Three lessons from Germany’s energy transition

Photo Pierre Audigier / General Mining Engineer / May 31st, 2013

It is a well-known fact that in the aftermath of Fukushima, there has been a “turning point” in Germany’s energy policy, the Energiewende - in fact, the acceleration of a process initiated in the early 2000’s: abandoning nuclear power and massively switching to renewable energy. Its success hinges on a triple challenge: firstly, that technologies still in trial stage or in pilot workshops today reach maturity; secondly, that people accept new investments – especially regarding the high-voltage power lines needed to transport the current produced to high consumption areas (which are mainly in the south, whereas wind turbines in their vast majority are installed in the north); and lastly, that the industrial leadership of German companies in the field of renewable energies and electricity storage yields a lasting benefit. The first lessons learned relate in particular to the cost, at the scale of the whole electrical system, of electricity generated from intermittent sources.

“Eventually, there will be so many beneficiaries of the wind power policy that it will be impossible to find a majority to curb it,” said Angela Merkel in Cologne, on Oct. 29th 2004. Merkel was then head of the CDU, the country’s major center-right political party. Seven years later, the now Chancellor took a major decision.

A watershed for energy
On March 14, 2011, three days after Fukushima, the Chancellor announced the immediate shutdown – a three-month moratorium – of Germany’s eight oldest nuclear reactors. On the 22nd of the same month, she set up an Ethikkommission, an ethics committee composed mostly of philosophers and sociologists. It concluded that Germany could benefit from energy security at a level equivalent to the current level while phasing out nuclear energy and developing renewable energies – with thermal power stations still in use for a transitional period. Two days later, the Minister of Environment announced that those eight reactors would not restart and the remaining nine would be decommissioned by 2022.

The Energiewende was launched and, in the summer of 2011, a package of laws (the Gesetzpaket) was adopted, setting very ambitious targets for 2050. In addition to the permanent closure of the eight older plants (8.4 GW), and the shutting down of the other nine (12 GW) by 2022, it includes a plan to increase the share of renewable energy sources up to 60 % concerning primary energy production, and to 80% concerning electricity production. Electricity consumption is to be reduced by 25% compared to 2008, and primary energy consumption, by 50% – an improvement of 2.1% per annum in energy efficiency. Greenhouse gas emissions are set to be reduced by 80 to 95% compared to 1990. Finally, in 2050, 20% of electricity consumption should be imported.

Such a turning point hinges on a triple bet. Firstly, that technologies that are still in trial stage or in pilot workshops today reach maturity. Particular attention should be paid to two of these: the capture and storage of CO2 and large-scale storage of electricity, both at a reasonable cost. Then, to have populations accept the new facilities – especially the high-voltage power lines needed to transport the current produced to high consumption areas which are mainly in the south, whereas wind turbines in their vast majority are installed in the north. Finally, there is a bet that the industrial leadership of German companies in the field of renewable energies and electricity storage will yield a lasting benefit, a leadership that would be likely to create enough export-related jobs and activity in order to offset the high costs resulting from being the “first mover”.

Where we’re at today
Producers of intermittent renewable energy benefit from a feed-in tariff, with a 20-year purchase guarantee (Vergütungszahlungen). For example, the weighted average purchase price of PV, the solar photovoltaic energy, was established in 2012 to be 285 euro/MWh. In turn, the EEG-Umlage is equivalent to the extra cost of this renewable energy compared to the market price: in 2012, the Umlage’s rate was 36 euro/MWh. The official forecast for 2013 is 53 euro/MWh, an increase of nearly 50% in one year. Such a figure is now higher than the average price recorded on the German market (45 euro/MWh in 2012 against 51 in 2011). German electricity prices are the highest in Europe, with the exception of Denmark, which is Europe’s champion regarding low CO2 emissions and the development of wind power. The monitoring report published by the federal government in November 2012 reported a household price (VAT included) of 25.30 eurocents/kWh in Germany and 14.03 eurocents/kWh in France.

Manufacturers are largely exempt from paying the Umlage. Power-intensive industries are also entitled to privileged access to extra high-voltage networks, which means they actually buy their electricity at a price lower than French prices. This is equivalent to a subsidy of about 5 billion euros. Self-generating parties are also exempt from paying the Umlage whenever they have to purchase electricity due to the absence of wind or sun; among them there are not only manufacturers but also many farmers who, by installing a few wind turbines in the middle of their fields and PV on their roofs, end up earning more than they do with their farming activity. Thus, most of the funding for renewable energy is provided by non-generating households.

