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Merkel election win signals an energy policy rethink

Germany's renewable energy policy has pushed up consumer bills, but carbon emissions have also increased over recent years

Angela Merkel has swept to victory in the German federal elections in late September, winning a third term as the country’s chancellor. Merkel’s Christian Democratic Union (CDU) party gained 41.5% of the vote - its highest level of support in almost two decades.

As Petroleum Economist went to press Merkel was in talks with the Social Democrats to form a new coalition government. When the makeup of the new coalition has been confirmed, a rethink of Germany’s energy policy will be at the top of the government’s agenda.

Germany has pursued an ambitious renewable energy policy in recent years which has pushed up consumer’s electricity bills. The country’s carbon emissions have also increased as its anti-nuclear policy means it has turned to coal as a power-generation fuel.

In 2011, Germany was the sixth largest generator of nuclear energy in the world, producing 102.6 terawatt hours, according to the US Energy Information Administration. It was also a leading exporter of nuclear technology.

Following the Fukushima nuclear disaster in March 2011, public protests forced the German government to close eight reactors brought into operation before 1980. It plans to shut down all of Germany's nine remaining nuclear reactors before 2022.

Renewable push

Soon after the Fukushima disaster, Merkel set ambitious targets for ramping up renewable energy capacity through the Energiewende, the German government’s strategic plan to shift the country’s focus from nuclear power and fossil fuels to renewable energy.

Merkel wants renewable energy to make up 35% of Germany’s energy mix by 2020, up from 23% last year. The government plans for this to rise to 80% by 2050.

In 2011, Germany was the world’s largest producer of electricity from solar power. It was also the largest European producer of non-hydro renewable electricity, including wind power and biofuels. This is an admirable feat in terms of low-carbon energy production, but it has come at a high price for German taxpayers.

Around 30% of German consumers’ electricity bills constitute taxes and the costs of implementing  government energy policies, according to Eurostat, the statistical branch of the European Union (EU).

This year, German residents are expected to pay around €20 billion ($26bn) for electricity generated from renewable power, despite this power having a market value of just €3bn. This is because of a disconnect between consumer demand for electricity and industrial production. Renewable energy producers are compensated for the power they produce, ultimately by German taxpayers, whether there is demand for that power or not.  

In times of low consumer demand, there may be excess renewable power on the German grid which is dumped, often at a cost. This is known as negative pricing.

Paradoxically, when there is insufficient power produced from renewable energy, electricity has to be sourced from gas or coal-fired plants. This can have a volatile effect on Germany’s electricity prices.

German consumers support renewable energy by paying a surcharge as part of their electricity bills, of €0.053 per kilowatt hour (kWh). The government expects that will rise by 20% next year to around €0.064/ kWh. Germany’s environment minister Peter Altmaier said the scheme could cost €1 trillion by 2039.  The energy industry has also warned that Merkel’s relentless pursuit of renewable energy is harming competitiveness.

The BDI, Germany's industry lobby group, has called for an overhaul in renewable energy subsidies and for feed-in tariffs, which guarantee producers a long-term price for power they add to the grid.

By 2020, Germany’s offshore wind farms are expected to generate around 10 gigawatts of power. To attract investors to Germany’s renewable sector, the government has created attractive subsidy conditions. Operators will be paid €0.19/kWh of electricity generated from offshore wind, around 50% more than for onshore projects. The government also shoulders the financial liability for the projects.

As part of Germany’s Renewable Energy Sources Act, offshore wind farm operators are entitled to claim 90% of any costs or lost earnings from delays to the connection of offshore wind farms to the transmission grid, disruptions to offshore power cables and prolonged operational interruptions from maintenance. The German taxpayer ultimately bears the cost of these compensation payments.

The tariffs have been largely responsible for the boom in German renewable capacity, but lead to higher prices for consumers, who fund the subsidies. 

A recent study by IHS, a consultancy, The Challenge to Germany’s Global Competitiveness in a New Energy World, said Germany’s pursuit of renewable energy is damaging its competitiveness and could force businesses to relocate to other countries. IHS said this “investment leakage” could have a damaging effect on Germany’s economy because exports of goods and services make up 52% of its GDP. 

In International Energy Agency (IEA) has also issued a stark warning that German electricity prices were becoming unsustainably high because of the government’s commitment to renewable energy. “The fact that German electricity prices are among the highest in Europe, despite relatively low wholesale prices, must serve as a warning signal,” IEA executive director, Maria van der Hoeven, said in May.

Carbon emissions

Germany set targets for a 40% cut in its carbon dioxide (CO2) emissions by 2020, from 1990 levels, rising to an 80% drop by 2050.Yet while Germany has been pursuing a renewable energy to cut carbon emissions, its coal use has soared because of low carbon prices and relatively expensive European natural gas.

As a result Germany’s CO2 emissions increased by 1.6% last year, to 931 million tonnes of CO2 equivalent, according to figures from Germany’s Federal Ministry of Environment. This was mainly because of higher use of lignite and hard coal for electricity generation.

As one of the main drivers of the wiser European economy, Germany’s influence on the rest of the continent is strong and the energy path it chooses will resonate with other countries. If the EU wants to achieve its CO2 emissions reduction targets, of 20% from 1990 levels by 2020, Germany must overhaul its energy policy.

Diversifying Germany’s energy mix by increasing the role of gas-fired power generation could be one way to reduce CO2 emissions without compromising energy security. But the government will have to make investment terms much more attractive for fossil fuel producers by de-prioritising renewable energy, analysts said. “We’ve seen a growing number of major generators in Germany mothball plants. It’s a sign of how tough times are for conventional (power) generators,” said Peter Osbaldstone, an analyst at Wood Mackenzie consultancy. “Many will be running at a large loss. Even coal plants are having a difficult time. We don’t see any scope for further investment for a number of years.”

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