Germany’s grand coalition and the ‘Energiewende’

Last week, the SPD, CDU and CSU reached an agreement to set up a new government in Germany. The business world was looking at the program of this new government with fear. The conservative CDU/CSU have traded their pro-business but electorally nullified partner FDP for the socialist party SPD. Many feared that the changes in energy policy, for example, would mean extra costs for German business (see my previous blog article). I therefore read the energy part of the coalition contract with much interest. What happens in Germany is not only important for German business. The rapid transition towards renewable energy (Energiewende) has impacted energy markets all across Europe. So, what will the new government do to Germany’s (and Europe’s) Energiewende?

When the two big German political families make a government together, they call it a ‘Grand Coalition’. Not much than can be dubbed ‘grandiose’ in this coalition contract, however. In such a coalition of parties with very different ideologies, every piece of policy is the result of a carefully crafted compromise. That means that it’s often hard to find a clear line of policy. On the other hand, it also means that policies are often well balanced and don’t produce too much unwanted effects. This is very obvious in the energy policy of this new government. On energy, the coalition contract is often more clear in what it’s not saying, then in what it is saying. Many items seem to be open still for discussion and the text leaves many openings such as ‘we’ll only do that if it’s not producing adverse economic effects’. So anyone saying that he/she has a clear idea of the new German energy policy after reading these ten pages is clearly over-interpreting. Nevertheless, I’ll attempt to summarize what can be read:

1. On the sensitive subject of EEG, the feed-in tariffs paid to renewable power producers that are to be compensated by the EEG tax on consumer’s bills:

  • The government wants to move forward quickly on a restructured EEG law, planning to table a proposal by Easter 2014 and then having everything voted by summer.
  • The rate of further development will be slowed down, or at least brought under strict control. The share of renewable power production should not grow to more than 40 – 45% by 2025 and 55 – 60% by 2035.
  • EEG feed-in tariffs will be made decreasing over time.
  • Winners are picked, namely solar, off-shore wind, onshore wind in those locations that have favorable wind conditions and biomass projects using locally produced (waste) material.
  • As of 2018 an auctioning model will be introduced. As of 2014, a pilot project for such auctioning will be executed for 400 MW of solar. It will be interesting to see whether this could herald a new way of subsidizing renewable energy.
  • As of 2017 electricity from renewables is to be sold directly into the market and not through the grid operators.
  • The grid operator and/or the marketer of the electricity should get the possibility of switching off the capacity for up to 5% of the annual production.
  • It will be researched whether large producers of renewable electricity can be obliged to always produce a minimum quantity of energy.

The above could boil down to a complete overhaul of the German system of subsidizing renewable energy. But much remains to be researched, so it could still be watered down.

2.    On the reduction on EEG payments for energy-intensive consumers

The important thing is here that the text clearly states that the government wants to keep the reduction, albeit with some changes:

  • Companies will have to show that they really are subject to international competitive pressure to get the reduction. Does this mean that the government will make a list of sectors? Will it pick winners and losers?
  • It will no longer be sufficient to have an (ISO 500001) energy management system, companies will have to prove that they are effectively reducing their energy consumption.
  • Companies producing their own electricity will have to pay EEG. It is unclear how much and how this will be measured. Auto-producers would also have to pay a grid fee. This is clearly in contradiction with another ambition of the government contract, namely to promote production of electricity on-site with cogeneration units. It is the goal to have a 25% cogeneration share by 2020.

3.    On climate change

 

  • Germany sets a goal of reducing its carbon dioxide emissions by 40% in 2020 compared to 1990.
  • In one of the clearest passages of the coalition contract, it is stated that back-loading of 900 million emission rights should be a one-off operation. And despite paying lip service to emissions trading, the contract states that operations such as the back-loading should not be executed if they create disadvantages for the companies concerned. So, for those that had hoped that the new German government would support stricter allocations and higher prices for carbon, I’m not convinced that’s what the contract says.
  • The government wants to increase efforts in energy efficiency and draw up a national action plan for that, although it remains very vague what they mean with that, apart from having free energy audits for residential consumers.
  • If renewables produce most of the electricity, electrical heating will be promoted.

4.    Capacity payments

 

The government thinks that as of 2020 there will be a shortage of conventional (coal and gas-fired) power production to deal with the intermittency issues of renewable energy. Therefore it wants to support smart energy applications. But it also wants to give support to owners of fossil fuel-fired power stations to keep them open. I presume this will mean the handing out of capacity payments to keep unused power stations warm. Again, the text is very vague, but it’s important to follow up on this, as such capacity payments would mean the creation of a new cost that is to be passed through to end consumers.

5.    Grid infrastructure

  • The construction of new grid infrastructure will be coordinated with the further development of renewable energy production.
  • The grid and intermittency issues of large-scale renewable power production will also be countered by supporting the further development of a pan-European power grid. This is a wise decision that could have important impacts for surrounding markets.

6.    Natural gas

 

Is prominently present in the coalition contract by not being present. This means that the German government doesn’t see the necessity of developing the gas market. Oh yes, gas is mentioned once. Fracking for producing the German shale gas reserves will not be permitted as long as chemicals that are toxic for the environment are to be used.

7.    Other topics

 

  • The nuclear phase-out will be continued, the last German nuclear power station will shut down in 2022.
  • Storage of power, a.o. by power-to-gas conversion, will be studied and/or supported. The text is very vague on this topic.
  • The ability to act of the local utilities (the so-called ‘Stadtwerke’) will be a topic. Yes, that’s what the text says. No idea what it means. Will this government be the first one to realize that the disparity of the German energy sector is a cost-increasing problem and not a solution?

The new Merkel government’s energy policy might be anything from a serious transformation of the Energiewende to a continuation with small adaptations of the current policy. Immediately after the publication of the coalition contract, many observers questioned its financial solidity. This is certainly true for the energy policy part. Some of the topics could have severe cost-increasing effects. How does that match with the goal of keeping energy affordable? So it’s important to stay updated as the vague coalition contract text finds its way into legislation in the next months and years.

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