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Feb 1, 2015 | 14:12 GMT

Moves Toward Green Energy Hamper Germany's Economy

Wind turbines stand behind a solar power park on Oct. 30, 2013, near Werder, Germany.
(Sean Gallup/Getty Images)
Summary

Germany is experiencing deflation for the first time since 2009. Though other factors have certainly contributed to the economic decline, Germany's transition from coal and nuclear energy to renewable energy sources is partly responsible. The transition has been costly, with industries and consumers paying the bulk of the price. However, the financial burden of shifting to renewables will not last forever.

On Jan. 29, the German statistics office announced that Germany's economy had slipped into deflation for the first time since the last half of 2009. Though this sharp decline is a direct result of the oil price collapse, underlying inflation had already been dangerously low in Europe's core nation. The reason for this slump is largely a result of unimpressive growth figures not only in Germany but also in Europe overall — a significant hindrance to German growth, since Europe is the market for 55 percent of Germany's exports.

Another factor, however, is that renewables had replaced coal as Germany's most consumed source of energy — 26 percent of the total energy generated. Though the energy shift might seem unrelated to the economic decline, it is quite likely that Germany's move toward green energy is partially responsible for its economic slowdown, or at least has restrained the German government's attempts to restart the country's economy. Since mid-2011, Germany's economy has seen unremarkable growth. 2011 also was the year when Germany closed eight of its 17 nuclear power stations following the Fukushima disaster and turned toward renewable energy as a replacement. Since then, electricity prices in Germany have skyrocketed.

Turning to Renewable Energy

The shift toward renewables is rooted in the Cold War, when the awareness that Germany could be the battlefield in a nuclear conflict created a cultural mistrust of nuclear energy. Coupled with the 1986 Chernobyl disaster lightly dusting areas of the German countryside with nuclear material, the then-nascent Green Party emerged. As part of coalitions at both the state and federal government level, the Greens consistently lobbied against nuclear power, achieving more success than their counterparts in other European countries. Anti-nuclear protests raged through Germany in 2010, and in 2011 when the Fukushima disaster erupted in Japan, German Chancellor Angela Merkel submitted to a strong tide of public opinion by announcing the immediate closure of the oldest plants, along with the promise that Germany would be completely nuclear-free by 2022. Renewable energy would receive government support until it was sufficiently developed to be able to provide an alternative.

The timing was in some ways fortuitous. Renewables already had support in Germany, with the German Renewable Energy Act of 2000 creating the legal framework for rapid growth in the sector. Renewable energy generation had almost tripled in the intervening decade, with 21 percent of electricity generation in 2011 coming from renewable sources, including hydroelectric, onshore wind, biomass and solar power.

However, the Renewable Energy Act framework was beginning to generate problems of its own. It had introduced a system involving feed-in tariffs, essentially forsaking market forces and setting an annual tariff to guarantee returns for renewable energy producers. This system proved too inflexible in the shifting market. The technology improved quickly, but the price-setters failed to keep up, generating oversized profits in the private sector for companies and enterprising individuals who entered the photovoltaic market by installing solar panels. As a result, solar capacity additions soared from 2,000 megawatts in 2008 (roughly level with wind) to 7,000 megawatts in 2010, while growth in wind remained steady. If Germany were in the Sahara, such an increase in solar capacity might be justifiable, but the amount of cloud cover over the North European Plain meant that the growth in solar energy's share of energy production had not kept pace with this increase in installed capacity, creating sizable inefficiencies (especially without adequate storage to compensate for cloudy days).

The Economic Burden

The overall spending underlying this shift has been gargantuan. The feed-in tariff program has cost more than 348 billion euros ($393 billion) to date, with some estimates predicting that total program costs could reach 680 billion euros by 2022. The way the program is structured puts the burden on the consumers, turning the Renewable Energy Act subsidy into a levy paid by the ratepayer. As production has increased and the subsidy has followed, rising from 8 billion euros in 2010 to 24 billion euros in 2014, the levy has also risen accordingly, tripling from 2.05 eurocents (2 cents) per kilowatt-hour in 2010 to 6.24 eurocents in 2014. 

From a commercial perspective, Germany has protected some of its businesses from the burden of the shift by introducing tax and levy exemptions for power-intensive industries, such as the paper, aluminum, steel and cement sectors, which make up about 40 percent of overall energy consumption. For industries not on this list, however, energy taxes and levies are the highest in Europe, making Germany the country with the third costliest energy overall in Europe, behind only Denmark and Cyprus. A German government-commissioned study released in 2014 found that a typical medium-sized company in Germany pays 9.14 eurocents per kilowatt-hour while an equivalent in Texas pays just 4.82 eurocents, and during the last few years German companies have moved to the United States in search of more affordable input costs.

A picture emerges of a German energy sector that has undergone a costly transformation, with consumers and businesses bearing the brunt of the impact. Though the political response to this hardship has been muted, largely because the shift to green energy originated under such a wave of popular approval in the first place, the policy undoubtedly has affected Germany's finances.

Meanwhile, there is a strong feeling that all of this money could be better spent elsewhere. In the last 12 months, outsiders as diverse as the International Monetary Fund, France, Italy and the United States have called for Germany to shift its fiscal position and to increase domestic spending — primarily on infrastructure — to increase domestic consumption levels, which they believe will help restart the Continent's economy. Germany's net domestic investment level, at 17 percent, is well below the Organization for Economic Cooperation and Development average. Meanwhile, reports of crumbling road systems and delayed projects within the country have emerged.

In October 2014, France suggested that a fiscal injection of about 50 billion euros into the German economy would help improve the economic situation. However, the German government recently announced its first balanced budget since 1969. The idea of sacrificing this achievement is politically unappealing, particularly when many Germans perceive the eurozone's slowdown to have been caused by the peripheral members and their high debt levels. In the end, all the German government came up with was a desultory investment in domestic infrastructure of 10 billion euros over three years.

In short, Germany's shift to renewable energy has come with significant sacrifices. The resulting increase in energy costs has undermined Germany's competitiveness (an attribute that it takes seriously) by increasing the costs paid by the industries that are not eligible for exemptions. A great deal of the economic burden has fallen to consumers, whose wages might have been better spent on domestic consumption than on supporting renewable subsidies, since that would have stimulated more growth in the economy. A German fiscal stimulus, meanwhile, which voices around the world have been calling for, would entail the removal of taxes and burdens on the economy. This task would be considerably simpler and could have been achievable alongside a balanced budget if Germany had not spent 348 billion euros on an energy shift that created sizable inefficiencies for few productive gains. 

Some of these burdens on the German consumer are likely to grow lighter in the years ahead. Berlin has recognized the limitations of the feed-in tariff system, and starting in 2017 a great deal of support — specifically the feed-in tariff — will be removed. With most of the costs of renewable energy arriving in the installation phase, and with the tariffs having improved the technology of the sector as intended, this removal should not corrode the industry's prospects. In addition, the removal of the tariff should help return cash to Germans' pockets, stimulating some of the growth in consumption that Germany's peers have called for. Moreover, Germany will emerge ahead of the curve in hitting emissions targets that will soon affect the energy policies of other European states (assuming they respect these targets). However, with Germany as a cautionary example, the other states probably will suffer less in the process of self-transformation.

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