Energiewende Costs

By Max Luke, Jessica Lovering, and Alex Trembath

Germany’s renewable energy transition, the “Energiewende,” has long been a subject of scorn among conservatives, who have argued that it is a massive ratepayer-subsidized boondoggle that has harmed Germany’s economy and imposed significant regressive costs on poor and working class energy consumers. But the last several months have seen growing skepticism about the Energiewende from the center-left as well. Both Der Spiegel and Slate have published lengthy investigative pieces raising troubling questions about the costs and the environmental benefits of Germany’s headlong pursuit of an all-renewable energy future. Even left-leaning Dissent Magazine recently published a long expose about the failure of the Energiewende to reduce carbon emissions, concluding that Germany’s enormous investments in renewables, together with plans to phase out its nuclear fleet, would cost the nation a generation in the fight against global warming.

At stake are not simply public perceptions of the Energiewende, but the future of efforts to rapidly expand deployment of wind and solar power elsewhere. Environmentalists and renewables advocates have long held up Germany’s example as one that the United States and other nations ought to emulate. To the degree to which the Energiewende is instead perceived as a cautionary tale, efforts elsewhere to expand subsidies and deployment mandates for renewable energy, and to dismantle the present day utility sector in favor of a much more decentralized electrical sector are clearly at risk.

It is a measure of just how serious the new center-left criticisms of the Energiewende have been, and how threatening they are to the long-standing green climate and energy agenda, that prominent clean-tech thought leader Hal Harvey, long a powerful behind-the-scenes player in efforts to expand deployment subsidies for wind and solar power and transform the utility sector, has stepped out publicly and issued an extended defense of the Energiewende against its growing chorus of environmentally minded critics.

As the head of the Energy Foundation and Climate Works and the director of the Hewlett Foundation’s climate and energy programs, Harvey aggregated and spent more money on climate and clean energy policy development and advocacy than any other philanthropic institution over the last two decades – between 2008 and 2010 alone, Climate Works and affiliated philanthropic institutions spend over a half billion dollars on climate and energy policy and advocacy according to one recent study. America’s overlapping mash of renewables subsidies, deployment mandates, and regional cap and trade programs is arguably as much Harvey’s legacy as anyone else’s. For this reason, Harvey’s defense of the Energiewende is revealing, both for what it acknowledges about the real costs and slow progress and for what it attempts to deny and downplay.

Harvey acknowledges the enormous costs at which renewables innovation has been achieved in Germany, writing that escalating costs of the Energiewende “need to be controlled” and that Germany’s large direct subsidies for renewables represent only a portion of their total cost. “One still has to pay for transmission and distribution, for taxes, and for system resources to balance the variability of solar output,” he notes.

And he recognizes the enormous challenges that still must be overcome in order for a transition from fossil energy to renewables to begin in earnest. “There is no doubt that the accelerated phase-out of nuclear power combined with the strong carbon targets for the utility sector make for a complex transition,” he concludes. “Germany will have to reinvent power markets, build more transmission lines, and think deeply about a new business model for its utilities.”

But he also obfuscates many inconvenient facts, particularly those that suggest that current problems facing the Energiewende represent more than temporary setbacks, associated with a cold winter, rising natural gas prices, and the nation’s decision to accelerate the phase out of it’s aging nuclear fleet, and rather are likely to represent endemic and persistent problems associated with efforts to achieve high penetrations of intermittent renewable energy sources given present day technologies in Germany and beyond. A basic reality check on Harvey’s claim follows:

Harvey claims that most of the impressive sounding 24 percent share of electricity that Germany generates from renewables comes from wind and solar. But in fact only about half does. The rest comes from hydropower, biomass, and trash incinerators. As The Economist recently reported, “the largest so-called renewable fuel used in Europe is wood.” Biomass has proven to be an increasingly dubious source of carbon-free energy before even considering the broader environmental implications for forests and habitat of returning to burning wood for energy at significant scale. The situation in Germany is not as bad as in some other European nations. But like the rest of Europe, Germany has relied heavily upon burning trees and trash in order to meet its renewables targets, a fact that is rarely mentioned by Energiewende boosters. Harvey is no exception in this regard. Of Harvey’s 24 percent, wind and solar represent about 5 and 7 percentage points, respectively, leaving less popular forms of renewable power to carry fully half the lift of the Energiewende.

