7 september 2013

[4C note: The following article on Germany's environmental transition had to be broken into parts to fit on our site. Moreover, it was accompanied by graphs and photos that we were unable to reproduce here. Please consulte the original web publication at the Down To Earth site.]

Germany in transition (Part II)

Transition trials

Wind and solar have unsettled the energy system, demand for reform is growing

After taking quick strides­rather too quick­in energy transition, Germany now finds itself grappling with several challenges. Electricity prices are rising, surge in production of renewable power is disrupting energy market and grid expansion is lagging. Although Germany has been producing more energy than it requires, electricity price in the country has been increasing every year. After the Denmark residents, it is the Germans who pay the highest electricity rate (28.50 euro cents per kWh) in the European Union. This is partly because the cost of renewable energy expansion is passed on to the households and small businesses. In feed-in-tariff (FIT), the premium paid to the producer above the price on the power exchange is collected from the consumer as surcharge.

So when more cheap renewable energy gets into the power exchange, the wholesale price of electricity decre ases but surcharge increases, says David Jacobs, research fellow with the Institute of Advanced Sustainability Studies in Potsdam. Over €12.5 billion (`1.09 lakh crore) are collected as renewable surcharge from German houses and businesses per year to finance FIT.

The latest increase in the price of electricity by 3 cents per kWh has been the sharpest (see ‘Surcharge inflates...’).

The surcharge is expected to increase from the current 5.3 cents to 6 cents in October, 2013. This would mean on an average a family will have to pay €200 more in a year,” says Fabian Joas, policy researcher with Potsdam Institute for Climate Change Research (PIK). “It could be uncomfortable for those living on social welfare,” adds Joas.

Electricity price is a big agenda for the Socialist Democratic Party in Germany for the coming elections. Left parties are also asking for special tariffs for the poor. Unlike India which has a tier system for electricity tariff, Germany has a flat price for everybody.

As a result even poor in Germany pay renewable surcharge. Some say funds for FIT should come from taxes so that the rich pay for the subsidy redistribution.

The rising rate is also pushing industry and individuals to produce their own power but again this leaves out those too poor to afford solar panels.

Eike Meyer, policy researcher with Berlin-based non-profit Green Budget Energy, says renewables should not be blamed for the price rise because conventional power also enjoys subsidy but it is not reflected in the electricity price.

Thomas Hirsch of Berlin-based non-profit Bread for the World, which works on hunger and climate change, argues that price rise has not affected the people much because the share of electricity in household expenditure has been constant at 2 per cent. “Germans pay more for heating and driving than for electricity,” adds Hirsch. Bernd Gurlt, who drives a taxi in Potsdam, agrees. He says it is the price of other commodities, like food, he is more worried about. He pays about €50 per month for electricity. But the prospect of a steeper rise than the current does make him a little less sure.

Hungriest industry gets it free

While even the poorest citizen pays the surcharge and other taxes on electricity, big industries are exempted. Energyintensive firms have to pay nominal charge for grid usage, even though they rely heavily on the grid. Besides, they are also exempted from the renewable surcharge on the ground that they have to compete in the international market.

This is when the electricity rate for industry on an average is already half of what a household pays.

The association of energy and water companies, BDEW, says it is just 4 per cent of firms that get exemptions on the ground of international competition. But it is these 4 per cent that consume a fifth of the energy supplied in Germany.

An increasing number of companies are asking for exemptions. These include public transport and bottled water companies that have no international competitors.

The exemptions are counterproductive to efficiency, says Patrick Graichen of policy think tank Agora Energiewende. At present, companies consuming beyond a certain amount of electricity are exempted from the grid surcharge. If these industries bring down consumption they will lose the incentive.

Noticing this cross subsidy, the European Commission in July launched a probe into the legality of exemptions.

According to some media reports, the exemptions granted to the energy intensive industry amounted to €300 million last year. Sources close to the government say the probe was postponed till the elections after Chancellor Angela Merkel intervened.

Energy market disrupted

The country’s changing energy mix and increasing production of solar and wind power have disrupted the energy market.

The market assigns preference for energy from the cheapest source. The plant with the lowest operating cost-mostly decided by the fuel cost­gets the first purchase preference. Since operating cost is negligible in case of wind and solar energy, it is bought first, followed by power from hydro, nuclear, lignite, coal and gas.

The operating cost of the last most expensive plant needed to cover the demand sets the electricity price in the energy market. This is called the marginal price. Since renewable energy is increasingly meeting a good part of the demand, expensive coal and gas power gets little chance to be sold. This is bringing down the wholesale price.

