WASHINGTON – An interesting WSJ story, (Germany’s Expensive Energy Gamble, August 27, 2014), provides a good illustration of top-down economic policies motivated mostly by ideological, as opposed to economic, reasons. The German government, presiding over the world’s fourth largest economy and number one within the European Union, years ago decided that the country had to embrace renewable green energy not because it is cost-effective; but because it is “good” for mankind.
In order to achieve this gigantic power generation and distribution shift, the Berlin government imposed mandates on the use of electricity produced from renewable sources, (mostly wind and solar), while subsidizing the cost of green energy production. The goal was and is to discourage the use of fossil fuels. The government also decided to phase out all nuclear power plants.
This was a political move. There is a very well-organized anti-nuclear movement in Germany. The government felt that after the Fukushima nuclear power plant disaster in Japan it had to act in order to prevent additional public demonstrations against nuclear energy. This decision had little or nothing to do with any assessment of the safety of German nuclear power plants.
Overall, the public policy objective is to have soon a truly “Green Germany” that uses zero nuclear power, while relying less and less on fossil fuels. Germany’s energy will be cleaner, and soon enough truly clean. Because of this epochal transformation, Germany will no longer contribute much to global greenhouse gases emissions.
Beyond the green goals, policy-makers assume that, by virtue of establishing itself as a global renewable energy leader, Germany will ensure that its technologies will be adopted world-wide.
Once it will be clear to all that renewable energy is really the way to go, most countries around the world would turn to Germany, the technology leader.
If successful, this major energy turnaround would prove that you can be green, innovative and profitable.
All this sounds really good. Except for one fact. For the time being, renewable technologies, while improving all the time, are still rather expensive.
Therefore the German government must subsidize them in order to make them economically viable. The cost of these subsidies is passed on to consumers.
As a result, on average, the Germans pay more than double for electricity than the average US consumer. That is a lot of money.
German energy intensive industries like chemicals, smelters and steel mills have already seen their operating costs rise and their global competitiveness reduced. Some of them are planning relocations and/or expansions in countries where electricity is cheaper, including the US.
Besides, as most of the wind energy is produced in the North of the country, Germany now needs to build new and very expensive transmission lines that will carry all this power to the energy hungry industrial South.
Why do all this?
Given all this, here is the question. Why on earth would the government in Berlin impose on the German economy –via expensive mandates and subsidies– the high cost of still immature green energy technologies?
Wouldn’t it be wiser to allow the market place to decide on what are at any given time the most cost-effective electric power generation technologies? Wouldn’t it be better for the government to limit its role to financing more R&D in renewable energy, this way helping its development, without picking winners today? Indeed, what if you pick the wrong winners?
There are other technologies
It fact, there is much progress in other (more conventional) energy technologies. We know from the recent US experience that an unexpected leap forward in new and cost-effective ways to develop immense shale gas reserves (hydraulic fracturing and horizontal drilling) led to large-scale production of really inexpensive natural gas for power generation.
This shale gas revolution completely transformed the entire US domestic energy supply picture in just a few years. Very important to point out that this happened while most of the leading energy experts where looking the other way. Key Washington policy-makers and their advisors did not see any of this coming. And yet it came. The real point here is that the market decided; and not policy wonks who believe they know what works and what does not.
Private sector in the lead
It is important to stress that the US shale gas development revolution has been entirely a private sector-led effort.
Energy companies did not pursue shale gas development because of tax exemptions, mandates or subsidies. Companies invested in shale gas because they were hoping to make money. And they did.
The net effect of these massive private sector investments is that (thanks to cheap shale gas) millions of Americans now enjoy comparatively lower electricity costs.
“Good” and “bad” energy
Back to Germany, the only explanation for the top-down, forced investments in renewable energy is that this momentous “green choice” is based mostly on politics and ideology, and not on economics.
For a variety of reasons, most Germans now believe that green energy is “good”, while nuclear and fossil energy is “bad”.
Therefore, going green is a moral and ethical choice. It has very little to do with economics.
Indeed, the basis of this costly energy policy is not cost-effective technology choices, but a mix of arguments grounded on (what most Germans believe are) final and definitive assessments about the damage to the environment and to public health caused by “bad” energy.
And, of course, there is also the argument that all responsible people must act –now– to stop and hopefully reverse the emission of greenhouse gases, the byproduct of burning fossil fuels, responsible (this is the undisputed consensus) for global warming.
Environmental protection is important
Now, having said that, I certainly do not want to dismiss the fact that the unrestricted use of “dirty” fossil fuels does indeed cause environmental and public health damages.
Therefore, all governments have an obligation to regulate any kind of power generation, with the goal of minimizing its environmental and public health impact.
For instance, ancient coal-burning power plants may indeed produce cheap electricity; but their harmful emissions also damage, (in some cases destroy), the health of communities living nearby. Therefore, either the plants can be retrofitted so that their emissions are within safe public health parameters, or they should be closed down.
No reasonable person would argue that, since obtaining cheap energy is our primary goal, we do not really care at all about the way it is produced, or about the consequences.
“Expensive Energy Gamble”
That said, the German government decision to progressively phase out all fossil fuels, while mandating the use of costly and still imperfect green technologies is indeed a very “Expensive Gamble”, as the WSJ story tells us, based on the sweeping assumption that all fossil and nuclear energy is bad.
Of course, we do not know how all this will play out, 10 or 20 years from now.
May be the German government will be praised for its incredible foresight and ability to anticipate future trends. May be the decision to gamble on renewables will turn out to be extremely smart.
What if they are wrong?
But what if things turn out differently? What if still expensive renewable energy will be unable to compete with, for instance, abundant and even cheaper shale gas?
Yes, in case you did not know, beyond the vast reserves we have in the US, there are incredibly vast amounts of shale gas all over the world, in countries such as China, Russia, Argentina, the United Kingdom and more.
If wind and solar became really inexpensive, it would make no sense to invest massive amount of fresh capital to develop non competitive fossil fuels. But if the cost of renewables remains relatively high, while the cost of producing shale gas stays the same or goes down, then fossil fuels will win, at least for a while.
In capitalistic economies, it is not unusual for private sector companies to make huge bets on still unproven products. Sometimes the bet pays off, sometimes it does not. In either case, corporate managers put at risk investors’ money.
The government chooses
But here we have the government of Germany, a large modern country, betting huge amounts (hundreds of billions) of other people’s money on something that it believes to be right not because of persuasive economic reasons; but purely because of beliefs that amount to a “green ideology”.
Is this really a sound foundation for public policy?