April 25th, 2013
in Op Ed
by Michael Edesess, AdvisorPerspectives.com
Germany's energy plans lie between Scylla and Charybdis: fossil fuel-generated carbon dioxide emissions on the one hand and potentially catastrophic nuclear energy on the other. With strong motivation to avoid both, Germany has been left with only one alternative. The direction of energy policy in the U.S. - and the rest of the world - may rest on whether Germany succeeds in its ambitious plan to embrace renewable sources.
Germany's giant investment in renewable energy and energy efficiency, known as the Energiewende or energy transformation, will surely produce technological breakthroughs for which the rest of the world should be grateful. Whether it will be beneficial for Germany itself, however, is a question that remains unanswered.
In an article in The Guardian Germany's motive is chalked up to efforts to escape its appalling history. Germany's energy program, the article says,
"goes back to the second world war and the postwar generation who challenged their parents afterwards for just standing by."
Germans I know, however, also chalk it up to German Romantik philosophy with a very special relationship to nature.
German Green Party politician Hermann Ott told The Guardian that the county's history -
"led to a very strong environmental and anti-nuclear movement. ... If something goes wrong, you have to speak up and do something otherwise your children will ask you in 20 to 30 years, 'Why didn't you do anything?'"
In Germany, no one doubts climate change or that its causes are rooted in human activities. Germany has a strong scientific tradition and an unshakable respect for scientists. Germans regard climate change as a very serious concern. Perhaps to atone for their historic failures, they have embarked on a world-leading effort to do something about it.
At the same time, however, many Germans regard low-carbon-emission nuclear energy with equal concern. The 1986 Chernobyl nuclear disaster had a major effect on Germany, spreading nuclear radiation across Eastern Europe and causing panic about the possible impacts on food and health. The actual impacts were difficult to determine at the time. But even if they turned out, in retrospect, to be less than feared, the incident was a reminder of the terrifying power and potential consequences of nuclear energy. The March 2011 nuclear reactor accident at Fukushima reinstated and reinforced these concerns. After Fukushima, Germany decided to phase out nuclear energy entirely.
These twin concerns have led Germany to stake its future on renewable energy.
The Moral Equivalent of War
Germany has embarked on a program of massive subsidization for renewable energy. In the United States, we would think such a market-distorting program is doomed to failure and destruction. But we forget our own past. The United States' rise in the latter half of the 20th century was foremost a product of a massively economy-distorting, government-led program to produce armaments for England and America to fight World War II. No private sector-led effort would have done this; no purely economic justification could have supported it. Yet its result in the U.S. in the second half of the 20th century was the most rapid and sustained surge of industrial and technological development the world has ever known.
On April 18, 1977, after a sudden increase in the price of oil, President Jimmy Carter called the energy crisis the "moral equivalent of war." If Germany believes that avoiding climate change and skirting the dangers of nuclear energy is the moral equivalent of war, could it lead a worldwide energy transformation this century?
Or, alternatively, will the economic distortions caused by Germany's energy program cause it to lose the war?
It is too soon to tell. But Germany's bold energy experiment is sure to have lasting effects. Unlike the solar panels that Jimmy Carter installed on the White House in 1979 and President Reagan removed seven years later, the rooftop solar panels that have spread like wildfire across Germany will continue to pump out electricity for many years.
The Feed-in Tariff
The basic tool of Germany's Energiewende is the feed-in tariff (FiT). The FiT is a long-term agreement to pay a guaranteed amount per kilowatt-hour (kWh) of electricity generated by a specified set of renewable energy technologies, including wind, photovoltaics (PV), biomass, and hydroelectric and tidal power. The tariff is set to pay the cost of the technology plus a 5%-10% return to the owner. Hence, the tariff is different for different technologies - highest for expensive technologies like PV (solar-electric cell arrays), lowest for large hydroelectric power projects. The per-kWh payment is set to decline from year to year; hence, it is highest in the earlier years. This means that if power-producing equipment is financed by borrowing, early power-producer revenues are much higher than the cost of financing. This set-up guarantees a substantial profit and encourages installation of renewable-power-producing technologies.
The payments are made by the electric utility to the power producer. In 2012, these payments were more than €20 billion. The difference between what German utilities pay to renewable power producers and what they take in by selling that power is called the EEG surcharge. That surcharge in 2013 is about 5.3 euro cents per kWh, or almost US$0.07/kWh - 47% higher than it was in 2012.
In other words, German consumers of electricity must pay US7¢/kWh more than they would if they weren't subsidizing renewable power production. This charge is increased by the fact that large industrial users of electricity that sell in international markets are exempted from paying it, for fear that they would otherwise move out of Germany.
The recent huge increase in the surcharge is due to the payments simply being too rich. It is such a good deal that renewable power technologies have been installed faster than expected, accelerating the subsidy drain. In fact, they have been installed so quickly that wind power has reached, temporarily, a self-limiting point in windy north Germany. Utilities cannot buy more wind power from the north until more transmission lines are installed to transport power to Germany's south.
Because of this acceleration, Germany's environment minister has announced that the law will need to be amended to prevent runaway costs. Nevertheless, it is planned only to rein in, not curtail, Germany's renewable energy revolution.
