From November 3 to 8, 2013, a delegation of US energy

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1 TRIP REPORT Germany s Energy Transition Steve Brick March 2014 From November 3 to 8, 2013, a delegation of US energy experts visited Belgium and Germany to learn more about European energy policies, US-EU energy relations, and especially, the German Energiewende, or energy transition. The 12-person delegation included representatives from business, academia, government, and NGOs. The project was sponsored by the Konrad Adenauer Stiftung and The Chicago Council on Global Affairs. This report summarizes the key themes and lessons that emerged from the meetings. Overview The European Union and its members are in various stages of implementing energy transition policies. These policies aim to increase the use of renewable energy sources and to reduce emissions of greenhouse gases (GHGs). Recent efforts stem from the EU Renewable Energy Directive of April 2009, which requires that 20 percent of all energy (electricity, transport, and heat) originate from renewable sources by According to the 2013 Progress Report, as of 2012 the EU as a whole met 12.7 percent of its energy needs with renewable resources. Overall, the policy is on track to meet its goal. The European Commission (EC) recently recommended a new GHG target (40 percent below 1990 levels by 2030), but proposed relaxing the renewable energy targets to 27 percent of total demand, essentially business as usual. Renewable energy advocates had hoped for more ambitious targets and see the EC recommendation as a significant set-back. European electric utilities, transmission owners, regulators, and NGOs are focusing on the following challenges: > coordinating the operation and expansion of the European transmission grid; > maintaining and improving electric reliability with a growing contribution from intermittent renewable energy resources; > creating a common European electricity market; > supporting research and development on critical technology, especially energy storage. EU-US discussions to date have centered mainly on trade and technology transfer. There has not been significant discussion about harmonizing US and EU energy or environmental policies. NATO is emphasizing energy security as an area of concern, focusing on risks associated with critical energy infrastructure (natural gas pipelines, high voltage electricity transmission lines, oil pipelines, energy-related port facilities) and methods for protecting that infrastructure from a variety of threats. THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 1

2 The key lessons from this trip are summarized below: > The EU and its members are making progress towards renewable energy and climate goals. > EU-US energy discussions focus mainly on energy trade and technology transfer. > NATO plans to take an increasing role in protecting critical energy infrastructure. > There is widespread and longstanding support among the German public for the energy transition policies. > There is agreement that German policies need to be adjusted to mitigate increasing costs, but there is little clarity on how this should be achieved. > There is concern in Germany that the not in my backyard (NIMBY) effect will slow or prevent building essential transmission lines. > The German market does not provide adequate economic incentives for providers of balancing power power needed when wind and solar photovoltaics (PV) are not available. The reliability of German supply will be compromised if sufficient balancing power is not available. > Natural gas is not expected to play a significant role in the European energy transition, at least in the near term. The United States should take stock of the European and especially the German situation. As the United States proceeds with its efforts to promote renewable energy, consumer costs and transmission system reliability should be considered. The same kinds of market reforms that are now contemplated in Germany are also likely to be needed in the United States. This is another reason US policymakers should pay close attention to the German experience. The German Energiewende Most of the delegation s time was spent learning about the status of the German energy transition. The German effort is the most advanced in the world, and some of the reliability and cost issues that are now emerging offer important lessons for the United States. In addition, Germany is Europe s most powerful economy, and weakness there would impact the whole of Europe and beyond. Background and public support In 1980 the Öko-Institute, a German environmental think-tank, began promoting the Energiewende, or energy transition, as social policy. The initial focus of the strategy was growth and prosperity without petroleum and uranium. The 1986 Chernobyl nuclear disaster increased German support for moving away from nuclear energy, and this was strongly reinforced by the 2011 Fukushima accident. As climate change gained prominence as a political concern in the 1990s, German public support for an energy transition also gained steam. In 2000 the German federal government enacted the first significant legislation that put the nation on the Energiewende path. German citizens support the energy transition policies for one of three reasons: > They are concerned about climate change. > They oppose nuclear power. > They support renewable energy. Support for renewable energy, in particular, overlaps with climate change, but also with national security concerns. Local sources of renewable energy are seen as reducing the economic burden on the German economy from imported energy and lowering the risk of supply interruption. For these reasons a majority of Germans perhaps 70 to 75 percent support the Energiewende and its associated policies. In 2010 the German government enacted legislation that codifies the following goals for the Energiewende: > 80 to 95 percent reduction in GHGs by 2050, > 60 percent of energy coming from renewable sources by 2050, > 50 percent increase in energy efficiency by Generous feed-in tariffs (FITs) offered to new renewable electricity projects are the cornerstone of the German policy. This policy has led to a fivefold increase in wind power since 2000 and almost a 300-fold increase in solar PV. The tariffs guarantee a 20-year stream of payments to renewable project developers that covers costs and provides an ample return on investment. However, the FIT scheme has significantly increased electric rates for most German customers. 2 - GERMANY S ENERGY TRANSITION, TRIP REPORT

