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Will Germany be a front-runner or a headless horseman by the end of the traffic light coalition’s green transition?

Never before in the history of reunified Germany have political divisions and social frustration been as strong as they are today. The main source of this, apart from the accumulated failures of immigration policy, is the radical full-speed green transition. The gulf between the assessment of the situation by the traffic light coalition and its critics could hardly be wider. Robert Habeck, the Greens’ economy minister and the key figure in the grand economic transformation, says that despite the difficulties, everything is going according to plan: the gas crisis is now over, energy prices are falling, renewable energy production is growing, the transformation of the German economy is accelerating, and the country will be the frontrunner (‘fore rider’ in German) of the global green transition. Critics argue that the opposite is happening: because of an economic policy that ignores market logic, is concerned only with meeting artificial, extreme political deadlines, and is irrationally anti-nuclear, Germany is losing its export industry, to which it owes its wealth and the resilience of its generous social safety net. It will not be a frontrunner, but a headless horseman: a cautionary tale for other countries on the flawed strategy of green transformation. The key question for Europe’s future is: which side is right?

“We have changed Germany,” declared Robert Habeck with the pride of a revolutionary general at the recent Green Party congress in Karlsruhe, only to warn his audience of the importance of perseverance and the search for solutions in the face of mounting difficulties. The German green transition itself is increasingly associated by the public with the traffic light coalition, and the Greens in it: but the truth is, of course, that the current political alliance, of which the German Greens are the dominant ideological force, has been in government for only two years. The Energiewende (energy turnaround) and the German green transition plan – at various levels of awareness – have been the main objective of the entire German political elite since the 2010s at the latest. The goals, binding deadlines, and the federal legal and de facto constitutional entrenchment of the green transition were begun by the CDU-SPD coalition, just as the decision to shut down nuclear power plants was also Angela Merkel’s own: the German governing parties of the time tried to anticipate the Greens’ demands and to take the wind out of the sails of the increasingly popular party. (In Merkel’s words: “asymmetric demobilisation.”) So in reality the changes the Greens’ two-year leadership has brought about are the even more aggressive shortening of the deadlines for the transformation, and the introduction of the necessary regulations, bans and state programmes at a rapid pace, almost at the drop of a hat. In other words, they have begun to actually implement what was previously a convenient – sacrifice- and risk-free – green transition that existed only in the future.

The diagram can be referenced here: https://public.flourish.studio/visualisation/16699097/

In light of this, it is worth briefly reviewing what the green transition plan actually consists of, which the German state is working on full steam ahead, putting all other pressing problems (ageing society, bottlenecks in defence capabilities, digital technology gap, migration) on the back burner.

  • After the fastest possible phasing out of nuclear energy, the same process with coal energy, and finally the phasing out of gas and oil, i.e. all fossil fuels, from German energy use. The process according to the deadlines is as follows: the share of renewable energy in the energy mix will rise to 80% by 2030. Energy efficiency will increase by 30% by then, emissions will be reduced by 65% compared to 1990. Between 2030 and 2038, there will be a complete phase-out of coal, and from 2035, the sale of non-electric cars will be banned. Achieving full climate neutrality as well as getting off gas energy from 2045.
  • Accordingly, converting Germany’s heating, transport and production infrastructure to be completely electricity-based: the complete replacement of the currently predominant gas and oil-based heating with heat pumps and other electric and geothermal systems. Replace and then ban fossil vehicles with electric cars and green public transport vehicles. In industrial production, drive companies to switch to green energy and raw materials through increasingly tighter regulation and higher carbon dioxide quota prices (e.g. in steel production, green circular metallurgy instead of gas and coal-based metallurgy. Switching to green fuels in aviation.)
  • Exponentially accelerating the deployment of renewable energy generation in order to meet the obviously dramatic increase in electricity consumption – since gas, coal and oil, the dominant energy sources today, including vehicle fuels, will be eliminated everywhere. As a temporary ‘bridge’ until sufficient renewable electricity generation capacity is built, the building of 50(!) new gas-fired power plants. These will also have to balance renewable energy (dark and windless periods when renewable generation is minimal).
  • To ensure the storability of the electricity generated by all of this, building a hydrogen energy industry and a new energy storage infrastructure (industrial-scale Tesla battery centres, pumped storage reservoirs) nationwide. Introduction and integration of smart and digital power systems at household and regional level for an optimised and intelligent distribution of available electricity.

