Germany’s $263 Billion Renewables Shift Biggest Since War

Not since the allies leveled Germany in World War II has Europe’s biggest economy undertaken a reconstruction of its energy market on this scale.

Chancellor Angela Merkel is planning to build offshore wind farms that will cover an area six times the size of New York City and erect power lines that could stretch from London to Baghdad. The program will cost 200 billion euros ($263 billion), about 8 percent of the country’s gross domestic product in 2011, according to the DIW economic institute in Berlin.

Germany aims to replace 17 nuclear reactors that supplied about a fifth of its electricity with renewables such as solar and wind. Merkel to succeed must experiment with untested systems and policies and overcome technical hurdles threatening the project, said Stephan Reimelt, chief executive officer of General Electric Co. (GE)’s energy unit in the country.

Utilities running gas-generating plants in Germany lost 10.92 euros a megawatt-hour today at 12:16 p.m. local time, based on so-called clean-spark spreads for the next month that take account of gas, power and emissions prices. That compared with a profit of 20.95 euros in October 2009, according to data compiled by Bloomberg. U.K. generators earned 2.06 pounds ($3.27), down from a profit of 7.02 pounds in October.

“Germany is like a big energy laboratory,” Reimelt said in an interview. “The country has a political and societal consensus to drop nuclear power but lacks a clear technological solution.”

Already, the program is expanding markets for Suntech Power Holdings Co. (STP), the world’s biggest solar panel maker, and Vestas Wind Systems A/S (VWS)., the largest maker of wind turbines. It’s hurting utilities from RWE AG (RWE) to EON AG (EOAN), which have stepped up cost-cutting to curb losses from closing nuclear stations early.

Bloomberg Conference

Technology officers from Lockheed Martin Corp. (LMT), IBM Corp. (IBM) and BP Plc (BP/) will discuss innovations that are spurring renewable energy businesses on a panel at the Bloomberg New Energy Finance conference in New York today.

“The German energy transformation is as challenging as the first moon landing,” said Peter Terium, who in July takes over as chief executive officer of RWE, Germany’s second-largest utility. “It’s a huge challenge we’ll be able to master only if everyone works together.”

Germany is among the first nations to grapple with a global need to upgrade power stations. By 2035, at least $10 trillion of investment is needed to add 5,900 gigawatts of generation worldwide, more than five times the capacity of all U.S. utilities, the International Energy Agency estimates. Half of that will come from renewable. A gigawatt is about enough to supply 800,000 homes in the U.S. and a bit less than the capacity of a nuclear reactor.

‘Be a Disaster’

“If Germany succeeds, it could be a role model for economies all over the world,” said Claudia Kemfert, DIW’s senior energy expert. “If it fails, it will be a disaster for Germany’s politicians, society and economy.”

Germany’s efforts in the industry are sending shocks through European power markets. When it’s windy and sunny, turbines and solar cells flood the grid with electricity, undermining the economics of natural-gas fired generators, since clean energy has supply priority over fossil fuels.

Utilities running gas generating plants in Germany lost 10.92 euros a megawatt-hour today at 12:16 p.m. local time, based on so-called clean-spark spreads for the next month that take account of gas, power and emissions prices. That compared with a profit of 20.95 euros in October 2009, according to data compiled by Bloomberg. U.K. generators earned 2.06 pounds ($3.27), down from a profit of 7.02 pounds in October.

Statkraft SF, a Norwegian power generator, said last month it’s shutting a gas-fired plant in the German city of Emden near the Dutch border because prices are so low. A biomass plant at the same site will keep working, the Oslo-based utility said.

‘Negative Margin’

“The picture for last year, the year before and the next two to three years is so negative that we see a negative margin going forward,” Asbjoern Grundt, a Statkraft executive vice president for markets operations, said in reference to his utility’s gas plants.

Norbert Roettgen, the 46-year-old lawyer who is Merkel’s environment minister and protege, is managing the transition and aims for the nation to generate at least 35 percent of its power from renewables by 2020, up from 20 percent last year.

Roettgen seeks 25,000 megawatts of power generated by wind farms in the North Sea and Baltic Sea by 2030, about the same as 25 nuclear power stations. About 200 megawatts of offshore wind plants are working now.

Scale of Shift

That will require 5,000 turbines, each standing taller than Big Ben and taking up 247 acres of sea each, on average. Combined, their footprint would cover 1,931 square miles (5,000 square kilometers), compared with the 305 square miles comprising New York’s five boroughs.

