The Cost of Green: Germany Tussles Over the Bill for Its Energy Revolution

Generous government subsidies have helped Germany build a world-leading renewable-energy industry. But is all that wind and solar worth the cost?

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Jens Buettner / EPA

Two men stand in the new solar power plant of operating company Norddeutsche Energiegemeinschaft in Buetzow, Germany, March 15, 2013.

Germany is coming under increasing pressure to move forward with its ambitious plan to shut down its nuclear program within a decade and replace the lost power mainly with renewables.

On May 24, the International Energy Agency lauded Germany’s Energiewende, its plan to transition to a renewably powered economy, while expressing concern over the impact of rising energy costs on industry and consumers. Agency officials urged the government to “maintain” a stable policy environment to reduce costs from the transition and distribute them more equitably while increasing investment.

“The fact that German electricity prices are among the highest in Europe despite relatively low wholesale prices must serve as a warning signal,said IEA executive director Maria van der Hoeven as she presented the agency’s report, Energy Policies of IEA Countries — Germany 2013 Review, in Berlin. “The German government should maintain its policy course based on a predictable and stable regulatory framework while actively seeking means to reduce the costs as sudden changes can undermine investor confidence and will drive up costs in the long term.”

Since approving the energy transition in 2011 — which aims to ensure that an ambitious 80% of the country’s electricity will be supplied by renewable sources by 2050 — Germany has been grappling with severe economic, technological and infrastructure issues in implementing the plan. But now analysts say the upcoming federal elections in September have created an additional stumbling block as German politicians worry over a backlash from voters because of the plan’s skyrocketing price tag.

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“It’s halting the development of the Energiewende,” said Matthias Lang, an attorney with Bird & Bird law firm in Düsseldorf who specializes in energy issues. “We’re in uncharted territory. But it is difficult with the elections — you have all these currents — they are preventing the necessary adjustments to keep the boat going in the right direction.”

Since late last year, the debate over the energy revolution has shifted from “How do we get this done?” to “How do we afford this?” say analysts. It has led to a push by the government to overhaul a key law credited with growing one of the world’s largest renewable-energy sectors — the cornerstone of the energy revolution — because of rising electricity costs due to a subsidy support scheme mainly paid for by private consumers.

Adjustments have already been made to that law, known as the EEG, reducing some subsidies to solar producers. Now more drastic changes are on the table, including dismantling exemptions for energy-intensive industry as well as deeper reductions in incentives for the renewables industry. “[The energy revolution] means a complete transformation of the backbone of the German economy and business,” said Environment Minister Peter Altmaier at a debate in Berlin earlier this year. “We are redoubling our efforts now in order to make this energy transition affordable.”

Environmentalists are up in arms, saying such measures hurt the renewables industry and threaten the transition. Industry is complaining that its competitiveness is in jeopardy because of high prices, with businesses threatening to slash jobs or even move production abroad. Supporters of renewable energy counter that industry posturing doesn’t allow for the regulatory certainties they need to invest in the technology and infrastructure required to get the energy revolution moving forward.

So months of acrimonious debate within the German government have left the country at an impasse: how to deal with spiraling energy costs as an election approaches. “Whoever wins the elections will have to do something, make the hard choices, control the costs,” said Lang. “Because at the end of the day, no one seems to really know how to [implement the energy transition] at a reasonable price.”

In February, Altmaier warned that if the law were not amended, the cost of the energy revolution could reach €1 trillion by 2040. Those costs arise from surcharges on electricity from renewables paid by consumers in a complex subsidy support scheme, and the massive infrastructure updates needed to accommodate the increasing amount of green energy. That includes expanding the power grid, building power lines and creating a storage system for intermittent solar and wind power.

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The more important issue, though, may not be the size of the price tag, but who pays. According to a Jan. 31 report by the German Association of Energy and Water Industries (BDEW), private households pay 35% of the subsidies for renewables but account for one-quarter of electricity consumption. Those subsidies in the form of surcharges on electricity for private households rose from 3.6¢ per kilowatt-hour in 2012 to 5.3¢ in 2013 — an increase of 47%, according to the report. That led Economics Minister Philipp Rösler to complain over rising electricity prices forcing an increasing number of Germans into “energy poverty” earlier this year.

At the same time, most energy-intensive companies in Germany are exempted from renewable surcharges, electricity-grid fees and energy taxes out of concern that higher costs would harm business competitiveness. Altmaier wants industry to pay its share of the costs; in March, he proposed legislation dismantling a number of those breaks. Representatives of industry counter that energy prices have already become prohibitively expensive, threatening their international competitiveness as well as local jobs. “Industry has to make its contribution to the energy transition — it profits from it too,” said Angelika Thomas, an adviser to the executive board of IG Metall, the main metalworkers’ union, in a post on the union’s website. “But industrial enterprises that foot massive energy bills and have to compete internationally need relief.”