 

Sources of German electricity generation

The share of renewable energy has grown dynamically, more than doubling in 10 years. The target is 80% by 2030.

The figure can be referenced here: https://public.flourish.studio/visualisation/16699201/

As can be seen at first glance, the goals listed here are perfectly rational in themselves: with the technology that exists today, and especially given the pace of technological development, they are not at all unachievable. But to achieve all the objectives listed at the same time? Not in a single city, but on the scale of an industrialised country of 83 million people, and in a very short space of time? There are a scant six years to 2030 and 11 years to 2035. A single major new industrial investment on a large scale in itself takes 5-7 years (and that’s without mentioning the issues of resources and economics, which we’ll come to later).

In good faith: the German coalition government’s plan is very bold and ambitious. In bad faith: a democratic country with a welfare market economy has never before attempted a transformation of this scale and intensity, which requires an all-controlling and coercive economic policy. It is no coincidence that Green leaders like to use the term ‘eco-social market economy’ to describe the new model. In other words, the role of the market is no longer primary. Let us examine the feasibility of the plan in concrete terms. The questions can be divided into three groups: 1. Theoretical-conceptual questions, i.e. is this plan a good idea? 2. Questions of implementation. 3. Questions of strategic implications.

Theoretical-conceptual questions

Climate policy and the green transition are about radically reducing carbon emissions to protect the climate. But here a fundamental problem immediately arises: individual countries do not have an atmosphere, the Earth does. German carbon dioxide emissions are now less than 2% of world emissions. China’s emissions are above 30% and rising, and fast-growing India will soon reach 10%. So the rate of growth and carbon use in China and India in a given year has a greater impact on global carbon emissions and hence the Earth’s climate than the entire planned German green transition by 2045. In addition, Chinese industry, according to the European Commission’s 2022 estimate, emits on average more than three times as much as the strictly regulated German industry. In other words, the relocation of production and jobs from the EU to China (think of the relocation of the German chemical giant BASF) due to the green transition will even increase global emissions! Two other issues are also worth mentioning here: what happens if developing countries simply buy up and burn for themselves the fossil raw materials not consumed by the EU but still extracted by producers for profit? (Only 61 of the 191 countries participating in the Paris Climate Agreement have committed to quantifiable emission reductions, and neither China nor India is among them. China builds new coal power plants every 10 days on average and emits more CO2 than all other OECD countries combined. The fact is that only 35% of global carbon emissions in 2021 are emitted by countries that actually reduce, not increase, their emissions.) And how much CO2 gain will there really be if China, and not Germany, becomes dominant in the highly polluting production of electric cars and their batteries? (Remember, the average electric car is more climate polluting than a diesel car up to its first 225,000 kilometres!)

So the reduction of carbon emissions in Germany is in fact irrelevant for the global climate, as is, in fact, the green transition of the EU as a whole: the really crucial question from a climate perspective is what energy mix China and the most populous developing countries will develop in the coming decades. And they seem to need all types of energy in all quantities (coal, gas, oil, and of course they are dynamically building renewable and nuclear capacity) to grow rapidly. At best, a successful German green transition would serve as a model for these countries that it is worthwhile to bring expensive green energy to the fore.

