Energiewende vs. Shale Gas
Germany’s Energiewende is under intense pressure both from consumers facing soaring electric bills and from German manufacturers fretting about their falling energy competitiveness vís-a-vís the US, where manufacturers are benefiting from the boom in cheap natural gas production. What should be done to address these concerns has become a major topic of the CDU-SPD negotiations forming Chancellor Merkel’s new coalition government.
From the viewpoint of German manufacturers, there are two ways the US shale gas revolution implies a worrisome competitive challenge. First, cheaper natural gas in the US is lowering electricity and other energy costs for American manufacturers, while Germany’s continue to rise. This is especially of concern to energy-intensive industries, where the EU now has 36 percent of world capacity and the US only 10 percent. Secondly, as the US begins to build facilities for export of liquefied gas (LNG), this capacity could have a significant effect on the price of electricity and gas in Asia. Gas prices there are now about four times those in the US. The region looks to become the main recipient of US LNG, which by lowering energy costs would improve Asian competitiveness versus the EU. Whether or not large quantities are actually exported also to Europe, where prices are about three times higher than the US, the consequences of all this for German manufacturers will be significant – and complex. For example, less Asian demand for Qatar’s and other middle eastern LNG may benefit Germany and Europe, thereby mitigating EU-Asian and EU-US differentials.
The idea of an energiewende took shape over many years, dating from at least 1980 in a proposal made by the Öko-Institut and then published in a book in 1982 calling for the elimination of all nuclear and petroleum energy in Germany – well before the natural gas revolution in the US had developed in the early 2000s . The latter is disrupting German industry’s previous expectations about their competitive position during the transition to renewable energy.
Limits on German Industry’s Support for Energiewende
As compared to Americans, Germans have clearly been more deeply concerned about carbon emissions. In a 2009 Pew survey , those affirming that “climate change is a very serious problem” were measured at 37 percent and 52 percent, respectively. At the same time, German citizens and manufacturers have long had some of the highest electricity costs in Europe and especially in comparison to the US.
Given this reality, German manufacturers only grudgingly accepted the energiewende in light of some specific assumptions:
a sense that the price of fossil-fuel-produced electricity could only continue to rise over time, as European and world gas supplies were thought to be waning,
meaning EU gas would increasingly come from regions with significant market and geopolitical risks (e.g., Russia, the Caspian, and North Africa);
although the energiewende would mean more expensive electricity in the short run, a successful transition could greatly boost German industry’s long-range competitiveness against industry in other countries continuing to rely on ever-scarcer natural gas;
meanwhile, German industry would become a leading supplier of new renewable energy technology — developed with generous doses of government energiewende R&D subsidies;
and, in any case, the bigger German industries, which are more intensive energy users, had the political clout to win legislation protecting their businesses from the rising electricity surcharges others are paying during the energiewende transition.
However, rather than foreign competitors’ gas supplies running down as expected, the US gas revolution developed, lowering energy costs for American firms as Germany’s rise. And the US is not the only country with extensive “tight gas” reserves that will eventually be exploited using fracking methods developed in Texas in 2005.
Hype or Reality? Impact of Unconventional Gas on German Competitiveness
Over the past few years, German industries’ electricity price disadvantage relative to American firms has worsened, as shown in Figure 2.
It should be noted that this further spread in US-German industrial electricity costs occurred in spite of the fact that wholesale prices for German electricity have dropped. But, why have they dropped? Rather perversely, because the replacement of coal by cheap, lower-CO2-emitting natural gas in electricity production in the US has produced a surfeit of cheap US coal made available for export to German electricity producers.
Nonetheless, this has only increased retail electricity prices for German households and the Mittelstand (small- and medium-sized manufacturers), because they are required to subsidize the difference between retail electricity prices and the guaranteed feed-in prices paid for power supplied by producers of renewable electricity. Only the largest, most energy-intensive industries have been exempted from paying for these subsidies.
In October, the International Energy Agency (IEA) released its biannual World Energy Outlook, furthering German manufacturers’ energy apprehension: “Lower gas and electricity prices in 2012 in the United States relative to Europe equated to estimated savings of close to $130 billion for the entire US manufacturing industry.” In addition, looking ahead to 2030, the IEA projects that “The US, together with key emerging economies, increases its export market share for energy-intensive goods, while the EU and Japan see a sharp decline” amounting to “… 10 percent of the global energy-intensive export market.”
