25 Jun 2015
| Jakob Schlandt

Germany's energy transition in the European context

The solo draws to a close

Germany’s energy transition began as a lonely expedition. Expanding green energy rapidly and switching off its nuclear power stations antagonised some neighbours and the European Commission. Germany has now learned that it cannot reach its goals independently and is investing in cooperation. But while many European countries are following in Germany’s footsteps, a European consensus does not appear within easy reach.

Content

What was the reaction abroad?

Fluctuating renewables at the heart of the European power system

Brussels alerted by feed-in tariffs and industry reliefs

Germany’s future power market design – more pro-market than the neighbours?

Grid extension and “electrical neighbours”

Could there be even more support coming?


In a recent speech to an international audience in Berlin, the influential state secretary of the German energy ministry Rainer Baake explicitly addressed critics of Germany’s energy transition (Energiewende), saying, “People in this country and also outside of Germany who believe this must be some kind of act of renationalisation of energy policy […] could not be more wrong.” Germany, Baake insisted, wanted to develop the transformation of the energy system – replacing fossil and nuclear power with renewables – in close cooperation with its neighbours. A Green Party member and one of the architects of the Energiewende, Baake pointed to Germany’s history of largely ignoring its neighbours on energy policy, and its current, more cooperative intentions.

“Until two to three years ago, the Energiewende was mostly a solo project of Germany,” says Markus Steigenberger, head of European Energy Cooperation at the German energy think-tank Agora Energiewende*. “Now, the European dimension is very present at the top political level, not only among experts.”

The energy transition began in earnest in 2000, when the Renewable Energy Act (EEG – co-authored by Baake), introduced feed-in tariffs to support investment in green energy, while the government reached a consensus with utilities on quitting nuclear power. At first, it went largely unnoticed. But the share of Germany’s electricity consumption covered by renewable energy trebled from below 10 percent in 2004 to nearly 28 percent in 2014. And in 2011, following the Fukushima accident, the German government decided to switch off the older half of its nuclear power station fleet immediately, and to shut down the rest by 2022. This was done without thoroughly consulting its neighbours. Very few European countries – most notably Denmark and Italy – have kept pace with this radical transformation. The United Kingdom, in comparison, increased renewable energy from 3.5 percent to 13.9 percent between 2004 and 2013, in France the share went up by just over two percentage points during the same period to 16.9, while in Poland it rose from 2.1 to 10.7 percent, according to the Eurostat database.

What was the reaction abroad?

As green power expanded rapidly in Germany, and newspaper front pages began to regularly feature climate change – a particularly hot topic a decade ago – curiosity grew. Experts from the US were quick to call it an “experiment” and even a “failure of public policy”. Others, including the International Energy Agency (IEA), applauded.

But initially, because renewable sources still had a relatively low share in electricity generation, the transition had little direct impact on Germany’s neighbours. The Energiewende was seen as a German issue. On the European level, all was quiet following a ruling by the European Court of Justice in 2001 that the EEG was, after all, not illegal state help.

Over recent years, however, this has changed dramatically. The huge rise in Germany’s production of fluctuating green energy has led to a surge in exports. When electricity is generated from wind and solar power plants, German power prices fall and imports from Germany become an attractive alternative to local production. Recent analysis by Dutch grid operator TenneT clearly shows that high renewable energy production leads to high exports. With over 20 gigawatts (GW) of interconnector capacity (a quarter of the country’s peak consumption), the German electricity market is now relatively well connected to its neighbours. And for the most part, electricity flows in one direction – out of Germany. According to analyses by the Clean Energy Wire of the database of the Federal Statistical Office’s (Destatis), the surplus in the electricity trade reached a record high in 2014 with 74 terawatt-hours (TWh) exported and only 36 TWh imported.

Some of Germany’s neighbours have had to cope with an enormous influx of German electricity over recent years. Polish imports of German electricity rose from 5.3 TWh in 2010 to 9.2 TWh in 2014, while the trickle of exports was reduced to just 0.051 TWh (down from 0.167 TWh in 2010). Dutch imports of German power quadrupled to 24.3 TWh over the same period – an astonishing fifth of overall consumption in the Netherlands.

Fluctuating renewables at the heart of the European power system

In short, Germany’s Energiewende has led to a surge of fluctuating production in the heart of the European power grid. Some aspects sound like a win-win situation. For Germany, the Energiewende is much easier, because when renewable production peaks, interconnections to its neighbours provide a buffer so that the domestic grid is not overloaded.

Nikolas Wölfing of the Centre for European Economic Research (ZEW) in Mannheim, says that without its neighbours, the Energiewende would “probably have collapsed already or at least be in much more trouble.” Not only can Germany export excess electricity, it can also import power in times of need. “Basically, being at the heart of Europe means that Germany has a gigantic battery at its disposal, in the form of foreign electricity networks.” Tellingly, the current emergency reserve for electricity shortages in Southern Germany is based largely on Austrian power plants.

