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German inefficiency? The Wind of Change

06.03.2014 / Energyboardroom

According to a senior spokesman at utility company RWE, Germany’s successful transition to a green-powered economy will be a Herculean challenge for the government.

The German power market industry is confronting two core challenges: nuclear phase out and the implementation of ambitious carbon reduction targets. Failure to adequately balance these two policy directives will act as a noose on the German economy.

The Fukushima disaster had widespread ramifications on the global power markets industry, particularly in Germany. In 2010, nuclear energy constituted 23 percent of the country’s electricity supply, yet the psychological shockwave of the accident initiated a dramatic rethink of the role of nuclear power. In the immediate aftermath, Chancellor Merkel ordered the shutdown of six nuclear reactors and by May 2011, Germany had formally announced plans to abandon nuclear energy completely by 2022.

Such a profound and hasty shift in Germany’s electricity supply matrix has contributed to anxiety among market players. One difficulty is that many of the nuclear power stations earmarked for decommissioning are located in the south, situated near large, heavy industry manufacturing belts such as Munich.

Harnessing wind power from the north and importing energy from abroad are seen as appropriate solutions to abate the energy shortfall. Yet, to achieve these solutions, heavy investment in the transmission infrastructure would have to be made as well as an increased campaign to appease environmentalist concerns.

Improving the transmission lines would result in the development of an ‘Energie-Autobahn,’ with a significant increase in the number of high-voltage cables and pylons crisscrossing the German countryside. Naturally, opposition to such a prospect has been fierce.

In combination with planned nuclear decommissioning, German decarbonisation targets have compounded the challenges.

Spearheaded by Chancellor Merkel, Germany has laid out an energy framework to increase the share of green energy in electricity generation from 20 percent today to 35 percent by 2020 and 80 percent by 2050. Furthermore, the government has pledged to reduce its CO2 emissions by 40 percent from 1990 levels by 2020.

Such an audacious energy vision, challenged further by the fact Germany will need to replace 17 nuclear power stations in less than decade, has generated widespread scepticism.

According to the state-owned energy agency Dena, the cost to effectively upgrade Germany’s electricity grid could amount to USD 56 billion. The overheads would include new lines that carry power the extra distance from the new wind farms, alongside new equipment and processes to help avert grid overloads that can occur with intermittent solar and wind spikes.

The power transformation seems to be directed by large scale investment in wind and gas power, with an array of renewable initiatives in force to incentivise green power generation.

However, to many, this cleaner energy blueprint is flawed. Already generators are having to import electricity to meet peak demands whilst suppliers have had to source their energy from expensive gas generators and, rather counterproductively, from CO2-rich coal plants. To cover increasing generation costs power companies have warned of high prices to consumers, with Eon warning the market of a 7 percent rise in household bills.

It is clear that market-wide cynicism over the financial realities of renewable energy – without government aid – represents a real challenge for energy generators.

Ultimately, uncertainty still shrouds the power market industry, with a number of generation companies reluctant to invest without long-term government guarantees.

Clearly, such market sentiment has a domino effect for energy intensive industries who believe that rising energy costs could undermine their competitive edge relative to emerging industrial powers. In November 2012 for instance, Volkswagen stated that rising German energy prices had forced it to switch the buying of some parts from domestic to foreign suppliers.

With generating companies becoming increasingly focused on ‘golden gas’ for power generation – particularly from Russia – there are wider geopolitical impacts which cannot be ignored. Such energy positioning only serves to weaken Germany’s comparative leverage over her neighbours and add supply insecurity.

Although the long term, green energy policy vision is laudable, the practical difficulties attached to this German energy renaissance are cold, costly and inefficient.

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