Planned tax on nation’s 17 reactors prompts a threat by utilities to shut them down

BackfireAs an idiomatic phrase, if something "backfires," it means plans for a project have not worked out and with unanticipated negative consequences. It can also mean that the plans were not thought out deeply ahead of time.  Technically speaking, a backfire is an explosion of unburned gas in the exhaust system.  Instead of blowing the doors off the competition, the poorly tuned engine blows the tailpipe off the car.

This is exactly what's happening in Germany this week as Chancellor Angela Merkel struggles to save the nation's 17 nuclear reactors and simultaneously tax their profits to buffer the impacts of her government's austerity budget. Germany's two largest utilities mounted a major campaign to push back on the idea of taxing their nuclear fuel rods to produce €2.3 billion a year or €23 billion ($2.9 billion) over the next decade.

The German newspaper Der Spiegel reports Aug 14 that the utilities threatened to shut down the reactors on their own unless the tax is replaced with a fixed contribution to a renewable energy fund. They claim the tax will severely cut dividends to shareholders and funds for capital investment though none is planned for new reactors.

While the German utilities are poor performers when it comes to stock prices, they pay generous dividends which could translate into votes in the next election. The utilities include RWE, E.ON, Vattenfall, and EnBW.  What's interesting about the utility group's proposal is that if limited to the next ten years it is half the size of a €40 billion fund Merkel proposed to create two years ago.

Both plans have the same objective, which is to subsidize the development of wind and solar energy projects in addition to helping to balance the budget.  Of the two renewable energy sources, wind has a better chance of success along the country's North Sea coast.  Germany's solar energy potential leaves much to be desired, but the country is a leading manufacturer of solar panels for export.

Michael Fuchs, the Christian-Democratic deputy leader in parliament, told Bloomberg wire service Aug 4 that expensive upgrades to the nation's transmission grid would be needed to manage the variable nature of wind and solar energy.

"Expansion of renewable energy is only possible if we speed up R&D on smart grids and storage capacity for wind and solar power."

Fuchs also told Bloomberg that as he sees it the reactors will be needed until 2042.

“A 20-year extension is realistic -- an infrastructure for renewable power isn’t built overnight,” said Fuchs in his office in Berlin. “This is about pragmatism and not about a dogmatic attachment to nuclear power. We need affordable power as we strive to fulfill our climate goals.”

Why tax the reactors fuel rods?

The government's plan in proposing the tax had two objectives. The first is that the tax is based on the need for revenue and the reactors are fully depreciated cash cows. The second is that the tax collections in a time of economic austerity would make the reactors too valuable to shut down.

This would turn the demand by green groups to do so into a tax issue. It would weaken their position as Merkel could then blame the greens for tax increases to make up for the lost revenue from shut down reactors.

Taxing the fuel rods contains an unknown element for the nuclear utilities. The more the economy grows out of the current recession, the more electricity they will produce and the more fuel rods they will find subject to the tax. A fixed contribution to a renewable fund is a bet that profits retained by the latter plan will exceed what would be attained under a variable tax.

Der Speigel reports Aug 16 that Deputy Finance Minister Werner Gatzer, who is leading the negotiations between the utilities and the government, likes the idea of a fixed fund as opposed to an open-ended tax. It would make it easier to collect the money. It would actually produce more revenue, about €30 billion, than the tax by extending the life of the reactors another 12 years.

Reactors needed to contribute to efforts to control greenhouse gases

Merkel also wants Germany, and Europe, to do more to cut greenhouse gases. Green groups praise her for that, but want the nation's reactors shut down by 2020 to be replaced by wind and solar energy projects.

Germany's export driven heavy industry is flatly opposed to the phase out of nuclear energy and asserts that pragmatic considerations indicate the reactors could be needed for another 30 years. No one has talked about building new reactors which the nation must start planning for now if it expects to keep their 25% share of the nation's power consumption.

German environmental minister Norbert Roettgen has advocated a much shorter life extension for the reactors and a much higher tax. His proposal was angrily denounced by Peter Keitel, president of a major business group, who said the environmental minister "should realize he is not the head of Greenpeace." Dieter Hundt, president of another major business association, told Der Speigel he supported an "unlimited extension" of nuclear reactor lifetimes.

"It is economically and environmentally impossible to shut down safe and profitable power plants for ideological reasons."

The legal authority for shutting down the plants is somewhat nebulous as both the government and the opposition controlled upper house of parliament claim to have the authority to either extend the life of the reactors or shut them down.

Utilities throw down the gauntlet over proposed tax

For their part, the utilities predict dire consequences if the fuel rod tax is imposed on their profits.  Johannes Teyssen, CEO of E.ON, told Dow Jones News Wires the tax "will reduce investment" in new energy facilities.”

The E.ON’s basic position is don't tax the utilities if you want to slow the growth of greenhouse gases and invest in renewable energy technologies. The firm said earnings could be reduced by as much as 14%, or €1 billion, of the firm's expected €7.1 billion expected in the next year.

"In the medium term, Germany can't forego zero carbon, inexpensive nuclear power if it intends to continue to play a leadership role in Europe's climate protection effort and if economic recovery is to continue."

The veiled threat here is that the utility won't put money into wind and solar energy projects if it has to pay a high tax on profits from its nuclear reactors. Germany's biggest utility had a similar line in its attack on the tax.

Juergen Grossman, CEO of RWE, told Dow Jones the tax will lead to higher energy prices, undermining the competitiveness of the recovering German economy, and undercut the government's plans to reduced greenhouse gases.

"We are talking about money that would no longer be available for new projects. This would substantially weaken the investment power [of the affected companies] and limit their ability to perform at full capacity."

He also said the tax would drop investment in the very technologies the green groups want the nation to adopt.

"The tax would substantially diminish our earnings power . . . and investment in renewables and smart grids."

Germany's economy grow despite global downturn

Amidst the back-and-forth of the tax debate, the New York Times reports Aug 13 that Germany's economy is expanded against the tide of a global downturn. The primary driver of success is reported to be reforms in the way employers hire and fire workers and labor agreements that put a lid on wages.

German firms furloughed workers or put them on shorter hours rather than laying them off wholesale and driving up government costs for unemployment benefits. The measures may have saved 200,000 jobs according to an OECD estimate.

As a result as new orders come in to the country's high tech manufacturing base, firms are able to quickly ramp up by restoring production hours and recalling highly skilled workers who hadn't left the company rolls.

What this means for Germany's nuclear utilities is that expanded manufacturing operations will drive increased demand for electricity. This will boost electricity generation at the nation's nuclear power plants and produce more profits for the four utilities. The situation makes the fixed contribution to a renewable energy fund look a lot more attractive than an open ended tax on fuel rods for each reactor.

Future of Germany's energy policy unclear

Merkel's government is said to be planning to make a decision on the tax issue when it unveils a new energy policy September 1. In it's Aug 1 report on Merkel's policy dilemma, the New York Times quotes Claudia Kemfert, an energy expert at a German think tank in Berlin.

She told the newspaper that Merkel has limited options due to the power of the business and utility lobbies and the pressure from green groups. Kemfert gets the last word on the current situation. She told the NYT there is no real energy policy.

"It's a big mess," she said. "Merkel should have stepped in months ago."

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