Cheap Energy Won’t Be One of Germany’s Competitive Advantages
OpinionOpinion Piece by ZEW President Achim Wambach
Germany has ambitious plans for the energy transition. Fossil fuels are to be replaced by electricity, generated by renewable sources. Currently, electricity accounts for just over 20 per cent of energy consumption. By 2030, the demand for electricity is expected to rise significantly: more cars will run on batteries instead of petrol, and heating will be increasingly powered by electric heat pumps instead of gas boilers. Presently, over half of the electricity is produced from renewable sources. The target is to reach 80 per cent by 2023 – already taking the anticipated higher electricity consumption into account.
During periods of insufficient sunlight or wind, adequate electricity storage, imports from abroad, or hydrogen-fired power plants will need to step in.
Germany faces a monumental investment task: The Institute of Energy Economics at the University of Cologne estimates an annual investment requirement of around 50 billion euros until 2030, just for erecting wind and solar power plants and expanding the electricity grid. Additionally, there are the hydrogen networks needed to import and distribute green hydrogen.
What does this mean for the electricity price?
In Germany, electricity won’t be particularly cheap compared to international standards. We don’t have a great many sunny days or the best wind conditions. It is no surprise that most studies predict that Germany will have to import green hydrogen from countries with more favourable production conditions, such as those with abundant sunshine.
Fossil fuels – gas, coal, and oil – will then become pricier. Germany has introduced emissions trading for fuels in heat generation and transportation. The EU will follow suit for these sectors in 2027, while other sectors such as industry or power generation are already subject to such trading. Simulations estimate that this will lead to prices of around 200 euros per tonne of CO2. This would translate to a rise in petrol prices of 60 cent per litre and an annual increase of 1,000 euros in heating costs for a family of four with a gas boiler.
Even if it doesn’t go that far – the German certificate price is currently capped at 65 euros per tonne of CO2 – we can expect price increases for petrol, diesel, and heating costs. And for good reason: emissions trading puts a price on environmentally harmful behaviour. The elevated cost of fossil fuels will propel the transition to electric vehicles and heating systems. In turn, the revenue from emissions trading can be used to mitigate the negative social and economic effects of such price hikes.
Grid expansion must be accelerated
What’s certain is that we need a lot more electricity from renewable sources, and expansion should be as efficient as possible. Unnecessary costs must be avoided. There is much to be done in this regard. Studies project wholesale prices to be between 50 and 130 euros per megawatt hour in 2030. In 2020, it was 30 euros. The underlying scenarios assume different gas price developments, progress in electrification, and compliance with the expansion of renewable energies as stipulated in the Renewable Energy Sources Act (EEG 2023).
There are several other levers that should be utilised to prevent costs from spiralling out of control. Grid expansion must be accelerated to transport electricity from windy areas to where it is needed. Otherwise, expensive conventional power plants will have to step in. Additional costs in grid expansion, such as those associated with underground cabling, should be avoided. The introduction of regional electricity prices will be necessary to incentivise electricity consumption, or to reduce consumption, where needed.
Those who are flexible will charge their electric vehicles at a time of the day when electricity is cheaper. Technology-neutral capacity markets should be established to ensure supply security at affordable prices. Although the government is currently planning to tender hydrogen-ready gas power plants that will be available when there’s no sun or wind, this won’t be enough. Additionally, electricity storage and flexible electricity consumers can contribute to avoiding situations where insufficient electricity supply meets high electricity demand. So-called capacity markets can provide the right incentives for this.
Particularly, onshore wind expansion and grid expansion are lagging behind schedule
In a recent report, the Federal Court of Auditors highlighted the high costs and risks associated with the energy transition. Specifically, onshore wind expansion and grid expansion are lagging behind schedule. The costs for managing grid congestion are projected to continue rising. In response to the report, the Ministry for Economic Affairs and Climate Action emphasised the need to accelerate expansion efforts.
But more attention should also be paid to risk management: Adequate safety buffers must remain in place during the phase-out of coal-fired power and the dismantling of gas networks to ensure security of supply and prevent excessive rises in electricity costs, even in the case of slow expansion.
The energy transition is a monumental task; higher energy costs are inevitable. Households will sooner or later “electrify”, switching to electric vehicles and heat pumps or district heating. Internal combustion engine cars and gas heating will become more expensive. Subsidies and social programmes will be needed to avoid heavy burdens, especially for poorer households.
Energy-intensive companies will need to consider relocating parts of their production, particularly those with less value-added, to areas where energy costs are lower. Germany’s strength has never been to be a low-cost producer. Sectors, including those of energy-intensive industries that are characterised by high levels of innovation and ingenuity, will continue to operate from Germany in future. That is, if the costs of the energy transition don’t spiral out of control and if Germany remains an attractive place to invest. Both are tasks for policymakers.
