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All change in Germany, the EU, and the US?

By Dave Elliott

Things are changing in Germany. With renewables booming, German energy giant RWE has suffered a massive loss of €2.8 billion, its first loss in 60 years. It has admitted it got its strategy wrong, and should have focused more on renewable and distributed energy rather than conventional fossil fuels: ‘We were late entering into the renewables market – possibly too late.’  A previous RWE CEO had gone on record with the immortal line: ‘Photovoltaics in Germany make about as much sense as growing pineapples in Alaska’.  www.reuters.com/article/2012/01/18/germany-energy-idUSL6E8CI12Y20120118

Now Germany has 36.5GW of PV, supplying around 5% of its electricity and at peak times much more!  And about 8% from its 33GW of wind. 

RWE were not alone in getting it wrong. As RENewEconomy noted ‘The big three German utilities have accounted for just 7 % of the renewable energy installations that now account for more than one quarter of the country’s generation, and which have transformed the market. Most renewable capacity has been installed by home and industrial consumers, and smaller and smarter energy companies’. http://reneweconomy.com.au/2014/germany-decline-of-fossil-fuel-generation-is-irreversible-75224

Clearly there are big changes ahead, given the new active consumer (‘prosumer’) led market. The German newspaper Handelsblatt reported that current RWE CEO Peter Terium wanted no further investments in fossil-fuelled powered plants: ‘In 2020, conventional forms of power generation should contribute no more than one fifth of  the operating result’. Instead RWE says it will now refocus on distributed renewables and integration services: ‘Developing an innovative and profitable prosumer business model is a challenge we also need to address successfully, as we see a billion-euro market emerging alongside our traditional value chain.’ http://reneweconomy.com.au/2013/rwe-sheds-old-business-model-embraces-new-energy-reality-52967

All of this worries large energy utilities and grid companies elsewhere, for example in the  US, where renewables are expanding rapidly too, although it’s mainly been wind (60GW so far) with PV solar expanding more slowly than in Germany, where it has been driven by the Feed In Tariff (FiT) system.  However PV has now reached around 12GW in the US, with 4.7GW having been installed in 2013. And The Economist says that, given price falls, solar should continue to expand in the US even after 2017, when the federal solar-investment tax credit drops from 30% to 10% (unless Obama can convince Congress otherwise).  www.economist.com/news/united-states/21598666-future-bright-solar-power-even-subsidies-are-withdrawn-let-sun-shine

The PV price reductions, coupled with reduced cost battery technology, has led Amory Lovins and the Rocky Mountain Institute to suggest that there will be less need for grids in future: www.renewableenergyworld.com/rea/news/article/2014/03/will-the-electricity-grid-become-optional?cmpid=WNL-Thursday-March6-2014   That view was also echoed by US Energy Secretary Ernest Moniz, who told Bloomberg that new battery technologies could be transformative   ‘It’s pretty dramatic. They are growing very, very fast.’ www.renewableenergyworld.com/rea/news/article/2014/03/battery-storage-may-vie-with-us-oil-boom-as-energy-game-changer-says-moniz?cmpid=WNL-Thursday-March6-2014

The German experience suggests that the US big power compares will be in for a rough ride. Lovins says hurray! http://blog.rmi.org/blog_2014_02_06_celebrate_renewables_disruption_of_electric_utilities

Some others, however, see the whole thing as undesirable, with some bitter criticism of this overall trend having emerged, usually from those unhappy with Feed In Tariffs and the like. In effect they want it all slowed or stopped. See for example this critique from a US conservative perspective: http://theenergycollective.com/willem-post/338781/high-renewable-energy-costs-damage-germanys-economy

And this very critical Swiss study, looking at ‘lessons for the US’: http://www.finadvice.ch/files/germany_lessonslearned_final_071014.pdf  It sees the FiT system as undesirable, although oddly says very little about alternatives.