3 Progress to date The following statistics for 2012 summarize the progress of the Energiewende thus far: > Germany produced about 12 percent of its total energy needs from renewable sources. This is slightly less than the figure cited for the EU above for the same year. > Germany produced about 24 percent of its electricity from renewable sources. Of this amount: 36 percent was produced by wind power, 31 percent was produced by biomass, 19 percent was produced by PV, 15 percent was produced by hydro. > Total installed capacity for renewable resources equaled 77 gigawatts (GW). Of this amount: 33 GW is PV, 31 GW is wind, 8 GW is biomass, 6 GW is hydro power. Cost and economic impact In 2012 wind operated at an 18 percent capacity factor (the ratio of energy produced to total possible energy producible). PV operated at a 7 percent capacity factor. These figures underscore the challenge presented by the intermittency inherent in wind and solar. Biomass resources, which produce energy more or less continuously, have much higher capacity factors than either wind or solar. As a consequence, they also have more favorable economics. The incentive scheme has been an unqualified success if measured by the amount of new wind, PV, and biomass it has brought forth. However, the economic consequences these incentives have for German consumers and for the German economy have begun to generate opposition and may begin to undermine support for the Energiewende. Beginning in early 2013, German and international press began to report on the pressure exerted upon German consumers by the cost of escalating energy incentives, particularly electricity rates. Der Spiegel argued that electricity was becoming a luxury for many Germans; The Economist suggested that an economic meltdown was in the making. The Chicago Council delegation of US energy experts met at the House of the Konrad Adenauer Stiftung in Brussels to discuss the reliability and security of European electricity transmission systems. Calls for German energy policy reform continue to grow in the first quarter of In March 2014 IHS Global released the study A More Competitive Energiewende: Securing Germany s Global Competitiveness in a New Energy World, finding that an increased role for natural gas in German electricity markets will have more favorable economic outcomes than a renewables-only pathway. For 2012 the basic economics of the German renewable support scheme looked like this: > Total investment in renewable energy of all types was about 20 billion ($27.5 billion) for the year. > Customers paid about 24 billion ($33 billion) for all renewable energy incentives, or about 292 ($390) per capita. > German electric rates are now the highest in Europe. Average residential rates are around 35 (US) per kilowatt hour (kwh). Average US rates for residential customers are around 12 per kwh. > If subsidies remain undisturbed, German ratepayers will pay an additional 300 billion ($413 billion) over the 20-year life of these agreements. In contrast, the total cost of the US wind production tax credit (PTC) is now about $1.5 billion per year, or about $5 per capita. The PTC and associated state policies have driven the development of about 60 GW of new wind power in the United States. The outcome of the German federal elections in September 2013 and the recently completed negotiations for a coalition government between the majority THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 3

