German Policy Watch

October 15, 2012

Germany’s energy policy: The historic challenge of the 'Energiewende' will be mastered

• Against the background of an intensified debate on energy prices in Germany, German environment minister Peter Altmaier last week announced his plans for a reform of the Renewable Energy Sources Act (EEG). Since its adoption in 2000 this innovative German law has served as a model for similar schemes in more than 50 countries all around the world.
• Over the years the renewable energy law incentives have led to a significant increase in the EEG surcharge and therefore reforms have to be carried out. For Altmaier a major problem of today’s EEG is the lack of coordination between market participants.
• We do not expect a new policy regarding the EEG before the German federal elections in autumn 2013. Afterwards there surely will be some adjustments, depending on the new government. If the Greens are part of it, the energy turnaround, the so-called “Energiewende”, may be implemented even more rapidly. But every other coalition will also stick to the course the German government has steered in the last two years given the energy and climate goals of the energy turnaround.

The planned termination of nuclear power production became, once again, German government policy in the aftermath of the Fukushima catastrophe. Already in the Schröder years, a long-term plan for the exit from this energy source had been agreed and put into legislation. In the autumn of 2010, the conservative-liberal government, however, challenged the plan and initiated a change and prolonged the lifetime of reactors. This was to be changed once again in 2011. Now, there is broad consensus that this turnaround shall take place.

However, Germany’s energy turnaround is far more than the accelerated exit from nuclear power generation that was decided after the disaster at the Fukushima reactor complex. In reality, the energy turnaround is a much more complex project. Besides the nuclear power phase-out by 2022, the following are the most important energy and climate-related goals of the German government:

• Increasing the share of renewable energies in total final energy consumption to at least 18% by 2020 and to 60% by 2050 (from 12% in 2011).
• Increasing the share of renewable energies in gross electricity consumption to at least 35% by 2020 and at least 80% by 2050 (from 20% in 2011).
• Increasing energy efficiency in Germany. Primary energy consumption is aimed to decrease by 50% by 2050 (compared to the 2008 level); electricity consumption is to decline by 25% in the same time period.
• The energy refurbishment rate of housing stock is aimed to increase to 2% per year (up from less than 1%). Primary energy consumption of buildings shall decrease by 80% by 2050.
• Reduction of final energy consumption in the transportation sector by 40% by 2050 (compared to 2005 levels), and of CO2 emissions by 40% by 2020 and by at least 80% by 2050 (compared to 1990).

The long-term goals were set before the Fukushima event and remained unchanged thereafter. Thus, the energy turnaround in Germany is not a new topic at all. The goals for 2020/2030 may come under reconsideration because of the investment needs and the current debates concerning the policies to choose.

• One example of a major problem still to be solved is the targeted increase in the energy refurbishment rate to 2%; this goal will not be reached under the current political framework and public incentives. Policy adjustments are currently hampered as legislation is stuck in the Bundesrat.
• One example of a truly important goal being reached much faster than expected is the increase in the share of renewable energies in gross electricity consumption. Due to the still very high subsidies for renewable energies according to the Renewable Energy Law (the “EEG”), the share of renewables in gross electricity production reached 25% in the first half of 2012 in Germany after “only” 20% in 2011. Therefore the goal of 35% in 2020 will be clearly exceeded. And - as a result - minister Altmaier now expects 40%.

There are still huge investment needs. In order for the many energy and climate policy objectives to be met, at least EUR 30 bn will have to be invested in Germany annually in areas such as renewable energies, conventional power plants, grids, storage facilities, energy-efficient buildings and alternative propulsion technologies – no small challenge!

One general problem is the occasional lack of rigour in political decision-making and the therefore still high level of uncertainty for investors and private households. It is currently becoming increasingly obvious that electricity prices for private households will increase rapidly in 2013. One reason is the dramatic increase in the EEG reallocation charge to 5.3 Ct/kWh in 2013 from 3.6 Ct/kWh in 2012; this is an increase of 47%. And – if the German energy policy regulation is not adjusted soon – the reallocation charge could reach about 7 Ct/kWh in 2014.

In 2013, the EEG charge will be borne almost exclusively by small companies and households. If roughly half of German electricity consumption was not exempted and all consumers participated, the EEG charge would fall to even below 3.5 Ct/kWh in 2013 – this is what Chancellor Merkel promised to be the limit for the future in 2011. Otherwise – all things unchanged – households will subsidise German industry by around EUR 2 bn in 2013 through their electricity bills/consumption.

Against the background of an intensified debate on energy prices in Germany, German environment minister Peter Altmaier last week announced his plans for a reform of the Renewable Energy Sources Act (EEG). As for Altmaier a major problem of today´s EEG is the lack of coordination between market participants, the minister first wants to start a political debate in the coming months to achieve consensus. We do not expect a new policy regarding the EEG before the German elections in 2013. Afterwards there surely will be some adjustments. But the direction will be determined by the new government. If the Greens are part of it, the German energy turnaround may be implemented even more rapidly. But every other coalition will also stick to the course the German government has steered in the last two years given the energy and climate goals of the energy turnaround.

The energy turnaround - at least the goals until 2020 - is not a question of technological feasibility. The goals can be reached but it may become more expensive than most politicians currently think. The costs of the energy turnaround will clearly depend on the political framework and on the degree of co-ordination between the German government, the federal states and the municipalities. One example: if there is no grid connection, the planned and installed wind power in the north of Germany cannot be consumed in the south. However, it still has to be paid for due to the EEG regulation. The timetable for grid extension is very ambitious and needs urgent legislative processes.

Today, the German energy turnaround is on its way. There are still tremendous challenges ahead, and implementation problems still need to be solved. Nonetheless, all important parties are (more than less) committed to the change. Therefore, the question is not whether Germany will be committed to the energy turnaround. The real questions are: (1) What remains to be done? (2) How can the goals be reached in time and at what cost? The debate is ongoing in politics and society.

The energy policy turnaround has created new winners and losers, but above all coordination problems in a hitherto pretty oligopolistic market run by a few regional monopolist companies, with some fringe production by “Stadtwerke”. While interaction in a more pluralistic market structure, a larger number of more decentralised producers and the need for high investments in grids are significant challenges, political consensus is no longer the binding constraint. It is effective coordination, cost control and planning, and market entry by new players in grid investment and electricity production.

Author :
Josef Auer +49 69 910 31878, josef.auer@db.com