Economics is the focus of many debates surrounding Germany’s aggressive “energy transition” (or Energiewende), which plans to move the country to nearly 100 percent renewable energy by 2050. Critics say Energiewende’s costs are unjustifiable, arguing they hurt the country’s international competitiveness and systemic inefficiencies exacerbate these costs.
At first glance, it’s hard to argue with them. The scale of investment in Energiewende can seem intimidating: So far, Bloomberg New Energy Finance estimates the total cost of Germany’s clean energy expansion at €106 billion. Furthermore, the Wall Street Journal quotes government sources when predicting total costs through 2040 to be about €1 trillion.
By contrast, however, Germany’s annual investment in fossil fuels has been €90 billion; and, investments in Energiewende go into electric grid upgrades that would need to happen in Germany anyway, whereas fossil fuel investments leave the country.
When viewed in context, there are many reasons to believe investments in Energiewende will reap economy-wide rewards, giving Germany a competitive global advantage over other countries that lagged behind investing in the future.
Energiewende is creating jobs, raising GDP, and attracting business
The German example shows an energy transition can lead to overwhelmingly positive, balanced, and pervasive employment impacts.
In 2004, Germany’s renewable energy sector employed 160,500 people, and that number doubled to 367,000 by 2010. The net employment gain from renewable energy in 2009 alone was 70,000-90,000, compared to the “business-as-usual” scenario in which energy was provided by fossil fuels. And this trend is only expected to continue.
The projected net employment gains for 2020 and 2030 are 23,000-117,000 and 105,000-241,000, respectively. Furthermore, because of indirect employment from supplying intermediate products and components to the renewables sector, all regions of Germany are set to benefit from renewable energy expansion.
As with employment, Energiewende also promises to positively impact Germany’s GDP. By 2030, German renewable energy exports are expected to reach €47–69 billion (€33-48 billion in 2005 Euros). In addition, relative to a scenario with no renewable energy policy, costs to the German economy are negative for all realistic scenarios. In 2009, total profits of German manufacturers of renewable energy facilities were €16.4 billion. Projected profit ranges for 2020 and 2030 are €28 billion-€42 billion and €43 billion-€60 billion, respectively.
Large industries, small businesses, and residential consumers share these economic benefits. The Heinrich Böll Foundation argues, “contrary to one common misconception, renewables have turned Germany into an attractive location for energy intensive industries.” In 2012 alone, renewables had driven down wholesale electricity prices by over 10 percent; and, cheaper electricity prices translate to lower business expenses. In addition, as of 2013, farmers and individuals owned renewable energy investments amounting to over €100 billion.
Paying for renewables now makes practical sense
The costs of renewable energy, such as wind, solar, and others, in Germany have fallen and are expected to continue to fall in the future as manufacturers accumulate experience, make improvements, and enjoy economies of greater scale. At present, premier wind farms produce electricity at a price comparable to that of gas and coal plants. In addition, the levelized cost of energy for solar PV has fallen 78 percent over the past five years, and PV is now competitive with residential electricity tariffs in many countries, including Germany.
Furthermore, while renewables fuel sources have no fuel costs, Germany's costs of importing oil, gas, and hard coal have increased by factors of 2.77, 2.68, and 2.26, respectively, over the past ten years. In addition, steel and cement prices jumped between 2000 and 2011, contributing to the cost of constructing a new power plant rising by 70-100 percent in many cases.
While the costs of Energiewende are growing, the majority of electricity price increases in Germany have been a result of rising fossil fuel costs. Energiewende costs were only responsible for about 29 percent of the average electricity prices’ jump of €0.118/kWh between 2000 and 2012. During this same period, costs of electricity generation, transport, and distribution of conventional power have risen by 46 percent of the entire price increase.
Finally, we can’t forget the societal costs associated with continuing to rely on fossil fuels for electricity. CESifo DICE quotes Küchler and Meyer when reporting, “The societal costs of one kWh of wind energy amount on average to 8.1 cents, and those of hydropower to 7.6 cents. In comparison, one kWh of coal power costs on average 15.6 cents (lignite) or 14.8 cents (hard), of natural gas 9.0 cents, and of nuclear 42 cents.”
All of this is to say, capitalizing on renewables now makes for a prudent investment that will pay for itself as both the actual and societal cost of obtaining, generating, and moving conventional energy sources continues to increase.
Cost vs. price: understanding the difference matters
Spiegel Online International points out that “German consumers already pay the highest electricity prices in Europe.”
But such a position is short-sighted. While the price of a kilowatt-hour of energy is high in Germany, the cost of electric bills is not unreasonable. The average German and American electric bills, at about $100/month, are the about same. Germany's energy efficiency leadership enables them to afford high rates without especially high bills.
An additional insight into Energiewende’s industrial affordability comes from the World Wildlife Fund (WWF), which states, “averaged over all industrial enterprises, energy costs account for a mere 2 percent of a company’s gross production value.” Similarly, CESifo DICE finds Energiewende affordable on the residential level; as of 2012, electricity expenditures only accounted for 2.5 percent of a private household’s consumer budget.
Putting “low income” in context
All sides agree heightened energy costs due to Energiewende have a greater adverse impact on the poor than on other social classes.
As Spiegel Online International expresses:
“In the near future, an average three-person household will spend about €90 a month for electricity. That’s about twice as much as in 2000…But despite those price hikes, government pensions and social welfare have not been adjusted. As a result, every new fee becomes a threat to low-income consumers.”
To this point, WWF notes “private households on low incomes need energy advice and support, e.g. to buy highly efficient appliances. Needy households which are hit especially hard by rising electricity prices should be supported with subsidies.”
For international context, however, even when compared to some of the most developed countries in the world, such as the United States, energy poverty is less prevalent in Germany. In 2011, 312,000 German households had their electricity cut off. Meanwhile, there were 16 million living in energy poverty in the United States.
Energiewende has already positively impacted the country’s GDP and employment situation, and this state of affairs promises to continue as renewable energy prices trend downward and the costs of importing fossil fuels trend upward.
Moreover, criticisms of Energiewende’s costliness tend to lack perspective. While electricity prices are high, electricity bills are as affordable as those in the United States. Renewables have caused electricity prices to rise in Germany over recent years, but conventional fuels have contributed to even larger increases. And energy poverty is a serious issue, but relative to other developed countries, Germany has fared favorably.
Regarding Energiewende’s long-term economic ramifications, The Heirich Böll Foundation foresees even more economic benefits. Germany’s goal is to gain “first-mover advantage” and develop high value engineering technologies, such as those required for solar panels, wind turbines, biomass and hydro power plants, battery and storage systems, smart grid equipment, and efficiency technologies.
Finance professionals spend their careers searching for investments that entail manageable upfront costs, low risk, and extraordinary potential. So far, Energiewende has fit this mold.
This is the second blog post in a six-part series on Energiewende, which will describe best practices gleaned from the German experience and examine their U.S. applicability. Topics will include the Economics, Politics, Governance, Implementation, and Reliability of Energiewende.