Is Germany Outsourcing Its Future Energy Security?

on June 12, 2015 at 12:05 PM
BIRMINGHAM, UNITED KINGDOM- JUNE 3:  Pylons are seen situated over a residential housing area on June 3, 2005 in Birmingham, England. Research released suggests that living too close to overhead powerlines apears to cause a higher risk in childhood leukaemia. The study concluded that children who lived within 200m of high voltage lines were at 70% higher risk. (Photo by Matt Lewis/Getty Images)

Pylons are seen situated over a residential housing area on June 3, 2005 in Birmingham, England. (Photo by Matt Lewis/Getty Images)

German Federal Minister for Economic Affairs and Energy (BMWI) Sigmar Gabriel recently touted another step towards enhancing EU energy security via regional cooperation. The Minister and 11 of his colleagues from neighboring European countries signed a political declaration meant to ensure the reliable and secure supply of electricity among those countries. Dubbed “12 electrical neighbors” – in essence a “mini energy union’ – and the idea itself dating back to July 2014 based on a German initiative, Minister Gabriel was quick to liken this latest development to the “usher[ing] in of a new era of energy policy.”

On this occasion he is quoted as saying: “They want to start considering energy security as an European issue, rather than a purely national one. And they want to focus on exploiting the benefits of the single energy market as the most important tool to deliver this. This means that the neighbouring states have defined clear priorities and have sent an important signal that they can rely on each other – even though there are some differences between their individual energy policies.”

Even though all participating countries clearly understand and are in agreement that further linking their respective transmission systems through interconnectors will eventually result in a win-win situation for all, harmonizing the countries’ often divergent energy policies, in turn, remains a tall order. Energy policy is a reflection of history, geography, and differences in natural endowments and has to be understood in terms of national security. So yes, the above declaration signals at least the willingness of those countries to consider relying for some of their energy needs on their respective neighbors. The German Ministry for Economic Affairs and Energy highlights in a press release the key points of the declaration:

  1. The neighbouring states have agreed to “place greater focus on flexibilising supply and demand by making use of strong market signals and by using price peaks; they have agreed to refrain from introducing legal price caps and to eliminate barriers that stand in the way of greater flexibility.”
  1. The neighouring states will “further reinforce the grids and they will not restrict the cross-border electricity exchange, even in times of electricity scarcity.”
  1. In the future, the neighbouring states will “place greater focus on assessing their generation adequacy as a regional group and to this end they will develop a common approach.”

The aforementioned list is telling in many respects – especially why it is prima facie imperative for Germany to link and integrate its centrally located power market with neighboring ones. Germany has to deal with a significant generation overcapacity as a direct result of constantly increasing electricity production from renewables while, at the same time, having a large conventional fleet of low-cost coal-fired power plants still online. According to Agora-Energiewende in a “Report on the German power system” from February 2015, Germany had a total installed capacity of 192 GW (as of July 2014). See the following chart for a breakdown by energy source.

roman German Installed Capacity (1)

Source: Agora-Energiewende (Feb. 2015)

More importantly, lignite and hard coal accounted for about 44 percent of all electricity produced in Germany in 2014, which translates to 265.9 TWh of total electricity produced in 2014. Meanwhile, electricity production from renewable sources reached 157.4 TWh.

roman German Electricity Production in 2014

Source: Agora-Energiewende (Feb. 2015)

These figures become even more interesting once they are put in relation to gross electricity consumption, which came in at 576.3 TWh for 2014 with an annual peak demand of 84.0 GW, according to AG Energiebilanzen data used by Agora-Energiewende. In view of an annual electricity production of 610.3 TWh in 2014, the potential and need for cross-border power exports is apparent.

No wonder, Germany has become a net energy exporter to neighboring countries like the Netherlands or Austria as it is pushing ahead with its “Energiewende”. From a German power market perspective, all those factors make closer European cooperation and, in particular, the integration of power markets around Germany logical next steps. Additionally, the Agora report points to another factor: “In 2012, Germany had 21.3 GW of available interconnection capacity – a high level compared with an annual peak demand of 83.1 GW. Still, only about half of this export capacity is utilized at any given time. Export capacity (…) is expected to continue to grow as planned interconnections expand cross-border transmission capacity with several neighbouring countries.” The following chart from a June 2015 Agora report on power exports and climate protection in light of the “Energiewende” bears this out for the year 2014:

Countries and their Cross-border Transmission Capacity

roman german Countries and their Cross-border Transmission Capacity

Source: Agora-Energiewende (June 2015)

While from a German power market standpoint it makes sense to push ahead with further European integration, it is even more important for Germany from an energy security standpoint if it continues to pursue out significant coal-fired power generation capacity in addition to the phase-out of nuclear power capacity (2022). The reason is that Germany may rid itself of significant base load capacity (back-up power sources for intermittent renewable sources if adequate storage capacity does still not exist at a later time), which then would be located across the border in neighboring countries such as the Czech Republic (nuclear power in Temelin) and France (nuclear power).

Unsurprisingly, the political declaration from above puts an emphasis on an uninhibited cross-border electricity exchange – i.e. “even in times of electricity scarcity” – and on the avoidance of price caps in wholesale power markets.

The objective is clear, in a sense Germany is attempting to stave off the need for a domestic capacity market via the further European integration with neighboring power markets on German terms. This is a perilous path to take in terms of future German energy security. Charles Kupchan wrote a book entitled “How enemies become friends” in which he described how nations can escape geopolitical competition and replace hostility with friendship. Undoubtedly, history saw this concept validated on the European continent but this is not a one-way street. Take Russia as most recent case in point. Governments and policies can change and thus seemingly outsourcing future German energy security to ‘avoid’ a domestic capacity market is misguided. Sound policy would be to pursue further European integration of power markets while maintaining a capacity reserve anchored within a domestic capacity market.

Moreover, not all is well in ‘energy transitioning’ Europe either despite the political declaration of a ‘mini electrical union’. Notably, the Czech Republic seems to regard unplanned power flows from Germany as a serious national security risk. As reported by the German magazine Der Spiegel, the Czech national electricity transmission system operator CEPS announced investment of more than 72 million Euros in phase shifting transformers at the German-Czech border – expected to be operational in 2016 – in order to shield the Czech Republic from the real possibility of a potential future blackout (Read on the ABB website on how to control power flow with phase shifting transformers).

Finally, one is struck by the fact that the political declaration includes as one key point the agreement to make use of “strong market signals”. In the case of Germany, where were the same strong market signals with respect to renewables and their rapid expansion, which were instead fueled by general subsidies and feed-in tariffs? Economists describe this phenomenon as market distortion. Now, once the power market has been distorted and the ‘new’ power market structure – as fait accompli – is suddenly the ‘new legitimate’ blueprint, the market has to be defended against any additional market distortion, even if it is only to right the previous wrong.

Nevertheless, it seems that signing on to a ‘mini electrical union’ will not prevent participating countries from ‘punishing’ such perceived double standards immediately or in the future.