Germany is well on its way towards having a predominantly green electricity supply. The transition from nuclear and fossil fuel electricity to using renewables is happening faster than anyone had anticipated. This is a success, but there is a downside: it is hugely expensive.
The energy transition is an explicit policy goal in Germany, having been made a priority project by the German chancellor, Angela Merkel. It has four strands: reducing CO2 emissions, improving energy efficiency, promoting renewable energy and the gradual phase-out of nuclear power.
Nuclear phase-out is actually an old story that started in 2000 when the Schroeder administration first announced a 20-year timetable. It was a bit of a “yes-no” rollercoaster until the Fukushima incident, after which the decision in favour was final. This is widely supported by the German public, meaning that nuclear power is politically not an option at the moment.
The direction of travel
Yet without a doubt, the most significant development within the energy transition project has been the growth of Germany’s renewable energy sources (RES). The chart below shows how it has developed in the past few years and where the government expects it to be by 2050.
Germany’s renewable energy supply
The horizontal black line depicts the approximate maximum demand at any time, which is about 85GW (this will not change much in the future). This shows that installed renewable capacity is now already more or less equal to maximum demand. On a very sunny and windy day, renewables are now capable of meeting the demands of the entire country.
But as we all know, the weather is notoriously unreliable and variable. So a secure system needs more renewable capacity and also more reserve capacity from conventional power plants (mainly fuelled by natural gas) to make sure it can always meet demand. As the chart indicates, installed renewable capacity in 2050 is expected to be 180GW, which is roughly twice maximum demand. By that time, the target is that 80% of electricity supply will be from renewables (basically this is how much renewable power you need to meet this level of supply on a regular basis).
In common with other countries moving in the same direction, the government has various motives for this big shift. Renewables are carbon-free and rely on no fossil fuels, so they are an essential component of meeting European emissions targets. The government hopes for positive spin-off effects on exports, innovation and new jobs. And once the investment cost of the transition has been incurred, we would hope that electricity supply is actually quite cheap. After all, sun and wind are free. Germany sees the energy transition as an investment in the future: we pay for the next generation.
The dark side of the boon
The move to renewables has been a success. It has happened at high speed since the late 1990s. The debate is no longer whether it will succeed, but rather what do we do with “too much” renewable power. But behind this positive story, the dark side is the huge expense.
Early in 2013, the then-minister of environment Peter Altmaier mentioned the staggering amount of €1 trillion (£790bn) as the potential cost of the overall transition. This relied on a quick-and-dirty back-of-the-envelope calculation, which raises many questions and was never confirmed, but it does give a feel for the order of magnitude. The end-users – and thus the voters in Germany – are starting to feel the pain.
Since the installation costs mean that renewables currently cost more per unit of power than conventional power, they are subsidised by a surcharge on the electricity price. In other words, electricity end-users directly pay for it. As you can see from the chart below, the surcharge for small end-users has soared since 2009 to cope with the rapid growth of installed capacity (the step-change that year reflected a sudden big rise in solar power, which is particularly expensive). The total subsidy is currently about €20bn/year, which amounts to €218/year per household on top of the normal electricity bill. Whether this is still affordable is a key question in the country right now.
Germany’s rising renewable surcharge
The energy transition has meanwhile changed the face of the electricity market, with severe consequences for traditional firms like E.ON and RWE. They are suffering badly at the moment and are having to rethink their business models completely. In short, they face three challenges. The nuclear phase-out means they have to make very significant write-downs on their nuclear plants, at a loss to the shareholders. They are still fighting the government for compensation payments.
Second, renewable power is suppressing electricity wholesale prices – essentially because they are cheaper to run per unit of power, which under the rules for calculating the wholesale price tends to bring it down across the board. This means that the revenues for conventional power plants are low and no longer cover the investment costs.
Third, conventional power from gas and coal is being pushed out of the market. This means that a lot of conventional power plants are largely standing idle and not making any money. Since the future business model for such plants is looking bleak, the power companies are sitting on investments, which are not going to be profitable. Of course, RWE and E.ON are adjusting their long-term strategies to survive.
While this has been going on, the rising costs for residential end-users have become a political problem. In 2014 the government responded with a reform package, which slows down the energy transition in an attempt to control the costs. Basically the annual growth of new renewables has been capped to a pre-determined level.
This seems to be working. The surcharge for 2015 has been calculated at 6.17ct/kWh, which is a small decline compared to 2014. Politically, this may well have been a wise policy, as public support for the energy transition was dwindling. It means that green energy development will happen more slowly. So far the government appears to be standing by the same targets outlined in my first chart, perhaps because the explosion in development over the past few years had put it on an even faster track. Whatever happens from here, one thing remains key: without public support, the energy transition will not work.