Many energiewende supporters understandably suspect German industry’s state of alarm is a mere ploy for more protection from energiewende costs and/or to preserve the role of large fossil fuel electricity generating firms threatened by the transition. This of course is one aspect.
Nevertheless, there is no denying that the revival of cheap energy in the US has already sparked significant US industrial expansion, including even investments by German firms, while Germany’s domestic industrial investment has remained flat since about 2000. According to The Economist : “… since 2011, 128 new energy-hungry industrial plants have been announced in the Gulf Coast region, [valued at] $114 billion. And, the Norwegian fertilizer manufacturer Yara and BASF of Germany plan to construct a ‘world scale’ ammonia plant there.” In addition, “Recently 19 new or expanded plants have been announced by firms including US Steel, Alcoa, and Arcelor Mittal,“ while energy-intensive cement and tire manufacturers will also benefit from cheap US gas.
In stark contrast to this situation, in Germany feed-in tariff payments keep pushing up retail electricity costs for households and its critical Mittlestand enterprises. Nevertheless, it is Germany’s large energy-intensive industry – where energy generally accounts for 80 percent of input costs – that have offered the most vocal protests.
The Chemical Employers Association BAVC and the chemical union IG BCE, recently signed an unusual joint letter to Chancellor Merkel, warning, "The German chemical industry is losing its competitiveness; not only are manufacturing and research positions at stake, but the industrial network overall is being affected.” They demanded quick relief, saying “Spiraling energy costs will soon drive us to the wall; It has become dangerous.” For its part, Germany’s powerful industry federation BDI complained that energiewende costs have become intolerable, warning : “The international competitiveness of German industry is in danger.”
Can the North American Energy Revolution be “Complimentary” to the Energiewende?
EU Energy Commissioner Günther Oettinger (CDU) put a good face on this in a talk at CSIS in Washington, DC in July. He spoke about the “complementarity” between the US energy revolution and the German energiewende when seen in context of the EU’s general program for “diversification of supply.” However, this is based on an expectation that Europe will compete (i.e. with Asia especially) to receive cheap LNG imports from the US. Consider first, however, that while there may eventually be significant US LNG imports to the EU, the energiewende has committed Germany to being supplied mostly by renewables (i.e. the portion reserved for gas will be smaller) and, secondly, as stated earlier, till now one sees significantly less activity by EU states to compete for LNG shipment contracts from Louisiana as compared to Asian activity. In early 2013 the UK landed a long-term contract for US Gulf Coast LNG, enthusiastically touted by Prime Minister Cameron, and since then there are reports of European energy firms interested in US LNG contracts.
History: High Costs Have Scuttled Previous EU Alternative Energy and Transport Targets
While ambitious, progressive targets for alternative electricity and transport set by the EU since 1999 have been missed for complex reasons, a reasonable argument can be made that most fundamentally the missed targets have been the result of competitive pressures from abroad. In other words, oil and gas prices simply never went high enough for a long enough time to make more costly European alternatives sufficiently competitive.
This is to say it has not been the direct costs, in absolute terms, of building alternative energy projects that have sunk ambitious plans, but rather the indirect costs in the form of the uncompetitive prices paid by enterprises for high alternative content electricity, transport fuels, heat, etc. These energy costs add to the cost of every commodity produced. Europe and Germany already have social service and labor costs added to their commodity production costs significantly above those of their North American and especially their Asian competitors. When energy cost differentials also increase, the hit to the competitiveness of European products sinks the EU’s environmentally and socially progressive alternative energy and transport projects.
Past history of this political-economic reality should raise alarm bells in Germany. The complex impacts of the US unconventional gas revolution need to be carefully quantified, and their repercussions addressed objectively, rather than either being exploited as an excuse to abandon the energiewende or to further shift its costs onto consumers and small- and middle-sized manufacturers — two tendencies which quite obviously exist.
This article by Thomas W. O'Donnell originally appeared in the German Council on Foreign Relations (DGAP) foreign policy magazine IP Journal. Republished with permission.