CBEYond the Moment: The German of a Great Evolution

Before it shut down and reopened its economy, Germany stood out for policies the government called the Energiewende, which sought to convert Europe’s largest economy to run only on fossil-free sources. Covid-19 froze its implementation, as it has frozen much of the world. Now Germany has reopened schools and businesses. While some argue that COVID-related pressures will curb enthusiasm for the conversation on climate change, others believe that the need for economic stimulus could create fiscal space for policymakers to rebuild a cleaner, more sustainable world.

This debate is beng held in virtual board rooms and city halls across Germany, a nation historically at the forefront of the clean energy transition. The cacophony of calls to loosen emission regulations (to boost economic activity) and demands to pass “green” stimulus packages that combine economic recovery with long-term environmental goals is growing louder.

Some conservatives have called for the suspension of the aviation tax planned in Germany's Climate Action Programme for at least one year. A rightish party, the FDP, queried the timing for a national price on carbon emissions in heating and transport, a core element of the country's future climate policy. The carbon taxes were slated to kick-in in 2021 (€25/ton of CO2) and ramp up in 2025 (€55/ton). On the other hand, some climate activists and energy transition experts see the economic downturn as a chance to commit to clean power solutions that can grow for years after the pandemic has passed.

All relief should “contribute to building a climate-neutral economy,” tweeted environment minister Svenja Schulz. Similarly, Patrick Graichen, director of energy policy think tank Agora Energiewende, wrote, "In order to leave this crisis in a good way we have to focus on the things that have fallen behind due to the coronavirus. This is especially true for climate change.”

Reducing emissions has been one of the Energiewende’s longstanding objectives. This target is currently tied to the international Kyoto Protocol (1997) and the National Climate Targets (set in 2007 and reinforced in 2016 with the Climate Action Plan 2050). 

Germany has achieved emissions reductions based on these commitments, but is not on track to hit its 2020 targets. For the Protocol’s first commitment period between 2008 and 2012, Germany exceeded its greenhouse gas reduction targets, promising a 21% reduction from 1990 levels and achieving a 24% reduction. For the second commitment period (ending in 2020), Germany set itself an ambitious target of a 40% emission reduction relative to 1990 levels, but will likely land closer to a 33% or 34% reduction (Note: according to new modelling by Agora Energiewende, COVID-19 measures and a mild 2019-20 winter could see Germany reduce greenhouse gas emissions by 40-45% this year compared to 1990 levels. However, this achievement would largely be the result of one-time, exogenous shocks and the “progress” would not transfer over to future years). According to a McKinsey report, if the pace of emissions reductions from the past decade continues, Germany will not hit its 2020 targets again until 2028, and will not hit those set for 2030 until 2046.

Claudia Kemfert, an expert in energy and environmental protection at the German Institute for Economic Research in Berlin, suggests that continued reliance on coal for power generation and the burgeoning transportation sector are to blame for missing the benchmarks.

“There is still a very high share of coal for electricity production. And in the transportation sector emissions are rising. Road transport is increasing and the cars are too big, and have high levels of emissions. We should have started with the coal phase-out earlier, and the transportation needs to be more sustainable and more electric than it has been in the past,” said Kemfert.


 

The eradication of coal, in particular, has remained a subject of intense debate among key stakeholders in Germany. Though most agree that the phase-out must eventually take place, political leaders disagree over when and how ― especially in traditionally coal-dependent regions of the country.

As Stefan Kapferer, head of Germany's largest energy sector lobby, argues, "The coal plants belong to companies who have ownership rights. So if you're going to insist they shut down, appropriate compensation has to be awarded."

However, dampened energy demand due to the coronavirus, as well as competitive oil and gas prices, may accelerate the phase-out of coal for economic reasons. Hanns Koenig, head of commissioned projects at German think tank Aurora, expects hard coal to be hit the hardest and operators to take part in closure auctions. "Tenders for hard coal [closures] will be lower," as operators will be content with lower compensation given the poor economics of their assets, Koenig said.

In fact, Austria and Sweden became the second and third European countries to close their final coal plants last month ― with Sweden doing so two years ahead of schedule. In March, the U.K. broke its own record for going without coal-fired electricity at 18 days, 19 hours ― the longest stretch of time since 1882. And as industrial power demand has plummeted in Germany due to the countrywide lockdown, S&P has observed that many plants went into lockdown or switched off.

Another principal component of the Energiewende is a commitment to diminish and ultimately eliminate the use of nuclear energy. Despite being touted by some as the key to a sustainable future, nuclear has few supporters in Germany. Nuclear energy is believed to be highly risky following the disasters at Chernobyl and Fukushima.

