Bloomberg News

End of Atomic Age Seen as Merkel’s Biggest Headache Now: Energy

September 24, 2013

Coal-fueled Power Plant

A cooling tower operates at the RWE AG coal-fueled power plant in Weisweiler, Germany. Photographer: Hannelore Foerster/Bloomberg

German Chancellor Angela Merkel faces one task above all others when she returns to her desk on the seventh floor of the Chancellery: fixing the biggest shift to clean energy of any developed country in history.

Merkel needs to keep a lid on soaring electricity bills that have provoked consumer and industry anger and clamp down on rising pollution as her government phases out nuclear reactors that have been the backbone of German energy policy. Failure risks hurting Europe’s biggest economy and would spell trouble for Merkel’s new government, whatever its composition.

The overhaul “is not only key to Germany’s economic competitiveness, it also affects the wallets of ordinary Germans,” Carsten Nickel, an analyst with Teneo Intelligence, said in a telephone interview. “Merkel will have to balance the plan’s renewable targets with making sure that energy prices don’t go through the roof.”

The chancellor said during the election campaign that her priority is changing the EEG law, a 13-year-old subsidy system that was copied around the world and helped turn Germany into Europe’s biggest clean-energy market. Reworking the rules may benefit consumers and reduce incentives for wind and solar farms, scaling back work for manufacturers such as Vestas Wind Systems A/S (VWS) and Trina Solar Ltd. (TSL:US) It could either help or hurt utilities such as RWE AG and EON SE.

Legal Incentives

Aimed at increasing the share of renewables to 80 percent of the power mix by 2050 from about 23 percent now, the EEG helped saddle Germans with the third-highest electricity prices in the European Union.

A spokesman for the German government declined to comment when contacted by phone yesterday.

Renewables no longer occupy a niche “but are part of the overall generation mix,” Merkel told lawmakers in the Bundestag on Sept. 3. “That leads to entirely new problems.”

Reforming the EEG to contain cost increases “is one of the first tasks” for a new government, she said. “It’s necessary to move the affordability of electricity into the focus of our efforts.”

In what would be a watershed move for developers of wind and solar plants, Merkel may abolish the EEG system of awarding uncapped above-market payments to developers for 20 years, according to William Pearson, the London-based director for global energy and natural resources at the Eurasia Group.

While there won’t be any retroactive changes to the support regime, “there’s a lot of talk” to move away from subsidized rates, called feed-in tariffs, for new projects “to a more market-based system” to reduce costs, Pearson said in a Sept. 17 phone interview.

Business Demands

The BDI industry federation that represents about 100,000 companies including Siemens AG (SIE) and Volkswagen AG (VOW) on Sept. 19 called for an end to feed-in tariffs and said developers must sell power on the market to encourage output that responds to demand, rather than when the wind is blowing or the sun shines. That echoes similar demands from industry groups such as the VCI chemical lobby, utility groups VKU and BDEW as well as the Free Democratic Party, Merkel’s second-term junior coalition partner.

Merkel’s environment minister, Peter Altmaier, a member of her Christian Democratic Union and a long-time confidant, has repeatedly clashed over the 550 billion-euro ($743 billion) project with Economy Minister Philipp Roesler, the FDP leader whose ministry shared responsibility for the program known in German as the Energiewende.

Merkel’s Command

Those frictions will be a thing of the past after Merkel’s Christian Democratic bloc got the biggest vote tally since Helmut Kohl’s post-reunification victory of 1990, taking 41.5 percent in the Sept. 22 elections, and the FDP crashed out of the lower house of parliament.

That leaves a coalition with the Social Democrats or the Greens as possible options, Volker Kauder, the CDU’s parliamentary caucus leader, said yesterday on ZDF television. Merkel has made contact with the Social Democrat leadership and also refused to rule out speaking to the Greens, she told reporters yesterday in Berlin. Negotiations could take some time. In 2005, it took 65 days to swear in the so-called grand coalition of CDU/CSU and Social Democrats, a record in post-reunification Germany.

“Energy policy will be key for Merkel’s coalition negotiations,” Claudia Kemfert, who heads the energy unit at the DIW economic institute, a research group in Berlin, said today by e-mail. Talks may be easier with the Social Democrats than the Greens because the latter favor a speedier expansion of renewables, she said.

Governing with the Social Democrats may help Energiewende reform, since friction that has delayed energy-related bills in the SPD-controlled upper house of parliament, the Bundesrat, would be dissipated. In any case, the Social Democrats are the co-architects of Germany’s first nuclear exit under Chancellor Gerhard Schroeder.

Offshore Gridlock

Getting Germany’s state leaders, who sit in the Bundesrat, to sign off on legislation may be easier in a grand coalition, Nickel said. “Convincing the states is key for this reform as there are so many different interests across the country,” he said.

For Merkel, there’s more to do than just getting costs under control. Germany last year alone added 10 gigawatts of wind turbines and solar panels -- the capacity of about 10 nuclear plants -- yet output varies with the weather and nightfall. That puts strains on an already outmoded electrical grid.

Wind Farms

Development of offshore wind farms that would replace reactors is behind schedule because of delays in connecting turbines to the land-based grid. The switch has also hurt the climate as more coal instead of cleaner natural gas is burned to replace the eight oldest reactors Merkel shuttered following the tsunami and nuclear disaster at Fukushima in Japan.

Gas-fired plants that in the past ran mostly in the middle of the day when demand peaked are losing money as wind and solar power floods the grid. EON and RWE (RWE), Germany’s biggest utilities that controlled 4.9 percent of renewable capacity by 2012, are shuttering gas plants and rely more on cheaper coal plants. Germany’s air pollution is now set to worsen for a second year, the first back-to-back increase since at least the 1980s.

Consumers fund clean-energy subsidies through a surcharge on their power bills. This year’s renewables fee is 5.28 euro cents a kilowatt-hour, up 47 percent from last year. The average cost of electricity for homes last year was 26.4 euro cents a kilowatt-hour, including the subsidy, according to data from Eurostat in Luxembourg.

‘Heavy Backpack’

No matter how Merkel’s overhaul looks, German consumers will pay more than 20 billion euros a year through 2030 to fund the shift to renewable power, according to Bloomberg New Energy Finance. That’s because subsidies are fixed for 20 years.

“Germany will be carrying a huge cost backpack for quite a while,” Hubertus Bardt, head of energy and environmental policy at the Cologne Institute for Economic Research, said by phone. “The government may eventually have to step in and use federal funds to relieve the burden on consumers and industry.”

To contact the reporter on this story: Stefan Nicola in Berlin at snicola2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net


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