Germans who revere their country's great strides in renewable energy point to the fact that it now gets 25% of its electricity from renewables - much higher than any other large country. Germany is especially ahead in the category of solar cells. Though solar cells generate less power than wind (9.2% of the total) and biomass (5.7% of the total - mostly wood), they still generate 5.3% of total electricity, much more than any other country. (In the U.S., solar electricity accounts for only 0.2% of total electricity generation.) Solar cells mounted on rooftops and the sides of buildings are the great hope for the future of renewables - if costs can be reduced sufficiently.
It has long been believed that with mass production, solar cell costs will lower substantially. That hope has in fact been achieved to a significant degree, with low-cost solar panels manufactured in China and purchased by Germany. Nevertheless, even when solar cell arrays come down in price, the cost of the system - power inverters, support structures, etc. - is still high enough to make solar electricity economically uncompetitive without subsidies.
German renewable energy enthusiasts, in my experience, seem unaware of or oblivious to the corners that are being cut in the process of phasing out nuclear and galloping ahead with renewables. Even well-informed Germans I have met believe Germany is importing no nuclear power from France. This is patently false - electricity crosses the border in both directions. Just as renewable energy sources are intermittent and need backup from constant forms of electricity generation like nuclear power, constant sources like nuclear also need supplements like gas-fired turbines. Wind and solar can help serve this purpose. Hence, exchanges between nuclear-powered France and (partially) renewables-powered Germany make sense.
The phasing out of nuclear means more coal-powered electricity - the worst carbon dioxide emitter - and more use of gas, at least until Germany can ramp up toward its goal of 80% renewable electricity by 2050. This goal should not be dismissed lightly. France generates more than 75% of its electricity from nuclear due to forging ahead with a national program launched in the early 1970s, in spite of very substantial cost overruns. France is now the world leader in nuclear energy. If nuclear energy becomes the energy source of choice, France is virtually assured a leading role. Similarly, if renewable energy takes the lead - or shares it with nuclear or other forms of energy - Germany will be in the forefront because of its decision to overspend on it now.
It's Not Just about Renewables
A publication by Siemens - Germany's big multinational engineering conglomerate states:
"Germany's new energy policy includes far more than just phasing out nuclear power by 2022. The expansion of renewables like wind and solar power ... will require a wide range of measures - measures that will have to fit together perfectly like the parts of a puzzle."
According to Siemens, those parts include:
- Making renewables competitive by improving engineering and production processes.
- Implementing energy-saving technologies.
- Building power transmission superhighways with low energy losses.
- Developing energy storage technologies and facilities.
- Creating smart power grids that can be optimally managed.
Massive projects are in the works to compensate for the intermittency of wind and solar electricity and to save energy. A high-voltage undersea cable is planned to connect Norway and Germany. Germany could use it to tap Norwegian electricity generated by hydropower and gas, while it can also pump electricity back to Norway when its wind and solar installations produce excess. In the Reichstag, where Germany's parliament meets, solar panels are embedded in the roof. There is a cogenerator in the basement powered by rapeseed oil, a biofuel, which produces both electricity and heat. Any excess is pumped underground nearly 1,000 feet into a natural aquifer and reclaimed to heat the building in winter.
Can the U.S. Do It too?
The U.S. has newfound energy wealth in shale gas and oil fracking and may lead the world in spreading those technologies to other countries. However, environmental concerns and uncertain limits to that wealth could bound the benefits. Solar, nuclear or both may come to dominate in the ensuing decades. Can the U.S. lead in those technologies?
As is often the case, the candidate for leadership in the U.S. is California, due to its progressive mind-set and tendency to be on the cutting edge of technology. California has a smattering of feed-in tariff programs but does not rely on those to the extent that Germany does. True to the American preference for anything market-driven, California's push for renewables lies mainly in what is called the Renewables Portfolio Standard, or RPS. The RPS requires that 20% of retail electricity sales be from renewables by 2017, and 33% by 2020.
To meet these targets, a California electric utility must create or buy enough electricity to amount to the required percentage of its sales. Any renewable power generator can be qualified as a renewable resource - a rooftop solar-cell array, for example. The owner can then create tradable renewable energy credits by operating its resource. Those credits can be sold directly to an electric utility that needs them to meet its RPS requirement or traded on the open market.
Instead of imposing a renewable energy subsidy, this program requires a minimum of renewable energy (or to put it another way, a cap on non-renewables). Hence, the RPS is similar to a cap-and-trade program for carbon emissions. The RPS caps the non-renewables portion of an electric utility's power generation (mostly carbon-emitting fossil fuel-fired plants) at 80% in 2017 and 67% in 2020.
California should be in a much better position than Germany to take advantage of solar energy. It receives twice as much solar radiation on the ground per square meter as Germany. Therefore, cost per kWh should be half as much. California's greenhouse gas cap-and-trade program, championed by ex-governor Arnold Schwarzenegger, provides further incentive to develop fossil energy alternatives. The program caps greenhouse gas emissions, largely carbon-dioxide emissions from power plants and refineries, which makes the use of fossil fuels more expensive. A number of cities and towns in California have gotten into the act. Lancaster requires that almost all its new homes generate solar electricity.
The U.S. might even gain in the end by sitting back to watch Germany's energy experiment. If Germany falters in this enterprise, the U.S. could learn from its experience and eventually launch its own bigger and better experiment.