Germany’s High Solar Subsidies Under Fire

Gärtner_Edgar

EDGAR L. GÄRTNER (Frankfurt)

Although the document released on Saturday, October 24th doesn’t mention it, the new German government coalition between Angela Merkel’s Christian Democrats and Guido Westerwelle’s Liberals will be obliged to sooner or later reign in Germany’s high subsidies for photovoltaic power.  One of the main causes of high German power prices is the expanding role of “renewables” in power generation Solar Panelssince the beginning of the 21st century. While wind power’s percentage now exceeds 6 percent, and biomass is approaching 4 percent, photovoltaic power has yet to reach one percent of total power production. This tiny portion of Germany’s energy supply is by far the most costly. Since feed-in prices for “renewable” power are guaranteed for 20 years,solar panels installed from the year 2000 to the present will cost German power consumers no less than 35 billion Euros.  Our export oriented economy can no longer support this luxury, particularly during a time of global recession.

Until the end of the 20th century, Germany enjoyed relatively low power prices due to the predominant use of coal-fired and nuclear generators.  Costs were particularly low in large traditional plants that burned lignite (brown coal).   Coal plants (well equipped with dust filters and desulfurization) and (largely forgotten) nuclear plants were employed by semi-public regional monopolies and produced very reliable electricity for about 2 cents/kWh.  Hard coal plants (using a mix of cheap imported and highly subsidized domestic coal) delivered nearly the same amount of power as lignite plants, but for more than twice the cost (5 ct/kWh) – comparable then to the costs of hydropower and natural gas.  For many years the contribution of hydropower to the German power mix has stagnated below 5 percent as nearly all available sites for dams are already occupied.  Natural gas generation also remained modest until the end of the 20th century.

When the German power market moved to competition in comliance with the EU’s power market policy, the mean power price for industrial consumers dropped to about 6 ct/kWh and the mean price for end consumers to 14 ct/kWh.  However, after 2000 consumer prices began a steady rise.  By 2008, industrial clients were already paying nearly 13 ct/kWh and private clients nearly 22 ct/kWh.  The main culprit behind the rise is the German law favoring investments in “renewable” energies (EEG) passed in March 2000. The EEG guarantees high subsidies for any quantity of power generated by wind turbines, biomass converters or photovoltaic panels for a period of 20 years.

Wind Turbine zThe guarantee was the key motivation for the recent investment-boom in the German “renewables” sector, especially in wind power.  Today 22.000 wind turbines are generating 6,3 % of Germany’s total power supplies (639 TWh) for a guaranteed price of 9 ct/kWh.  The unreliable nature of wind turbines requires backup by gas turbines which can easily be turned on and off.  The proliferation of windmills is driving the power sector’s dependence on natural gas.  While Germany’s wind power production between 1990 and 2007 rose from zero to 40 TWh, Germany’s gas consumption for power generation more than doubled in the same period (from 36 to 75 TWh) and today represents approximately13% of the country’s total power generation (for 7 ct/kWh). The country imports 83% of its natural gas supplies. Last year, 42% of the total gas consumption came from Russia. Wind power is clearly not reducing Europe’s dependence on imported fuel, contrary to the frequent claims of its proponents. In fact Germany’s experience shows that it is increasing dependence on imported natural gas (see my analysis published in  the Wall Street Journal last year.  Although this is not true for gas and electricity generated by biomass converters, these are nevertheless strongly contributing to the rise of power prices in Germany for they deliver some 3,6 % of the total power supplies for 14 ct/kWh.

Only nine years after the EEG, the structure of Germany’s energy supply has already changed considerably. The mean power generation costs rose from 3,5 ct/kWh in 2003 to 5,61 ct/kWh in 2008. One reason of this evolution was the nuclear phase out which was also decided in 2000. The new government coalition in Berlin has promised to revise this decision. Another reason is the start of the European carbon emissions trading scheme (ETS) which has caused power from lignite plants to begin to lose its advantage.  The main cost driver in years to come will probably be the growing generation of solar power which is directly subsidized by all power consumers via guaranteed feed in prices. From 2004 on private producers of photovoltaic power received 57,4 ct/kWh. Since the beginning of this year the price guarantee was lowered to 43 ct/kWh in order to take into account some cost decrease. This is still nearly eight times higher than the mean generation costs and double the price that end consumers must pay.

Until now, the role of solar power in total German power supplies (some 0,8 % in 2008) has remained rather modest. But if you consider high price guarantees, over the next 20 years German power consumers will have to pay 45 billion Euros for a tiny quantity of power!  This means € 563 for every German citizen. Since the photovoltaic capacity in Germany is rapidly growing (an additional 2,5 Gigawatts are expected to come online this year as the price of photovoltaic modules has dropped faster than expected due to the financial crisis.  The cumulative costs of solar power will already exceed € 70 bn in 2010, then largely cross  the € 100 bn threshold in 2015, with estimated of € 133 to 169 bn and finally attain between € 180 and 300 bn in 2020 – or some € 3,000.- additional energy costs for every German citizen, babies included.  In spite of this gigantic cost, the contribution of solar energy to the German power supply mix will still not exceed 8 to 19,8 percent.

German LightsDieter Damian, a Bonn based economist has produced a realistic model.  Damian reports that it is a popular trick of government propaganda to comsider only the annual costs of “renewable” energies with some 30,000 jobs allegedly created in this sector of the economy (out of a total of some 280,000 “green” jobs claimed by German government in March 2009) and to hide the total amount of money which must be spent by all power consumers over 20 years. Damian’s unpublished calculations are confirmed by Manuel Frondel and colleagues from the  Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI Essen). They have found that by the end of 2015 subsidies for solar power in Germany will reach € 120 bn. The price decrease introduced last year would lower this sum only to € 105 bn. Every job in the solar industry was subsidized, already in 2006, with € 153,000. Frondel underlines that as the photovoltaic modules installed in Germany are mostly assembled in countries with lower labor costs, the German EEG is better at creating jobs in China than Germany.

Given the influence of powerful lobby organizations, it would be unrealistic to expect the new German government to simply abolish the EEG.  However it does seem certain that the feed-in prices for solar power will be sensibly lowered. German consumer organizations are proposing a 30 percent reduction in solar subsidies starting in 2010.  The German mainstream press, for instance DER SPIEGEL which enthused over solar power for years has recently taken to reporting the findings of Manuel Frondel and others, preparing public opinion for deep cuts in solar subsidies.

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