June 15, 2013
Germany

Tilting at windmills: Germany’s Energiewende bodes ill for the country’s European leadership

The Economist | Jun 15th 2013 | www.economist.com

Osterath’s 12,000 citizens are angry. Their quiet backwater in the Ruhr, close to Düsseldorf, is the proposed site for the biggest converter station in Europe. This vast installation will transform high-voltage direct current to alternating current. It will be an important link in Germany’s new “power highway”, a network of transmission lines that will send electricity generated by wind farms in the north of the country, and offshore in the North and Baltic Seas, to the manufacturing belt in the south. Osterath’s residents reckon it will be a monstrous eyesore, and intend to stop it. A bill to determine the outlines of the new power highway is making its way through the federal parliament. Of 3,300 objections from the public, 2,300 are from Osterath.

This kind of nimbyism is only one of many problems facing Germany’s Energiewende. The literal translation is energy change or turn, but this is more of a revolution, designed to convert Europe’s biggest industrial economy so that it runs largely on renewable energy. This includes ambitious conservation and efficiency goals, but above all it involves changing the power supply. By 2022 all nuclear power plants, which now produce 16% of the country’s electricity, are to be switched off. And by 2050 about 80% of electricity is to come from renewable sources, compared with 22% now.

In principle, this bold plan brings huge opportunities for Germany, not only to help save the planet but to become a global leader in tomorrow’s energy-efficient and green technologies. The reality has been messier, marked by price distortions, political U-turns, surging costs and inadequate infrastructure.

Businessmen say the Energiewende will kill German industry. Power experts worry about blackouts. Voters are furious about ever higher fuel bills. The chaos undermines Germany’s claim to efficiency, threatens its vaunted competitiveness and unnecessarily burdens households. It also demonstrates Germany’s curious refusal to think about Europe strategically.

Germans have long had a greener streak than other Europeans and a greater fear of nuclear power. Some put this down to cultural romanticism, but more probably the worries stem from living in a country with a dense population and few natural resources, and a culture that values earnest efforts to do good. Whatever their origin, the environmental convictions run deep. The Greens, an environmentalist party founded only three decades ago, are now a powerful political force. They won more than 10% of the national vote in the 2009 federal elections and do a lot better still in many urban areas.

The Energiewende’s formal targets were set in the early 2000s, when the Greens were the junior partner in a coalition with the SPD under Gerhard Schröder. A renewable-energy law passed in 2000 promised 20 years of guaranteed prices and priority access to the power grid for anyone who installed wind, solar or other renewable sources. These “feed-in tariffs” were paid for by a surcharge on all electricity bills. To protect German competitiveness, the most energy-intensive firms, such as producers of chemicals, were spared the extra whack.

The incentives were designed to be predictable, but energy policy, particularly in Mrs Merkel’s second term, has been anything but. The first U-turn came in 2010, with the passage of a new law that nuclear power plants, originally destined to be phased out by 2022, would be switched off only when they reached the end of their working life. That decision, deeply unpopular with many Germans, was reversed only six months later, prompted by Japan’s Fukushima nuclear disaster in March 2011. The day after Fukushima Mrs Merkel decided that Germany would ditch nuclear power after all. Eight reactors were to be switched off immediately, the rest by 2022.

The chancellor claimed that her second U-turn was a reasonable response to the Fukushima catastrophe. The dangers of nuclear power had been made all too clear. Cynics saw an ulterior political motive. Largely because of its pro-nuclear stance, Mrs Merkel’s CDU party, which had long dominated politics in Baden-Württemberg, a big southern state, was slipping in the polls before an election there. The change of mind was a desperate attempt to show green credentials. In political terms it failed: the CDU lost and the Greens gained their first state premier. Economically the switch brought huge uncertainty.

Germans had responded with gusto to the generous feed-in tariffs, installing anything from solar panels on roofs to industrial-scale wind parks. Bavaria now has more photovoltaic capacity than America, with only 0.7% of its land mass. The share of Germany’s electricity derived from renewable sources rose from 15% in 2008 to 22% in 2012. On current plans it will be 48% by 2022, says Stephan Kohler, head of the German Energy Agency, a research group.

The trouble is that most wind and solar power is generated a long way from the parts of the country where the nuclear plants are to be switched off, so new power grids have to be built (see map). Their construction is far behind schedule. On current plans Germany needs more than 4,000km of new transmission lines by 2022, of which less than 300km have been built. One reason is the Osterath mentality: people see no paradox in demanding an end to nuclear power but objecting to the new transmission grid being built in their backyard. Another is the lack of co-ordination between different states. Political wrangling has made cross-country projects hard to plan and harder to finance. Fifteen out of 24 grid-expansion projects are up to seven years behind schedule.

A second problem is that many sources of renewable energy are intermittent. The wind does not blow, nor does the sun shine, all the time. Bulk electricity storage is still in its infancy, and there are not enough mountains for much hydroelectric storage, so Germany still needs a big back-up capacity of conventionally generated power. But because so much renewable power has come on stream, and because it has priority access to the grid, the spot price of electricity has fallen to a level at which modern, clean natural-gas power plants are not viable. Only ageing, dirty brown-coal power stations with low variable costs can compete.

The result is a web of grotesque distortions. On sunny days Germany pushes its excess power into the European grid at a loss. Because producers of renewables are paid a fixed price, their subsidy rises as the spot price of electricity falls. On cloudy days Germany relies ever more on brown coal. Last year its CO2 emissions rose.

The cost of this mess is passed on to electricity users. Household fuel bills have gone up by a quarter over the past three years, to 40-50% above the EU average. And because the contracts guaranteeing renewables prices are set for 20 years, the problem will get worse as more such supplies come on stream. Thomas Vahlenkamp of McKinsey reckons that the cost of the Energiewende will double over the next decade. Rising electricity bills will dampen German consumers’ spending, exactly the opposite of what is needed to rebalance the economy.

Winners and losers

The impact on German business is complicated. Some firms have grown fat on the renewables surge. Siemens now gets 40% of its revenues from energy-saving and green technologies. But industrial power users are in a bind. As the renewables surcharge has risen, ever more companies have demanded exemptions. The number of officially “energy-intensive” firms has risen from 59 in 2003 to over 2,000 today. Between them they use around a fifth of Germany’s power. Companies that do not qualify for the exemption but still use a lot of power are increasingly building their own generating capacity to avoid paying the green levy. For instance, Storopack, the packaging firm described in the previous section, has built a biomass-fuelled generator at its plant in Mainleus. As more firms generate their own power, fewer contribute to the high prices promised to renewables producers. And the European Commission has started to investigate the exemptions as a possibly illegal form of state aid.

All this is happening as prices for natural gas and electricity in North America are plunging, thanks to the shale revolution, so Germany’s most energy-intensive industries are now eyeing expansion on the other side of the Atlantic. There is a risk of a ripple effect as their customers start to move, too.

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