In the American press, there has been much discussion of Germany’s Energiewende—a plan that not only aims for a nearly carbon-free economy by 2050, but also seeks to achieve this ambitious goal with no nuclear power at all.
Countless individuals and organizations share the optimistic view that what has happened in Germany so far shows that a totally decarbonized economy is both technically feasible and eminently affordable. Paul Krugman, for example, claims in one of his op-ed columns for The New York Times that the “climate threat” should be solved since “[t]he science is solid; the technology is there; the economics look far more favorable than anyone expected.” And Joe Romm, founding editor of Climate Progress, suggests that it is possible to integrate “very large amounts of renewable electricity into the electric grid cost-effectively.”
But the celebrations are premature. A nearly carbon-free economy is still an ambitious goal for a major Western economy, or any industrial powerhouse of the developed world.
True, Germany’s energy system is changing at an incredible pace. Its renewable energy share increased exponentially over the past two decades, accounting for almost a third of Germany’s gross electricity consumption in 2015. And Germany accomplished all this without having its economy collapse—in fact, it is doing well, even while renewable energies became the largest source of power in the German electricity mix.
But this energy transition has come at a high cost and created not only winners. The Energiewende has also destroyed the effort embedded in existing infrastructure and put an unprecedented strain on German society. The rapid shift to renewables—with their emphasis on lots of small-scale, decentralized power and heat production—has fundamentally altered the traditional way of doing business for the big utilities in Germany, causing a huge drop in market share and big losses in earnings. From their past position as the backbone of the German economy, the utilities now totter on the brink of dissolution; there has been a large sell-off of assets by the utilities as a result. (Among other things, they are now trying to reposition themselves as providers of Big Data, and intelligent technology.)
And despite what some op-ed writers may have said, this energy-turnaround is most assuredly not a “done deal,” technologically speaking. There are still many issues to be sorted out, especially in the area of what energy experts call the intermittency problem—the fact that wind and solar don’t generate electricity around the clock. Nor is there a guarantee that efforts so far will make Germany hit its decarbonization targets. In fact, it looks like the country will miss its goals for 2020 and 2050.
Therefore, we probably should take a deeper look at Germany’s energy transition experiment.
What is the Energiewende? Germany’s Energiewende is the result of a long and unique political, technological, and societal process that aims to steer Germany’s transition towards low-carbon technologies and to design a better and more sustainable German society. It encompasses a broad range of successive and sometimes overlapping or even colliding innovation policies, tools, and institutional arrangements that have been articulated and implemented in the past four decades with the overarching goal of alleviating adverse climate effects. And it has come about as the result of a convoluted path: This bold project of a right-oriented administration was entirely built on left-wing ideas.
In September 2010, when the German government first presented its “Energy Concept” and described Germany’s roadmap to carbon neutrality (whose goal is to reduce emissions by 80 to 95 percent with respect to 1990 levels), it simultaneously passed into law a series of regulations—based on the recommendations of a long-term research project at the time known as Germany’s “Energy Concept” or “Prognos” study—that included the decision to extend the life-span of existing German nuclear facilities by up to 14 years, among several other measures. But only six months later, after the accident at the Fukushima Daiichi nuclear power plant in Japan, Chancellor Angela Merkel changed course in the wake of fast-spreading anti-nuclear protests. Driven by the fear of losing her political legitimacy, Merkel decided to decommission all German nuclear power plants by 2022, while still retaining the ambitious greenhouse gas reduction target of the German “Energy Concept.”
Germany’s Energiewende did not just happen overnight, however. The vision of a carbon- and nuclear-free future can be traced back to the 1970s and 1980s, two decades of severe oil crises, intensive deployment of nuclear power plants, and increased environmental awareness. The term EnergieWende means energy turnaround and was first used in 1980 as the German title for Amory Lovins’ Soft Energy Paths (a book that nourished the environmental grassroots movement in Germany). Consequently, it took four decades for the agenda of the Green movement to be made into a government program.