Overproduction of solar energy, especially between 11 am and 2 pm, leads to a sharp fall in electricity price in the spot market (see ‘Renewables displace...’ on p38). This is giving a hard time to the producers of conventional power. “In this changing system, running conventional power plants is increasingly getting uneconomical,” says Volker Holt - frerich, unit manager of BDEW. Many industry players are threatening to shut shop and move to other countries.

Gas-based power plants worry that this system will put them out of business because their operational cost is even higher than coal. Jacobs offers a solution: “One way to avoid this is to levy CO2 tax on the fossil fuel. This would make coal expensive.”

Noise made by threatened conventional power plants has initiated a debate on market reform in government circles. Industry and some economists are arguing that the existing system cannot guarantee reliable power. Their point is that during the sunless and windless days one needs conventional energy, so conventional power plants should remain in business.

What Germany needs is flexible power plants, which one can start and stop depending upon the demand. “A reservoir of adequate conventional power capacities is needed to provide a flexible and reliable system,” says Holtfrerich. Ensuring system reliability or keeping a backup capacity is not just desirable but of special importance to Germany because it is likely to face a shortfall in uninterrupted power, according to a recent report by Agora Energiewende. The country’s decision to phase out nuclear power will eliminate 4-gigawatt (GW) capacity between 2015 and 2019 and another 8 GW by 2022, states the report. Though around 2.7 GW of lignite-based capacity became operational in 2012 and about 8 GW of new coal capacity is expected to be commissioned by 2015, no new coalbased power plant is likely to be built given the current scenario.

So how can Germany ensure a reliable power system without hurting renewables? Industry’s answer is it be paid incentives for having capacity. “And the plants can be brought to life whenever demand arises,” suggests Jurgen Weigt, senior policy officer at German Association of Local Utilities, Berlin. Graichen estimates giving capacity incentives to the coal and gas-fired plants will require €4 billion. Agora’s report points out that the existing conventional power system is, however, not able to make rapid adjustments like being able to start and shut down quickly. They need to be modified for flexibility.

Grid and storage not adequate

German electricity networks are still the most reliable in Europe, with German consumers experiencing only 15 minutes of electricity disruption in a year. Contrary to the popular perception, renewable energy has so far not made the grid unmanageable. But the need for grid upgradation is now being felt.

Since most of the renewable energy generation, especially wind, is spread over large areas far from demand centres, expansion of the grid is necessary.

The grid between north and south Germany is not capable of carrying the electricity generated by the windiest north to south and south west where most of the industry is located. So when there is overproduction, some plants are asked to shut down or wind energy is pushed into other countries­Poland and Czech Republic on the east and the Netherlands on the west.

The German grid consists of 35,000 km of ultra-high-voltage transmission lines plus 80,000 km of high-voltage lines, which were built for conventional power. But most of the renewable energy projects produce low-voltage electricity, therefore, modernisation of lowvoltage distribution grid is also required, especially to become bi-directional to accommodate households selling electricity to the grid, as well as buying from it.

According to official estimates, the country will need an additional 4,500 km of high-voltage line by 2020 but could manage only 214 km by 2012.

This is largely due to opposition from the communities who do not want transmission grid in their backyards.

An alternative to the grid is storage but it is expensive due to efficiency losses. In fact, a big argument in Germany is whether to consume the energy where it is generated or build an intensive network for widespread grid distribution across Germany and the European Union. Most energy experts are in favour of developing different areas based on their local potential rather than concentrating generation capacity in resource-rich regions­wind in the north and solar in the south. This way more renewable energy can be fed into the grid and consumed locally, says Hirsch.

Building a strong grid network will also help stabilise electricity prices. By 2020, Germany will produce about twice the amount of electricity from wind and sun as the rest of the EU. “The increasing overproduction of renewable energy will continue to drive down price in the spot market. When this happens, demand from neighbouring countries can be used to stabilise prices and conversely when wind and sun are weak, energy from neighbouring states can flow into Germany and dampen the high market price,” says Graichen. For example, Scandi navian countries have a large amount of hydroelectric power and storage. When cheap electricity is available in Germany they can stop their production or store the power.

Graichen says it is estimated that the extra grids in Germany will cost 0.3-0.4 cent to transport 1 kWh. In contrast, new storage technologies cost 15-20 cents to store the same amount of electricity. Thus, building grids is cheaper.

