Fracking Is Not a Good Alternative to Germany’s Renewable Energy Policy

Craig Morris argues that Germany’s Energiewende is not making the country less competitive.

Over the past few months, oil and gas expert Daniel Yergin has become a critic of the Energiewende, Germany's clean energy policy, due to its its impact on energy prices for industry.

"There has been a kind of waking up to the fact that the premises of the Energiewende, however well-intentioned they are, no longer hold because the world is changed," wrote Yergin in a recent New York Times article.

The article also refers to a recent IHS study (Yergin is vice president of IHS), which argues that "the country cannot meet its future needs solely through renewable sources." However, the study argues that Germany cannot do what it is not attempting -- the goal is 60 percent renewable energy by 2050, not 100 percent.

In February, Yergin told the Wall Street Journal that "Germany should scale back its plans for expensive renewables and complement the drive with more domestic natural gas production." And in January, he reported from the World Economic Forum in Davos that Germany's economic competitiveness was at stake, particularly in light of lower energy prices in the U.S. Strangely, he did not add what the Forum itself found: Germany is the fourth most competitive country in the world, ranking even ahead of the U.S.

To be fair, Yergin also quoted German Industry Minister Sigmar Gabriel, who conjured up the threat of "dramatic deindustrialization." But the concern makes little sense.

Let's start off by recognizing that Germany actually still has a lot of industry to lose, though the Energiewende has been going on since at least 1991 or 2000, depending on which legislation you start with. In 2012, industry made up 19.1 percent of the U.S. economy, 21 percent of the U.K.'s economy, and 28.1 percent of the German economy.

Next, let's acknowledge that Germany's neighbors would love for the Germans to be less competitive. The country's unemployment rate is at its lowest level since reunification more than two decades ago. Its tax revenue hit a record high in 2013. Germany's Finance Minister recently announced the first balanced budget since 1969. German businesses are doing so well that the country posted a record trade surplus last year. The surplus almost reached 3 percent of GDP, a record not only for Germany, but for any country anywhere throughout history. Yet we read that U.S. investors are worried about German energy policy.

There is no doubt that energy prices are higher in Germany than in the U.S. There is also no doubt that cheaper fossil fuel is not a goal of the Energiewende. Leaving more unburnable carbon where it belongs -- in the ground -- is the goal. The Germans aim to transition to renewables, phasing out nuclear completely, as well as fossil energy to a great extent. These goals are only achievable in combination with greatly reduced energy demand. Germany is also highly dependent on fossil fuel imports, and prices are rising.

Shale gas -- one reason why energy prices are currently so low in the U.S. -- is politically not an option in Germany. Shale gas is booming in America not just because of technical breakthroughs, but because the Energy Bill of 2005 makes it nearly impossible to hold fracking firms liable for environmental damage.

Last year, former German Environmental Minister Peter Altmaier, a member of the Christian Democratic Union party, said shale gas can move ahead anytime in Germany -- as soon as a community is found that accepts it. In other words, he would not give corporations rights against the will of local communities affected. The new coalition under Chancellor Merkel (also a member of CDU) has not changed that position.

Here is the point of confusion for many observers. Yergin is mainly talking about the price of gas, which is indeed relatively high in Germany. Look closer, and you'll see that most discussions about "high energy costs" in Germany are more closely linked to natural gas than electricity.

Retail electricity rates are up; Germany has the second-highest in the EU after Denmark. But industry doesn't pay retail rates. The rates they pay differ greatly, however, depending upon which exemptions to surcharges are granted. Firms with the greatest power consumption (that is, the ones with the most exemptions) paid as little as around 0.05 euros per kilowatt-hour in 2013. Energy-intensive industry in Germany is therefore paying prices close to those in New England where, incidentally, power prices rose by more than 50 percent last year. In contrast, wholesale prices in Germany are falling.

Energy policy designed to keep industries at home

With all the talk about deindustrialization, you'd think that energy-intensive industry in other countries would be doing better. In reality, Dutch aluminum firm Aldel declared bankruptcy at the end of 2013, claiming it could not get a direct connection to the German grid fast enough so it could buy much cheaper German electricity.