A brief history. Although Germany’s engagement in mitigating climate change led to incontestable achievements in the renewable energy realm—which no one had even dared to imagine 10 years ago—the plans for Germany’s energy transition experiment barely succeed in reaching its overarching carbon reduction goals, with no room for error. And the country also lags behind with respect to other Energiewende goals such as primary energy consumption, energy productivity, and energy efficiency in transportation, to name a few.
In his official 2012 press release, Germany’s environment minister, Norbert Röttgen, stated that the envisioned transformation of Germany’s energy system “is not only feasible, it also pays off.” Despite this optimistic statement, the energy costs for end users continuously rose. Energiewende costs—which are paid by all consumers—can be seen in the form of fees for renewable energy deployment; fees for access to the electrical grid; additional grid fees for combined heat and power, off-shore wind, and biogas support; and taxes on electricity and gas. Renewable energy deployment led to an electricity oversupply, responsible for falling prices at the electricity wholesale market. (Despite the falling prices for electricity, the Energiewende contributions overcompensated, resulting in higher final energy costs for end users.)
Meanwhile, to protect Germany’s economy and prevent the defection of domestic industries to Energiewende-free pastures in Asia and elsewhere, energy-intensive industries had to be exempted to a large extent from paying Energiewende contribution fees. These exemptions resulted in an increased burden for small and middle-sized end users, who have to shoulder them instead. Moreover, given that German companies are in business to deliver profits to their owners or shareholders, they exploited every gray area in the legislation to the fullest extent allowed by the letter of the law, thereby increasing the burden for other actors even more. The flawed legislation and exemptions to the Energiewende contribution scheme created what economists call a “free rider” situation, where those who benefit do not pay, which helps to explain why Germany’s economy didn’t collapse.
Thus, between the government’s best intentions and its ambitious decarbonization plans, the actors in the Energiewende arena have been pushed and pulled in a number of different directions since the 1990s, by things such as the ratification of the Kyoto protocol, the implementation of the European Emission Trading System (a European cap and trade system for carbon), the deregulation of electricity markets, the successive support schemes for renewable energy deployment, and the complex mechanisms for promoting energy efficiency and enforcing clean air regulations.
While trying to make the best of these successive waves of change and still remain up to date with the constantly changing regulatory framework, the players in the Energiewende arena also faced soaring energy costs, an increasing dependence on intermittent power sources, severe energy transmission and storage problems, forced electricity exports, and competitive disadvantages for domestic manufacturers. These situations sometimes led, in extreme cases, to bankruptcies, business closures, unemployment, the migration of businesses into countries with less strict regulations, the export of greenhouse gas emissions, and even to energy poverty. (In 2014, German electricity suppliers sent 6.3 million dunning letters for delayed payments, and disconnected 351,802 households from the electricity grid for not being able to pay their electricity bills, according to Germany’s Federal Net Agency.)
Inside the Energiewende, there was no economic branch harder hit by the successive waves of induced changes than the utility sector.
What happened with Germany’s utility industry in the last 25 years? In the wake of the deregulation of Germany’s energy sector in the late 1990s, utilities have been subjected to increased competition and lost their state regional monopolies. Although they used the early stages of deregulation to consolidate and improve their position in the market (primarily by establishing large multinational energy groups), the spread between turnover and earnings steadily increased. The successive Renewable Energy Acts that entered into force between 2000 and 2014 favored decentralized electricity generation, brought new players into the Energiewende arena, and reversed the wave of consolidations in the utility industry.
In the early phases of the transition towards renewable energies, utilities strongly opposed the renewable energy acts—as well as other Energiewende regulations—and tried to reverse the legislation through lobbying. Although this opposition was often interpreted as unwillingness to cope with new technologies, I would argue that this reaction was mainly driven by technical and economic reasons.
But realizing that the Zeitgeist wouldn’t allow them to reverse these policies, and recognizing that there was a comfortable way to make profits without taking risks (by taking advantage of the generous renewable energy tariffs), utility companies changed their strategies. They embraced the Energiewende and massively invested in renewables. While major German utility groups had nearly no interest in renewables in 2000 (excepting large hydropower projects that were never subject of the renewable energy stipulations, having been implemented long before the vision of a carbon-free future was born), they instituted new renewable business areas in 2008, and ended in splitting their companies into “good” and “bad” holdings between 2014 and 2016—much like what happened with the banks after the economic collapse of 2008.
