Germany’s energy policy: Hurrying ahead in the wrong direction

Germany wants to make it big. By the year 2050, German government aims to have achieved an 80 percent target for electricity supply from renewable energy sources. As stated by German Government, the resulting new energy system also has to be secure and affordable. Its energy concept is flamboyantly called “Energy Change” (“Energiewende”). Proponents of the German Renewable Energy Act (GREA) – the core instrument of the energy legislation – are proud of the dynamic development of the use of renewable energy sources in Germany. They believe it is an unmatched recipe for success and a prototype for other countries’ legislation regarding renewable energies. Renewable energy source receives a payment guaranteed price according to its generation cost, and network operators must feed this electricity into the grid. No doubt this provides incentives to every company involved in renewable energy generation business to invest and produce as much as possible. At first sight, one’s apt to confirm this conception. Since its introduction, the percentage of renewables in the consumption of electricity grew from 8 percent to 23 percent in 2012, which is more than a quarter of Germany’s 80 percent goal in 2050. The share of electricity production from renewables was about 22 percent in 2012; 7.3 percent wind power, 5.8 percent biomass energy, 4.6 percent solar power, 3.3 percent water power and 0.8 percent power from waste combustion.

So far so good, but a look at the differences in production capacity and power generation reveals some problems in German alleged success story. While solar power capacity is about 38 percent of the total renewable capacity, the actual power production is only 17 percent. Wind contributes little more than 45 percent of the capacity and 42 percent of generation. Only the proportion of production from bioenergy and water power is larger than its capacity share. Renewable energy capacity is unreliable and seldom working at its maximum. While wind power and solar power are expensive because of high fixed costs and underutilization, relatively high fuel costs add to the costs of producing electricity from biomass. Since the network operators are forced to feed electricity from renewable sources into the grid, preferentially to the electricity generated by conventional sources, it is produced where investors find the best natural conditions. Consequently renewable energy capacities are scattered across the country and often away from big energy users.

Therefore, Germany is confronted with growing costs of integration and redistribution of highly fluctuating electricity production. According to the German Association of Energy and Water Industries, from 2000 to 2013 the difference between the sum of all feed-in-tariffs and the market value of electricity generated from renewable energy sources grew from 0.9 billion euros to about 16 billion euros. Germany’s energy users have to pay the growing bill. While in 2000, ordinary households had to pay merely 0.2 eurocent per kWh to cover the subsidies for renewable energies, today the price tag is 5.37 eurocent per kWh. The next years’ forecast is 6.24 eurocents. Meanwhile some inconsequential tariff cuts for electricity generation from solar power couldn’t compensate the capacity growth and exploding solar energy production triggered by rapidly shrinking solar panel prices. In 2013 energy users paid 246 euros per MWh, 126 euros per MWh for biomass power, 138 euros per MWh for offshore wind power and 49 euros per MWh for onshore wind power. More than half of the share of the costs for energy users is allotted to solar power, a quarter to biomass power and about 16 percent to onshore wind power. About one percent of the contribution covers the costs to market green electricity. The apportionment of the feed-in-tariff in 2013 adds up to almost 200 euros per capita. The additional costs to stabilize the grid are not even included. In its Network Development Plan 2012, German government estimates the midterm costs of network expansion to be 14 to 22 billion Euros. Due to the unreliability of renewable power production, there will be very little substitution of conventional capacity in the next years, unless a breakthrough in storage technology makes reasonably priced storage capacity possible. After the shutdown of eight nuclear power stations in Germany, and in anticipation of the complete nuclear phase-out in 2022, additional conventional power capacity is necessary to deal with the fluctuating power from renewables. A new study by PROGNOS Germany estimates that fossil-fueled thermal power stations must contribute nearly three quarters of backed capacity in 2020 and about a half in 2050. No wonder coal consumption is rising in Germany’s electricity production. Even European neighbor countries already worry about the impact of Germany’s power dumping into their grids.

The increasing costs of Germany’s energy policy are already an economic problem. Not for nothing was German government forced to exempt some energy-intensive enterprises to protect their ability to compete at the global market. Nevertheless, most small and medium German enterprises pay the apportionment without deduction. Energy users and consumers will not be able to escape the dire consequences of Germany’s energy policy. According to EUROSTAT, in 2012 German households paid the third highest price for electricity in Europe. The distributional consequences of the Renewable Energy Act are alarming. Therefore, critics of all political convictions start to worry about energy poverty of low income households. Since renewable power production also has an uneven spatial distribution, the net flow of subsidies between provinces has a redistributive effect. While German provinces like Brandenburg, Schleswig-Holstein, Mecklenburg-Vorpommern, Sachsen-Anhalt and Bavaria received a net flow of funds of up to 160 per capita; accordingly, the net flow from province like Bremen, Hamburg, Saarland and other German states was negative. Therefore, the GREA apportionment system is already taunted “the second financial equalization scheme” between the provinces. Understandably, reforms of the GREA failed for lack of agreement in the German Federal Assembly.

Even the environmental balance of the “Energiewende” is not as favorable as many proponents would like us to believe. On the one hand, renewable power isn’t reducing any amount of carbon dioxide as long as other power stations can use complementary EU emissions, trading carbon permits for burning more fossil fuels. On the other hand, renewable energies add to the environmental burden of power generation. Wind power kills rare birds, biomass production needs lots of fertilizer and pesticides and solar power is very resource hungry due to a very low energy return on resources invested. The high costs per power production are strictly related to the use of resources. In terms of opportunity costs, it would be wise to take the resources and invest in other, more environmentally effective technologies. Even if renewable energy could really substitute scarce fossil fuels, it is inefficient to impede the allocative mechanism of the market. Rising fuel prices signal the scarcity of fossil fuels and induce research and development in the exploration of energy resources and new energy technologies. There is no need to speed up this process, except for the need to internalize environmental externalities of energy use. But, as economists always recommend, this could be done using fossil fuel taxes or other market oriented policies to regulate the emission of pollutants.

Germany’s “Energiewende” is neither a success story, nor a boost for technology development promoting Germany’s global competitiveness. It is an ideological setback that takes us to the dark ages of centrally planned economy. Politicians are trying to erect a façade of clean and secure power supply to please green lobbyists, eco-ideologues and innocent voters. Given the escalating burden of this political bubble, its collapse is simply a matter of time. That’s no reason to relax, because the collateral damage isn’t reversible.

Steffen Hentrich