Questions of implementation

The price of electricity

First of all, it is important to be clear about the confusing picture created by conflicting media narratives on the price of electricity generation and consumption (“Record renewable electricity generation has caused the stock market price of electricity to fall into negative territory,” while “German electricity prices have quadrupled due to the war”). The average price of electricity generation in Germany had already quadrupled before the outbreak of the war in 2022 (so this has nothing to do with Russian gas!). The only reason for this is economic policy interference: on the one hand, the closure of coal and nuclear power plants had begun, and on the other, the European Commission had timed the price increase for CO2 certificates wrongly: the unexpectedly rapid economic rebound after the Covid closures had caused their trading price to rise dramatically by 400%. (This is, by the way, a real economic example of unintended consequences.) Let us not forget that the price of electricity – produced from fossil fuels – includes not only environmental taxes but also the price of CO2 certificates added to the cost of production. So, for example, a German coal-fired power plant that could normally sell 1 KWh for 3-6 euro cents could only sell it for more than 12 euro cents after the steep rise in CO2 prices in 2021. It is important to note here that, excluding taxes, levies and certificate costs added to the electricity price, the average German gas power plant produces 1 KWh for 6-8 euro cents, while nuclear power plants produced 1 KWh for 2-4 euro cents. Only in this light is it worth looking at the evolution of consumption prices:

the average German household bought 1 KWh for 25 cents in 2012, but in 2023, even with slowly normalising electricity prices on the stock exchange, it cost 43 cents. For the same amount of electricity, a French household in the country of operating nuclear power plants paid 27 cents (the difference is almost double!) This immediately shows, firstly, the negative impact on electricity costs of moving away from cheap nuclear power and, secondly, how European consumers are already getting their energy at an upwardly distorted price. Of course, in principle, we could say that a higher price is the price of more climate-friendly energy, but as we shall see, it is not that simple.

The figure can be referenced here: https://public.flourish.studio/visualisation/16699286/

The energy market crisis following the outbreak of the war pushed European electricity prices even higher, to unrealistic levels: as the minimum price of electricity is determined by the price of gas (“merit order” pricing, i.e. the electricity market adjusts to the price of expensive gas power plants), and panic exploded on the gas market over Europe’s supply, prices on the electricity markets also exploded. This panic gradually subsided in 2023, so electricity prices followed the gas price downwards – but almost everywhere else they fell more than in Germany. The reason is that Germany, which was a net exporter of electricity in the nuclear era (exporting almost twice as much as it imported in 2013, for example), is now import-dependent. When the sun and wind are strong, European renewable energy production really does break records. But this causes electricity prices to plummet on European power exchanges, and producers have to sell their surplus at a loss (without state subsidies). But when the weather is bad (most of the year, and especially in winter), German energy companies ramp up fossil-fuel power plants, polluting the atmosphere proportionally more than elsewhere in Western Europe, and buy the missing electricity abroad at high prices, because there is a shortage of renewable electricity elsewhere too. (But there is no shortage of French or Czech nuclear, Nordic hydro, or Polish coal energy, for example.

The good news is that, undoubtedly, thanks to cheap Chinese technology, solar energy can be produced very cheaply in good weather, so once the capacity is built, storage is basically the only problem to solve. However, the cost of wind energy, for example, is a much more difficult issue: the building of wind turbines has been facilitated by countless state and EU subsidies, and taxpayers’ money is now keeping struggling wind companies afloat. In fact, we don’t know how much wind power costs now. (But it certainly costs a lot more than fossil and nuclear power, especially when adjusted for environmental taxes and CO2 allowance prices.) Another aspect of the price of green energy that is usually not talked about is that the extremely rapid development of green infrastructure (installation subsidies, feed-in tariff subsidies, transmission and distribution systems) is not free, and is increasingly being built back into the price of electricity (in the form of grid fees, taxes, levies) by the states as time goes on. The price of carbon allowances is also rising by design, precisely to make fossil energy production unbearably expensive over time and force companies to adapt. The switch to green energy will therefore inevitably lead to a trend rise in electricity prices, even if this is tempered by a rapid increase in renewable electricity production, which is genuinely cheap at times, or by low gas prices on commodity markets, depending on the international situation.

In light of this, it is not surprising that the price of electricity bought in Germany is one of the most expensive in the EU, and that electricity bought in the EU is one of the most expensive in the world. In the first half of 2023, the average reference price of electricity in the EU was €100 per megawatt on the stock exchange; €75 in Japan, €60 in India, €40 in the US and €30 in China. The latter are all major industrial competitors of the EU, including Germany.

