5.6 billions in 2006 to EUR 13.5 billions in 2011 (1), and this latter figure is expected to double by 2014.

The German Energy Minister, Sigmar Gabriel, said, in his first major policy speech on January 20, 2014, that annual costs for renewables of about EUR 24 billions are already pushing the limits of what German economy could handle (2). This increase is largely due to the solar and wind build-out as well as to nuclear phase-out program. The German Minister for Environment stated that the total cost of the Energiewende could reach EUR 1 trillion. The Karlsruhe institute of technology predicts that wholesale electricity prices will be 70% higher by 2025. None the less, Germany projects to significantly increase the share of intermittent renewables in its electricity mix although with caps (3), but above EU targets.

Some big energy intensive companies have managed to win exemptions from the surcharge, but smaller and family owned businesses that are the bedrock of the economy and the households are required to pay such extra costs.

“A nearly 50% increase in the EEG surcharge between 2012 and 2013 has heightened concerns that the Energiewende as it is currently formulated, is not meeting one of its primary objectives: providing competitive priced electricity in Germany. Germany’s electricity prices are rising at the same time that development and production of new, low cost natural gas resources in North America is reducing energy costs there. As a result, Germany industrial gas prices are now more than three times higher than those in the US [….]. Moreover, costs in Germany continue to increase as renewables deployment progresses. The direct net cost of renewables support is expected to exceed EUR 19 billions in 2013. The full cost of integrating renewables is actually higher than indicated here, as the figures exclude the substantial costs of network development and management associated with rising renewable penetration” (4).

“Germany must build or upgrade 8,300 km of transmission lines (not including connection to offshore wind farms) [….]. The EUR 20 billions national grid plan assumes that the biggest needs will be to supply northern wind power to southern and western consumers [….]. But the vision is contested. Expansion of the grid has been thwarted by bureaucrats’ inertia, politicians’ foot dragging and activism by those who hate transmission masts as much as they do nuclear power. Even upgrades to existing lines can mobilise opposition, as in Quickborn, south of Niebüll. Hard-core decentralists deny that power must be transmitted over long distances” (5).

Energy costs are critical to Germany’s industrial competitiveness in global and domestic markets. If electricity prices increase in Germany relative to the rest of the world, products made in other countries can replace German exports. At the same time, imports pose a greater threat to cost-disadvantaged domestic producers.

“Lower net exports and investment leakages together lead to direct losses of output and jobs [….]. Worse still, the relocation of a company could force other companies to follow, regardless of their energy intensity, in order to hold on their customers and suppliers. Indirect effects would thus multiply direct losses of output and jobs” (6).

In two separate studies published on 23 and 24 May 2013, the International Energy Agency (IEA), raised concerns regarding energy policy of Germany (Energiewende) that consists of phasing out nuclear and increasing the share of renewables. This policy led to an increase of German electricity prices that are now among the highest in Europe and is likely to impede economic growth. The IEA study records that contrary to Germany, “Finland has succeeded in developing a particularly well-diversified national electricity production mix with roughly three equal thirds of its production coming from renewables, nuclear and hydrocarbon energies respectively. Thanks to its policy, Finland is on the track to meet its EU GHG emissions reduction target of 20% below 1990 level by 2020.” IEA considers that “further policy measures are necessary if the country’s ambitious transformation is to maintain a balance between sustainability, affordability and competitiveness.”

Four scientists are asking environmentalists to support the development of safe nuclear power as one way to cut fossil fuel pollution (7). They sent a letter in November 2013 to leading environmental groups and politicians around the world. The letter urges a crucial discussion on the role of nuclear power in fighting climate change. The joint letter says:” The time has come to embrace development and deployment of safe nuclear power systems as part of efforts to build a new global energy supply.”

