A view from the Spree: Australian Energy Delegation to Berlin

In September the Australian Energy Council’s General Manager Policy and Research, Ben Skinner, participated in a delegation to Berlin as part of the Australia – Germany Energy Partnership, followed by meetings with the AEC’s German equivalents and broader industry. The exchange was titled “Energy transition – Power system design and security of electricity supply” and provided an opportunity to learn a great deal about the German decarbonisation journey. This journey was central to talks despite the distraction of the immediate European gas crisis, the scale of which renders Australia’s travails trivial.

Representatives of other Australian Industry Associations, Governments and investors also attended the delegation.  Energy Networks Australia has already published EnergyInsiders here and here. Here we present some reflections on Germany, with respect to both the crisis and the long-term journey.

Now THIS is a crisis

While Australia’s east coast energy market winter can justifiably be described as an unprecedented crisis, Germany puts this into perspective as it is facing something much bigger and longer.

Figure 1: German Electricity and Gas Prices 2022

Notes:

1. Electricity prices yellow line, Gas prices blue line.
2. Gas price is quoted in EUR/MWh. To convert to $AUD/GJ, multiply by 0.42.
3. “NS1” is Nordstream One pipeline – the main pathway of Russian gas to Germany.

Source: Energie Baden-Württemberg (ENBW)

At the time of the visit, despite pleasant autumn weather, wholesale gas was trading at an eye-watering equivalent of $AUD140/GJ. And, electricity spot prices responded, sitting between $AUD700-1000/MWh.

Experts advised the delegation that the latest forecasts suggest that if the 2022/23 winter is mild, Germany will just avoid mandatory gas rationing thanks to the enormous “demand destruction” that such prices will provoke. And a cold winter would be far worse.

Unsurprisingly, in a meeting with BDI (the peak body for German industry associations), representatives were exasperated as to how heavily natural gas dependent German industry could possibly remain at all competitive with such input costs, even asking if the AEC could arrange to divert some Australian LNG into Germany.

During the delegation, the German Government was making emergency decisions to ease the pain on customers. One decision was to move legacy renewable energy subsidies from customer levies over to the federal government budget. They would then recover some of this cost through windfall taxes from the few German beneficiaries of these prices; ironically this is mostly windfarms. There is however no intention of introducing a pay-as-bid market design as is being discussed in the UK.

How did they get into this mess?

With the benefit of hindsight, it is now obvious that Germany had allowed itself to become dangerously vulnerable to a capricious gas supplier. Before the Ukraine War, Russia was supplying 60 per cent of Germany’s gas at competitive prices. Gas had become a cornerstone of its economy, and indeed, its way of life. This was the culmination of several decades of economic, environmental, political and geopolitical drivers, for which the simple answer was to always import more cheap Russian gas:

• The need to reduce sulphur pollution from the burning of German coal, that had previously dominated the power sector, industrial energy and domestic heating. German air is now almost as clean as Australian air, much of which is thanks to natural gas.
• A political determination to close all its nuclear plants, which was at one stage 20GW of generation but is now nearing completion.
• The high costs of mining German hard (black) coal, comprising about half Germany’s coal fleet.
• The desire to phase out all of Germany’s 40GW of coal-fired generation by 2038 to meet carbon objectives, whilst investing heavily in wind and solar, firmed almost exclusively by natural gas.
• The ability to import Russian natural gas through pipeline rather than the more expensive LNG, particularly via the Nordstream Baltic sea pipelines that skirt other countries.
• A geopolitical desire to engage Russia through trade.

Russia is now supplying less than 5 per cent of German gas, and even if the war resolves, Germans were unanimous that they would not repeat the mistake. Instead, they are scrambling for alternative supplies. Greater pipeline imports from Norway and North Africa are helping, but Germany has no LNG import facility and so floating terminals are being rushed into place. Before this year, the whole of North-West Europe had a total 800PJ/a of regasification capacity. By 2026 it will be almost 3000PJ/a[1].

Figure 2: Locations of planned German LNG regasification terminals

Source: ENBW

Much has been made of decisions by the new Green-Left government to defer closure of and recall some coal and nuclear plants. This is happening, but it is not particularly large (several GW of each), and only for a year or two. The ability to hold plant in reserve and defer scheduled closures is part of the German coal closure process and was intended for exactly this sort of emergency. Discussions however revealed some doubt on the technical readiness of some of the plant.

