Germany’s seismic energy policy U-turn

Berlin finally comes off the fence. Now it faces some hard realities.

Europe is undergoing a profound awakening. Russia’s ruthless bombardment of Ukraine is shaking the scales off people’s eyes. Decades of political hand-wringing and rhetorical contortions around Russia’s central role meeting European demand for gas and coal are coming to a dramatic head. The fence-sitting of some EU member states, Germany in particular, was always problematic. Now it is untenable, and we are witnessing a seismic shift in thinking around European energy security.

The German government’s indefinite halt of Nord Stream 2 (see last Friday’s issue) was followed by another two highly significant policy U-turns. On Saturday, Berlin decided to send arms to Ukraine, breaking from its neutral standpoint that had limited assistance to sending helmets to Ukrainian frontline soldiers, prompting ridicule in some quarters.

On Sunday, Chancellor Olaf Scholz indicated his administration’s willingness to defer planned coal and nuclear plant closures that are widely expected to drive greater natural gas burn. Simultaneously, Berlin intends to expedite the development of Germany’s first two LNG import terminals to diversify gas supply sources, and invest more in seasonal gas storage and subsidise wind and solar to the hilt.

‘The energy of freedom’
Germany imported 56.3 billion cubic metres of Russia gas in 2020 (source: BP statistics), equating to 55% of the country’s entire gas procurement that year. Reducing Germany’s gas demand and diversifying its gas supply sources have shot up the political agenda in Berlin. This means promoting alternative power generation and finding non-Russian gas suppliers. It could also spell an end to the installation of gas-fired heating systems in German buildings. “Installing new gas heating systems in this situation is politically wrong and no longer justifiable,” says German econ min Habeck ahead of EU energy Council meeting.

Germany is doubling down on renewable power sources to phase down reliance on Russian exports. A draft government draft obtained by Reuters purports to set a target for Germany to meet 100% of its power demand from renewables by 2035, an acceleration of the previous “by 2040” target. An amendment to the Renewable Energy Sources Act (EEG) is said to be in the works to support a roll-out of wind and solar to cover 80% of demand by 2030. This would require 100 GW of onshore wind, 30 GW of offshore wind and 200 GW of solar PV capacity. If true, this is a gargantuan increase on today’s 62 GW of onshore wind, 7.7 GW of offshore wind and 59 GW of solar installed capacity — and will come will an immense price tag in the EEG, which will be borne by either consumers, taxpayers or both. Here’s how German Finance Minister Christian Lindner referred to renewables yesterday: German Finance Minister Christian Lindner: “Renewable energy is the energy of freedom.”

Entrenched reliance
Germany’s new government came to power with plans to accelerate the country’s coal phaseout to 2030. Combined with an imminent nuclear exit, this would leave the country heavily reliant on gas to balance variable output from wind and solar sources until there’s enough redundancy in the system to cover periods of dunkelflaute. That’s a big obstacle, because seasonal demand varies enormously.

There are, of course, many problems to overcome. Germany is heavily reliant on Russian coal, which accounted for 45.4% of the country’s coal imports in 2020 (source: CLEW). And, as I’ve discussed previously on the podcast, some European coal power stations are configured to run only on Russian coal (I can only presume that some of these plants are located in Germany; this Argus article does not elaborate).

Prolonging coal burn beyond 2030, as is now being discussed, might be necessary without Russian gas. But this would be bad for CO2 emissions and air quality in Germany. If this is deemed to be a price worth paying, there must be a plan in place to ensure that ‘Russiaholic’ Germany is not merely swapping one brand of vodka for another.