Can Germany power down big generation and still thrive?

On Sept. 14, the Solar Electric Power Association (SEPA), with support from energy consulting firm ScottMadden, Inc., led a group of 34 business leaders from American utilities, solar companies, financial firms and a regulatory agency to Germany to study that country’s transformation of its energy sector, the Energiewende. The mission sought lessons learned that could inform energy industry business decisions in the United States.

Members of SEPA’s fact-finding mission to Germany arrive at E.ON offices in Dusseldorf for a day of discussions with their German counterparts.  (Photo by Bob Gibson)

Germany is in the midst of an ambitious, disruptive transformation of its energy economy, and the leading symbol of this change is its commitment to solar power. With no more annual sunshine than Anchorage, Alaska, Germany manages to convert more of its solar resources into power than any country in the world. And in the process, it has created a market that has helped slash the global cost of solar 80 percent in the past five years.

Yet one of the many revelations of SEPA’s 2014 fact-finding mission to Germany is that the impacts of the Energiewende are bigger than the growth of solar or wind, the shuttering of nuclear plants, rising electricity rates or an electricity generation market turned on its head.

“Some describe what’s happening in Germany as a turning point,” Gerard Reid, a financial analyst with Berlin-based Alexa Capital, told the SEPA mission. “But it really is a revolution.”

Germany is betting that a wealthy, industrialized nation can transform its economy from one powered almost entirely by electricity from central generation stations to one largely run on distributed, renewable energy sources. Turning away from baseload power generation, it is putting its money on energy efficiency, customer choice, renewable power, energy storage, and enhanced communications and controls on medium and low voltage systems.

The end result of this decades-long transformation could be a diversified, decentralized grid. The plan revolves around reducing energy use, while making power generation cleaner and greener, and making Germany more energy self-sufficient.

The transformation is complex, putting the country on a steep, fast and often bumpy learning curve. But, if Germany weathers the current storms in its energy markets and succeeds in its plan, it may provide a model for the future evolution of electricity and energy markets in the U.S. and other countries. Already it stands as a cautionary tale about the risks of holding too long onto 20th-century electricity market business models.

Making sense of the Energiewende

While actually comprising a range of policies covering all energy sources, the term “Energiewende” has commonly come to be used as shorthand for the rise of solar in Germany over the past decade.

The underlying concept of energy sector transformation appeared in a 1980 study proposing that German economic growth could be achieved even as energy consumption was intentionally curtailed. A plan unfolded to reduce all energy use through efficiency, move to a predominance of clean, renewable sources and make it all work with investments in a stronger, more resilient grid.

Estimates of the final bill for the Energiewende show it exceeding the cost of the reunification of East and West Germany. But Germans think the price is worth it.

•Germans, as well as the rest of the European Union, believe climate change is a critical threat and addressing it should be a top priority

•In a country with very limited fossil fuel resources, energy security is a huge issue, driving the commitment to efficiency and renewables.

•Anti-nuclear sentiment is deep and powerful, rooted in the environmental movement imported to Germany from the U.S. in the 1970s and reaffirmed by the Chernobyl disaster in 1986 and Fukushima in 2011. 

It all adds up to a commonly held sentiment — and political imperative — succinctly expressed by Gerard Reid: “No German government will be elected which is not pro-Energiewende.”

Looking at Germany as a glass half-empty . . .

The design of German energy markets features what is called a “merit order” that puts renewables at the head of the queue as the resources with the lowest marginal costs. On some days of the year when solar and wind are producing at high levels and demand is low, not only do renewables dominate but the value of wholesale power dips into negative figures.

The impact on the fossil fuel generation business has been devastating, damaging the financial well-being of utility companies that own and operate coal and natural gas generation.

Germany has relied on its strong ties to other European countries to keep things in balance. But the low-cost energy now spilling over from Germany has caused problems for its neighbors as well. Meanwhile, retail electricity rates in Germany have doubled since 2001, in part due to renewable subsidies, which the country will be paying for many years to come.

Or a glass half-full

Launched in 2000, Germany’s solar feed-in tariff (FIT) has put photovoltaic (PV) panels on a million rooftops, providing homeowners, farmers and businesses with a handsome return on investment while making the country one of the world’s solar leaders with 38 GWs installed.

