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Energy policy

Time to celebrate the Energiewende

Poor Energiewende – no one seems to love it. The current governing coalition consists of the two parties that have traditionally opposed the switch to renewables over the past two decades, and lots of these politicians still have a hard time wholeheartedly embracing their new policy. Nor is there much praise from the traditional supporters of renewables. These days, the opposition Social Democrats and Greens – the parties that really got the ball rolling with the Renewable Energy Act in 2000 – also now find themselves mainly criticizing details about what Merkel's coalition is doing with their political baby.

Already skeptical international audiences must think that nobody within Germany believes in the project. Germany wants to phase out nuclear and coal even as it reduces carbon emissions and remains an industrial powerhouse? It sounds impossible. The problem is, it's happening.

Folks, it's time for someone to tell it like it is: the Energiewende is a fantastic project. Even those who support nuclear because of its low carbon emissions would not want to enter into the risk that nuclear entails if it could be proven that renewables can do the job. Now, a country that preaches austerity and still has its industrial base has set out to prove just that.

This is a cause for celebration. The flipside of "the project might fail" is "the project might work." In fact, if anyone can do it, the Germans can.

Overstated concern

Industry Minister Philipp Rösler has warned of blackouts this winter, and the international press has been keen to pick up the story. Yet, we heard those warnings last year, when Germany saved neighboring France from blackouts, and while there were reports of reserve power plants needing to be fired up nearby in Austria, it also turned out that a number of gas turbines in Bavaria unexpectedly remained unused during those days. If anything, the risk of a blackout after the sudden dramatic shutdown of eight nuclear power plants decreases each year as Germany has time to fill in the gap.

The New York Times reported this week that Angela Merkel faces "popular challenges… as she prepares to face the general election next year" – but in fact, if she loses the election, the people who will take over are more likely to get things right – after all, they wanted this all along.

True, Germany pays second highest retail power prices in Europe behind Denmark, as the New York Times points out, and French retail rates are only around half as high. But Germany spot market prices are lower than in France, and the German economy is stronger than the French.

Germany social democracy protects poor

Everyone seems suddenly concerned about the cost impact of renewables on the poor, but take this example to demonstrate how shallow the concern is: RWE, one of Germany's four biggest utilities (and traditionally a staunch opponent of renewables), has graciously announced it will not pass on the increase in the surcharge for renewables, which is expected to cost the average household around five euros per month. The tactic is a public relations coup, however, for the firm announced a price hike of around 4.50 euros only a few months ago.

But aren't poor Germans having their power cut off? The New York Times puts the figure at 600,000 homes last year, but just the other day we heard it was 200,000 – which one is it, and is that figure higher than usual? We don't know because Germany does not (yet) collect such statistics.

 - Countries with a lot less renewable power have even more energy poverty than Germany. Wind turbines in Thüringen.
Countries with a lot less renewable power have even more energy poverty than Germany. Wind turbines in Thüringen.
Urgixgax - pixelio.de

Would 200,000 or 600,000 people a year be a lot in international comparison? Many Americans believe Germany is socialist; Forbes recently (and completely inaccurately) claimed that the German poor live on "energy credits." But the Australian press reports that in Queensland 34,484 "homes and businesses were disconnected due to late payment of power bills in 2010-11"; Germany has roughly 17.7 times the population of Queensland, so that figure is equivalent to 600,000 on the German scale for those two years – or 300,000 for one year.

Figures are hard to find for the US as a whole (if you know of such data, please provide a link in the comments below), but utilities in California alone were recently shutting power off for nearly 70,000 customers a month due to outstanding bills when the state reacted, equivalent to 840,000 a year in a state with a population roughly half the size of Germany's.

One thing is certain – Germans do not call their political system "socialist," but rather "social democracy." While the country does not provide "energy credits" for power consumption, welfare recipients can apply for special hardship compensation to cover higher heating bills, and it is likely that the country will take some steps to protect its poor from the extra five euros a month for renewables.

