The risk of locking in coal and stifling gas: Germany's reaction to Fukushima
Posted April 3, 2012
This blog has not had a new entry in a long time but with so many interesting developments, more posts are to be expected in the very near future!
A bit more than two weeks ago, the world commemorated the anniversary of the Fukushima Disaster. Immediately after the accident, German chancellor Merkel announced the rapid phase-out of nuclear power, which has its own anniversary in two months; it is time to review the German energy economy.
As I described in a previous post, Germany has reversed course on this issue three times. Reversing course many times like this possibly harms Germany’s carbon emission targets more than anything. Over the past year, the Nuclear Program at NRDC has tracked the U.S. Nuclear Regulatory Commission’s (NRC) response and summarized findings in a recent report. We concluded that the reaction is rather underwhelming. A few safety upgrades have been planned but nothing has been implemented, yet. Not surprisingly, the study found that Germany’s response is the strongest one worldwide. Spain and Switzerland have also announced to gradually phase out nuclear power by not allowing new nuclear power stations. Italy has abandoned ambitions to resume nuclear power in its energy mix.
Merkel announced to replace the vanishing nuclear capacity by 2022 with renewable energy generation. Despite record installation of solar power capacity, the reaction still looks a bit hasty: at the same time, Germany also promises to lower its carbon emissions. As my estimates show in the graph, Germany’s energy-related carbon emissions have actually increased immediately after the shut-down of eight plants during the first round of the phase-out activities and will spike once more for the second round in 2022. The data originates from the German government’s estimates of renewable energy sources development and the official phase-out times of the country’s nuclear plants. Distributing the difference between electricity demand and carbon-free generation over the existing carbon-intensive plant infrastructure yielded this estimate. This calculation inspires calling the aforementioned difference the carbon-intensive generation gap.
Figure 1: Estimate of Carbon Emissions, bumps demonstrate “rounds” of nuclear shutdowns. Please note that these are rough estimates only.
The political process behind energy planning and which state bodies inform the government in Germany is complex. There is the Deutsche Energieagentur (DENA), the German Energy Agency, an energy consulting firm specializing in renewable energies. The government owns more than fifty per cent of it and is the only customer. Its role in energy questions is comparable to that of the National Academy of Sciences, which, among other things, counsels government institutions with expert opinion. The DENA has only a few staff consultants and outsources most of its work to universities and independent, sometimes state-funded, institutes that specialize in relevant sub-disciplines such as energy economics or power line engineering. DENA’s largest energy studies are Grid Study I and Grid Study II, which comprehensively address German energy needs up to 2030. From those papers, one may catch a whiff of large-scale central planning, but they are generally seen as recommendations intended to provide a sound foundation to any debate on German energy. The authors of these studies are qualified engineers specializing in environmental concerns, power supply, and mechanics as well as economists.
Policy debates on Germany’s energy trajectory, however, occur on the basis of elections and an increasing anti-nuclear sentiment of the population that seemed to accept the very first decision to phase out nuclear power by 2021. The Christian Democratic Union (CDU)/ Free Democracy Party (FDP) coalition, both rather business-friendly parties, waited until after the elections in North-Rhine-Westphalia (NRW) to publish their intent to extend licenses for nuclear power plants. This plan was part of the agenda for nationwide energy planning, known as the “Energiekonzept”. The reason for waiting to announce license extensions was that CDU-FDP incumbents did not want to tamper with current approval ratings and saw their status among left-leaning voters endangered in NRW, Germany’s wealthiest and most populous state whose election outcome is usually a harbinger for general elections (almost like Iowa in the US). Eventually, the CDU-FDP coalition lost the election in NRW and Berlin felt comfortable to extend licenses in 2010 through a decision by the Bundestag. This energy-concept was the second change, out of three, regarding nuclear power.
The 2010 nuclear power plant license extensions may have easily disgruntled investors of fossil fuel power. Relying on the initial 2002 phase-out decision, these investors channeled their funds towards coal and gas plant projects that would have been uneconomic with the older nuclear power plants still present. In particular, this timing of non-nuclear investments favored the more carbon-intensive coal plants over gas plants as University of Potsdam energy policy expert Michael Pahle shows in his paper “Dash for Coal”. He attributes this trend mainly to declining coal prices and the age structure of coal plants that calls for replacements. Then, a second turn on nuclear power triggered by the Fukushima disaster accelerated the nuclear phase-out back to a 2022 deadline. While investors probably cheered at the need for non-nuclear replacement generation, another legal package, the so-called Erneuerbare Energiengesetz, or “renewable energies law,” promised financial aid for renewable energy technologies that could knock out natural gas generation (not biogas, though) from the competition.
Germany’s back-and-forth in nuclear policy thus first encouraged investors to pursue coal plant investments because the energy market saw the need to replace nuclear generation and new coal looked competitive even under future carbon constraints because of low coal prices. After recanting the nuclear phase-out and extending nuclear licenses, these coal investors became worried. Now, Germany is experiencing a threat of closures of natural gas plants because European gas prices (they are not linked to the lower American prices but to the rising, worldwide price of oil) have risen. Had Germany waited with the nuclear phase-out until gas plants had become more economic, i.e. spared the 2002 and 2010 turnarounds, the “Dash for Coal” would have never taken place. With the current situation, gas generation should receive further subsidies to successfully outcompete coal.
Economists have identified two special types of goods: perfect substitutes and perfect complements. Perfect substitutes are defined as any pair of two products that can be exchanged for one another, such as a blue cup versus a red cup, whereas, perfect complements are any pair of items that cannot be substituted for one another, such as left and right shoes. A carbon-conscious individual would likely prefer renewable energy sources and gas to be those perfect complements (you need both), if one has to have some form of fossil fuel. That, sadly, is unlikely to be the case.
The politics of the nuclear phase-out has produced a situation in which renewable energy sources outcompete gas generation but not coal generation. Many politicians and also the Ethics Commission for a Safe Energy Supply (a group of experts commissioned by the Office of the Chancellor to draw qualitative conclusions for Germany from the Fukushima accident) like to mention gas generation as an intermediate step in a transition to a renewable energy economy. Unfortunately, the history of announcing a phase-out in 2002 during a period that favored coal now makes lower levels of carbon generation less attainable. The German energy market will witness a tough battle between coal generation and renewable energy sources. What would be more desirable in terms of carbon emissions is competition between gas and renewable energy generation without coal involved at all. Idiosyncratically, the subsidy structure that favors renewable energy sources effectuates the market to decide that renewable energy sources and gas generation become perfect substitutes within the energy mix where renewable energy sources clearly win. Coal on the other hand seems to be locked in for the next decade and poses as a perfect complement with either renewable energy sources or gas generation.
In sum, gas is crowded out by renewable energy sources whereas it should have been that gas would displace coal, leaving the largest chunk of the energy mix to said gas and renewable energy sources.
As a Fukushima response, the phase-out wasn’t altogether an unreasonable idea, especially given the plans to introduce renewable energy sources. But in light of Germany’s history of announcing a phase-out of nuclear power before, which produced the “Dash for Coal”, Germany may have locked in some of the dirtiest fossil fuels. There is hope, though, as daily reports on electricity usage show a decline in conventional load hours across the entire spectrum – and that includes coal.