In some aspects, the effects of the Energiewende on markets are a welcome development outside Germany, too. All across central Europe, power prices have fallen. “That’s a boon to all consumers, be they private households or industry,” says Wölfing. Even Hungary, which does not share a border with Germany, enjoys lower power prices as a result of German exports, say government officials.

Some countries see the Energiewende in Germany as nothing less than a business opportunity. Embracing the German transition, Norway’s Foreign Minister Børge Brende has said his country would be happy to become a "green battery for Europe and the world." (See factsheet)

Others are less thrilled. Recently, the Czech Minister of Industry and Trade, Jan Mládek, complained publicly that his country would have to “live with the Energiewende,” but voiced fears that so-called “loop flows” could lead to blackouts in the Czech Republic. In times of overproduction in Germany’s windy north, uncontrolled currents from the German network first flow abroad and then re-enter Germany further south. As a result, exports to the Czech Republic rose from 0.56 TWh in 2010 to 3.83 TWh last year. Worried about grid stability and the economics of their power plant fleets, Poland and the Czech Republic pressed hard for the installation of phase-shifters at their borders. Once construction is completed in 2016 and 2017, they will in effect be able to block electricity flows. The project – which runs against the goal of market integration – will cost 300 million euros, shared equally between the German, Polish and Czech grid operators.

The German electricity grid agency Bundesnetzagentur is even considering splitting the Austrian-German common power market for electricity. The only “bidding zone” shared between two larger EU countries currently makes it possible to trade electricity at uniform prices and without having to buy grid capacity. But the integration of these two markets, which began in 2002, could be reversed as early as 2018, says Bundesnetzagentur. The reason: Worries about security of supply not only in the above mentioned central eastern European countries, but also in Germany. The need for an emergency reserve of power stations for the southern German electricity market could be substantially reduced if Austria was split from the German market. At the moment, trade volumes to Austria often exceed the physical connection capacity, resulting in additional power shortages in the south of Germany.

“It is a worrying development that Germany’s Energiewende can have a disintegrative effect on the European energy market,” says Wölfing from ZEW.

Brussels alerted by feed-in tariffs and industry reliefs

It is not only the expansion of green energy that has caused irritation abroad. France, Wölfing says, depends on Germany to provide reliable electricity exports to cover its peak winter consumption, caused by electric heating. Germany’s decision to switch off its nuclear power stations had the French deeply worried, he says. “Germany has basically acted for years with very little or no regard for its neighbours.”

The Energiewende has not only alerted neighbours, but Brussels, too. European Union treaties state that member states can make independent decisions on their energy mix. But energy policies have to be in accordance with competition laws. After more than a decade of little interference with the Energiewende, the European Commission opened an investigation in 2013 into exemptions from the EEG surcharge for Germany’s energy-intensive industry. After months of haggling, the German government was able to keep the rebates at a similar level, but changed the awarding procedure for the exemptions. More importantly, it was forced to commit to largely replacing feed-in-tariffs with an auction system by 2017. A lawsuit by the German government that is still underway will eventually clarify if the EEG constitutes state aid or not.

Steigenberger of Agora Energiewende concludes that over recent years, the Energiewende has begun to feature prominently on the agenda of Germany’s neighbours due to a “perfect storm” of interlinked factors. “The exit from nuclear energy, rising production of variable renewable energy, increasing German electricity exports, stagnant demand due to the financial crisis and efficiency measures, and depressed power prices across Europe, have alarmed European policy makers.” In 2014, large European utilities like E.ON (Germany) and GDF Suez (France) prompted further concern when they announced that low energy prices had hit their profits hard, pushing them deep into the red. Germany has been repeatedly lambasted for its state interference to promote green energy and shape the Energiewende on its own terms, without taking into account the impact on European markets.

Germany’s future power market design – more pro-market than the neighbours?

However, on a key aspect of energy market design, Germany is likely to opt for a more a pro-market approach than its neighbours. France and the UK recently adopted capacity mechanisms to support investment in power stations and ensure that even with a rising share of renewable energy in the power system, there will always be enough conventional capacity to provide backup. A final decision has yet to be taken, but the German government has made it clear that it is not likely to introduce such a capacity market in Germany. Instead, only an emergency reserve will flank the market.

Felix Matthes, an energy expert at the Öko-Institut, an ecological think-tank in Berlin that produced its own proposal for a “focused capacity market”, says this is “an extremely inconsistent position”. On the one hand, Germany provides green energy with a support scheme that creates robust, low-risk revenue streams, to enable return on investment. But when it comes to fossil power stations, Germany is in a state of denial that similar measures are necessary, Matthes says.

However, the future of the European energy framework will be decided quite soon. The European Commission has started a sector inquiry looking at capacity mechanisms in 11 member states (Germany is among them because of its emergency reserve). This summer it will publish preliminary findings and begin a public consultation. RWE, Germany’s second largest utility, fears that a patchwork will emerge: “A wild variety of different market systems does not make any sense, because power plant operators will not be able to operate in comparable environments and cannot sell across boarders,” says RWE’s Chief Operating Officer (COO) Rolf Martin Schmitz. He argues that there is an urgent need for the EU to provide strict European guidelines.

