Germany’s electricity situation

From the American utility industry vantage point, the German electricity sector appears to be in turmoil. The energy transition known as energiewende brought about a series of changes – some intended and some a bit more than that. The impact of these changes are quite widespread raising debates and questions on both sides of the Atlantic.  Renewables proponents showcase Germany as the poster child of what policies should be.  Traditional utilities tout that the right policy is exactly opposite of what Germany did.  Indeed, many believe good intentions gone bad.  Here are the key issues:

First, the phasing out of nuclear power by 2022. Germany has currently 9 nuclear reactors that generates about 15% of total electricity. After the Fukushima disaster Germany created a mandate to phase out all nuclear generation by the year 2022. Is this the right move? Is this an overreaction? Without securing backup generation, this is certainly turning out to be a hasty commitment that has become a political hot potato – too hot to touch anymore.

Second, the introduction and then proliferation of the Feed in Tariffs (FiT). Many countries have granted subsidies in various forms – FiT, tax credits, government grants, etc. to support the growth in solar PV. The way German FiT policies work is it requires transmission companies to buy solar PV at wholesale rates and then sell it to the retail customers. Assuming solar PV generated power in more expensive, the PV owner is made whole by a Feed in Tarriff that are ultimately paid for by the retail customers. Thankfully, the industrial customers are exempted which kept the energy prices for the Germany industry competitive with rest of the world. Has Germany gone too far? Does this create market distortions that ultimately result in inefficiency? Will solar PV become economical going forward?

Third, unprecedented growth in Solar PV driven by plummeting prices and favorable policies. Prices have fallen by 75% since 2006. With FiT and tremendous government push there is a growth in renewables. Solar PV is already reaching 6% of total energy consumption which may not look high but quite high by global standards. Is this sustainable?

The impacts so far have been quite pronounced with noteworthy the future implications in the electricity sector.

First the positive. The big governmental push has helped the solar PV penetration and its ride down the cost curve. Solar PV has become economically competitive and a viable alternative in certain parts of the world with certain limitations. On the other hand, German utilities are certainly the bearing the biggest brunt. The so called big-four utilities – E.On, RWE, Vattenfall and enBW are all struggling due to reduction in production and fall in wholesale prices. However, customers are facing high retail prices despite low wholesale prices, due to recovery of FiT susbsidies. FiT’s initial estimate was $3-4 B but due to the rapid rise in deployments that number has escalated to about $10B annually and likely to remain that until 2020. Another issue is the slowdown in carbon emissions market that has resulted in a growth in lignite based generation to cover for baseload power reduction largely due to reduction in nuclear generation. The low costs of carbon emissions (~$10/ton)  do not curb polluting behavior, which requires at least $30/ton by typical estimates. Lignite based generation – which is by far one of the dirtiest forms of coal for atmospheric emissions – will likely stay unless the carbon markets become material again.  Indeed, lignite generation, has an uptick not just in Germany – but also in neighboring countries from Poland to Czech and Bulgaria. All have plans to build lignite plants, absent higher carbon pricing.

Is it misplaced policy or a series of masterful political maneuvers to keep the constituents happy? Lot of theories are floating around. Promotion of renewables but passing the costs onto the customers is clearly not always apparent. Placing the death knell on the nuclear industry and pandering to the public fear and outcry after Fukushima disaster. No doubt, the issues sound simple, but it is quite complex. Time will tell how the transition finally gets implemented and received, and we all get to witness the full spectrum of intended and unintended consequences.

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