The figure can be referenced here: https://public.flourish.studio/visualisation/16699277/

The infrastructure

It is definitely good news that, disproving all scepticism, German renewable energy production is indeed growing at a very fast pace, thanks to the rapid pace of capacity building. In 2023, for example, renewable energy production increased by 12% and the share of renewable energy production exceeded 50% (in 2021 it was only 41%).  True, this was helped by the fact that the fall in industrial production led to a significant drop in absolute electricity consumption in the German economy. It’s safe to say that, in terms of the share of renewable generation, the traffic light coalition’s targets are achievable over time. (Although, cynically, we might add that mathematically, every time we build a solar farm and close a coal plant, the share of green energy in the energy mix suddenly jumps.)

But here too, the problems of state control and forced development familiar from socialist planned economies are emerging: the German high-capacity grid is nowhere near keeping pace with the growth in renewable electricity generation – the construction of the missing 15,000 km of new grid is proceeding very slowly. One consequence of this is that in good windstorm conditions, for example, Germany is unable to transmit the power generated by wind turbines in northern Germany to industrial plants in the south, such as Bavaria – when this happens, the electricity that cannot be redirected is lost, while wind turbine operators receive payment for the electricity at a pre-guaranteed price. (And, of course, there is worldwide press coverage of record power generation from German wind turbines.) In time, and with the investment of the required roughly €50 billion, Germany will of course overcome this hurdle, but when will it be ready? Similarly stalled, physically nowhere to be seen, is the construction of the declared 50 new gas-fired power stations and the hydrogen industry. Since these are no longer market-based decisions – hydrogen energy, for example, is four times more expensive than its conventional competitors – but depend on German state subsidies for profitability, private capital is unwilling to get involved in these projects. More precisely, market players are waiting for explicit and generous state guarantees, which in themselves take years, and which the German state does not currently have the resources to provide. The lack of public resources to spend and the spiral of inevitable fiscal austerity that this has led to is not the fault of the Greens, by the way. The German constitution forbids indebtedness, and the budget must, with a few exceptions, close without a substantial deficit. Obviously, the next step will be to abolish this and start the debt-financed green transformation.

Almost the same symptom pattern can be seen in the area of heating and energy storage infrastructure conversion:

The use of heat pumps is a great and rational solution in itself. But to retrofit most buildings at short notice is another matter altogether. It is not only that we are talking about millions of buildings, and the cost of retrofitting them is between €130 billion (government estimate) and €600 billion (independent estimates). Even if it is successfully carried out, overall German carbon dioxide emissions would fall by only 1.4%, as the increased electricity consumption in winter due to heat pumps could only be met, given the lack of nuclear, by – what else? – fossil energy. (The traffic light coalition has postponed the deadline for the introduction of mandatory heat pumps after the initial outcry.)

We face the same reality with energy storage: exponentially increasing renewable energy production only makes sense if the excess energy can be stored for periods of darkness and calm winds. There are suitable old (water pumping) and new (e.g. Tesla Megapack) technologies that can serve local needs well on a local scale, albeit at high cost. (What does hight cost mean? The 100 MWh of storage capacity to be built in Hungary in 2024, which some of the press are hailing as a ‘new era’, will cost 33 billion forints. But what is not mentioned is that Hungarian electricity consumption in a strong month is 4 million MWh, and this too is on a rising trend. The scales are therefore hardly comparable.) With the development of technology and the fall in prices, the energy storage market is of course expected to develop rapidly. But how fast does this development have to be to make these storage facilities available on time in all of Germany? Germany’s electricity consumption in 2023 was 460 million MWh, and this does not even include the fact that the entire German car fleet is supposed to be electrified in a few years’ time, replacing petrol and diesel (not to mention the future electricity demand from heat pumps, robotisation, fourth-generation industrial plants and data centres. The German government, clearly being optimistic by default, estimates that by 2045, the year of the green transition, German electricity consumption will be 1 billion MWh.) Currently, the maximum capacity of German energy storage is only 10 thousand MWh. Reservoir-based storage is much more cost-effective, but it would require suitable topography, at least several billion euros and 5-8 years to build a single new reservoir (not to mention the environmental damage and the resistance of the residents and green organisations concerned; see the sad case of Bős-Nagymaros). At the macro level, here too, the German plan goes far beyond what is realistic.