The German DIW (Deutsche Institut für Wirtschafsforschung) estimates that the power utilities will have to invest about EUR 20 billions/year over the next 10 years to make up for the phase out of nuclear power plants. DENA (Deutsche Energie Agentur) warns that the kWh price could increase by 20% within 2020. The German Industry Federation (BDI) is still more pessimistic with 30% rise before the end of 2018. This jump would correspond to an extra cost of EUR 33 billions for the consumers, three quarter of which being supported by the industry. The industrial sectors mainly affected by increasing electricity prices are chemistry, basic metals, motor vehicles and machinery. The German Chemical Industry Association (Verband der Chemischen Industrie, VCI) has called for a new course in the German energy policy in order to preserve the competitiveness of Germany as a land of industry.

German utilities face unprecedented challenges: the closure of all nuclear power plants in the country by 2022, reduced power demand and a considerable boom in intermittent renewable energy pushing conventional electricty sources out of the market. The priority of power delivery in the grid granted to solar and wind power did not deliver the expected outcome. Indeed, such constraint did not lead to meeting the de-carbonisation targets, one of the main goals of the Energiewende, but make conventional power plants non profitable. Indeed, Germany’s CO2 emissions actually rose in 2012. This is due to the need of balancing variable renewables with conventional power generation and to large export of cheap US coal into Europe making coal plants cheap to operate and modern, efficient gas fired power plants to shut down. The failure of the carbon ETS system, with low priced certificates, has not helped. According to Gerard Mestrallet, CEO of GDF Suez, about 50,000 MW of gas fired capacity in Europe has been closed down or mothballed by 10 of continent’s biggest utilities over the past 5 to 6 years. This has implications for energy security, namely there may not be any gas plant available to provide peak power in Nothern Europe when the wind is not blowing and the sun is not shining.

Maria van der Hoeven, IEA executive director, called current energy costs, in Germany, for households and small businesses too large and unsustainable. The IEA says the government must reduce the costs of the EEG, distribute these costs more equitably and ensure that global investments deliver the most efficient outcome for consumers. She stressed the need to reform the exceptions for large energy intensive industries but cautioned that this should be done in a way that avoids driving industry out of the country.

Germany’s electricity networks have been under pressure since nuclear phase-out began, especially during the winter 2011-2012. Maria van der Hoeven stressed that expanding the transmission and distribution networks is the most important means of transforming the nation’s energy supply. It will cost EUR 70 billions at a time when public opinion is divided on paying more to the Energiewende and is more and more concerned with visual nuisances (the “not in my back yard” effect).

Moreover, social concerns are changing in Germany as well as in the EU. “The 2008 financial crash, the ensuing eurozone debt crisis and the weak recovery that followed, have changed the parameters of the debate and made it harder for policy makers to balance what are often mutually conflicting goals. There has been a tangible shift in Europe [….]. The balance has now moved away from reducing emissions at any cost to the question of affordability” (8).

The number of companies affected by social disputes is increasing in Germany. In 2012, 1.2 million workers were involved in strikes from 180,000 at the beginning of the year and the number of lost working days doubled compared to 2011 according to the Institute of Economic and Sciences (Wirtschafts-Wissenschaftliches Institut, WSI): 630,000 against 304,000 (9). Today a high percentage of German employees are impoverished because of Hartz IV (10) reforms and salaries cuts. They are affiliated to unions dedicated solely to the defense of their interests. The fragmentation of the trade-union landscape is likely to durably weaken the German “Mitbestimmung” model and the growing burden of environment levies and renewable energy subsidies are not going to mitigate such hardship, on the contrary.

“Germany is at the crossroads of critical decisions about its future energy policy. The current national energy strategy has become disconnected from its original objective to deliver competitive energy while reducing CO2 emissions [….]. Rising electricity costs present a challenge analogous to the one Germany faced a decade ago from rigid labor market. Solving that problem was key to enabling Germany’s formidable export performance in the years since. Today, costs put Germany’s international competitiveness, thus its economy, at risk. Rising electricity costs are a particular challenge to Germany’s export based economy. Exports of value-added goods and services made up 52% of Germany’s GDP in 2012. This strong export based economy is highly sensitive to any change in its competitive position to its peers [….]. Owing to the nature of Germany’ economy, high energy costs flow from energy intensive industries, mostly at the beginning of industrial value chains, to the other parts of the manufacturing sector, dominated by the German Mittelstand, and to the broader economy” (11).

