Two Political Lessons from Germany’s Energiewende

Check mateAs the recent midterm elections have thrust American politics to the media’s forefront, battles for political power are fresh in our minds. While Democrats and Republicans are not the contestants in governments outside of the U.S., struggle for power among groups whose ideals clash are the bedrock of political systems everywhere, including Germany, where politics play a major role in shaping the country’s energy transition.

Political actors in countries with coordinated market economies, such as Germany, prefer dialogues, strategic concessions, and trade-offs that give rise to policy decisions unanimous among main stakeholder groups. However, for Energiewende – Germany’s aggressive plan to transition to nearly 100 percent renewable energy by 2050 – unanimity is constrained. That’s because two interest groups, the Conventional Energy Coalition (CEC) and the Sustainable Energy Coalition (SEC), support fundamentally different energy systems that oppose each other.

The CEC strives “to maintain the status quo of the energy system… Officially, they support Energiewende, but they neither invest in the Energiewende nor support it.”  The foremost motivating factor for the CEC is money, and their major proponents “benefit largely from the current system, either because they own the current infrastructure or because they fear financial losses, increasing costs, and costly projects by the change of the system.”

Opposing the CEC, the SEC’s foremost ambition is for Energiewende to maintain momentum and the transition to renewables to occur in a timely and efficient manner. (For more information on CEC/SEC political stances and leadership, as well as German political parties’ positions on Energiewende, see these tables.)

We can learn a lot from the political friction between these two groups arising from Germany’s transition to a clean energy economy. Below are two best practices that the U.S., and other countries planning a similar transition, should consider when plotting their course.

Best Practice 1: Sustained, robust agenda-setting efforts are critical for achieving and maintaining popular support for an energy transition. Building a strong, like-minded coalition of entities to help spread this agenda is also important in gaining popular support.

Today, 84 percent of German residents favor achieving 100 percent renewable energy “as quickly as possible.” Energiewende has earned and maintained its popularity via strong agenda setting from political parties, private renewable energy companies, non-profits, and research institutes. Non-profits have been especially active in building popular support among citizens through coordinated events, public statements, studies, campaigns, and generating expertise in support of Energiewende, as well as playing defense against oppositional efforts.

Despite being vastly outnumbered, the CEC continues to ardently fight the energy transition. This state of affairs reveals the importance of political stamina in the energy transition context; the wealthy, powerful opposition is slow to die, if it ever does.

Best Practice 2: Energy transition policies should present compelling incentives for established utilities to invest in renewables early, especially if the energy transition relies on these utilities for backup generation and investment to help build the new grid. Designing schemes that enable utilities to alter business models in a way that maintains profitability is prudent.

The spike in Germany’s renewables capacity – only five percent of which is owned by the largest four utilities (E.On, RWE, Vattenfall, and EnBW) that produce 80 percent of the country’s power  – has seriously hurt utilities’ profits.

About half of Germany’s generating capacity comes from renewables, and total capacity in Germany far exceeds peak demand. As a result of virtually costless solar and wind having first rank in the merit order of electricity supply – a direct result of  Energiewende policies – wholesale prices have fallen from €80/MWh in Germany in 2008 to €38/MWh in 2013.

As wholesale prices fall, so does profitability for utilities. In 2008, Europe’s top 20 utilities were worth €1 trillion (USD $1.3 trillion), and the top ten utilities had a credit rating of A or better. By 2013, however, the value of the top 20 utilities had been cut by more than half – over €500 billion – and only the top five utilities had a credit rating of A or better.

These large utilities are expected to provide two vital ingredients for Energiewende: last-resort electricity and investment for building the new grid. According to The Economist, however, European grid upgrades by 2020 are expected to cost up to €1 trillion, and “companies worth €500 billion cannot finance anything like that amount…In their current state, utilities cannot finance Europe’s hoped-for clean energy system.”

As a result, governments will need to convince other types of investors, such as pension funds and sovereign wealth funds (defined as “pools of money derived from a country’s reserves, which are set aside for investment purposes that will benefit the country’s economy and citizens”), to finance the energy grid’s upgrades. And pension funds and sovereign wealth funds have historically disliked “the political risks of owning projects in which governments play a role, either through planning or price setting.”

