Germany aligns renewable rollout with slower grid expansion to cut costs

Germany is set to lower some of its energy transition ambitions in response to a highly anticipated "reality check" report designed to lower costs and improve the competitiveness of its struggling industry. The country will adjust the rollout of wind and solar power, as well as battery storage and hydrogen electrolysers, to the slower progress of electricity grid expansion, said economy minister Katherina Reiche.  

Future renewable additions should be “grid friendly” to ensure all kilowatt-hours of electricity produced are indeed used, and new capacity is added where it makes sense, Reiche said, adding that system costs will be a decisive factor in future energy policy, rather than the cost of renewables alone.

The results from the “reality check” energy transition monitoring report will form the basis for the coalition government's policies going forward, where cost-efficiency is set to play an equally important role as security of supply and clean power targets. Reiche's economy ministry presented a list of ten "key measures" it is now planning to implement. 

“Energy policy decisions must not lead to misguided investments or overregulation, but must focus on the market, technological diversity, and innovation,” Reiche said. In future, public money would flow to renewables in a more targeted way, the minister added. This means, for example, phasing out feed-in subsidies for rooftop solar installations, which combined with a battery “pay off without subsidies”, Reiche said.

“The successes achieved so far in expanding renewable energies are obvious and a great achievement for Germany, but the next steps will be much more difficult,” the minister warned. She added renewables already often generated more electricity than needed, while requiring fossil fuel backup in times of little wind and sunshine, resulting in high system costs borne by consumers, and undermining competitiveness.

Germany can increase cost-efficiency of energy transition – report

As the share of intermittent renewables grows, electricity systems need to change to ensure a secure supply at all times. This requires investments in transmission and distribution grids, but also storage, backup capacities, and interconnectors, as well as more measures to incentivise flexible electricity demand. The better coordinated these systems are, the lower the costs can fall.

The report, carried out by consultancy BET and economic institute EWI, suggests numerous policy reforms to lower costs. For example, the authors pointed to improving the coordination of where electricity is produced and consumed, and ensuring that options to make electricity demand more flexible benefit the power system.

Achieving climate neutrality would be incredibly expensive and complex, so using public money more efficiently could increase the chances of achieving that goal, said Alexander Kox, managing director at BET Consulting.

Renewables feed-in tariffs to include profit cap

Germany needs to adapt its support for renewables to European power market rules, meaning that support mechanisms need to include a repayment clause to avoid possible overfunding. Reiche said future renewable projects should react to price signals and reduce production when there is oversupply, for example by terminating remuneration at times of negative power prices.

The government aims to introduce a “technology neutral” capacity market by 2027 to ensure backup capacities for times of little wind and sunshine get built. The economy minister said Germany would draw on other European countries’ experience. 

The economy ministry also said in its list of priorities that Germany would strengthen cooperation on electricity and hydrogen grid planning with its neighbours. “We will overcome energy policy divides in the EU and leverage the undeniably high cost-reduction potential of a better-integrated European energy system,” the ministry said. 

Concerning the rollout of hydrogen technologies, the ministry said overly complex regulations like the EU definition of “green hydrogen” will be “removed and replaced by pragmatic criteria. Low-carbon hydrogen will be treated equally.” Seeing as the hydrogen market has not developed as expected, Germany would also scrap its aim of building 10 gigawatts of electrolyser capacity by 2030, and instead replace this with a flexible target. 

Industry groups and climate actors with mixed reactions

The country’s most important industry group BDI said the report had been necessary “to get the energy transition on track in terms of climate protection and competitiveness”.

“Minister Reiche's 10-point paper is the foundation for significant efficiency improvements in the energy system, which must now be tackled swiftly,” the lobby group said.

Chemical industry association VCI welcomed the report and said the ministry’s proposed energy policy changes were urgently necessary. The focus of the renewable rollout should shift from quantity to quality, the lobby group said.

The industry-affiliated initiative German CEO Alliance for Climate and Economy called the monitoring report’s lower electricity consumption forecast an “alarming signal”, as it signalled a deepening deindustrialisation. It added lowering renewable rollout targets was the wrong lever, and called for increasing investments in an efficient rollout, batteries, smart meters, hydrogen, and the electrification of heating and transport.

Environmental NGO Greenpeace said the government wanted the energy transition to be cost-effective, but was ignoring long-term costs and climate damage. “Instead of vigorously pushing ahead with the urgently needed transformation, the monitoring report threatens to become a lever for energy policy setbacks,” Greenpeace said. NGO Environmental Action Germany accused the ministry of pursuing a “fossil agenda instead of a reality check” by slowing the renewables rollout and betting heavily on gas power plants that still need to be built.

Renewables to cover 80% of power consumption by 2030

Earlier this year, Germany’s economy minister promised to present the “reality check” with the aim of reigning in the costs of the energy transition by updating forecasts for future energy demand and adapting grid and renewable expansion targets accordingly. In her view, renewables development has proceeded in a way that neglected cost-efficiency, and the report’s results should serve to “reorientate energy policy”.

The previous government made the faster rollout of wind power and solar PV a focus of its energy policy to pave the transition to low-carbon electricity, and make up for sluggish expansion in previous years. However, the growing share of renewables has increased the need for grid interventions, which increases system costs that are passed on to consumers.

Germany aims to bring the renewable share in power consumption to 80 percent by 2030 – a goal that the new coalition government sticks to – and plans to have an almost climate-neutral power supply following the completion of its coal exit, which is meant to be completed by 2038 at the latest.