There are many signs that the European energy system is partially disintegrating – and Germany is one of the main actors in this development. But Germany has also been at the helm of European moves to better link up its energy markets. The European Agency for the Cooperation of Energy Regulators (ACER), which plays a key role in synchronising power grid regulations so that energy can flow more easily across borders, has had wholehearted support from Germany and its national regulator, the Bundesnetzagentur. On the EU level, the technical and economic integration of energy markets is progressing.

Grid extension and “electrical neighbours”

Severin Fischer of the German institute for International and Security Affairs (SWP) says “market coupling is well under way. European grids are being extended and will be better connected in a few years,” thanks to a 10-year development plan and financial support from the EU.

Grid extension in Germany, as in many other countries, is politically controversial and notoriously delayed. But some progress is being made. Earlier this year the final investment decision for NordLink was taken. If everything goes according to plan, the 1.4-gigawatt (GW) sea cable will connect north Germany to Norway by 2020. The latest grid development plan includes a total of six interconnections.

Regional initiatives are helping to coordinate and implement grid extensions across Europe. The most prominent is probably the North Seas Countries’ Offshore Grid Initiative (NSCOGI), which, among other things, helps allocate the cost of new connections to individual countries.

Most recently, 12 countries around Germany signed a declaration for regional cooperation. The document epitomises the current state of affairs, leaving individual countries full control of their energy mix and instead focusing on “no regrets” measures regarding market flexibility. Signatories, led by Germany, have vowed to “allow flexible prices; we will particularly not introduce legal price caps and we will avoid that national measures have the effect of indirect price caps". Under the agreement, cross-border trade should not be inhibited.

Germany’s energy transition is, in principle, supported by the top levels of the European Union. Prime ministers and presidents agreed last October to new targets for 2030: greenhouse gas emissions should fall by 40 percent (compared to 1990), renewables should reach 27 percent of energy consumption (though through binding national targets) and energy savings are set to rise by the same token. Additionally, the EU’s Emissions Trading System (ETS) is being reformed with the goal of reducing a surplus of emissions certificates. Even though energy companies are currently sceptical about the real impact, a revived ETS has the potential to boost the profitability of greener investments in Germany, and hence contribute to reaching the goals of the Energiewende.

Could there be even more support coming?

The new EU Commission, inaugurated last October, has put energy centre stage and is pursuing an “Energy Union”, aiming to become the global leader in renewable energy. The Commission’s vice president Maroš Šefčovič has even been put in charge of the issue. But its initial focus is largely on natural gas and security of supply. And the Commission itself is unclear on Germany’s role. In a recent interview with the magazine BIZZ energy today, Šefčovič said that while Germany could be seen as a blueprint for Europe, the Energiewende has “far-reaching effects on the profitability of conventional power plants and fluctuating electricity is a challenge for grid stability”.

Some experts expect very little from the Energy Union. The political aim of creating “coherence” in Europe’s energy markets is unrealistic, says Fischer of SWP, and the number of measurable targets very limited. At the same time, “the member states are as keen as ever to keep control over their national energy mix, even when it clearly hurts common European interests,” says Fischer, citing Hungary’s deal with Russia to install new nuclear power plants. The Energy Union would nevertheless be useful to support small but important steps, he added.

The relationship between France and Germany, who can still decisively shape the European Union if acting in accord, epitomises this development. Some “rapprochement” in energy policies is visible, argues a recent study. France adopted a renewable energy target of 40 percent of electricity consumption by 2030, while reducing nuclear’s share from 75 to 50 percent by 2025, initiating its own, smaller scale “transition énergétique”. But there remain “immense differences,” according to a paper by the Jacques Delors Institute, and introduction of a capacity market by France “has the potential to drive a wedge between the two countries, especially considering their very different electricity market designs.” Closer cooperation would pay off, the Delors Institute argues. Bringing the two markets into sync could save up to 4 billion euros per year. But both countries would still consider energy policy as a national prerogative.

Wölfing from ZEW, too, believes this is a common theme in Europe. “Germany did not consult its neighbours on the Energiewende. But the unilateral introduction of capacity markets across Europe shows that they are not the sole perpetrator of largely nationalistic energy policy.” He expects the EU Commission’s role to be reigning in such excesses.

Matthes of the Öko-Institut sees the EU’s upcoming decision on capacity mechanisms as pivotal, because the Commission could start to develop a consistent framework for different kinds of revenue streams in the electricity sector. “It is probably too late for harmonisation,” he says, “but a push for convergence would be an important starting point.”

Overall, says Wölfing, Germany’s Energiewende will remain both an inspiration and a challenge for Europe. “An ultimate solution to all problems is just not feasible,” he says. But the unequivocal acknowledgement of top officials like Baake that the Energiewende cannot succeed in isolation is a step in the right direction.

* Agora Energiewende, like the Clean Energy Wire, is funded by the European Climate Foundation and Stiftung Mercator.

Jakob Schlandt is a freelance contributor to the Clean Energy Wire. He also writes for Europolitics and BIZZ energy today and his own blog http://phasenpruefer.info/.

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