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.
Mandates
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.
Tech leader?
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.
High cost
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.
Ideological argument
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?
Paolo, I’ve got to disagree with much of what you have written.
1. Nuclear energy: While one can argue until the end of time whether the plants are safe, it is not clear what that term even means. It is obvious that nuclear plants rarely have accidents and meltdowns, however, when they do the costs and potential societal impacts are catastrophic. Classic “low probability, high impact”.
2. Germany has a severe strategic problem which is not mentioned: they receive 36% of their natural gas and 39% of their oil imports from Russia. Russia has shut-off the natgas to Germany in the depth of winter multiple times. Getting off of Russia gas and oil is clearly a strategic imperative for Germany, yet very difficult to implement.
3. You mention the shale gas breakthrough which has been led in the USA and other countries which are believed to have large reserves. The problem with this argument is the lead time to get a transport infrastructure in place to move meaningful amounts of natgas – it is 5 to 10 years. What to do in the meantime?
4. You article repeatedly states that renewables are “expensive and imperfect”. In fact, wind power is generally considered to be the lowest cost new-generation resource available (at least in the USA). Solar has been acknowledged by several utilities to be the lowest cost peaking resource. Both technologies have been dropping in price by 10% per year for the past four years, with those curves showing no signs of abating.
I believe that you conflate price with cost in your article. Germany has extremely high Feed-in-tariff’s (FIT) price for renewables, which are far above typical PPA prices in the USA. Like the PTC in the USA, these high subsidies increase the rate at which renewables are being installed, but do not speak to their costs. If comparing “new plant” to “new plant”, your statements about renewables being more expensive are not well supported. Further detail is provided on this point here: http://theenergycollective.com/conroyt/427021/fastest-path-cleaner-electricity-infrastructure
5. A completely valid public policy issue is the question of how much to invest in our electricity generation infrastructure, which determines how fast we move forward to a cleaner and more reliable future. The German’s have apparently decided to move forward quickly to replace risky nuclear and polluting coal generation resources. There is a cost to replace existing generation resources no matter what you replace them with – replacing nuclear with nuclear would also add cost…so noting that there is an added cost is an implicit support to maintain the status quo generation portfolio.
The fact that these are “political decisions” has been true ever since nationalized and price-controlled electricity utilities were established in each country. By noting that the German populace is voting for green and safe is simply calling out a completely valid feature of the utility model in Germany (and the USA), which is not a private enterprise model.
The answer to your question: “Is this really a sound foundation for public policy?” is certainly “YES” where a country has chosen a politicized and state controlled utility model. What would be the governing model in a state controlled enterprise otherwise?
Greetings Tom,
Many thanks for reading my article and for offering your thoughtful comments…
Of course, one can interpret Germany’s energy mandates in many different ways…and I get your points…
However, for the moment, these are some facts based on the impact of the German policies thus far.
–Germany’s emissions are in fact higher than they used to be on account of the fact that cheaper coal has displaced natural gas, itself displaced by subsidized renewables. While this may change, so far the results of the green policies are not those intended.
–Many German energy intensive industries are planning relocation/expansion in other countries. All German industrial groups complain that the high cost of power creates a major competitive disadvantage.
–Germany’s electricity prices are two to three times higher than America’s.
As to the wisdom of heavy investments in solar energy in rainy Germany, a prominent German businessman said that: “Solar power in Germany makes just as much sense as pineapple farms in Alaska”. May be he is wrong, who knows.
Again, in a very complex environment, one can find pros and cons for any given policy.
However, I personally do not believe in economic policies mandated from above. Time and again policy-makers, with the best of intentions, make huge and costly mistakes.
While power generation and distribution will always be regulated to some extent, I am not sure that broad mandates based on unproven belief in the superiority of any given technology are a good way to go.
The Soviet 5 Year Plans did not work. The more business friendly French style “dirigiste model”, managed by a state bureaucracy, (The “Commissariat du Plan”), this is close to what we would call “industrial policy” here in the US, has been an utter disaster. Look at France today.
Did the German Government “get it right” on energy? I wish them well, but I do not think so, simply because while the technology picture changes rapidly, mandates, once implemented, tend to stay…
Paolo