Current Energy Commentary

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Germany’s “energy transformation:” unsustainable subsidies and an unstable system

Perhaps when Germany’s Chancellor Angela Merkel was a child, she attend a party and was the only one who came without a present, or wearing inappropriate attire—and the embarrassment she felt haunts her to this day. That’s how psychodynamic psychology (Freud) might explain her December 3 decision spend more money on Germany’s failing energy experiment to avoid, as Reuters puts it: “the embarrassment of missing her government’s goal of a 40 percent reduction of emissions by 2020.”

As Europe’s biggest economy, Germany has also embraced the biggest carbon dioxide reductions through a program known as “Energiewende”—or, in English, also called energy change, shift, or transformation. Energiewende was launched in 2000 under Merkel’s predecessor who offered subsidies for any company that produced green energy.

While the European Union (E.U.) has committed to carbon dioxide cuts of 40 percent by 2030, Germany’s national goal aims to get there a decade sooner—which may have seemed achievable early in the program. After the 1990 reunification of Germany, the modernization of East Germany brought rapidly reduced emissions. However, the program’s overall result has raised costs and the emissions the expensive programs were designed to cut.

A few months ago, Bloomberg reported that due to increased coal consumption: “Germany’s emissions rose even as its production of intermittent wind and solar power climbed fivefold in the past decade”—hence Merkel’s potential embarrassment on the global stage where she’s put herself in the spotlight as a leader in reducing emissions.

On December 3, while 190 governments were meeting for two weeks of climate change talks in Lima, Peru (which, after 30 hours of overtime, produced a compromise deal that environmental groups see“went from weak to weaker to weakest”), Merkel’s cabinet agreed to a package that continues Germany’s optimistic—though unrealistic—goal and increases subsidies for measures designed to cut emissions. Regarding Germany’s “climate protection package”, Barbara Hendricks, Environment Minister, admitted: “if no additional steps were taken, Germany … would miss its targets by between five to eight percentage points.”

The results of the German agreement will require operators of coal-fueled power plants to reduce emissions by at least 22 million tons—the equivalent of closing eight of them. The Financial Times (FT) believes the plan will “lead to brownouts in German homes.”

With the goal of generating 80 percent of its energy from renewable sources by 2050, Germany has aggressively pursued a green dream with unsustainable subsidies that have produced an unstable system described by FT, on November 25, as: “a lesson in doing too much too quickly on energy policy.”

So, what are the lessons? What should the U.S., and other countries, learn from Germany’s generous subsidy programs and rapid, large-scale deployment and integration of renewable energy into the power system? These are the questions U.S. legislators should be asking themselves as they argue over a tax extender package that includes a retroactive extension for the now-expired Production Tax Credit for wind energy.

Fortunately, the answers are easy to determine. Finadvice, a Switzerland based advisor to the utility and renewable industry, did an exhaustive study: “Development and Integration of Renewable Energy—Lessons Learned from Germany.” The introductory comments of the resulting report, includes the following statement: “The authors of this white paper would like to state that they fully support renewables as a part of the power portfolio.  …a couple [of the authors] have direct equity interests in renewable projects.” The author’s viewpoint is an important consideration, especially in light of their findings. They wanted Germany’s experiment to work, yet they begin the Executive Summary with these words:

“Over the last decade, well-intentioned policymakers in Germany and other European countries created renewable energy policies with generous subsidies that have slowly revealed themselves to be unsustainable, resulting in profound, unintended consequences for all industry stakeholders. While these policies have created an impressive roll-out of renewable energy resources, they have also clearly generated disequilibrium in the power markets, resulting in significant increases in energy prices to most users, as well as value destruction for all stakeholders: consumers, renewable companies, electric utilities, financial institutions, and investors.”  

After reading the entire 80-page white paper, I was struck with three distinct observations. The German experiment has been has raised energy costs to households and business, the subsidies are unsustainable, and, as a result, without intervention, the energy supply is unstable.

Cost

We, in the U.S., are constantly being told that renewable energy is close to cost parity with traditional power sources such as coal and natural gas. Yet, the study clearly points out the German experiment has resulted in “significant increases in energy prices to most users”—which will “ultimately be passed on to electricity consumers.” Germany’s cost increases, as much as fifty percent, are manmade not market-made—due to regulation rather than the trust costs. The high prices disproportionately hurt the poor giving birth to the new phrase: “energy poverty.”