Feed-in tariffs not premium, not a tax, and not a subsidy

The New York Times article from Wednesday calls the surcharge for renewables a "tax," which it is definitely not – no taxpayer money is involved, and the revenue does not go back to the government – and says that feed-in tariffs guarantee a return on investments "above the market rate." What is the market rate for energy investments? The passage makes little sense, but the target ROI for German feed-in tariffs is 5-7 percent (most of which goes to small investors), far below the guaranteed return, say, of nearly 10 percent for grid operators.

Energy firms in the US also largely do business on a regulated market of monopolies (i.e., with guaranteed profits), and these firms would apparently not be satisfied with the average profit margin of six percent provided by German feed-in tariffs. For instance, Duke Energy's profit margin in Q2 2012 was 12.41 percent; Peabody’s, 25.94%. Indeed, this overview of utility profit margins suggests that a six percent profit margin might get you fired as CEO.

Against the backdrop of the usual ROIs guaranteed in the energy sector, feed-in tariffs look quite modest, not premium.

 - Germans largely pay the modest profits from feed-in tariffs back to themselves, not to large corporations.
Germans largely pay the modest profits from feed-in tariffs back to themselves, not to large corporations.

Probably, the New York Times journalist means that more is paid for renewables than for electricity on the market, but not even that is true anymore. The bottom has fallen out of the price of solar over the past five years, and it is now far, far cheaper than the retail rate in Germany – a maximum of 18 cents versus 26 cents for power from your socket right now.

But no matter, even renewables experts outside of Germany fail to get their heads around the world's most successful policy for renewables. On Monday, the NY Times published a separate article by the CEO of one of the UK's biggest solar firms, and he also erroneously claimed that "feed-in tariff subsidies… pay premium prices," and he looks forward to the day when "feed-in tariff subsidies are no longer needed."

For some reason, everyone outside Germany – even solar businessmen – thinks that feed-in tariffs can be done away with once renewables have become "competitive" with conventional power. But Germany still offers feed-in tariffs for wind power, which has been competitive with the marginal price of natural gas and coal power for years now. Furthermore, it is foolish for the renewables sector itself to ask for its own subsidies to end; after all, nuclear, coal, and natural gas have been profitable for decades, if not centuries, and still continue to receive subsidies.

So it's three cheers for the German Energiewende – may Germany prove once and for all that we can switch to renewables even as we reduce our carbon emissions and have a strong economy – yes, even without nuclear. Admit it – you'd like for it to work, too. (Craig Morris)

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3 Comments on "Time to celebrate the Energiewende "

  1. Craig Morris - 21.10.2012, 10:16 Uhr (Report comment)

    Thanks, FromOZ!
    James, comparing FITs to a firm's "return on assets" definitely does not improve the comparison a homeowner's return on a solar roof is much, much smaller than the ROI for the investments if measured in terms of that person's total assets.
    Believe me, energy firms do not like ROIs below 12% (measured in terms of specific investments/projects).

  2. FromOz - 21.10.2012, 10:11 Uhr (Report comment)

    in Australia 2010-11 is one year, not two. It refers to the fiscal year running from July 2010 to June 2011. Hence the Queensland disconnections figure would compare to more than 600,000 disconnections in Germany (assuming Germany has 17.7 times the population of Queensland). Power prices in Australia have been rising dramatically even without an Energiewende. These rises have been due in large part to the dramatic uptake and very peaky use of air-conditioning systems. Poorly designed and insulated homes not suited to the prevailing climate are an important contributing factor.

  3. James Wimberley - 20.10.2012, 15:03 Uhr (Report comment)

    Financial howler! A profit margin (unit sales less unit costs) is not the same thing as a return on capital (profits per unit assets). a href="http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=DUK"Duke Energy's 5-year capital ratios are: return on equity 6.3%, return on assets 2.5%, return on invested capital 3.7%. As a regulated utility, I guess Duke will be using a discount rate quite close to the 6% rate of return used for the German FIT.

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