Energy prices for industry in Germany are about 40% more expensive than in France and the Netherlands, and 15% more expensive than the E.U. average, according to a recent study by the Cologne Institute for Economic Research. Energy-intensive sectors such as chemicals and steel are among the hardest hit and would have to bear almost €740 million and €710 million in yearly additional costs, respectively, if prices increase by 2¢ per kilowatt-hour. And major companies faced with rising costs may simply move abroad: one recent study by the German Chambers of Industry and Commerce called the Energiewende Barometer found that 4% of industry is considering leaving the country because of spiraling power costs. The survey also reported that 36% of Big Industry, which contributed to 26% of GDP in 2011, said they were “negatively” impacted by the energy revolution.

First-quarter growth in 2013 was slow in Germany, chiefly because of unusually cold temperatures that delayed activity in the construction sector, as well as sluggish demand from European trading partners. But over the long term, some economists do believe that higher energy prices could make a dent in Germany’s economy. “There are significantly increasing differences in the energy costs between the U.S. and Germany,” said Carsten Brzeski, chief economist at ING Financial Services’ Brussels office. “There are German companies considering maybe moving parts of their facilities to the U.S. just to go for the much cheaper energy costs.”

Still, some see the complaints over rising costs as merely politics and posturing, and say consumers and businesses have adjusted before to rising energy costs and will do so again. And across party lines and among the German public, there is consensus about the importance of the energy transition as key to meeting Germany’s carbon-emissions-reduction goals and providing energy security in the future. “The energy transformation is disruptive — the old system dies while the new system is created,” said R. Andreas Kraemer, director of the Ecologic Institute, an environmental think tank based in Berlin. “Disruption is always painful for those who are disrupted, and they’re fighting back.”

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But for most Germans, the price of the energy transition has been worth it. Polls since 2011 have continuously shown that a majority of Germans still support the program, despite the cost. A deep-seated fear of nuclear power that goes back before the Chernobyl meltdown of 1986 has made Germans more willing to make sacrifices to protect the environment — and themselves. Three decades after members first entered Parliament with flowers in their hair, the Green party and their antinuclear platform have gone mainstream, winning the leadership of the influential and traditionally conservative state of Baden-Württemberg in March 2011 elections for the first time. The Greens look poised to enter into a coalition government with Chancellor Angela Merkel’s conservatives following the fall elections. “It’s certainly the biggest success in the party history that even in the opposition we managed to force the other parties, in particular the governing parties, to follow us,” said Green party co-chairman Cem Özdemir. “Now the real work starts.”

The government has promised a full overhaul of the energy law — after elections. But in the meantime, analysts say the political posturing over the law is threatening the very investment needed to make the transition happen. It’s difficult for utilities to make those decisions — most of which require a very long lead time — without more regulatory certainty. Thousands of kilometers of transmission lines need to be built to transport energy across the country to from wind-power sources in the Baltic to Bavaria in the south. The technology to store solar or wind energy on cloudy or windless days still needs to be developed and implemented. And most critically, the electricity grids need to be expanded, modernized and made more flexible to deal with an increasingly decentralized energy supply, according to a study by the German Energy Agency (Dena) in December.

Dena projected that an investment of between €27.5 billion and €42.5 billion will be necessary by 2030 depending on the rate of growth in the amount of renewable energy feeding into the grids. In the report, Dena criticized the lack of incentives for energy providers to invest in the necessary improvements. As a result, energy projects have been put on ice because of a lack of funding and investment.

After the German Environment Minister announced a cap on the subsidy support scheme at the beginning of the year, Stadtwerke München, a utility that delivers power to the 1.3 million residents of Munich, announced it would put green-energy investment on hold and seek investment opportunities in neighboring countries. And proposed subsidy cuts have already slowed the growth in the wind-energy sector, which made up about 8% of Germany’s gross energy production in 2012. Germany’s once lauded solar industry has fallen into crisis over the past year with revenues plummeting because of cuts in government subsidies and global overcapacity, which has caused the price of panels to fall. A number of German solar providers have filed for bankruptcy over the past year and a half.

Still, while the solar industry faces major financial and technological challenges, manufacturers plan to increase solar’s share in Germany’s energy mix from where it currently stands at 5% to at least 20% by 2030. And in spite of those hurdles — and the uncertainty of the upcoming elections — analysts and the renewables industry say that Germany will meet its green goals. The question is when — and who will pay. “In the future, Germany’s electricity demand will be covered mostly with solar and wind power,” said David Wedepohl of the German Solar Industry Association. “That’s because people want the Energiewende, and they are increasingly taking things into their own hands.”

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