The very generous support scheme for intermittent renewable power did not even lead to a net creation of jobs in Germany. On the contrary, a number of wind turbines and photovoltaic panels manufacturing and installation companies had to suppress jobs, filed request for winding-up agreement or worse, went bankrupt. This to say nothing of the job destruction in the power utilities, once wealthy, as a consequence of the shifting from fossil and nuclear to intermittent renewable power.

In conclusion, as energy costs is key to international competitiveness of German energy intensive industry, rising electricity prices are making them less competitive and are encouraging those firms to relocate elsewhere. Booming electricity costs are also cutting households purchasing power and have a negative impact on small and medium sized enterprises. These high prices are to a large extent a consequence of intermittent renewable energy and nuclear phase out policy.

Mister Gabriel submitted proposals for overhauling the energy law to Chancellor Angela Merkel’s cabinet on January 22, 2014. This proposal is intended to contain surging EEG related costs by cutting the subsidies paid to producers of electricity generated from solar and wind by about a third by 2015 while setting limits to improve control on the expansion of onshore wind and solar farms. Although he stressed that expansion of renewable energy needs to be controlled in order to avoid the anarchy that has been experienced previously, he has emphasized that he is not promising to lower electricity prices which are already among the highest in Europe.

Will this proposal be sufficient to protect the German socio-economic model that has been so successful up to now?

The EEG challenge was to deliver competitive energy while reducing CO2 emissions. The renewable Energy Act did not deliver any of those objectives. Nuclear phase out and shifting from gas to coal (lowest cost substitute thanks to cheap US exports) to fuel power plants did not contribute to climate policy. On the other hand, surging electricity prices have been jeopardizing industrial competitiveness and decreasing household purchasing power and consequently putting German socio-economic model at risk. Mister Gabriel’s proposal, although in the right direction, is not likely to improve sufficiently this situation. Indeed, affordability becomes more urgent than reducing CO2 emissions at all costs.

To preserve competitiveness, shouldn’t a more balanced mix of energy be adopted, involving a more moderate expansion of intermittent renewables and an higher contribution from nuclear and thermal power? Within such a framework, shouldn’t support schemes be cancelled for mature technologies such as onshore wind and solar power. This would automatically reduce relating investments and, consequently, re-balance the mix of power in favor of non-intermittent energy. Moreover, the high capital and connections costs and uncertain sustainability of offshore wind power suggest a more cautious expansion policy. This is the reason why the 15,000 MW target by 2030 proposed by the Minister of Energy and Economy should be scaled down. On the other hand, extending the operation of the 9 remaining nuclear power stations beyond 2022 and enhancing the role of conventional electricity, particularly gas, would better secure power supply and decrease the heavy investments in electricity networks.

Notes •

(1) Willem Post, Independant consultant, The Energy Collective, January 16, 2012.

(2) According to the Bundesverband der Energie-und Wasserwirtschaft e.V (BDEW), the average electricity price for a three person household increased to 28.50cEUR/kWh in 2013 from 25.23 cEUR/kWh in 2011, Stand January 31, 2013.

(3) Sigmar Gabriel’s proposal for overhauling the energy law, to Angela Merkel’s new cabinet on January 22, 2014.

(4) The challenge to Germany’s global competitiveness in a new energy world, HIS Inc., October 2013.

(5) “Energiewende”, The Economist, July 28, 2012.

(6) See footnote 3.

(7) James Hansen (former top Nasa scientist and now at Columbia university), Ken Caldeira (Carnegie Institution), Kerry Emmanuel (MIT) and Tom Wighley (university of Adelaide in Australia).

(8) “Struggle to strike the right balance”, Financial Times, September 14, 2013.

(9) Institute of Economic and Social Research (WSI), Annual report on industrial action for 2012, February 2013.

(10) Hartz IV reforms, implemented on January 1, 2005, chaired by Peter Hartz, brought together the unemployment benefits and social welfare into one neat package. Unemployment has considerably dropped since then, but jobless people are forced to accept the next job they can find even if it is low paid.

(11) The challenge to Germany’s global competitiveness in a new energy world, op. cit.