Merkel’s Taste for Coal to Upset $130 Billion Green Drive

When Germany kicked off its journey toward a system harnessing energy from wind and sun back in 2000, the goal was to protect the environment and build out climate-friendly power generation.

More than a decade later, Europe’s biggest economy is on course to miss its 2020 climate targets and greenhouse-gas emissions from power plants are virtually unchanged. Germany used coal, the dirtiest fuel, to generate 45 percent of its power last year, its highest level since 2007, as Chancellor Angela Merkel is phasing out nuclear in the wake of the Fukushima atomic accident in Japan three years ago.

The transition, dubbed the Energiewende, has so far added more than 100 billion euros ($134 billion) to the power bills of households, shop owners and small factories as renewable energy met a record 25 percent of demand last year. RWE AG, the nation’s biggest power producer, last year reported its first loss since 1949 as utility margins are getting squeezed because laws give green power priority to the grids.

“Despite the massive expansion of renewable energies, achieving key targets for the energy transition and climate protection by 2020 is no longer realistic,” said Thomas Vahlenkamp, a director at McKinsey & Co. in Dusseldorf, Germany, and an adviser to the industry for 21 years. “The government needs to improve the Energiewende so that the current disappointment doesn’t lead to permanent failure.”

Slumping Prices

While new supplies sent wholesale power prices to their lowest level in nine years, consumer rates are soaring to fund the new plants. Germany’s 40 million households now pay more for electricity than any other country in Europe except Denmark, according to Eurostat in Brussels. A decade ago, Belgium, the Netherlands and Italy all had higher bills than Germany.

“Politicians are often trying to kid us,” Claudia Fabinger, a 65-year-old self-employed marketing manager, said in between shopping for groceries on Leipziger Strasse in Frankfurt. “Our power bills keep rising and rising to fund clean energies; on the other hand, we are still polluting the air with old coal plants.”

The annual increase in residential rates has accelerated since 2011, when the nation boosted solar and wind subsidies in response to closing down eight of its oldest nuclear reactors. The annual increase is now 7 percent, compared with 4.3 percent between 2005 and 2010, according to Eurostat.

Consumers paid 106 billion euros between 2000 and 2013 to renewable energy producers, according to the nation’s four grids. To stem gains, the government cut green subsidies last month by 29 percent on average to 120 euros a megawatt-hour, according to the Economics and Energy Ministry’s website.

2008 Peak

German power for next year, a European benchmark, traded at 34.90 euros a megawatt-hour today in the wholesale market, or 59 percent below its 2008 peak, broker data compiled by Bloomberg show.

The average day-ahead German power price will probably drop to the lowest in 12 years this year amid the boost of renewable energy and a glut of capacity at conventional plants, Johannes Mayer, researcher at Fraunhofer-Institut fuer Solare Energiesysteme ISE, said today by phone from Freiburg, Germany.

The contract has averaged 31.40 euros this year and is at its lowest level since 2002, adjusted for inflation, Mayer said.

The price slump -- coupled with the surge in renewable energy into the market where the biggest power generators also sell the output from their coal, nuclear and gas plants -- cut the average operating margin at the eight biggest producers in Germany to 5.4 percent on average last year from 15 percent in 2004, company data compiled by Bloomberg show.

‘Black Gold’

Even as margins slid, the burning of coal rose 68 percent from 2010 to provide a steady supply of electricity. Fossil-based power plants, including those fired by hard coal and lignite, are “indispensable for the foreseeable future,” reads the agreement between Merkel’s conservatives and the Social Democratic Party that helped form her current government. “The ‘black gold’ is still an important factor in the energy generation mix,” the government says on its website.

While utilities make around 5 euros a megawatt-hour by burning coal, they lose more than 17 euros generating power from gas, according to Bloomberg calculations based on current prices for the electricity, fuels and emissions costs. On the other hand, gas only emits about half as much carbon dioxide, the greenhouse gas scientists say cause global warming.