Harvey claims repeatedly that Germany has successfully decarbonized its electricity sector through the Energiewende. In fact, the carbon intensity of Germany’s economy has seen little change since 2000, when the nation embarked on the Energiewende. More recently, emissions have been rising. As the latest numbers from Germany’s BdeW utility consortium show, Germany’s greenhouse gas emissions rose 1.6 percent in 2012, the increase mostly coming from carbon dioxide emissions by coal-burning power plants. Anthracite coal carbon emissions rose 3.4 percent, while emissions from lignite rose 5.1 percent. Emissions are projected to rise again in 2013.

Harvey claims that Germany’s nuclear phase-out has not resulted in increased coal burning, but the evidence he cites contradict the claim. To support his claim, Harvey argues that no new coal plants have been approved since Germany announced plans to accelerate its nuclear phase-out after the Fukushima accident. Harvey is correct when he states that Germany’s current coal building binge has been long planned. But so has its nuclear phase-out, which was initiated over a decade ago. One can reasonably surmise that the long planned expansion of coal facilities has been, at least in some part, in anticipation of the long planned phase-out of aging nuclear facilities. Harvey chooses not to entertain this possibility.

Harvey claims that recent increases in emissions from coal plants are temporary phenomena, relying entirely on analysis lifted whole cloth from a recent blog post by Amory Lovins to suggest that rising emissions were the product of a cold winter and rising natural gas prices. In fact, they are in significant part a direct result of renewables policies. German policy mandates that the grid take renewable energy first and fossil energy second. This results in what is known as the merit order effect. As more intermittent renewable energy enters the grid, it displaces the most costly type of fossil power generation, natural gas. As a result, natural gas generation decreased last year while coal’s share of electricity rose from 43.1 percent to 44.7 percent.  And lignite – the dirtiest form of coal – increased from 24.6 percent to 25.6 percent.

Moreover, as the Energiewende continues, carbon emissions from coal will likely continue to rise. The confluence of a priority grid access for renewables and a low European carbon price have squeezed flexible natural gas out of the market, adding to the gains coal has taken from nuclear power. In 2012 Germany commissioned 2.9 GW of new coal-fired power capacity. According to BdeW, Germany will add another 4.6 GW of coal power in 2013. Of a planned 42.5 GW of major power plants to be built by 2020, two thirds will be new coal and gas generators.

Harvey claims that Germany’s low wholesale electricity prices, due to increasing competition from renewables, cancel out much of the cost of the renewable energy surcharge that retail customers pay to underwrite Germany’s feed in tariffs. Yet his own numbers belie this claim. Harvey acknowledges that the renewable energy surcharge constitutes one sixth of the retail electricity rate, adding approximately five cents per kilo-watt hour to the price of retail electricity. He then cites German government estimates that higher renewables penetrations have driven wholesale electricity prices down one cent per kilo-watt hour, saving ratepayers about $5 billion Euro per year. At best, then, lower wholesale prices mitigate less than a quarter the cost of the renewables surcharge. While lower wholesale rates will save ratepayers about $5 billion in 2013, Financial Times reported recently that in 2013 the feed-in tariffs will cost ratepayers €20.4 billion ($27 billion).