If utilities had invested in renewables capacity at the energy transition's beginning, then it is possible they could have maintained their profits and they'd be less adamantly opposed to Energiewende. As it stands now in Germany, utilities are influential players in stifling the Energiewende's progress.

Conclusion

The two best practices described above are strategies for managing conflicts stemming from financial incentives associated with Energiewende. Despite their status as an extremely unpopular minority in Germany, proponents of the CEC and the status quo continue to fight the energy transition because they reap massive profits from the current system. However, it is beneficial to both utilities and proponents of Energiewende for utilities to maintain their financial clout as the energy transition unfolds.

Proponents of an energy transition in the United States face a tall order politically. Four American-based oil companies (Exxon, Chevron, Phillips 66, and Valero) and two motor vehicles companies (General Motors and Ford) are members of Fortune’s top 10 companies.  Powerful people have depended on fossil fuels for making their fortunes, and the Koch brothers and other fossil fuel magnates are not shy about financing political campaigns. Such an old guard is also prevalent in Germany, so studying how German grid modernization efforts have succeeded politically is fruitful for those in favor of an energy transition in the United States.

 

This is the fifth 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.

Photo source: Flickr/Jonathan Boeke

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2 Comments

  1. Bas
    Posted November 21, 2014 at 4:49 am | Permalink

    German reality is different on essential points:

    Money is not the issue with major grid adaptations; NIMBY is/was. With the new rulings delays due to NIMBY are curtailed, so grid adaptation is no real problem anymore.

    German utilities do not own or operate the grid in Germany. The grid is a natural monopoly.
    So it is operated by separated grid companies under close supervision of government (~DENA~Energiewende). Grid companies are allowed to have a regulated profit (~6%). When investment is needed (e.g. for the new high capacity long distance lines) either the grid company arrange itself and/or DENA(Energiewende) lend the money or give loan guarantees.

    Electricity generation is free. Generated electricity can be sold at the Leipzig spot (whole sale) market (av. price ~3.6cnt/KWh) or via contracts to other utilities or to consumers.

    Utilities that sell electricity are not obliged to generate themselves. They can buy at the spot market or via bilateral contracts with utilities that do generate. They are only obliged to cover the obligations of their sales contracts in a reasonable way (e.g. by buying futures at the spot market).

    A group of farmer(s) that run a (few) wind turbine(s), have solar panels on their roofs, and some bio-gass installation can and do start an utility. They sell often only whole-sale via the spot market (long term contracts).

    Nowadays there are ~100 utilities that sell electricity to consumers in Germany.
    Here in NL there is less choice. Still I can choose between ~20 utilities; some deliver 100% renewable, or 100% wind, or 100% nuclear, or the cheapest, or …

    Of course some utilities collapse under the competition. Also big ones as usual in a free market (in USA GM went bankrupt; still GM's cars were serviced). Others will fill the space.
    DENA monitors the situation and has tools such that it can prevent that power plants close, also if the owner goes bankrupt.

  2. Peter Sopher
    Posted November 22, 2014 at 12:58 pm | Permalink

    Bas,

    Your thoughtful comments are much appreciated. Yes, there are many ways in which German and American contexts differ in terms of the way the grid is owned and operated. And the closer one looks, the more one sees grey rather than black and white. For example, the majority of power supply in Texas comes from retail providers rather the IOUs, whereas many other US regions are dominated by IOUs.

    For this blog, the role of Germany's "Big Four" utilities as investors in the grid is highlighted because of the scale of grid upgrades forecasted for Energiewende and the fact that high-capital investors are attractive for financing these upgrades. With the "Big Four" utilities losing financial clout, the source for these grid investments is less obvious.

    Thanks,
    Peter

  • Policy Analyst, Clean Energy
    Peter conducts research as part of the Clean Energy Program's "Idea Bank," or its internal consultancy. His research centers on many of the moving parts that comprise the electricity sector modernization.

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