According to IEA, Germany emits 450 g of CO2 per kWh produced (against 90g/kWh in France, thanks to nuclear power). Six GW of coal/lignite power plants should be connected to the German networks in 2013 to alleviate the consequences of the 12 GW of nuclear power remaining to be decommissioned and to replace old low-yield coal-fired power plants that also fall short of today’s environmental standards. The aim is also to mitigate the effects of intermittency.

Resorting to coal is attributable to the global drop in prices that came as a direct result of the United States’ exploding production of shale gas, making large quantities of coal available for export. In Europe, electricity produced from coal is cheaper than that produced with gas. Coal has thus once more become Germany’s preferred fuel. At any rate, coal consumption has increased by 9% in 2012, lignite’s by 7% (source: Fraunhofer).

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Coal Mine in Germany – Photo fxp / Felix @Flickr

The contribution of German consumers to networking costs is already much higher than that of their neighbors: 74 euro/MWh in Germany against 41 euro/MWh in France. And the need to roll out new lines is important. There are several reasons to this: intermittent wind sources are mainly located in the north while the needs are mainly located in the south; intermittency, owing to its very nature, leads to increase the flows that depend on winds and the sun. Hence a considerable need for new lines, not only for large-scale power transportation, but also for local distribution.

And yet the construction of new lines is met with opposition by local populations. A bill is to be passed soon (one of the rare subjects on which there is a consensus at the German Parliament) with the aim of reducing construction times from ten to four years.

Other implications of the random nature of the new resource include:
1/ a completely disorganized electricity market. In fact, intermittent energy sources take precedence (Einspeisevorrang) regarding access to networks, thus exerting downward pressure on the wholesale market – to the point that the wholesale price ends up informing about the weather rather than about margins. Prices may even become negative. This is the case when the production of intermittent energy exceeds demand, a circumstance that is proving increasingly frequent as the sector develops. This paradox is explained by the fact that dispatchable stations must run continuously, even in reduced power mode, so as to be ready to quickly increase their power generation to compensate for sudden stops from the intermittent power sources.

It may also happen that wind power generation in the north of the country exceeds the capacity of the transport network; producers must then shut it down and are then financially compensated for doing so (dispatchable units receive no compensation when they have to curb their production to make room for intermittent production).

2/ the need to build coal-fired power stations to mitigate the consequences of the unavailability of renewable energy sources.

3/ growing requirements concerning the flexibility of dispatchable resources. Although weather forecasting has made tremendous progress, much remains to be done, especially where wind is concerned. Thus the most likely scenario is that, by 2020, the German power system will have to be able to compensate for a sudden drop of 50 GW of wind power.

A new turn for the turn?

The Energiewende can boast several achievements. Among them, the first follow-up report published by the German Government in December 2012 (Energie der Zukunft) mentions that renewable energy sources have effectively been deployed in accordance with the objectives, that the system’s security was ensured despite the brutal suppression of more than 8 GW, that some 380,000 gross jobs have been created in the Renewable energy sector and in thermal renovation; lastly, a spectacular development of the renewables industry between 2000 and 2010 has been reported.

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Offshore Wind Power Farm

However there are other elements to take into account that should give pause for thought. The construction of plants destined to mitigate the consequences of intermittency is certainly taking a long time. Prospective investors are reluctant to commit themselves because there is uncertainty about the number of hours during which the future machines shall be in operation. As for the new renewables industry, it is now suffering from Chinese competition. Both in solar and in wind energy, one witnesses bankruptcy after bankruptcy. As for the price of electricity, it keeps increasing and, as might be expected, non-privileged consumers are beginning to balk.

The main factor behind this increase in prices is the continued development of renewable energy sources. The estimated costs of the country’s energy transition keep being revised upwards. In a recently published interview (February 19, 2013) for the Frankfurter Allgemeine Zeitung, Peter Altmaier, Germany’s Minister of the Environment, estimated the cost of new energy investments to be made by 2030, in the event the current policy is maintained, at 1,000 billion euro – a figure equivalent to half the German debt. Last February, Peter Altmaier published a paper titled Energiewende sichern – Kosten begrenzen (Ensuring the success of the transition – Controlling costs). His goal is simple: to maintain the Umlage at its current level (5.28 eurocents/kWh) in 2014 for residential consumers and to subsequently limit the increase to 2.5% per year after 2014.

To this end, several measures have been proposed: reducing exemptions for the industry (over 4 billion euro); terminating the exemption from Umlage enjoyed by self-producing consumers, raising a special contribution (called “EEG-Soli” ) on existing renewable energy facilities. New installations of more than 150 kilowatts will not benefit from feed-in tariffs any longer, but will only retain the market premium (greatly reduced compared to 2012). Lastly, for new facilities there will be five months without subsidies.