Harvey further claims that increasing competitive pressure from renewables on wholesale prices will ultimately mitigate all of the costs of the renewables surcharge, citing a study from the German Institute for Energy Research (DIW) projecting that by 2020, lower wholesale electricity prices resulting from higher renewables penetrations will exceed the cost of renewables. But this 2011 study is based on outmoded assumptions that are inconsistent with observed trends in both the cost of the renewable energy surcharge and the wholesale electricity market. In reality, both retail electricity prices and the renewables surcharge are growing much faster than wholesale electricity prices are falling. Der Spiegel notes that German electricity rates could exceed 40 euro cents ($0.53) per kilowatt-hour by 2020, almost twice what they are today. The DIW study that Harvey relies upon, by contrast, assumed that the cost of the renewable energy surcharge would decline over the last several years, dropping below 3 euro cents per kWh in 2012 and then rising very slowly over the rest of the decade to 3.6 cents in 2020. In reality, the surcharge has already risen to 5.3 cents for 2013, with a further 20 percent increase projected for 2014.

DIW then inflated its assumptions about cost savings from lower wholesale electricity prices by assuming a counterfactual, in the absence of the Energiewende, in which coal prices rose sharply while the EU ETS carbon price rose to $25/ton. In reality, coal prices have fallen precipitously, not due to lower demand for coal because of growing renewable generation (coal generation has risen in recent years), but due to expanded lignite production from German mines and cheap imports from abroad. Meanwhile, with Europe awash in excess carbon credits, thanks to the deep economic contraction of recent years and the overallocation of credits during the first phase of the emissions trading scheme, the EU carbon price has collapsed and is today below $7/ton.

Harvey claims that exemptions for industry have resulted in the cost of the renewable energy surcharge to residential customers being twice what it otherwise would be. In fact, none of the proposals offered by any of Germany’s political parties to close loopholes and more broadly distribute the costs of the surcharge would result in anything approaching a halving of the cost of the surcharge to residential consumers. Der Speigel reports that the value of the proposed changes to the average retail consumer will be about $.70 per month or less than $10 per year. Harvey, Lovins and others insist that the industry exemptions are a glitch. In fact, they are essential to the political acceptability of significantly raising energy prices in a highly industrial country.

Harvey claims that while the cost of the renewable energy surcharge is significant and rising, it still does not constitute the lion’s share of what consumers pay for electricity, which is the actual cost of energy generation, transmission, and distribution. But while the wholesale price of electricity has declined in recent years, Harvey’s own data show that the total cost of generation, transmission, and distribution has risen substantially since the introduction of the Energiewende, increasing costs that are additional to the rising cost of the surcharge. While it is difficult to fully disentangle the indirect cost of integrating intermittent renewables into the German grid from a variety of other factors that may have contributed to rising electricity costs, it is also difficult to conclude that the Energiewende has not contributed substantially to the total cost of provisioning grid electricity. Meanwhile, German grid operators themselves note mounting challenges to managing highly volatile electricity generation from high penetrations of intermittent wind and solar.

Harvey claims that increasing generation from renewables is increasing competition and “disciplining” wholesale electricity prices. In fact, heavily subsidized, highly intermittent renewables generation, with priority access to the grid and the wholesale market, have forced utilities to operate conventional power facilities unprofitably. An Energiewende that is predicated on forcing utilities to generate power unprofitably can’t be sustained for long. And indeed, Harvey acknowledges this reality both when he observes that the traditional utility business model will be unsustainable should the Energiewende continue to move forward and when he calls for capacity markets to provide an adequate revenue stream to keep the centralized plants upon which the grid depends in service.  In so doing, Harvey undermines all of the prior claims about wholesale electricity prices. Wholesale prices that reflect neither the direct subsidies for renewables deployment nor the capacity markets and enormous new transmission costs necessary to keep an intermittent grid operating reliably tell us nothing about the real cost of electricity.

Conclusion

Putting aside haggling about exactly why German emissions increased last year or how sustained the expansion of coal burning will be going forward, the claim that the Energiewende has driven significant decarbonization of the German economy simply cannot be supported. Zero carbon energy constituted 36 percent of German electricity generation in 2000, it constituted 38 percent in 2010, and if Germany moves forward with an accelerated phase-out of nuclear energy as planned, it will constitute 38 percent in 2022.

While there is little doubt that the Energiewende has accelerated the pace of wind and solar innovation, it has clearly done so at enormous cost. The cost of the renewable energy surcharge alone exceeds $100 billion already, and will continue to rise unless German policy-makers scale back the pace of solar and wind deployment or retroactively reduce subsidies that have already been committed.