It will not completely rule out the necessity for storage but reduce it greatly.

Integration of energy systems is, however, not going to be easy. Poland has started putting barriers on transmission grids over a certain capacity to block cheap electricity from Germany that is putting their gas and coal plants out of business.

To meet these challenges Germany needs to reform energy infrastructure, pricing mechanism and energy market.

Liberal economics minister Philipp Rösler early this year called for a fundamental reform of the Renewable Energy Sources Act (EEG) and urged the government to rein in spiraling electricity prices before the September election.

His demand was supported by environment minister Peter Altmaier who proposed cuts in FIT in June.

Germany’s Energiewende is influenced by its climate policy. Critics say Germany is going ahead without a proper plan. For example, a lot of solar PV was allowed when prices were very high.

People who put up PV in their fields and on roofs made a lot of money with 20 years’ guarantee. “PV was a money printing machine,” says Joas.

Critics say that even when the PV prices were falling and demand to reduce FIT was pouring in from nonprofits and policy analysts, the government paid no attention. The reason was political. States in Germany have a huge influence in Parliament. And people who put up solar panels on their roofs constitute a strong vote bank for local leaders.

It was only last year and then in April this year that the government cut FIT drastically. Critics say the measure came late. According to a recent McKinsey report, renewable subsidies will rise from the current €13.5 billion a year to €15 billion in 2015.

But Germany continues with the expensive energy transition which is now being seen in its commitment to develop off shore wind capacity. It aims to build 10 GW of off shore wind by 2020 from the current 270 MW. For Germany off shore means at least 50 km off the shore because it does not want to spoil its scenic beauty. The farther the wind mills from the shore, the more expensive the installation. FIT for off shore would also be double than that for on shore wind energy.

One way to incentivise renewable energy while reducing its cost progressively is to develop a mechanism for an auctioning scheme in which renewable power producers bid for a given capacity and the lowest bidder gets the contract, something like what India has done. This would also help in reducing the electricity price, says Joas.

Why has Germany chosen this expensive way to check climate change? The most pronounced hypothesis is that this way Germany can demonstrate to the world that decarbonisation of the electricity sector is possible through renewable energy and demand side management. Germany wants to be seen as a leader and secure a future business.

So when, in the future, nations would be desperate for quick answers to climate change, it would be ready with its strong technology base and expertise in renewable energy to become a technology provider.

“It is costly now but will save more than it costs after sometime between 2025 and 2040. The reason is that the fossil fuel-based energy system would also need high investments to replace or rebuild obsolete infrastructure, which will be saved by a combination of very cost-effective energy efficiency and renewable energy that has high upfront costs but very small operating costs,” says Stefan Thomas, director of the Research Group Energy, Transport and Climate Policy at the Wuppertal Institute of Climate, Environment and Energy.

In this bold and challenging experiment, Germany is willing to pay for its mistakes than go back. Jeremy Rifkin, a US economist who has advised the EU and Merkel on energy issues, told the media, “Germany cannot afford to fail because the whole world is looking at the German model.”


Germany has crossed the hump

Renewable is real in Germany


‘Wind gas’ plant produces hydrogen from excess wind power and mixes it with biogas to produce electricity. Hydrogen can also be stored and used to run cars

I heard about energiewende about two years ago when a German friend told me about the ambitious goal that his country had announced for renewable energy, energy efficiency and greenhouse gas (GHG) emissions reduction. It did not excite me much mainly because till then the outcomes were modest: the share of renewable energy in the electricity mix was only 15-16 per cent, which was similar to India’s, and there was a question mark on achievements in sectors like transport and industry. Although Germany had reduced its GHG emissions more than it had to under the Kyoto protocol, it could do so because of the reunification wherein a number of inefficient industrial units in the erstwhile East Germany were closed down. For me, then, energiewende was no different from what many developed countries had put out as their emissions reductions targets for 2050 under the Cancun agreement­big numbers, but little to show.

As the noise around energiewende grew louder, so did my interest. The turning point for me was a newspaper article that reported how power companies were threatening to shut down their coal and gas plants because renewable energy was making them unviable. We decided to go and see for ourselves what this energy transition was all about. For 10 days we criss-crossed Germany­from Heidelberg and Frankfurt in the centre to Breklum in the north to Feldheim and Schenkenberg in the east. The more we travelled the more excited we got. Germany’s energiewende was opening our eyes to a new energy future. Sure we found problems and challenges; but we also saw commitment, achievements and innovation. Most importantly, across the political and economic spectrum, we found people supporting this transition.