4 Members of the energy delegation toured Feldheim, a rural German village that heavily employs renewable energy sources. Christian Democrats and their Social Democratic partners confirm that there is concern about the economic impact of German energy policies. The coalition agreement embodies a commitment to: > ease continuing pressure on electric rates by reducing subsidies, > include customers (mainly larger, energy-intensive industries) now exempted from paying the incentives, > protect payments to existing renewable projects, > stay the course for the Energiewende established in It may be difficult to achieve these objectives. Reduced incentives will still increase electric rates, albeit at a slower pace. Including larger industries in the scheme will spread costs somewhat, but raises the specter of industrial flight. Staying on track will be difficult without continuing to increase electricity costs. While there seems to be a consensus that policies need to be revised to ease the economic burden on the country, there is little clarity on how this will be successfully achieved. Electric system reliability: renewable integration and balancing challenges The engineering difficulties posed by the variation in output for wind and solar PV energy are another significant challenge facing the Energiewende. This challenge has both domestic and international dimensions. There are two aspects to the domestic challenge. First, new transmission lines are needed to enable the movement of wind and PV power around the country. In June 2013 the German government endorsed an ambitious plan for expanding the nation s transmission grid. The German public views proposals for new overhead transmission lines with considerable skepticism. (In this respect, Germany and the United States are entirely similar, highlighting one of the greatest challenges associated with any new energy pathway public acceptance.) Early indications suggest that some of the most important new lines (very large, high-voltage lines running 200 to 300 miles from north to south) will face considerable public opposition due to the NIMBY effect. If these lines are not built, it will be increasingly difficult to meet and maintain the Energiewende targets, given that Germany s largest industrial energy users are located far from newer sources of renewable energy. The power of citizens and the threat of direct action is real. A frequently cited lesson involved the controversy over the unsuccessful proposal to build a new central train station in Stuttgart. Citizens took to the streets until the proposal was scrapped. This accounts for the widespread assertion that public acceptance is essential for new transmission facilities to be built. A repeat of the Stuttgart experience is possible and can have a significant impact on the success of the Energiewende. The second domestic challenge is ensuring sufficient conventional power generation to balance wind and PV energy when they do not operate. Two factors suggest that this will become a growing concern. First, in the wake of the Fukushima accident, the German government made a very swift decision to accelerate the retirement of its remaining nuclear power plants. At present, these plants help balance the system when wind and PV power are not produced and ensure that power is available in Germany s industrialized areas, where most of the nuclear plants are located. Second, the current German electricity market is inadequate to stimulate new investment in conventional power plants. In fact, some of the newest and cleanest natural gas fired plants have been retired in Germany because they cannot earn acceptable returns from the market. As a result, coal plants are increasingly called upon to provide balancing power, increas- 4 - GERMANY S ENERGY TRANSITION, TRIP REPORT

5 ing CO 2 emissions and moving Germany farther away from one of the key Energiewende goals. Restructuring the electricity market to create appropriate incentives for new conventional generation resources will be controversial because it will add a new layer of costs to an already costly system. Without such changes, however, it is hard to see how reliability can be assured. One thing is very clear: if the collection of challenges just described leads to decreased system reliability or widespread outages, support for the Energiewende will suffer. However controversial, addressing the need for new transmission and balancing generation is a make or break issue for the German policy. Internationally, large, intermittent flows of renewable energy from Germany affect the reliability and cost of neighboring systems. Poland and the Czech Republic have experienced large, inadvertent flows of energy from Germany. These flows require the unanticipated adjustment of the Polish and Czech systems, which increases costs to Polish and Czech customers. Such flows can also compromise reliability if adjustments cannot be made quickly enough. These inadvertent flows are the subject of ongoing controversy and negotiation between Germany and its neighbors to the east. The fact that excess renewable energy from Germany is available at very low cost much of the time does not appear to offset the concerns about system reliability. This could potentially become a concern in the United States, where the state-by-state energy policy patchwork creates a similar situation. A second international issue involves the push to create a common EU electricity market. The cost and reliability concerns posed by the German system are obstacles to achieving a unified market. Indeed, there has been recent concern expressed in Brussels that the German FIT scheme is not consistent with EU policy. The minor role of natural gas The delegation also discussed the role of natural gas and its impact on the Energiewende. Europe has not benefitted from the low gas prices resulting from the shale gale in the United States. Supplies are much more restricted in Europe, and shale resources have not been developed to augment that supply. In addition to public concern over the land-use impacts of shale gas development, the economic incentives do not align to provide the kind of public support shale development has enjoyed in the United States. Specifically, subsurface rights in Europe are owned by the state, not by the landowners, as in the United States. These rights and the associated income from gas production for landowners are key drivers for the US shale gas revolution. Unless alternate supplies can be developed to exercise market discipline in Europe, it seems that gas will play a minor role in supporting the Energiewende. Conclusion It is clear that the Energiewende stands at a critical point. Costs, electric system reliability, and public acceptance of new infrastructure must be simultaneously balanced to stay on course. Significant international concerns must also be addressed. It is not surprising that an ambitious policy with demonstrated success should encounter challenges. Indeed, it would be surprising if obstacles did not arise. One speaker described the Energiewende as a Faustian bargain, a kind of deal with the devil. In the 1970s the US physicist Alvin Weinberg used identical language to describe the civilian use of nuclear energy to produce electricity. Perhaps, then, this is the nature of energy systems, whether nuclear or renewable. The next 12 to 18 months will be critical for the Energiewende, and the members of this delegation are well positioned and eager to observe its progress. About the author Steve Brick, senior fellow on energy and climate, joined The Chicago Council on Global Affairs in 2009, providing broad experience from his 30 years of work at the intersection of energy and environmental policy. His expertise includes utility regulatory policy, energy economics, energy technology assessment, and air pollution control policy and economics. THE CHICAGO COUNCIL ON GLOBAL AFFAIRS - 5

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