German energy transition – 2017 update (part 3)

The final instalment of a mini-series on the energy transition from the perspective of meeting targets for environmental and climate protection, security of energy supply and affordability.

Since September 2012, consulting firm 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 evaluates the feasibility of meeting 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), and the assessment of area (II), Security of energy supply, in part (2).

In today’s instalment, we will examine the results of the assessment of area (III), Affordability, which is specified in greater detail by the following five parameters:

Area (III): Affordability

• 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) Affordability

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 the 2009-2010 period.

Household electricity prices have risen substantially since 2001. The current price of 30,38 ct/kWh is +47,3% above the current EU average of 20,6 ct/kWh. Given the expected further increase in the RES surcharge in the coming years, McKinsey analysts do not expect the situation to improve by the target year of 2020. Among EU member states, Germany and Denmark have the highest household electricity prices.

In view of the conclusions discussed, achievement of the 2020 target was unequivocally assessed as “unfeasible” (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 the 2008-2010 period.

During the reference period for compiling the current edition of the Index, a price of 10,21 ct/kWh (excluding electricity tax and VAT) was reached, 17,1% higher than the relevant EU average of 8,7 ct/kWh. Germany has long seen debate over the federal government’s excessive leniency towards large electricity consumers with regard to the level of the RES surcharge. Environmental groups are seeking to ease the burden on consumers and shift a greater financial burden onto industrial companies. These companies, however, argue to the government that maintaining the competitiveness of German industry requires acceptable electricity prices as one of the basic conditions.

In view of the conclusions discussed, achievement of the 2020 target was assessed as “unfeasible” (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.

Compared with 2016, the surcharge increased by a further 8,3% to 6,88 ct/kWh. Analysts expect an upward trend until 2020, as it is only during this period that older generating facilities receiving support will be decommissioned on a larger scale, which could reduce the overall volume of funds collected through the RES surcharge.

Given the current level of the surcharge and the potential for its future reduction, analysts unequivocally assessed achievement of the 2020 target as “unfeasible” (N).

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

The number of employees in the RES sector has declined for four consecutive years. It fell from last year’s level of 355 400 to 330 000. The largest declines were recorded in the onshore wind (-8000) and PV (-7000) segments.

Nevertheless, the current number of employees stands at 102% of the required value, so meeting the parameter by 2020 was assessed as “feasible”.

The employment target in energy-intensive industry was defined with the ambition of maintaining the 1 593 808 jobs recorded in 2008. Energy-intensive industries are 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.

At the end of 2016, employment stood at 1,645 million people. The required target is currently being met with a slight margin, and meeting the 2020 quota is therefore assessed as “feasible”.

Interim conclusion for area (III), Affordability

The analysts’ data on employment in the RES sector and energy-intensive industry show that the federal government is succeeding in meeting the fundamental political objective of maintaining the social acceptability of the energy transition. The number of jobs in energy-intensive industry slightly exceeds expectations, while the number of jobs in the RES sector has been declining for four years but still remains slightly above the expected level.

On the other hand, the federal government is clearly failing to meet the fundamental economic targets of the transition, as clearly demonstrated by the assessment of the RES surcharge, which in turn adversely affects electricity price trends, particularly for households.

The current intersection of technical and economic realities has resulted in an RES surcharge of 6,88 ct/kWh. The 2020 target of 3,5 ct/kWh was based on the 2008 level of 1,16 ct/kWh and, when the objective was formulated, was considered a “safe parameter” set with a sufficient margin.

German end consumers of electricity currently support RES generation through the RES surcharge to the tune of around EUR 24 billion annually. This amount should increase until 2020, when it is expected to reach as much as EUR 26 billion, before gradually declining in subsequent years and returning to EUR 22 billion in 2025.

While the RES surcharge has a relatively significant impact on German households, industry has been well aware from the outset of the transition of the realistic technical and economic possibilities of the power sector by 2020. Unlike the general public, it therefore took a realistic view of environmental visionaries’ claims that electricity from RES would soon fall below the generation costs of conventional sources. And it naturally took the appropriate measures in time – specifically, it secured exemptions from the federal government in the calculation of the surcharge payable by companies with energy-intensive production. In the general public’s view, the population is subsidising industrial companies because of these exemptions. To some extent, the analysts’ conclusions confirm this: while industrial electricity prices are “only” 17,1% above the EU average, household electricity prices are 47,3% higher. In this case, however, it should be recalled that industrial companies naturally consume significantly larger volumes of electricity and in practice pay more than half of the total amount collected through the RES surcharge.

The economic aspects of the energy transition generally pose a serious problem for the federal government. The politically and legislatively supported development of RES remains fundamentally dependent on external financial support provided through the RES surcharge. However, in view of continuously rising RES generation, the current system of guaranteed feed-in tariffs and mandatory offtake is becoming unaffordable even for wealthy Germany, and complicated discussions have been under way for several years on its future reform towards standard market mechanisms.

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

If we summarise the interim conclusions from today’s economic area (III), Affordability, we can state that two interim targets are being met: maintaining employment in energy-intensive industry and in the RES sector. Three interim economic targets are not being met: household electricity prices, industrial electricity prices and the level of the RES surcharge. These, however, represent the fundamental economic basis of the entire transformation process. In my view, this indicates a significant initial underestimation of the economic aspects of the entire transition.

Results in the technical area (II), Security of energy supply, show the highest degree of fulfilment. Three interim targets are being met: the duration of electricity supply interruptions, ensuring capacity reserves, and connecting offshore wind. Two interim targets are not being met: the financial costs of grid measures and progress in building transmission grids. In my view, the solid degree of fulfilment of technical requirements demonstrates the competence of the technical sphere in the practical implementation of political and environmental visions. If we add the overruns in planned expenditure on grid measures, we can conclude that none of the economic parameters of the transition is being met. The construction of transmission grids faces significant public opposition, which is politically supported by municipalities and, in some cases, also by federal states.

Weaker results are also being achieved in the key environmental area (I), Environmental and climate protection, which should be the main driver of the entire transformation process. Two interim technical targets for the construction of offshore wind and PV are being met. Three key interim “climate” targets are not being met: reducing CO2 emissions, reducing primary energy consumption and reducing electricity consumption. Moreover, it can logically be expected that increased efforts to meet the ambitious environmental targets in area (I) will result in further cost increases, with a subsequent adverse impact on meeting the set economic targets in area (III).

Overall, seven of the fifteen set targets are currently being met, in the technical field and in ensuring employment. The remaining eight unmet interim targets represent the fundamental environmental and economic framework of the entire transformation process. On the other hand, it should be noted that the assessment of a process as complex as the German energy transition undoubtedly cannot be carried out through the lens of a “politically imposed” 2020 completion date. I therefore leave it to each reader to form their own opinion. I hope that I have presented sufficient material in the three parts of this mini-series to formulate one’s own view on the matter.

(Written for the blog.iDNES and OEnergetice.cz websites)

Petr Nejedlý