German energy transition – 2016 update (part 3)

Since September 2012, consultancy McKinsey has regularly published the “Energy Transition Index”, which, based on an assessment of fifteen measurable parameters, clearly illustrates the current state of this complex transformation process and assesses the feasibility of achieving the political, environmental, economic and technical targets defined by the federal government by 2020.

The assessment of area (I) Environmental and climate protection was presented in part (1), while the assessment of area (II) Security of energy supply was covered in part (2).

In today’s final instalment, we will examine the results of the assessment of area (III) Cost-effectiveness, which is further specified by the following five parameters:

Area (III): Cost-effectiveness

• Household electricity prices (deviation in % from the EU average)
• Industrial electricity prices (deviation in % from the EU average)
• RES surcharge [ct/kWh]
• Jobs in the RES sector [-]
• Jobs in energy-intensive industry [-]

Assessment: (III) Cost-effectiveness

The 2020 target for household electricity prices was defined as a requirement to maintain a deviation of +25,5 % from the average electricity price in the EU in 2009-2010.

Household electricity prices in Germany have remained high over the long term. The current price of 29,5 ct/kWh is 41,1 % higher than the European average. Given the unclear outlook for the RES surcharge (see parameter 13 below), analysts do not expect any significant price reduction in the foreseeable future. Achieving the 2020 target was therefore unequivocally assessed as “not feasible” (N).

The 2020 target for industrial electricity prices was defined as a requirement to maintain a deviation of +8,5 % from the average electricity price in the EU in 2008-2010.

In the case of industrial electricity prices, a slight improvement was indicated compared with the previous assessment for the first half of 2015. The current price of 11,1 ct/kWh is 19 % higher than the EU average, but shows a downward trend. The reason can be found in the decline in the exchange-traded electricity price, which occasionally fell below 28 €/MWh during the assessment period and is currently at even lower levels. Nevertheless, despite the reported slight improvement, achieving the 2020 target of 8,5 % is still assessed as “not feasible” (N).

The 2020 target for the RES surcharge of 3,5 ct/kWh was based on the 2008 level, when it stood at 1,16 ct/kWh.

Following a one-off decline to 6,17 ct/kWh last year, the RES surcharge rose to its highest-ever level of 6,35 ct/kWh. Analysts assess the future outlook as unclear, as even the federal government’s analyses are rather cautious on this issue. This is hardly surprising: several years ago, the federal chancellor personally stated that she did not expect the surcharge to exceed 3,5 ct/kWh, whereas it is currently almost twice as high.

Given the current level of the surcharge and the potential for its possible future reduction, analysts unequivocally assessed achieving the 2020 target as “not feasible” (N).

The employment target for the RES sector was defined with the ambition of increasing the number of 322 100 jobs recorded in 2008

Total employment in the RES segment declined from 371 000 to 355 400. Since 2013, a significant downturn has been recorded in solar energy, where a full third of jobs have been lost. However, the decline was offset by workers moving into wind energy, due to increased construction of onshore and, above all, offshore power plants. Nevertheless, despite the reported decline in employment, the indicator is currently being met at 110% and achieving the 2020 target was therefore assessed as “feasible” (F)

The employment target for energy-intensive industry was defined with the ambition of maintaining the 1 593 808 jobs recorded in 2008. Energy-intensive industry is defined as sectors in which electricity costs account for at least 10% of gross output – for example mining, the paper industry, metallurgy and coke production, and petrochemicals.

Employment in energy-intensive industry remained at roughly the same level. In March 2015, around 1 616 000 people were employed in this segment, an increase of 8 000 compared with the previous assessment for the first half of 2015. The indicator is currently being met at 107% and achievement of the 2020 target is assessed as “feasible” (F).