In January, German Economy Minister Philipp Roesler estimated grid operators would have to add or upgrade 4,500 kilometers (2,800 miles) of high-voltage power lines to connect the turbines with the national electric grid. Operators also must modernize their systems to integrate fluctuating supplies from renewable with the steady output that comes from coal and nuclear stations.

“The energy transformation is the biggest modernization and infrastructure project in the coming decade,” Roettgen said in a televised speech on March 11. “Whether other countries follow our model will depend on whether we succeed.”

Others are making similar pledges, and Germany’s only ranks fifth in Europe in terms of ambition. Sweden, Austria, Spain, Slovenia, each of which have richer hydro-electric resources, are promising a bigger share than Germany for renewable by 2020. The U.S. has no federal mandate on renewable. Japan, also phasing out nuclear power, will announce policies to accomplish the goal in the next few months.

‘Open-Heart Surgery’

“The energy transformation is open-heart surgery,” Hannelore Kraft, state prime minister of North Rhine-Westphalia, said Dec. 20 in Essen. “We need a master plan and careful monitoring so this operation can succeed.”

After lobbying against clean-energy subsidies for years, utilities are gearing up to make money from the industry. EON, the country’s biggest operator of nuclear power stations, plans to invest 7 billion euros in renewable energy projects in the next five years. That includes 1 billion euros on the Amrumbank West wind farm in the German North Sea, a project that Siemens AG (SIE) will supply with 80 of its turbines.

“We don’t do this because we think it’s nice, but because we believe we can be successful,” Johannes Teyssen, EON’s chief executive officer, said Dec. 20 in Essen. The German energy experiment, Teyssen said, is “a task that will occupy an entire generation.”

Hurdles to Clear

Roettgen faces difficulty on a number of fronts in achieving his targets:

-- Delays in connecting offshore wind turbines to the grid are threatening the government’s aim to have 10 gigawatts installed by 2020, according to RWE and EON, which say slow permitting and the short supply of cables and transformer stations are to blame.

-- German solar manufactures including Solarworld AG (SWV), Q- Cells SE (QCE) and Conergy AG (CGYK) are struggling to finance their operations after competition from Chinese companies led by Suntech depressed margins and panel prices. Solon SE (SOO1) and Solar Millennium AG (S2M) are in bankruptcy proceedings.

-- Output from solar panels and wind turbines is highly unpredictable, which strains the stability of the power grid and has forced utilities to pay renewable generators to shut off supplies on some days. Last month, the Czech government complained it was close to a blackout because wind farms in northern Germany overloaded the grid.

Mixed Messages

Merkel herself is raising questions about how quickly companies should push into the new business, slashing subsidies for solar energy. A record 7.5 gigawatts of solar capacity was installed last year, more than double the government’s target for this year. Her government plans to cut rates for solar power by as much as 29 percent from April 1 and make further reductions each month beginning in May.

“We’re very concerned by the government’s recent steps on solar energy,” said Eicke Weber, the head of the Fraunhofer Institute for Solar Energy Systems, a Freiburg-based institute researching renewable energy technologies. “They look like an about-face.”

Germany’s advantage is it was the first major economy to provide incentives for clean energy, offering a feed-in tariff guaranteeing above-market prices for solar power starting in 2004. That made it the world’s biggest market for solar panels when it comes to total capacity and an innovator in other technologies from wind to building materials.

Germany’s Edge

Already, Germany has built the world’s biggest renewable generation complex, with 53.8 gigawatts of wind and solar generators at the end of last year. Italy last year added a record 9 gigawatts of solar panels, overtaking Germany for the first time. The U.K. plans 18 gigawatts of offshore wind capacity by 2020, up from 1,500 megawatts now.

Some of Germany’s biggest companies are entering the renewables business and backing the innovations needed to make expand the scale of the industry.

Robert Bosch GmbH (RBOS), the world’s biggest car parts supplier based in Stuttgart, has invested about 1.5 billion euros into its solar energy business by purchasing companies and building new plants. Hochtief AG (HOT), Germany’s biggest builder, has commissioned four heavy-duty ships to erect wind farms at sea including the 200 million euro “Innovation.”

Volkswagen AG (VOW)’s Audi luxury car division plans to build a plant that uses water and carbon dioxide to convert electricity into natural gas, backed by 5 million euros of investment from EON in a pilot plant based on a similar technology.

“This energy transformation is about innovation,” Roesler, the German economy minister, said in Stuttgart in January. “If we do it right, there will be many chances for economic growth.”

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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