The challenge of the German energy transition – turning from headlines to action

Federal Minister for Economic Affairs Sigmar Gabriel: "We have laid a solid basis for the evolution of the electricity market."

Sigmar Gabriel, Federal Minister for Economic Affairs speaking at the BDEW-Kongress 2015© Gerhard Kassner

More electricity from renewables, lower carbon emissions, better energy efficiency, and a phase-out of nuclear power by 2022: if Germany is to meet these long-term goals, it needs to follow a systematic approach to the energy transition. This applies to the design of a future electricity market, to the changes in the power-plant sector, and also to the question of how best to upgrade and extend the grids. "We have made progress across a number of key fields of action", said Federal Minister for Economic Affairs, Sigmar Gabriel, speaking at the convention of the German Association of Energy and Water Industries (BDEW) last Wednesday. But he also said that this year’s most important political challenge in the field of energy policy was yet to come, when a decision will be taken about the design of the future electricity markets. On this issue, the Federal Ministry for Economic Affairs and Energy has now tabled a White Paper for the electricity market, which sets out specific solutions for this task.

In summer last year, the Federal Ministry for Economic Affairs and Energy had tabled a 10-Point Energy Agenda, which set out a roadmap for the key political decisions to be taken on energy policy, and, for the first time, brought the different strands of the energy transition together. This roadmap also extends to some of the decisions that are to be taken in the coming days and weeks, before the recess: Mr Gabriel pointed out that progress on the design of the future electricity markets was the most important point – along with resolving related issues, such as selecting the right tools to promote cogeneration, making headway on grid extension, and agreeing on ways in which the electricity sector will contribute to the effort of reaching Germany’s climate targets. "We are carting away the rubble that had been left lying around for four or five years", he said, addressing the BDEW convention. Besides, he added that it is time to move forwards – from 'reform on paper' to 'reform in practice'. The minister went on to say that it was now time to demonstrate, step-by-step, ways of guaranteeing long-term energy security and of making the energy transition more predictable.

What will our future electricity market look like?

Last year, the share of electricity from renewables rose to 28.7 per cent of Germany’s final electricity consumption. Within the next decade, this figure is set to rise to 40-45 per cent. The challenge here is that wind power and solar energy are intermittent, and that private households and industry rely on a continuous and stable supply of electricity. Mr Gabriel said that by turning the existing market into an "electricity market 2.0", it would be possible to continue to guarantee a high level of energy security at an affordable cost, thus speaking out against the creation of a "capacity market": to introduce a capacity market, he said, would be to create a new electricity market in addition to the existing one. A market whose sole purpose would be to provide payments to electricity providers merely for making generating capacity available. The additional cost would be passed on by utilities to their customers. "Creating a capacity market, above all, would lead to a risk of costs spiralling out of control, of government-imposed false incentives, and of disruptions on the electricity market. We do not want to interfere in price formation on the electricity markets on a permanent basis. Investors need to be able to continue to rely on this", the minister said. Instead, he spoke out in favour of a market-based design: "I want to go back to a situation whereby the markets finally send signals of scarcity again – and where these are not undermined by government. Also, there is a great deal of over-capacity in the electricity market." The minister referred to two recent reports which factor in cross-border electricity sales between European neighbours and came to the conclusion that neither Germany nor its neighbouring countries are at risk of an electricity shortage. This shows that the electricity trade within the European Single Market is making a crucial contribution to Germany’s energy security.

Renewables vs fossil? The truth is, we will need both

The fact that wind and solar power are accounting for a growing share of Germany’s electricity consumption does not mean that the country no longer needs other sources of energy. The opposite is true: Germany will continue to have to rely on highly-efficient and flexible fossil-fuel-fired power stations to ensure that there is a secure supply of electricity. Mr Gabriel pointed out that the energy transition cannot be a matter of "either renewables or fossil-fired power plants". "We will need both for a very, very long time."

Last December, the Federal Government had reiterated its commitment to its ambitious climate targets: greenhouse gas emissions are to be cut by 40 per cent by 2020 (compared to 1990). In order for this to be possible, the electricity market will have to make an additional contribution. There are currently two political proposals on the table on how this could be achieved: the first proposal is for a "climate contribution", under which any additional emission certificates would have to be purchased for blocks of power stations that are more than 20 years old and whose emissions exceed predefined limits. Under the alternative proposal, high-emission power plants would be used as a reserve only, additional efforts made to promote cogeneration, and a new host of measures for better energy efficiency introduced. "Essentially", the minister explained, "this second proposal is to say, rather than introducing a climate contribution, we will gradually phase out coal-fired power". This is the basis, he said, upon which a decision is now to be taken.

The electricity market’s contribution to the efforts to curb climate change: two alternatives

"In our view, the advantage of a climate contribution would be the fact that it presents us with an efficient, low-cost solution. The disadvantage of the proposal is that companies have come forward with credible arguments that suggest that the whole thing could result in unemployment and structural disruptions that we do not want", Mr Gabriel said. He went on to explain that the alternative proposals would result in higher costs, both in terms of budgetary spending and in terms of a rise of the cogeneration surcharge (which is used to promote cogeneration, i.e. combined heat and power (CHP)). This additional cost, the minister said, must not be passed on to consumers and SMEs. Much of the future funding for cogeneration should be targeted towards existing facilities. "For a limited period of time, up to the end of 2019, these facilities should receive financial support in order to prevent them from being decommissioned. What we are doing is to invest in facilities we already have. In addition to this, we want to have a moderate increase in the funding that is available for new facilities, so as to safeguard the future of cogeneration", said Mr Gabriel, who, at this point, referred to the ambitious climate targets for the coming years, which were adopted in 2010 by the then-incumbent government. For these targets to be reached, emissions from electricity generation must be cut by another 22 million tonnes of CO2 by 2020, before curbing them by another 200 million tonnes – nearly ten times as much – by 2030, and by 400 million tonnes by 2040. The lion’s share of this burden is to be shouldered by the electricity sector.

"In the long run, the energy transition will only become a reality if we take everybody on board", said the minister. He said that the population must not gain the impression that their concerns about jobs and employment are being overlooked in the interest of reaching grandstanding targets – otherwise people would no longer back the energy transition.

Re-organisation of the electricity grids – more scope for underground cabling

As the energy transition is being put into practice, an increasing share of our electricity supply has come from distributed installations. Twenty years ago, Germany's entire electricity supply came from a few hundred medium-sized and large power stations. Now, there are almost two million installations, mainly PV modules and wind turbines, that feed in intermittent power into the grids, and particularly the distribution grids to which consumers are directly connected. This is why the Federal Ministry for Economic Affairs and Energy presented a paper in March, setting out the key principles of a new framework that would make it easier for the distribution system operators to make the necessary investments. Mr Gabriel said that a great deal of work was being done to convince the public of the necessity of building new transmission lines that will carry electricity across long distances. He argued that creating greater scope for using underground cabling in some sections could help lower the cost and speed up the process. In contrast, he said, relying solely on overhead power lines for the new high voltage direct current (HVDC) lines, the new electricity highways, would lead to higher costs being incurred – "these are litigation costs and costs resulting from delays in grid construction."