There have also been those in Germany opposed to the Energiewende policy. For example, the German Commission for Research and Innovation (EFI) said the Germany’s Renewable Energy Law (EEG) and the Feed In Tariff (FiT) system was fundamentally flawed: it was not a cost-efficient instrument for climate protection and is not producing a measurable effect on innovation, based on patent filings. ‘For both these reasons, there is no justification for a continuation of the EEG.’ . www.e-fi.de/fileadmin/Gutachten/EFI_Report_2013.pdf  and www.germanenergyblog.de/?p=15384#more-15384

Some Germany companies backed this view, complaining that the EEG had led to rising energy costs, which were making them uncompetitive. However the counter view is that, although there were short term costs, longer term the EEG should reduce costs – by reducing the use of expensive fossil fuel. In terms of new technology, patent numbers are of limited use as a measure of innovation, and the EEG/FiTs stimulated significant market innovation – e.g. the rise of PV ‘prosumers’ and energy co-ops. Maybe it’s that the utilities were unhappy with – they were loosing control of the market.  Oddly all the EFI report seems to offer as a solution is a switch to trading of green certificates. That’s something like the UK’s Renewable Obligation Certificate system which most see as ineffective, and is being replaced, although with arguably something even worse – a contract auction system.

In the event, as I reported in my previous post, the German government has responded to the critics to some extent by reducing some interim targets, cutting back on FiT support, and moving towards a more market based approach. Is this wise? Are FiTs really that bad?

The EFI says that, under the FiTs, ‘the excessive growth of the market has indirectly lead to market entry barriers for less mature technologies, while at the same time facilitating lock-in effects in favour of established renewable energy technologies.’  There may be some truth in that, although it is not clear what EFI has in mind in terms of alternative  technological options. And would green certificate trading be any better in stimulating innovation? It would focus even more on the most competitive options. The EFI does admit that the EEG /FiT system has ‘created opportunities for incremental innovations, as operators demand technologies with the best possible ratio of production costs and feed-in tariff rate per unit of electricity produced’.  But it says ‘the incentives provided by the EEG for developing radical technological innovations are limited, because the remuneration guaranteed by the EEG is calculated based on the average cost of the respective technology.’  The UK’s revised CfD system has tried to deal with this by introducing competitive auctions for each technology/project area, but that too seems likely to push the mature options on, while ignoring the less developed options.

The European Commission has now proposed a similar approach: from 2017 the emphasis EU wide should be on competitive auctions/tendering, not FiTs, with trials in 2015-16. http://uk.reuters.com/article/2014/04/09/eu-funding-energy-idUKL6N0N12FP20140409

So will FiTs die off? FiTs have certainly helped wind and PV lift off in Germany, but, in the case of PV, at high cost to consumers. It may be that an alternative support mechanism would be better for the early phase of innovation.  FiTs may not be ideal for very new technologies, with high initial costs. So if support for a specific new option is thought to be worthwhile, it may need special separate interim grant support, until it is ready for a FiT to take it to the market, following on from initial RD&D support, with the FiT then creating new markets for new entrants to prosper.

That would require state intervention and investment, things which governments at present evidently want to avoid. So we are left with the current proposed market/auction approach.  It will be interesting to see how the next phase in Germany and elsewhere plays out – will competition create new cheaper technologies and expanding markets? It’s not clear. It may just slow development.

At present Germany is of course centre stage. See these helpful statistical overviews: www.destatis.de/EN/FactsFigures/EconomicSectors/Energy/Production/Tables/GrossElectricityProduction.html and http://www.ise.fraunhofer.de/en/downloads-englisch/pdf-files-englisch/data-nivc-/electricity-production-from-solar-and-wind-in-germany-2014.pdf

But the prospects in Denmark also look good. Indeed it has even more ambitious renewables targets than Germany (it aims for 100% of all energy by 2050), as is explored in the new expanded edition of Henrik Lund’s book ‘Renewable Energy Systems’ (Elsevier).

However, the issues, and likely technological and market developments, transcend the national focus. In the next few posts I will be looking at some examples of emerging new technologies and markets. As my next post will explore, in addition to national level programmes and grass roots/prosumer initiatives, the future is also likely to involve increasing cross-national interaction via supergrid links.

 

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