The Germans now realise they won’t be able to run their economy on unlimited exajoules of cheap piped gas that they previously expected. The new government’s election pledge to accelerate the coal phase out from 2038 to 2030 now seems unlikely, but there remains widespread commitment to retain a date in the 2030s.

Nevertheless, the outcome of the crisis will probably consolidate rather than slow Energiewende. Germany understands that whilst renewables will still need gas-fired capacity for firming, the more renewables are installed, the less running of that capacity there will be and therefore the less use of expensive LNG based gas imports for electricity. And the previous interest in phasing out natural gas in favour of electrification and hydrogen has become more than environmental: it’s now a matter of national security.

Long-term decarbonisation

Current national emissions are 772Mt CO₂e, or 9.3 tonnes per capita[2], viz Australia’s 18.9 tonnes per capita.

Germany has an ambitious decarbonisation plan, targeting net zero by 2045, and a 65 per cent reduction from 1990 levels by 2030. This reference date of 1990 is convenient thanks to the decline in East German emissions in the years following reunification, and it has already reduced by nearly 40 per cent. Nevertheless, net zero in 2045 requires an even steeper gradient, and action well beyond the electricity industry.

Figure 3 German Decarbonisation targets

Source: Federal Ministry for Economic Affairs and Climate Action (BMWK)

Figure 4 2021 Generation Shares

Source: BMWK

Like in Australia, the electricity industry is well ahead of other sectors in its decarbonisation, with renewables rapidly growing, presently comprising 42 per cent of generation. Ambitious technology-specific renewable energy targets have been adopted, with solar to increase from 59GW now to 215GW in 2030, onshore wind from 56GW to 115GW and offshore from 9GW to 30GW[3].

Also like Australia, industry and transport are yet to begin their journey, but unlike Australia, buildings (heating) has made some progress thanks to shifting from coal to natural gas heating and adopting very strong building efficiency standards. It is hard to find a single-glazed German window.

The German government is several years ahead of Australia’s in that it has recognised that it needs to engage with more than the electricity industry on its decarbonisation journey. Their focus is now on:

• Getting transport electrified;
• Getting buildings even more energy efficient and replacing gas (and a few remaining coal) boilers with heat pumps; and
• Getting the hydrogen economy underway.

What happened to nuclear?

Germany’s determination to close its once large nuclear fleet is difficult for outsiders to understand, as it has increased the challenges of decarbonisation and exposure to imported gas. Meanwhile, Germany’s neighbours, particularly France, are retaining and even increasing their fleets.

Denuclearisation is deeply cultural for Germany, beginning in the twentieth century with peace movements, and is the genesis of the powerful Greens party. A plan to phase it out over 20 years was struck at the start of this century. Ten years later, as carbon became a bigger concern, the nuclear phase out was briefly paused, but then the unfortunately timed Fukushima accident forced restoration of the original plan.

The phase out is now in its final stages, and there is general consensus that this matter is beyond discussion: Germany’s nuclear era is behind it and it will play no further role.

The coal compromise

In 2021 EnergyInsider published a detailed discussion on Energiewende, particularly the managed phase-out of 40GW of privately-owned coal plant. That article described the German “Coal Commission” of 2018 that prepared this plan. The delegation was fortunate to learn from environmental policy academic, Dr Felix Matthes, a member of that Commission. The Commission was impressive both for its successful outcome, and for the exercise in itself.

Dr Matthes noted that Germany is subject to the European Union’s carbon price, presently trading at AUD$116 per tonne. A classical economist would suggest that the economic pressure of this, combined with renewable subsidies, sulphur controls and, at the time, cheap Russian gas, would see coal naturally decline. However, “leaving it to the market” was seen as politically untenable in regard to energy security, affected workers and communities.

The government assembled 30 key people, and, before it began, agreed to abide by their recommendations. The members represented industry, workers, local communities and environmentalists. Dr Matthes described it as “1/3 pro coal, 1/3 coal critics (including Dr Matthes) and 1/3 neutral”.