That incentive created a market for solar that has dramatically lowered panel and other hardware costs around the globe. Germany has also mastered the “soft cost” side of the solar equation. Despite having the same hardware costs as the U.S., German installation costs are a third lower.

And even with high levels of renewable energy flowing onto the German distribution grid, the country has absorbed the variability with little disruption and maintained high reliability. Average outage times are 7 percent of the U.S. average.

As Oliver Schäfer of the European Photovoltaic Industry Association told us, “From an economic perspective, Germany’s power market has not been well-suited to accommodating large amounts of renewables. But from a technical perspective, the German grid has integrated a lot of solar and wind without adverse effects on reliability or resiliency.”

Architects of the Energiewende suggest that the right foundation has been laid for a stable future, despite the rise in prices and significant financial commitment to renewables. Martin Schöpe of the German Federal Ministry for Economic Affairs and Energy said that the permanent reduction achieved in the cost of renewables will eventually lead to a leveling off of electricity prices.

“The benefits of renewable energy exceed the costs on an economic basis,” he said. “The [FIT] is paying off. It may rise slightly from today’s price, but then it will fall and we will have the cheapest power production” in Europe.

German utilities: The biggest losers in the push to expand solar?

It is true that the large, established utility companies operating in Germany have taken significant financial hits during the Energiewende era. In fact, the eight largest utility companies in Europe, three of which operate in Germany, have lost a combined €300 billion of market capitalization since the end of 2007.

But such generalizations carry two important caveats:

The losses are tied directly to holdings in fossil-fuel and nuclear central station generation. Other utility operations are healthy, though for Germany’s “Big Four” utilities — E.ON, RWE, EnBW and Vattenfall — that does not make up for the loss of value in generation. Each of these four utilities retained a share in transmission and distribution following electricity market deregulation in 1998, but must compete with many other players.

For example, a total of 800 Distribution System Operators manage the delivery of power. Similar to distribution utilities in the U.S., they include subsidiaries of the Big Four, as well as smaller private companies and many municipal systems serving cities large and small. The retail market also includes thriving energy cooperatives and collectives.

Further, while triggering a market loss for traditional generation, Germany’s strong subsidies for renewables — and the creation of a generation market merit order that favored solar and wind — were not the only reasons for damage to the big utilities. The companies themselves admit to miscalculations in investment choices. Besides passing up any significant investment in renewables, they chose to invest heavily in new coal and gas generation as replacements for phased-out nuclear.

They also failed to anticipate the sustained downturn in demand for electric power, even though reducing energy use has been a guiding principle of the Energiewende for many years.

Meanwhile, average electricity customers in Germany, as well as most of Europe, had a poor view of the large utility companies that dominated markets before deregulation.

“People in Germany were fed up with the arrogant attitude of the big utilities in the past,” said Susanne Nies, head of distribution system operators for Eurelectric, a European association of electric utilities. “Utilities are paying for that today.”

The German utilities readily acknowledge that they were slow to recognize what their customers want and thus lost market opportunity.

“Our biggest mistake was in selling kilowatt-hours like baked beans when customers wanted to buy a service,” one executive with RWE said.

Differences between the U.S. and German electricity markets

The U.S. energy sector differs from its German counterpart in two key aspects.

First, natural gas is plentiful and relatively cheap in the U.S., while limited and expensive in Germany. In one of the imperfect wrinkles of the German market, since imported natural gas, largely from Russia, is expensive, cheaper lignite coal follows solar and wind in the dispatch of generation resources. This means that coal plants must be used to back up variable resources.

With the shuttering of nuclear plants, the result has been a slight rise in carbon emissions overall in a country with vigorous carbon reduction goals. Government officials say that this is a temporary problem.

Equally if not more important, the German public — across all political parties — strongly supports climate change action, as well as the development of renewable energy. Public opinion surveys even show some supporting increases in the cost of the subsidy program for renewables.

Lessons for U.S. utilities

The closing session of the fact-finding mission included a lively and thoughtful discussion of the insights and lessons that utility executives and other on the trip would take home. Several overarching themes emerged.

• Utilities need to stay close to their customers and listen to what they want.
• They must also recognize the value of opportunities on the customer side of the meter.
• Large amounts of renewable energy can be successfully integrated into the grid.
• Significant opportunities exist for investments in transmission and distribution systems and services, less so in conventional generation.