25 January 2018

Germany and the Green Power Revolution

Germany plans to boost renewable energy sources and to phase out nuclear power by 2022 and most fossil fuels by 2050. Through this transformation, dubbed Energiewende, Germany was able to produce 38.5 percent of its power from wind, solar and other renewable sources during 2017. Among the larger economies, only China is close to matching Germany in the energy transition. Germany, the world's fourth largest economy, is leading the way in a global transition to renewable energy. Through its own transformation, dubbed Energiewende, Germany was able to produce 38.5 percent of its power from wind, solar and other renewable sources during 2017. That figure is well ahead of the progress made by any other country among the world's rich and developing nations, and Germany showed that it could be done while maintaining strong economic growth over the past 15 years. And though this green revolution has helped make renewable energy into a major global business, it hasn't come without mistakes. But even those missteps can serve as signposts for the countries that want to follow the trail blazed by Germany.

Yes to Green, No to Nukes

The beginnings of Energiewende lie in the Energy Supply Act of 1991, which set up feed-in tariffs for green electricity. Under the law, small-scale generators of renewable power were permitted to feed electricity into the grid, and utilities were required to pay them. The movement got a boost from the Renewable Energy Sources Act of 2000, which guaranteed grid access. Later modifications set the feed-in tariffs at a rate well above the wholesale market price of electricity, helping to make the small-scale operations profitable. The tariffs were to be reduced every year, and they were to be paid for through a surcharge on electricity bills. Germany was the first major country in the world to introduce these innovations and helped kick-start the renewables industry.

In addition to support for renewables, Energiewende involves a complete phaseout of nuclear plants by 2022 and of most fossil fuels by 2050. For several decades, Germany has been strongly anti-nuclear. This sentiment can be linked back to the 1980s, and the Chernobyl nuclear disaster in Soviet Ukraine in 1986. This no-nukes view got a boost 25 years later with the Fukushima Dai-ichi nuclear power plant disaster in Japan. That accident, following an earthquake and tsunami, led the Christian Democratic Union (CDU) party to reverse its opposition to the nuclear phaseout. It also reinforced the anti-nuclear stance of the German electorate. This means that the country's surge in renewables has come at the expense of nuclear much more than coal or natural gas. As a consequence, power from nuclear energy, which was 12.5 percent of total generation in 2006, fell to 5.5 percent in 2016.

In its move to green electricity, Germany originally set a target for renewable power generation of 20 percent by 2020. It later raised that figure to 35 percent. Early estimates from a Fraunhofer Institute indicate Germany already has hit 38.5 percent, beating the 2020 target by three years. But the long-term goal is 80 percent renewable electricity generation by 2050.

Paying the Piper

Though Energiewende is altering the production of electricity, no transformation of this scale comes without challenges. For Germany, those difficulties come down to limiting coal consumption, meeting deadlines on carbon dioxide emissions and managing the high costs of the transition.

Since 2000, Germany has spent on average about $13 billion per year on Energiewende, but that sum represents less than 1 percent of the annual gross domestic product. Also, the cost of renewable energy has plummeted, leading Germany to replace the feed-in tariffs with auctions in most cases. The first bidding on the subsidies for renewables took place last year. But costs are still a concern, because the renewables surcharge amounts to an average of 23 percent of a consumer's electricity bill. Grid fees account for an additional 25 percent, part of which is attributable to Energiewende. But overall electricity tariffs at the consumer end have been almost constant for the past four years.

As for businesses, Germany has managed to grow its renewables this much without an exodus of companies to other parts of Europe, which some people had feared — despite the fact that larger industries pay a lower surcharge rate than households and small businesses. The growth in renewable energy has created new jobs — the balance between gains and losses is slightly positive — and spurred technological innovation, marked by more than 2,000 new patents. But Germany’s traditional energy companies, such as RWE and E.ON, have been turned upside down; many have lost money and have seen their stock plummet. But other successful businesses have emerged, including those inspired by a "bottom-up capitalism" and made up of citizens or small communities that own solar panels or wind turbines.

Also, as a first mover into renewables, Germany has absorbed the initial high costs of creating the technology and was instrumental in setting off the chain of events that led the costs of electricity to ultimately crash globally. In this sense, other economies moving into renewables, such as China, India, Japan and the United States, are benefiting from the positive side effects generated by Germany's initial plunge and upfront investments.

Dirty Coal and Greenhouse Gases

For Germany, greenhouse gas emissions and the consumption of coal are tightly intertwined. A large fraction of the coal burnt by Germany is lignite, or brown coal, which produces more carbon dioxide than hard coal. Germany is also one of the world's leading producers of lignite, meaning miners and unions can bring political pressure to bear. Coal consumption has fallen quite slowly overall, and coupled with higher emissions from transportation, has led the country to underperform on its greenhouse gas goals. If Germany had stressed expanding both nuclear and renewables and made more progress on transportation, it probably would have met its greenhouse targets. Now it will probably miss its self-imposed and aggressive climate goal for 2020. Germany’s experience indicates that curbing carbon emissions requires considerable effort and that action cannot be limited to just a single sector.

The key to understanding this Energiewende shortfall lies in German politics. Massive transformations such as this are quite challenging because of the initial high costs, the challenges that come from scaling up and the resistance of interest groups. Germany managed to do it thanks to an unusual coalition of anti-nuclear and pro-coal politics represented by a "red-green" coalition of Gerhard Schroeder's Social Democratic Party (SPD) and the Greens in 2000. One of the SPD's core voting blocs is coal labor unions, while the Green Party has been anti-nuclear since its inception.

The next logical step in Energiewende is greater action on coal power, but the German government is resisting pressure for a coal phaseout. (In contrast, the United Kingdom has dramatically reduced dependence on coal and has banked on expanding natural gas, renewables and nuclear in its own energy transition.) And the collapse of the "Jamaica coalition" talks is generally seen as a setback for this next phase of Energiewende, because the pro-coal SPD was excluded from this attempted coalition. (Jamaica coalition refers to the colors on the Jamaican flag and the German parties involved: black for the CDU, green for the Greens and yellow for the Free Democratic Party.)
Looking to the Future

Though the overall scorecard for Energiewende is mixed, it has gained major traction and is now irreversible. The extensive investment, the creation of new businesses and interest groups, and the support of more than 90 percent of Germans mean that the transformation will continue, though now at a slower pace because the auction-based system has reduced incentives. The transition has kick-started a major new industry in Germany and the world, overcome technical barriers, such as grid integration, and spurred technological innovation.

New energy markets don't necessarily self-generate; they may need an initial "state-society" support for their creation. Political coalitions and the state may need to make the investments that underpin the growth of the new market until it can sustain itself through supply and demand and low prices. And among the larger economies, only China's transition compares to Germany's. Though it is a late starter, China has begun to funnel enormous resources into green technologies and into scaling them up, but it is in the early stages. Germany looks to be the vanguard of the renewable revolution for some time to come.

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