The accelerated deployment of renewables induced major changes in the electricity mix and led to a significant price reduction on the electricity wholesale markets, substantially diminishing the utilities’ returns from sales of conventional power. Moreover, utilities registered additional losses, because they had to give up domestic market shares to newcomers.
Furthermore, given their strategic importance for the economy, utilities were subjected to command-economy tactics, such as not being allowed to phase out plants that hurt their balance sheets, in order to deliver backup power for times of no sunshine and low wind. The increased dependence on intermittent sources of power, the complex balancing tasks, the legal requirements for non-discriminatory energy grid access, and the small profit margins in this strongly regulated business made the operation of transmission grids increasingly unattractive for utilities, with the consequence that they pulled away from it to a large degree. The early nuclear phaseout and its tremendous decommissioning costs, coupled with the unsolved problem of a final repository for nuclear waste, added yet more expense, pushing this once-powerful industry to the brink of dissolution.
Under these conditions, utilities have too little financial means to find a substitute to make up for the lost business, to adjust to the steadily changing policy frame, and to actively shape the Energiewende. In their desperate effort to recover, utilities changed the core of their business and switched their focus to demand-side management, energy services, and what are known as “intelligent” technologies such as smart grids, smart homes (able to start heating shortly before people return home and to optimize energy consumption), smart meters, smart appliances (that turn on or off depending on the price of electricity), smart virtual power plants (that accumulate renewable power generated from different sources into a single virtual power plant), and so forth. All these technologies are based on software programs able to handle a large amount of data, which means that in this field the utilities compete with Yahoo, Google, and other telecommunication platforms—who all have in comparison much more experience in processing large amounts of data.
What all this means is that despite their position as the backbone of the entire German economy, utilities were sacrificed for the greater good on the Energiewende altar, and it pretty much looks like their sacrifice was not sufficient to meet Germany’s ambitious decarbonization goals, according to the Statement on the Fourth Monitoring Report of the Federal Government for 2014. Given these perspectives, it is no wonder that American utilities see risks in the energy transition processes—and why some of the big players in the US energy industry have been fighting so hard to retain the fossil fuel status quo.
Outlook: Not entirely sunny. The major challenge for any energy transition is to integrate intermittent sources of power into the existing energy systems. With the exception of energy sources such as biomass (that can deliver base load electricity similar to fossil and nuclear sources) and hydropower (that is relatively stable and has only seasonal variations), the other significant renewable energy sources (wind and solar) are characterized by strongly intermittent patterns.
In other words, the wind does not always blow steadily and predictably, and there are cloudy days.
Moreover, given that biomass and hydro potentials are finite and almost completely in use already, Germany’s energy system is increasingly dependent on intermittent sources of power. Despite all efforts to convert excess electrical power to hydrogen, methane, heat, or other storable commodities, and despite all progress made in battery research, there still is no technology in place at this time that can economically store electricity at a large scale.
Given that Germany’s electricity grid did not collapse, one might declare the intermittency problem as solved. Unfortunately, this ignores two essential aspects of the Energiewende that explain how Germany solved the intermittency problem until now. First, the problem of generating electricity on cloudy and windless days could only be managed because utilities were obliged to cover these intermittencies by maintaining and running fossil power plants as backup source, in an uneconomic mode. Second, Germany’s electricity generation on windy and sunny days often exceeds by far the grid’s balancing abilities, forcing the power surplus into the adjacent grids of neighboring countries, and obliging other countries to compensate for German intermittencies. These solutions are neither sustainable nor possible in a carbon-free economy. Moreover, whether bold Energiewende-like concepts will be successful or not essentially depends on our ability to really solve the intermittency problem.
Thus, despite what some op-ed writers may have said, Germany’s energy-turnaround is most assuredly neither cheap nor a done deal, technologically speaking. There are still many issues to be sorted out, and we have more work to do.
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