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Eye on the Market | October 22, 2012
J.P.Morgan
The most important energy developments of 2012: how countries are planning for Independence Day

II: Is Germany making an impetuous mad dash into renewable energy?
In the wake of Fukushima, Chancellor Merkel announced a plan to accelerate the closure of coal and nuclear power plants, with the goal of relying more on renewable energy to fill the gap. Germany is by far the largest user of electricity in Europe and its manufacturing to GDP ratio is high, so the consequences may be substantial. To get a sense of the potential impact, start with the first chart on Germany's current generating capacity and output by source. While wind and solar installations have increased in recent years, their electricity output is less impactful due to wind and solar intermittency.

The two largest increases in Germany's renewable plan are offshore wind and photovoltaic (solar). Offshore wind connections are very expensive; according to Netherlands-based transmission system operator TenneT, they work out to ~1.1 million Euros per MW, and that's just for the connection (not the wind turbine itself, that's extra). That offshore wind connection cost is even higher than the 0.8-1.0 million per MW upfront capital cost of building new natural gas plants, using data from RWE AG (Essen) and SWB AG (Bremen). Wind is free and natural gas isn't, so we should look at all-in levelized costs⁵ by electricity source. As shown in the second chart, all things considered, offshore wind is a very expensive way for Germany to generate electricity, and solar is higher by another order of magnitude. The relative ordering is similar in other countries.

Snapshot of current German capacity and generation
Percent of total
[Chart: Generating Capacity vs Electricity Generation for Coal, Nuclear, Natural Gas, Wind, Solar]
Source: BDEW Bundesverband der Energie- und Wasserwirtschaft e.V.

Levelized cost of electricity production in Germany
USD/MWh
[Chart: Costs for Nuclear, Coal, Natural Gas, Onshore Wind, Offshore Wind, Solar]
Source: International Energy Agency, Nuclear Energy Agency and OECD.

Germany is a very energy-efficient country, and has among the lowest electricity-to-GDP ratios in Europe. However, the cost of electricity to industrial consumers is already among the highest in Europe when including taxes, and for residential consumers, Germany is the highest. As a result, the proposed shift to renewable energy may further increase electricity prices for both residential and commercial users. There's not enough data yet to measure the impact so far.

Average retail electricity price in 2011:
residential segment, EUR/MWh
[Chart showing prices for GER, BEL, ITL, SPN, NED, POR, CZE, UK, FRA, GRE]
Source: Wirtschaft & Infrastruktur GmbH & Co Planugs - Renewable Energies.

Average retail electricity price in 2011:
commerial/industrial segment, EUR/MWh
[Chart showing prices for ITL, GER, BEL, CZE, SPN, NED, UK, GRE, POR, FRA]
Source: Wirtschaft & Infrastruktur GmbH & Co Planugs - Renewable Energies.

Germany's goal: raise the contribution of renewable energy from 20% to 35% by 2020, and to 80% of total consumption by 2050. The total cost of financing this transition is estimated at 800 billion Euros by DIW Berlin. The first stage, from now until 2020, is supposed to cost 200 billion Euros. At a time when commitments to save Spain and the rest of the Periphery are

⁵ Levelized costs are all-in costs which include construction, financing costs, ongoing maintenance and operations and fuel inputs costs. In Europe (unlike in the US), levelized cost numbers also include a carbon footprint estimate @ $30 per tonne of CO2.

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