The Minister concluded with the need to introduce a price guarantee to be activated as soon as the sum of commitments incurred under the EEG bill exceeds the amount provided by law. Altmaier also called for an overhaul of the EEG. But it should have to wait after the elections in September.

He was immediately attacked by the opposition: “Altmaier is mixing everything up, he behaves as the “turning point’s” gravedigger and his estimates are overstated. The simplest solution would be to redistribute the considerable revenue collected by the federal government arising from to the increase of the VAT yield (the Stromsteuer) in favor of a free first 1,000 kWh.”

If the transition only concerned the Germans themselves, all that would remain for us would be to wish them good luck. This is not the case: the Energiewende exercises some sort of a halo effect on the electrical systems of neighboring countries.

Implications on EU policy and on neighboring countries

The European Commission’s priority – one might recall that it has the power of legislative initiative at the European Council – is to achieve the liberalization of energy markets and in particular that of the electricity sector.

Yet, there is hardly any reference to costs or prices in the Commission’s papers, other than, here or there, to remind the reader that competition law, as should be expected, will keep exerting downward pressure on costs and will encourage operators to align their prices on costs.

That said, an exception was made in favor of renewable energy sources on the grounds that it was a fledgling industry and that it was appropriate to help them reach maturity. A policy which, at the time, was quite rational.

Today the Commission continues to promote renewable energy sources: development of interconnections, financing of R&D programs for storing electricity, etc. The last Green Paper, A Framework for Policy on Climate and Energy for 2030 (issued on March 27, 2013), provides an accurate summing-up of the Commission’s ideas on the subject.

Philip Lowe, Director General for Energy at the Commission, readily admits that the situation is not satisfactory: “At a time when renewables needed a kick-start, it was necessary to grant renewable electricity the privilege not to cover the costs it created for the electrical system. It is no longer acceptable today.” Energy Commissioner Oettinger concurs, although according to him the solution lies in the development of interconnections and storage technologies.

In addition, the Commission seeks to coordinate the mechanisms of cross-border capacity allocation that are being set up in piecemeal fashion in several countries of the Union, at the risk of further interfering with market mechanisms.

As for the carbon market, it is in agony, with a price of around 7 euro per ton, which is totally inadequate to deter the use of carbon-emitting technologies.

The development of intermittent power sources results, as we have seen, in considerable and random electricity flows and therefore in a considerable need for the development of modern very high voltage networks. For neighboring countries, this comes with at least three consequences:

First, whenever Germany is in a state of overproduction of intermittent renewable sources and as long as grid interconnections allow it – as we have seen above, this is the Commission’s priority – the surplus is released on neighboring countries that – this is paramount for single market ethos – have a duty to absorb the surplus.

Thus, by 2020, the installed capacity of intermittent power sources in Germany is likely to exceed 90 GW; and by 2030, 120 GW. Minimum demand in Germany is of the order of 30 GW, the mean demand being of 55 GW. Even if electricity consumption was to increase slightly – the government’s plans seek to stabilize or even reduce it – neighboring countries must prepare for considerable spills of inevitable end-energy incoming from Germany. Some of them – Poland, the Czech Republic, the Netherlands – are also seriously considering installing phase-shifting transformers along their borders with Germany to protect the stability of their networks.

Next, the development of intermittent power sources translates into a dire need for investment that comes on top of the need for newer plants destined to replace an aging fleet. Politicians behave as if “stewardship will follow.” But so far, stewardship is not following. The root causes of this situation are known.

Finally – due to market coupling – the price on some of Germany’s neighbors’ wholesale market has already hit a negative.

Three lessons

It must first be noted that the conditions to achieve a successful energy transition like Germany’s are not the same from one country to another. Furthermore, the Germans are beginning to find that their “turning point” is expensive. We saw why. But Germany has means, and it has significant resources of coal and considerable ones in lignite.

First lesson, verging on the banal: one must learn about the reality of the Energiewende and the difficulties encountered by the German government when setting out to correct the excesses the reform has led to. Priority should be given to on intermittent energy sources.

Second lesson: one must create a system to keep track of the current and future costs of the transition – “who’s paying for what and for whose benefit?” – while preserving the possibility to take a step back if necessary. As the Germans are now experiencing, it is very difficult to go back if safeguards were not implemented from day one.

Finally, one should closely monitor the progress of research in order not to be surprised, but learning to carefully and clearly distinguish – this is the third lesson – between labs, trial stages, pilot workshops and their deployment at a scale commensurate with the extent of the issues at stake.

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