In fact, following large anti-nuclear protests in Germany after the Fukushima disaster in 2011, Chancellor Merkel’s government announced the Atomausstieg (“nuclear exit”) and declared that the country would close all of its nuclear power plants by 2022. While the energy source was the largest contributor to the country’s electricity supply in 2006, it supplied just 12% by 2019 and just six nuclear plants are left in operation, according to AG Energebilanzen.

To be sure, some pundits are wary of the decision to remove nuclear energy from the country’s power generation capabilities. Earlier this year, Jochen Bittner, a journalist for the New York Times based in Germany,  argued that Germany’s energy sector could be tying itself to the future use of fossil fuels (to prevent energy shortages), thereby limiting the country’s ability to deal with climate change. However, Germany has set a 2022 target for its nuclear phase-out and stands poised to meet it. Even the coronavirus pandemic is not expected to have a lasting impact on this goal, though a national curfew has delayed the detonation of the Phillipsburg plant’s cooling towers until mid-May.

In the same way that Germany’s nuclear plants are unaffected by the pandemic now, their phase-out is likely to proceed as planned once this crisis is in the past.
The third key initiative in Germany’s Energiewende is the rapid deployment of renewable energy into the nation’s energy mix. German leaders have set a target of 80% renewables in the country’s electricity production by 2050.

According to Fraunhofer ISE, the share of renewable electricity consumption rose from just 3.4% of gross electricity consumption in 1990 to 10.2% by 2005 and accelerated to 46.3% by 2019. Already, this exceeds the nation’s 2020 goal of 35% and places Germany in a strong position to meet its future renewable energy targets.

Some analysts have gone so far as to declare Germany the world’s first renewable energy economy. This seems premature, though momentary episodes of fossil-free generation have occurred. Although a small number of developing countries have previously reached the 100% renewables milestone, accomplishing the same feat in a large industrialized economy like Germany is a different proposition. Examples of countries like France (where 17.5% of total electricity generation currently comes from renewables), the United Kingdom (27.9%), the United States (14.7%) and Australia (14.5%) show just how far ahead Germany (46.3%) is on integrating renewables into the country’s energy mix. 

However, progress in renewables has not always come easily. Detractors point to the supply’s intermittency issues and high electricity prices. McKinsey wrote that the nation’s heavy reliance on intermittent solar and wind (which produces more than half of Germany’s renewable energy) was leading to an increasingly insecure energy supply. For three days last June, the electricity grid nearly blacked-out. Supply shortages like this caused the costs of short-term "balancing energy" to skyrocket in 2019 ― costs which have largely fallen on German companies and consumers.

German electricity prices are 45% above the European average, McKinsey reports, with green taxes accounting for 54% of household electricity prices and average electricity prices for companies increasing 60% over the past five years. Prices are now more than double those in the United States. For Germany’s energy-intensive industries, increasing energy prices could spell disaster, making domestic businesses significantly less competitive than firms abroad and imposing a significant cost on the overall economy. In this context, the impact of the coronavirus could have two separate effects on the industry.

Firstly, the pandemic could slow renewable energy adoption. Supply chain disruptions, particularly in solar panels and wind turbines manufactured abroad, have already impacted renewables companies in Germany and new projects have had to be delayed due to the quarantine. Furthermore, new investment could be stalled as debt-backed deals could be difficult to close during these economically trying times.

Yet renewables could also see heightened support following the coronavirus crisis as a means by which to create jobs and bolster economic growth. Investors fortunate enough to have access to capital now could view wind and solar farms as safe havens producing steady returns during today’s extreme market volatility. On the policy side, the European Council approved a statement last month which highlighted the role of the “green transition” as part of a “comprehensive recovery plan” to the crisis.

As previously discussed, the Energiewende provides a platform for German lawmakers to continue to work towards climate solutions, while providing dearly needed economic stimulus during what some believe could turn into the worst economic slowdown since the Great Depression. 

Even before COVID-19, the potential economic benefits of the Energiewende were lauded by its proponents. Despite hefty price tags (up to €1 trillion by the end of the 2030s, according to some estimates), the initiative would help the country avoid the direct costs of floods, droughts, forest fires and major storms, and indirect ones from increased energy prices and the costs of protection measures like dikes and water protection walls. In fact, BCG managing director Philipp Gerbert and leader of a financing study on the Energiewende said that “even without the external costs of climate change… [the net effect from the Energiewende is] slightly positive on the economy.”