January 17, 2014
Germany

Germany’s energy transition: Sunny, windy, costly and dirty

Jan 18th 2014 | BERLIN | From the print edition | The Economist | www.economist.com

Sigmar Gabriel has been on a roll. The boss of Germany’s centre-left Social Democrats (SPD) has herded his party into a coalition with Chancellor Angela Merkel and become vice-chancellor. He is jovial, convivial and aligned with the Zeitgeist. Demonstrating the SPD’s vision of work-life balance, he plans to take Wednesday afternoons off to pick up his two-year-old daughter from her crèche.

But Mr Gabriel, who is mulling a run for chancellor in 2017, will by then be judged on a more daring project. As part of his coalition deal with Mrs Merkel, he is now a “super minister” combining two portfolios, energy and the economy. He is thus in charge of rescuing Germany’s most ambitious and risky domestic reform: the simultaneous exits from nuclear and fossil-fuel energy, collectively known as the Energiewende, a term that means energy “turn” or “revolution”.

More a marketing slogan than a coherent policy, the Energiewende is mainly a set of timetables for different goals. Germany’s last nuclear plant is to be switched off in 2022. The share of renewable energy from sun, wind and biomass is meant to rise to 80% of electricity production, and 60% of overall energy use, by 2050. And emissions of greenhouse gases are supposed to fall, relative to those in 1990, by 70% in 2040 and 80-95% by 2050.

German consumers and voters like these targets. But they increasingly dislike their side-effects. First, there is the rising cost of electricity. This is a consequence of a renewable-energy law passed in 2000 which guarantees not only 20 years of fixed high prices for solar and wind producers but also preferred access to the electricity grid. As a result, Bavarian roofs now gleam with solar panels and windmills dominate entire landscapes. Last year, the share of renewables in electricity production hit a record 23.4%.

This subsidy is costly. The difference between the market price for electricity and the higher fixed price for renewables is passed on to consumers, whose bills have been rising for years. An average household now pays an extra €260 ($355) a year to subsidise renewables: the total cost of renewable subsidies in 2013 was €16 billion. Costs are also going up for companies, making them less competitive than rivals from America, where energy prices are falling thanks to the fracking boom.

To forestall job losses, Germany therefore exempts companies who depend on electricity and compete globally from paying the subsidy. But the European Union’s competition commissioner, Joaquín Almunia, has been investigating whether the entire package of subsidies and exemptions violates European law. Only concerted German lobbying in Brussels just before Christmas has held him back from seeking repayments for now.

So Mr Gabriel is in a bind. New estimates by McKinsey, a consultancy, suggest that there is almost nothing he can do to reduce the costs of the subsidy. Germany’s constitution forbids retroactively reneging on promises already made. Cutting subsidies for, say, new windmills by 15% in the next two years would reduce an average household’s annual electricity bill by only a cent. Even if Mr Gabriel decided to stop supporting renewable energy completely (which is unimaginable), the surcharge on consumers’ monthly bills would hardly decrease. And if he hypothetically scrapped all industrial exemptions (also unimaginable), the average bill would still fall only a little.

Cost is not the only problem with the Energiewende. It has in effect turned the entire German energy industry into a quasi-planned economy with perverse outcomes. At certain times on some days, sun and wind power may provide almost all German electricity. But the sun does not always shine, especially in winter, and the wind is unpredictable. And “batteries”—storage technologies that, for example, convert power to gas and back again to electricity—on a scale sufficient to supply a city are years away. Nuclear-power plants are being phased out (this week’s court decision that the closure of a plant in Hesse was illegal will raise costs even more, as it may entitle the operator to more compensation). So conventional power plants have to stay online in order to assure continuous supply.

The Energiewende has, in effect, upset the economics of building new conventional power plants, especially those fired by gas, which is cleaner but more expensive than coal. So existing coal plants are doing more duty. Last year electricity production from brown coal (lignite), the least efficient and dirtiest sort, reached its highest level since 1990. Gas-fired power production, by contrast, has been declining (see chart). In effect, the Energiewende has so far increased, not decreased, emissions of greenhouse gases.

This puts the SPD and Mr Gabriel in a particularly awkward spot. Germany is the world’s largest miner of brown coal, and mining belts such as the one in North-Rhine Westphalia are traditional strongholds for the party. Mr Gabriel cannot therefore be seen to be “anti-coal”. But that is exactly what the ecologically minded Greens in the opposition are. They want Mr Gabriel to lean on Brussels to reform the EU’s emissions-trading regime, making certificates for carbon-dioxide emissions more expensive and thus coal-fired plants less attractive than gas-powered ones. Ideological allies before last September’s election, the Greens and the Social Democrats could now become increasingly shrill opponents.

As Mr Gabriel plans his rescue, he enjoys just one advantage over his predecessors: as super minister, he has all the relevant bureaucracies under his control. The accompanying disadvantage is that, come the next election, voters will know exactly whom to blame if the Energiewende is still a failure. If that happens, Mr Gabriel may find that he can pick up his daughter from school a lot more often.