ON DECEMBER 3rd the German government announced plans to redouble its Energiewende, or “energy transition”, and accelerate progress so that the country can meet its goal of a 40% cut in greenhouse gases (from 1990 levels) by 2020. The same week, E.ON, a big German utility, announced its decision to split into two companies. One will focus on traditional nuclear and fossil-fuel electricity generation, and the other on renewable energy, electricity distribution and “energy services” for cost- and climate-conscious customers. Both decisions have been seen as evidence that the Energiewende has failed. But what has gone wrong? The Energiewende has two main policy tools: generous support for renewable sources of energy, and an exit from nuclear power by 2022. The government supports renewables by promising those who install solar panels or finance windmills a fixed, above-market price for each kilowatt-hour of energy they feed into the grid. Those renewable sources have grid priority, meaning they must by law be drawn upon before other energy sources, like electricity from coal, gas or nuclear plants.

The above-market prices meant that many Germans rushed into renewables, from installing solar panels on barn roofs to buying shares in wind farms. Renewable capacity expanded quickly, and now accounts for an impressive 27% of electricity production. But the renewables rush began as utilities also invested heavily in new fossil-fuel generation, especially modern gas-fired power plants. The simultaneous dash to renewables and new fossil-fuel power plants resulted in overcapacity and caused wholesale prices to tumble, which has battered the utilities’ profits.

At the same time, the prices paid by consumers have been rising. This is because of the above-market prices guaranteed for renewable energy. On a sunny, windy day, a flood of renewable energy surges into the system; it must be, by law, bought by grid operators first, with the producers paid those above-market rates. Those rates are subsidised by a surcharge on customers, and the surcharge must go up when more renewable kilowatt-hours are poured into the system. But an unintended side-effect of the policy has been that renewables undercut relatively climate-friendly natural gas on price. This means that traditional utilities have turned instead to much more climate-damaging coal for generation. The result is that prices have gone up and the use of renewable sources has expanded, but Germans have ended up emitting more carbon dioxide as a result of the extra coal—hardly the result the architects of the Energiewende hoped for. Fixing it is one of the current government’s top priorities—as it should be.



Dig deeper:

A German power-producer is breaking itself up (Dec 2014)

Germany's reliance on Russian gas is falling (Sept 2014)

Angela Merkel preaches pro-growth reforms but implements anti-growth ones (April 2014)