German push to green power is brave but risky

Europe’s industrial leader wants to wean itself off nuclear power and fossil fuels, so Germany will become the world’s test laboratory for renewable energy. The policy is farsighted, but in urgent need of more German efficiency to keep costs under control.

When Germans embark on an engineering project, they usually get it done properly. The country must hope that this proves true for the biggest technical challenge the nation has taken on in generations: revamping the entire energy system. Phasing out nuclear power by 2022 is the relatively easy part. The real challenge is to get rid of fossil fuels almost completely by 2050.

“Energiewende” (energy transition) enjoys broad support in Germany. Despite some pitfalls, it is a brave and farsighted endeavour that the world should watch closely. So far, it seems to be on track. In 2012 the share of power generation from renewable sources jumped to 23 percent, from 20 percent in 2011. The government’s intermediate goal of at least 35 percent by 2020 may even be met prematurely.

The main problem with wind, solar and other environmentally helpful power sources is that they’re expensive to build. Germany’s energy-intensive industries have been exempted from paying, but households are facing significantly higher energy prices. The subsidies for renewables already constitute 16 billion euros a year – almost a fifth of households’ total electricity bills – and are poised to rise further. The byzantine and inefficient subsidy system urgently needs an overhaul, but the issue won’t be addressed before the federal election in September.

The remaining work includes an upgrade to the transmission grid and maintaining enough conventional power capacities as a backup for cloudy and windless days. Fossil fuel power stations, representing a quarter of Germany’s total production capacity, will only be used a few hours per year as soon as 2020, Agora Energiewende, a think tank, forecasts.

Agora reckons that this conventional capacity will cost a manageable 700 million to 1.4 billion euros annually. Unfortunately, the current electricity pricing system offers no incentives to provide that reserve capacity. Something should be done in the next few years to ensure security of supply.

If done the right way, Energiewende need not be too expensive. The industry lobby group BDI estimates 200 billion euros of total additional investment up to 2030, in addition to the 150 billion euros the old system would have needed. Stretched over two decades, that comes to less than 0.8 percent of GDP each year. In the short to medium term, consumers will have to pay a bit more for their electricity.

In return, however, Germany gets a nearly emission-free electricity system with near-zero marginal costs. That doesn’t look like a bad deal.

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