In the past 10 years, Germany has done remarkably well in the renewable electricity sector. Today its installed capacity of renewable electricity is almost equal to that of fossil fuels­about 80 gigawatts each.

In the first seven months of 2013, 15.5 per cent of the electricity generated in Germany came from just solar photovoltaics and wind power. This is a record in the world. In June this year, when the weather was moderately windy but the sun was shining bright, a record 7.7 Terawatt hour or 22.5 per cent of the total electricity was produced by wind and solar plants­again a record. On July 7, when the mercury crossed 35°C in most parts of Germany, between 10 am and 4 pm, the 1.3 million solar power plants, installed on houses, commercial buildings and farms, collectively met half the electricity demand­yet another record. Renewable power is, therefore, real in Germany.

But not all is well with energiewende. There are major challenges in sustaining and upscaling renewable power in coming years without disrupting the electricity supply. The current market design, though favourable for renewable energy that is enjoying assured feed-in-tariff, is creating major problems for the conventional power plants who have to either shut down or sell their power free during peak solar and wind periods. It is also not sustainable for the solar and wind energy producers in the long run.

During peak wind and solar period, so much electricity is produced at nearzero cost that the wholesale price of electricity dips significantly. As a consequence, wind and PV destroy their own prices at the wholesale spot market.

Without feed-in-tariff they will not be able to earn enough revenue because the price will always be lower than the market price average whenever they will produce electricity. Thus, Germany will need major reforms in pricing electricity from renewables.

There are proposals on the table that advocate moving from “energy only market” to “energy, investment and storage” market. In the proposed market, the electricity producers will not only be paid for electricity, but also for capacity­for conventional power plants to remain available when required and for wind and solar plants to recover their investments. Businesses will also be paid to store electricity and feed it to the grid when required. But electricity in this market will not be cheap. And the future market will have to be far more regulated than today.

Energiewende also suffers from skewed focus. Discussions are largely focussed on electricity and supply side management, not on heat energy and demand side management.

In a typical German household 75 per cent of the energy is consumed for heating and 25 per cent is used in the form of electricity. The heating energy is largely supplied by natural gas and fuel oil. So the spotlight on renewable power is actually taking away the focus from reducing heating energy.

There is a lot of criticism within Germany on the energy efficiency front. In January last year, around 30 energy economists of Germany wrote an open letter to Chancellor Angela Merkel and Parliament, complaining that the country is not doing enough to increase energy efficiency of buildings and industry. Some experts even believe that Germany is likely to miss its energy efficiency targets for 2020 because of its lopsided focus of energiewende on renewable power.

Germany faces challenges in the mobility sector as well. It has one of the highest car ownership rates in the world. Fossil fuel consumption in cars, which the Germans love to drive, is not reducing and the targets that Germany has set to have one million electric vehicles and 20 per cent biofuels mixed in its automobile fuels by 2020, are not likely to be met in the current scenario.

At present, only 5.25 per cent of the auto fuels used in Germany are biofuels, mainly ethanol and biodiesel. Considering immense pressure on land and conflicts with food production, Germany is now importing palm oil from Malaysia and Indonesia to make biofuels. But certifying imported palm oil’s carbon emissions savings is an elaborate process that experts are questioning. They are asking for more money to be put on third-generation biofuels, based on algae, and on public transport.

Electric vehicles are finding very few takers. At present, Germany has only 7,000 registered electric vehicles and many experts believe that meeting 1 million vehicles target will not be possible unless the driving range of these vehicles are improved and Germany offers more incentives.

There is also an element of social inequality in energiewende, which is now being voiced by the left political parties and some Green party politicians. In the coming elections this is going to be an important issue.

Even with all the challenges and problems, German energiewende is the most ambitious venture to decarbonise an economy. No other country even comes closer. Germany is showing to the world that a completely new energy system based largely on renewables is possible.

In this energy system, the majority of energy demand­electricity, heating and for mobility­will be met from renewable sources. The “base load” fossil fuel power plants that dominate our lives will disappear. What we will have instead is flexible fossil fuel plants that will operate only when required. To maximise on renewable potentials in different countries, we will have regional grids to import and export renewable power. Renewable energy will be stored in pump storage dams and in the form of electricity and hydrogen. The stored energy will supplement the peak demand.

The German model also fosters a new energy market dynamics in which the small players win. Germany’s wind and solar transition is not being propelled by large utilities and big companies. It is being led, owned and operated by citizens, small utilities and en

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