Discussions were sometimes difficult, coming close to collapse, but ultimately agreed the “coal compromise” involving over €40bn of federal funding to support affected investors, workers and communities. This expense was immediately criticised, yet government nevertheless honoured its promise and faithfully legislated the agreement. A new coalition government elected in 2021 pledged to accelerate the timetable (before the Ukraine crisis emerged) but not undo the commission’s approach and/or reduce funding.

Dr Matthes emphasised that the commission believed the most important part of the compromise was support for affected communities, whose interests should not be assumed to align with those of unions. Securing the financial circumstances of older, wealthier, coal workers was not a priority for the mayors of affected regions. Instead, they wanted entirely new industries likely to attract young families. Dr Matthes cited a new rail commuter service to Berlin – an unexpected outcome of a coal closure plan.

Storage

For a country that gave the world the term Dunkelflaute, the rolling out of mass electrical storage is surprisingly low on the agenda. There are plans for more pumped hydro, but the geography is not well suited. Germany has fewer large-scale batteries than Australia, and the long-term forecasts don’t grow this much.

When asked about this, the usual response was “because batteries are very expensive”. Having sufficient installed capacity to meet instantaneous peak demand seems of less concern than it is in Australia. It can get some support from its neighbours, but the actual level of interconnection is small compared to peak demand and, due to market trading rules, is not considered entirely “firm”. The main way it intends to overcome lulls in the sun and wind is with gas-fuelled peaking generation, which is hoped, in future decades, to ultimately convert to hydrogen-fuelled.

Interestingly there is a bigger interest in storage at the consumer end of the market. New home builds include obligations for solar and batteries. Thermal storage is a big focus, using hot water tanks, electrically heated at times of surplus for later reticulation through buildings.

Electrification and Hydrogen

The German Government sees mass conversion of gas-fired building heating to electric heat pumps as an immediate task. Many German cities have reticulated district heating fired by gas (and in some cases by coal), which can also be converted. Electrification is also seen as a pathway for a considerable amount of industrial gas use.

Electrification of transport is a widely supported goal. Like other European countries, electrified public transport already moves much of the population, but Electric Vehicles (EV) still comprise only a small percentage of private transport and freight. Car sales are subject to fuel efficiency standards, but not the very strong EV incentives as employed in Norway. The main policy focus is rolling out charging infrastructure – now a common site on Berlin streets, but still far from ubiquitous.

It may seem hard to imagine, but there is even more hydrogen hype in Germany than there is in Australia. The German economy is underpinned by heavy industrial facilities presently burning natural gas and coking coal to produce such products as plastics and high-quality metals.  The necessary temperatures and chemical reactions can only be practically decarbonised with hydrogen, assuming hydrogen itself eventually becomes practical.

Government has great plans for local electrolysis fed by renewables, but they also realise this will not be enough and are hoping to be major importers in a world-wide hydrogen economy. To that end, the German Government is providing international grants to encourage overseas early development of export capacity.

Like their Australian equivalents, BDI, as representative of industrial users, were among the few who did not share the Government’s optimism in overcoming the huge technical challenges of a hydrogen economy.

Also like Australia, representatives of gas distribution networks strongly disagreed with the Government's enthusiasm for electrification of heating, arguing that in time hydrogen would do the job better.

Conclusion

Exposure to Germany’s ambitious decarbonisation journey proved an invaluable insight into how a large, industrialised economy could make the transition. It is a market economy, but relies more on government guidance for such an economic transition, and this larger role of government is not a matter of debate. Like Australia, it is a federation, but there is widespread acceptance that the energy transition should be led from Berlin, not from the states, even if this is not constitutionally explicit.

The Coal Commission and the resulting phase out plan is a very positive example of a German approach to an otherwise intractable problem and one from which the Australian polity could learn a great deal.

Meanwhile, the Ukraine war has revealed a historical naivety in allowing the economy to become so reliant on a dubious trading partner. This has plunged Germany into an energy crisis that far exceeds anything experienced here. Whilst this is a great distraction, it is sensibly seen as something that has to be dealt with in the short-term, and has not de-railed long-term plans.

[1] ENBW

[2] BMWK

[3] BMWK