The higher costs hurt—and not just in the pocket book. The authors cite an International Energy Agency report: “The European Union is expected to lose one-third of its global market share of energy intensive exports over the next two decades due to high energy prices.”

Subsidies and instability are big factors in Germany’s high prices.

Subsidies

To meet Germany’s green goals, feed-in tariffs (FIT) were introduced as a mechanism that allows for the “fostering of a technology that has not yet reached commercial viability.” FITs are “incentives to increase production of renewable energy.” About the FITs, the report states: “This subsidy is socialized and financed mainly by residential customers.” And: “Because of their generosity, FITs proved capable of quickly increasing the share of renewable power.”

Germany’s original FITs, “had no limit to the quantity of renewables to be built” and “lead to unsustainable growth of renewables.” As a result, Germany, and other E.U. countries have “had to modify, and eventually phase out, their program because of the very high costs of their renewable support mechanisms.”

Germany has also begun to introduce “self-generation fees” for households and businesses that generate their own electricity—typically through rooftop solar, “to ensure that the costs of maintaining the grid are paid for by all consumers, not just those without rooftop PVs.” These fees remove some of the cost-saving incentive for expensive solar installation.

Section four of the report, “Unintended Consequences of Germany’s Renewable Policies,” concludes: “Budgetary constraints, oversupply and distortion of power prices, transaction-specific operational performance, market economics (i.e. Germany proposing to cut all support for biogas), debt structures, and backlash of consumers paying higher prices were all factors contributing to regulatory intervention. Projecting past 2014, these factors are expected to continue over the next several years.”

Stability

Hopefully, by now, most people—especially my readers—understand that the intermittent and unreliable nature of wind and solar energy means that in order for us to have the lights go on every time we flip the switch (stability) every kilowatt of electric capacity must be backed up for times when the sun doesn’t shine and the wind doesn’t blow. But, what most of us don’t think about, that the report spotlights, is that because the favored renewables benefit from “priority dispatch”—which means that if a renewable source is generating power, the utility company must buy and use it rather than the coal, natural gas or nuclear power it has available—the traditional power plants operate inefficiently and uneconomically. “Baseload thermal plants were designed to operate on a continuous base. …they were built to operate at their highest efficiencies when running 24 hours a day, seven days a week.” Now, due to renewables, these plants operate only a fraction of the time—though the cost to build and maintain them is constant. “The effect of fewer operational hours needs to be compensated by higher prices in these hours.”

Prior to the large integration of renewables, power plants earned the most when demand is high—in the middle of the day (which is also when the most solar power is generated). The result impacts cost recovery. “There are fewer hours in which the conventional power plants earn more than the marginal cost since they run fewer hours than originally planned and, in many cases, provide back-up power only.”

This translates into financial difficulties for the utilities that have resulted in lower stock prices and credit ratings. (Note: utility stocks often make up a large share of retirement portfolios.) Many plants are closed prematurely—which means the initial investment has not been recovered.

Because the reduced use prevents the power plants from covering their full costs—yet they must be available 24/7, power station operators in Germany are now seeking subsidies in the form of “capacity payments.” The report explains that a plant threatened to close because of “economic problems.” However, due to its importance in “maintaining system stability” the plant was “kept online per decree” and the operator’s fixed costs are compensated.

*****

Anyone who reads “Development and Integration of Renewable Energy” will conclude that there is far more to providing energy that is efficient, effective and economical than the renewable fairytale storytellers want consumers to believe. Putting a solar panel on your roof is more involved than just installation. The German experiment proves that butterflies, rainbows and pixy dust won’t power the world after all—coal, natural gas, and nuclear power are all important parts of the power portfolio.

Why, then, did Merkel continue Germany commitment to an energy and economic suicide? It is all part of the global shaming that takes place at the climate change meetings like the one that just concluded in Lima, Peru.

If only U.S. legislators would read “Development and Integration of Renewable Energy” before they vote for more subsidies for renewable energy, but, heck, they don’t even read the bill—which is why calls from educated constituents are so important. I am optimistic. Maybe we could learn from Germany’s experience what they haven’t yet learned themselves.

 

The author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc. and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE). She hosts a weekly radio program: America’s Voice for Energy—which expands on the content of her weekly column.

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