Likewise, French aluminum firm ArcelorMittal would also like to close shop (the French government is trying to stop it). In mid-March, Bloomberg reported that "the competitiveness of large French power consumers" has "dropped off in a way that is extremely worrying," according to a French industry lobby group. The article adds, "large German industrial power users will pay 35 percent less for their electricity next year than those in France." Not surprisingly, aluminum giant Norsk Hydro recently announced a 130-million-euro investment in a new production line in Germany.

The conflict is not, however, primarily between foreign firms and German firms. It began as a conflict between large German firms with exemptions to surcharges and smaller companies without any exemptions. While firms that are not exempt are harder hit, it is important to keep in mind that energy does not make up much of their total expenditures. On average, energy only makes up around 2 percent of total expenses at such companies, according to the German Industry Ministry.

One current proposal is to charge energy-intensive firms an extra 1.2 euro cents per kilowatt-hour, which is fair; in 2009, wholesale prices were a full 1.5 cents higher than today. As Bloomberg recently explained, solar and wind have helped bring down wholesale prices for four years in a row. So while we continue to hear complaints about the Energiewende driving away energy-intensive firms, these firms have actually benefited considerably from lower wholesale prices.

Not surprisingly, energy-intensive firms are not leaving Germany. BASF, the largest chemicals firm in the world, recently invested 10 billion euros at its headquarters in Germany, roughly 150 percent more than it is now investing in the U.S. The company makes all of its electricity from its own natural gas turbine, so it has been completely unaffected by the entire power price discussion. The firm is doing quite well; its EBIT rose by 17 percent to 1.45 billion euros in Q4 alone.

Nonetheless, in an act of preemptive complaining, BASF's CEO has recently begun criticizing the Energiewende. One figure tossed about is 60 million euros, which is the amount the firm would allegedly lose annually if it had to pay the full charge for renewable electricity. No one is proposing that BASF pay the full charge, but it's worth putting that amount into perspective. It's equivalent to around half of one week worth of corporate profits based on the Q4 figure above.

Fracking lacks support and wouldn’t reduce gas prices in Europe

BASF is not just a buyer of natural gas. Wintershall, a German gas provider, is a 100 percent subsidiary of BASF. The chemicals giant can get its gas from its own subsidiary, so not even gas prices are an issue. When BASF nonetheless calls for shale gas in the name of low prices, it is merely asking to be able to produce gas domestically -- a resource that would give the company considerable business for a few decades.

Contrary to claims made by BASF and Yergin, shale gas production in Germany would not lower prices. In the U.S., the lower prices associated with shale gas production have not been not spread evenly across the country; rather, they were the result of excessive production in specific areas. But in Europe, gas networks are better developed, and Germany has by far the greatest gas storage capacity of any EU country. German gas firms were even able to sell gas quite profitably to the U.K. from its reserves in the harsh winter of 2012-2013.

In the end, the real conflict is between large firms heavily invested in fossil fuels and communities that do not wish to bear the burden of socialized risks while corporations rake in profits. The energy sector is increasingly turning out to be one in which mom-and-pop shops -- homeowners, SMEs, and municipal utilities making their own energy -- can handle everything fairly well, thereby marginalizing large energy providers.

The danger is not that industry will not be able to get affordable energy. Increasingly, industry is making its own renewable energy. So are communities and homeowners in Germany. For sellers of conventional energy, the danger is the prospect of a smaller market .

So don't worry about how the Energiewende will impact the German economy. The Germans are replacing fossil fuel imports with renewables and reducing consumption in order to improve their economy, not to hurt it. With each year, renewables become more affordable; conventional energy, less so. It will take some time, but within the next ten to twenty years -- a short timeframe for infrastructure -- economies banking on shale gas today will wish they had gone renewable earlier.

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Craig Morris (@PPchef) is the lead author of an e-book available at Energy Transition.de, which explains the Energiewende to the world in English and other languages. He also writes every day at RenewablesInternational.net and is the 2014 winner of the IAEE journalism prize for energy economics.