Interim conclusion for area (III) Cost-effectiveness

In this area, the situation has remained virtually unchanged compared with the previous edition of the article series in September 2014. The analysts’ employment data for the RES sector and energy-intensive industry show that the federal government is succeeding in meeting its political objective of maintaining the social affordability of the energy transition. The number of jobs in energy-intensive industry is stable, while the number of jobs in the RES sector exceeds original expectations, despite the severe blows dealt in recent years to domestic photovoltaic technology manufacturers by Asian competition.

From the outset of the energy transition, German industry was well aware of the real technical and economic possibilities of the power sector. Unlike the general public, it therefore took a realistic view of environmental groups’ claims about an imminent and significant fall in the price of electricity from RES below the production costs of conventional sources, or about a future reduction in the RES surcharge. As a result, when the basic framework of the transition was being formulated, it secured exemptions from the calculation of the RES surcharge payable by companies with energy-intensive production. Public opinion generally holds that households subsidise industrial companies because of these exemptions. At first glance, the analysts’ conclusions confirm this: while industrial electricity prices are “only” 19 % higher than the EU average, household electricity prices are 41,1 % higher. However, it should be noted that industrial companies and manufacturing businesses consume substantially more electricity than households and therefore actually pay almost two-thirds of the total RES surcharge, leaving the remaining third for the households under discussion.

The economic aspects of the energy transition generally represent a serious problem for the federal government. The politically and legislatively supported development of RES remains fundamentally dependent on external economic support provided through the RES surcharge. However, given persistently rising RES generation, the current system of guaranteed feed-in tariffs and mandatory offtake is becoming unaffordable even for wealthy Germany and will need to be substantially modified towards standard market mechanisms in the near future. Reform of the current system has been seriously discussed for several years. One specific outcome was the Electricity Market Development Act and the Generating Capacity Reserves Regulation, approved by the federal government on 4 November 2015 as part of the broader Electricity Market 2.0 initiative. However, tangible results in the electricity market will apparently only become visible in several years.

Summary of interim conclusions from areas (I), (II), (III)

If we return to the interim conclusions from the previous parts of the series (see part 1, part 2), we can conclude that targets are being met rather unsatisfactorily in the key area of (I) Environmental and climate protection, which defines the fundamental goals of the entire transformation process. Two interim technical targets for the construction of PV plants and offshore wind power plants are being met. Three fundamental climate targets are not being met: reducing CO2 emissions, reducing primary energy consumption and reducing electricity consumption. In assessing progress towards the CO2 emissions and electricity consumption targets, I would venture to question whether the target values are achievable at all. Primary energy consumption will probably be reduced, but substantially later than originally planned.

Results in the technical area of (II) Security of energy supply show a higher degree of target achievement. Three interim targets are being met: the duration of electricity supply outages, ensuring capacity reserves and connecting offshore wind power plants. However, two key indicators aimed at integrating weather-dependent RES generation into the power system are not being met: transmission grid expansion and the costs of grid measures. The solid degree of fulfilment of technical requirements generally demonstrates the competence of the technical sector in the practical implementation of political and environmental visions. In the case of the costs of grid measures, it is also possible to question whether the required target will ever be met.

If we summarise the interim conclusions from the economic area of (III) Cost-effectiveness presented above, we can conclude that only two interim targets are being met: employment in energy-intensive industry and employment in the RES sector. Three interim targets are not being met: household electricity prices, industrial electricity prices and the level of the RES surcharge. These, however, represent the fundamental economic premises of the entire transformation process. In my view, this indicates a significant initial underestimation of the economic aspects of the transition as a whole.

Overall, seven of the fifteen set targets are currently being met. Moreover, the interim parameters that are not being met define the fundamental environmental and economic framework of the entire transformation process. On the other hand, it is fair to note that an assessment of a process as complex as the German energy transition can hardly be conducted through the lens of the originally declared 2020 completion date. Like other major political, economic and social reforms, the energy transition will clearly proceed much more gradually and at significantly higher cost than originally declared. Of course, I do not prevent readers from forming their own opinion based on the materials presented or the referenced original sources.

(Republished with the author’s permission from nejedly.blog.idnes.cz)