The indirect costs of integrating such high levels of renewables into Germany’s electrical grid are more difficult to quantify directly. But the significant increase in the cost of provisioning electricity at the retail level since the inception of the Energiewende, and Germany’s high electricity rates compared to other similar economies suggest that those costs are already substantial and will likely continue to rise further, given plans for major expansion of offshore wind generation and long distance power transmission.

Finally, it appears that renewable energy policies are directly contributing to both the re-carbonization and economic destabilization of the German electrical sector. Mandates to privilege intermittent renewable generation over baseload fossil generation are driving a shift away from gas fired generation and toward coal fired generation. These dynamics have been further reinforced by the economic pressure that large amounts of highly subsidized intermittent renewable energy generation capacity with low or nonexistent marginal operating costs have placed on traditional utilities. The shrinking profitability of centralized generation has sparked a race to the bottom by utilities seeking the lowest cost on-demand generation available, namely older plants burning dirty coal.

The past, of course, is only prologue. But all indications suggest both that the cost of Germany’s transition will continue to rise absent significant steps by policy-makers to contain them and that the those costs are leading policy-makers to reconsider the ambitions of the Energiewende. Already, the German government has placed a cap on PV installations covered under the feed-in tariff at 52 gigawatts, which will be reached within the next several years, to control costs and generation variability. Retroactive subsidy cuts have already slowed the growth of renewables generation, with more significant policy reforms expected after the elections on September 22. With other cost-saving measures potentially on the post-election horizon, it remains highly uncertain how much further current renewables policies will take Germany.

Given these uncertainties, climate and clean energy advocates would do well to consider alternative pathways to decarbonization. Harvey hasn’t done so, but others have. What emerges from those analyses suggests that policy-makers in the United States and elsewhere might do well to consider those pathways seriously before reflexively following Germany’s example.

Mathematician Geoff Russell, for instance, finds that the growth in Germany’s wind and solar over 11 years (2001-2012) added only a small fraction of the per capita electricity generation that growth in nuclear power did in Sweden (1975-1986), France (1979-1990), and Belgium (1976-1987).

Robert Wilson finds that the pace of the Energiewende doesn’t even match past energy transitions in Germany. Natural gas, which supplied 1 percent of Germany’s energy in 1965, had grown to 12.3 percent a decade later. By contrast non-hydro renewables, which supplied 1 percent of Germany’s energy in 2001, had only grown to 7.8 percent a decade later, and much of this growth came from non-wind and non-solar energy such as biomass and waste incineration.

While Germany’s decarbonization has stalled, an energy transition of a different kind has driven down emissions in the United States faster than those of any other nation since 2005. The rapid transition from coal to gas in the United States has displaced large amounts of coal fired generation during the same period that Germany has been bringing new coal plants online.  While the rapid expansion of fracking in the United States has been exceptional, the role that increasing gas generation has played in recent US decarbonization efforts is not. The development of cheap, abundant gas resources also played an important role in the rapid decarbonization of the UK and several northern European economies in the 1990’s.

In fact, just about every significant period of decarbonization in major developed economies over at least the last forty years has been driven by the expansion of either gas or nuclear, not renewables. The same is true at the global level. Roger Pielke Jr, in a recent Breakthrough Institute analysis, finds that the world deployed vastly more zero carbon energy between 1965 and 1999, when the focus of such efforts was predominantly focused on nuclear and hydro power than it has since, when the focus shifted to renewables.

Future transitions may, of course, look different. But taking into account both the challenges that Harvey acknowledges and those that he obfuscates, policy makers and clean energy advocates alike would be well served to consider whether a single-minded focus on deploying present day wind and solar technologies is particularly wise, particularly in contexts where the policies necessary to do so foreclose the viability of alternative technological pathways, such as gas and nuclear, that have actually succeeded in significantly decarbonized major economies at sustainable costs as they have in Germany. 

Photo Credit: Energiewende Costs/shutterstock