The figure can be referenced here: https://public.flourish.studio/visualisation/16699439/

Questions of strategic implications

The biggest, and actually not very big, risk for the implementation of the German green transition is that parts of it will fall well outside the deadlines and budgets set. (One might wonder what happens if a target is met in 2035 instead of 2030.)

This cannot be said, however, about the strategic consequences of the German green shift. One of the most important of these is the question of global competitiveness and thus the future of the German economy. As we have seen, the process of accelerated green transition brings with it a dramatic increase in energy prices compared to competitors. On average, exports account for almost 50% of Germany’s GDP, which is the envy of the world. And more than half of these exports comes from the export performance of the automotive, machinery, chemicals and other energy-intensive sectors. Rising energy costs (exacerbated by the divestment from cheap Russian raw materials) have caused the output of the German energy-intensive industry to shrink by 20%, despite the fact that Germany has spent €356 billion(!) on energy price subsidies since the outbreak of the war. (To put this in perspective, the EU as a whole has spent €672 billion on this, France ‘only’ €161 billion. Put another way, the EU has spent almost as much on energy price subsidies as the annual US defence budget.) One could say that so far, the punishment of fossil fuels has triggered the adaptation of governments, and not companies, in the form of subsidies.

Obviously, once the war recession and the disruption to international trade ease, the performance of German industry will improve somewhat. However, both the absolute and relative trends are clear: today’s Germany, with its energy prices and the constantly intervening, uncertain regulatory environment, is not a favourable location for heavy industry:

The figure can be referenced here: https://public.flourish.studio/visualisation/16699486/

We are not talking just about the threat of the German industry’s share of the global supply falling (think about it, in the aluminium industry 70% of costs is energy!). The green transition, which is wrecking competitiveness, coincides with the increasingly overwhelming dominance of Chinese and American competitors, be it electric cars (BYD, Tesla), fourth-generation industrial and telecom infrastructure (Huawei), artificial intelligence developers (Google, Microsoft, Baidu, Tencent) or the extraction of the rare metals needed for the green shift and green technologies themselves. All this is already pushing the EU towards the exclusion of competition and protectionist isolationism: an early example of this is the carbon tax scheme (CBAM) that is being introduced to offset the lower prices of climate-polluting industrial goods from outside the EU. Let’s hope it will work better than the sanctions against Russia, and in the long run it will not create a parallel green and non-green world market – with the EU being completely squeezed out of the latter. Because then it will not matter whether Germany has been the world leader in going green at great cost.

Finally, the other strategic problem is the political dimension of the fast-paced green transition. As we saw at the beginning of the analysis, the traditional German party system has invested virtually all its political capital in the success of the green transition.

The positive side of this is that the German political elite is almost united in its determination to go green – and is willing to take serious financial and political risks to do so. At most, there are disputes only about the methods of implementation.

The negative consequence, however, is the total political inflexibility and doctrinaire rigidity that this entails. One would think, for example, that the outbreak of a major European war for the first time in almost a hundred years, the chaos on the energy markets that followed, and the radical speed with which Russian gas was cut off would lead to a responsible government postponing the closure of nuclear power plants. However, the opposite has happened: although it had just become clear that the war had made an early phase-out of coal unrealistic, the physical destruction of the nuclear power plants that had already been shut down began. There was also no discussion, for example, even at the height of the gas crisis, about extracting the massive German shale gas reserves that would have given Germany geopolitical independence and competitive gas prices. (The question arises as to what would happen if, in some market or geopolitical crisis, there was not enough or properly priced LNG gas from the US and Qatar.) Nor has the capture and storage of carbon dioxide emissions from coal-fired power stations been considered instead of banning them (CCS, carbon capture – a technology supported by the UN Climate Council, and in which the German chemical industry has made major breakthroughs.)

Because of this ideological rigidity, the frustration of German society is not finding its way and the AfD is gaining strength, even at the expense of the CDU in opposition. There is no end to the number of new parties and organisations being formed these days. The political risk is therefore ultimately Germany’s envied political calm and governability.

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