The average usage of German gas-fired power plants declined 31 percent since 2010, according to German regional utility lobby VKU. The average gas plant ran 2,306 hours in 2013, compared with 3,333 hours on average in 2010, the data show.

‘Dirtier and Dirtier’

“The share of renewable energy is rising and is at nearly 30 percent now, but the remaining 70 percent is getting dirtier and dirtier,” Carsten Thomsen-Bendixen, a spokesman at EON SE, Germany’s biggest utility, said Aug. 20 by phone from Dusseldorf. “That’s an obvious flaw in the system that needs to be put to an end.”

With nuclear plants typically running at full throttle all the time, gas is the only other large-scale alternative to coal. At current prices, gas-fired plants will lose money until at least 2018, Bloomberg calculations show.

“Yes, we are burning more coal; on the other hand it is also true that Germany still plays a leading role when it comes to emission reductions in Europe,” Beate Braams, a spokeswoman for the German Economics and Energy Ministry, said by phone on Sept. 4.

Germany reduced its greenhouse gas emissions by 25 percent from 1990 through 2012, according to the European Commission. The U.K. and Denmark also reduced pollution by the same percentage, more than any other major European economy.

Nuclear Phaseout

The nation’s current green ambitions date back to June 2000. The decision to boost renewable energy amid plans to phase out nuclear by about 2020 was forged by the coalition between Chancellor Gerhard Schroeder’s Social Democrats and the Greens.

Among the lawmakers who worked on that first version of the renewable energy act was Juergen Trittin of the Greens, then Germany’s environment minister. Still a member of parliament, he now says that while the government has the means to meet its greenhouse-gas reduction target of 40 percent by 2020 from 1990’s levels, it lacks the will.

As well as taking the lead in reviving Europe’s market for emission permits, Germany could introduce a national minimum price for the securities as an emergency measure, he said by phone from Berlin on Aug. 27. That would increase costs for coal generators and make gas more attractive. The government could also boost energy efficiency in buildings or cars, he said.

“But nothing is happening right now because there are some decisions Germany doesn’t want to make,” he said. “It would take some courage to take on sectors such as the car or construction industry and I currently don’t see this courage in the government.”

Missing Target

The country’s carbon-dioxide emissions from power plants fell one percent on average every year between 2005 and 2010, only to rise by the same number from 2011 through last year, data from the environment agency UBA in Berlin show.

The 40 percent target may be missed by as much as 7 percentage points if no further steps are taken, the government said last year. The Environment Ministry said in April it would seek additional means of cutting emissions.

“It’s true that not enough has been done so far and we said that in April after taking stock of Germany’s progress,” Nikolai Fichtner, a spokesman for the Environment Ministry said by phone from Berlin Sept. 8. “All ministries have to do their share and make suggestions as the emissions reduction target is part of the government’s coalition agreement.”

No Suggestion

The Economics and Energy ministry, which oversees the Energiewende and the German power market design, hasn’t made any official suggestions yet, according to Braams.

“We can’t exit coal and nuclear plants at the same time,” she said. “We need to consider the security of power supply.”

The share of power from hard coal and lignite plants in Germany rose to 45 percent last year, the highest level since 2007, according to data from AG Energiebilanzen e.V., a group of energy lobbies and economic research institutes.

Germany can lead the way and help revive the emissions market, according to Vattenfall AB, the Sweden-owned utility and Germany’s second-biggest emitter after RWE.

Over time, the market will direct investments toward low-emission technologies, Stefan Dohler, head of asset optimization and trading at Vattenfall in Hamburg, said Aug. 22 by phone. Until then, coal plants will still provide power in Germany at times when the wind doesn’t blow and the sun doesn’t shine, he said.

“Lignite is the only cheap, domestic source available in great quantities in Germany that delivers power around the clock,” Dohler said. “Every day, every night, every week and every weekend.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE