The Russian aggression against Ukraine, the sanctions on Russian oil and coal and Russia’s gas supply stop has forced Germany to reassess its energy and climate policy and to redefine priorities in the energy trilemma sustainability- supply security-economic competitiveness. Before the war, Germany clearly prioritized climate sustainability and the electrification/decarbonization of the economy. Meanwhile, it considered fossil energy-especially gas- security stable and secure and competitiveness increasingly a function of the energy transformation.
Now, while Berlin has not given up on mid-and long-term climate goals and plans to even further accelerate the transition, it also needs to strike a difficult balance between short-term fossil supply security and economic welfare on the one side and longer-term climate goals on the other. Before the war, Germany’s dependence on Russian fossil fuels was overall high ( Natural gas: 55%, Oil and oil products 37%; Coal: 57%). However, it is the dependence on and the substitution of Russian natural gas supplies which poses the biggest challenge, for both supply security and energy transition. With nuclear and coal to be originally phased out respectively in 2022 and 2030, gas has emerged as the ideal bridging technology to realize the energy transition and reach the net zero-goal in the long term, while allowing industry and households for gradual adjustments in the short-midterm. Before the war, natural gas made roughly 26% of Germany’s primary energy consumption with industry and households covering together almost 60% of Germany’s final gas consumption. In the electricity sector, natural gas made around 15% of electricity generation, but the share was set to increase in the mid-term after the phase-out of nuclear power and coal-fired power plants. In fact, with a declining share of nuclear and coal in electricity generation, the natural gas turns out to be the main stabilizer of the energy grid in times of demand peaks or when renewable energy output fluctuates. Gas is also a key price setter for electricity, as production costs of gas-fired power plants set the price for electricity generated by all other technologies.
The impact of the Ukraine war on Germany’s energy pathway
Against this backdrop, in the months after the Russian aggression, the German government announced that it would work on a dramatic acceleration of its already ambitious energy- and climate policy agenda in line with the Paris Agreement targets, the Green Deal, and the 2021 coalition agreement. It would capitalize on the energy and price crisis to accelerate the transformation of the energy and industrial system. This would also allow for an accelerated phase-out of Russian gas imports and potentially for a faster decline in gas and fossil fuels demand and overall imports.
The coalition agreement defined a 100% share of renewables for electricity generation by 2035 and forecasted an increase in electricity consumption up to 750Twh by the same year. Meanwhile, the updated climate law approved in Summer 2021 defined an even more ambitious goal: to reach net-zero or carbon neutrality already by 2045 and a new, higher emission reduction target of 65% by 2030 (as opposed to the original 55%). Shortly after the war outbreak, in April, the Federal Government announced the so called “Easter package”. This represents the major comprehensive overhauling of the regulative and legal energy transition package since the introduction of the renewable energy law in early 2000. In a nutshell, the aim of the Easter package is to accelerate the expansion of renewable energies and increase the share of renewable energies in electricity generation to 80% at least already in 2030. Under the package, the expansion of renewable energies becomes now a national priority. The package provides new areas for the expansion of photovoltaics, strengthens the involvement of municipalities in onshore wind and photovoltaics, it aims to further develop the connection to locations with weak winds by expanding the electricity network and strengthening the legal framework for the expansion of photovoltaic roof systems. Specifically, it aims at building up 22 GW of solar energy capacity and roughly 18 GW of wind capacity (of which 10 onshore and 5-7 GW offshore) every year until 2030. Moreover, the “Easter package” supports the development of hydrogen as energy, i.e. electricity storage medium as well as the construction of hydrogen-fired power plants to substitute natural gas usage. More generally, the market ramp-up for a hydrogen economy has gained further relevance. Since 2020, when a national hydrogen strategy was approved, Germany has bet big on a national and global (green) hydrogen market and trade to accelerate the decarbonization of hard-to-abate sectors like steel and chemical industry. Already before the war, the new government coalition had announced an overhaul of the National Hydrogen Strategy and its targets (from originally 5GW to 10GW installed electrolysis capacity by 2030).
After the war outbreak, the Government has stressed even more the international dimension of the Hydrogen Strategy by reinforcing hydrogen Diplomacy and hydrogen partnerships with Africa, South America and the Gulf and accelerating the implementation of its financial-regulatory instrument to secure global hydrogen volumes and match global supply with internal demand (H2 Global).
The German struggle for energy security
Notwithstanding these revisited ambitious goals and the pledge for an accelerated “green” path, losing Russian gas supplies means that in the short to midterm Germany will be even more dependent on increasingly volatile and unpredictable markets, particularly for gas. Even after the war outbreak, while Germany pledged to work on reducing dependence on Russian gas as quickly as possible, the Government initially opposed a gas embargo: Russian deliveries were needed to secure a smooth and gradual switch to alternative supplies, even under an “accelerated” scenario. Since early September, when Russia reduced its supplies to almost zero, the substitution of Russian gas has now become a necessity and less of a choice.
The Federal Government’s strategy to secure gas supplies has been twofold: demand-side, it has aimed at reducing internal consumption by committing to a 20% reduction by the end of the year and by increasing energy efficiency. Supply-side, the strategy has been largely centered on LNG volumes and infrastructure build-up. The Federal Government has authorized Trading Hub Europe, Germany’s market area manager for gas, to buy as much LNG Volumes as possible on the global spot market to fill in the gas storage before the beginning of the heating season. The Government also sped up the construction of at least three LNG-Terminals until 2025 and charted four floating LNG terminals for the next two years. Meanwhile, it has temporarily reactivated coals-fired power plants and half-heartily postponed the phase out of two of the three still active nuclear power plants until April 2023.
The Federal Government’s overall approach to the crisis relies however on short-term uncertainties, and mid to long term dilemmas, which might derail the energy transition and its climate goals.
First, Germany will not only need to speed up the construction of renewable power plants, gas to hydrogen power plants and combined heat-power plants to become rapidly and fully independent from Russian energy imports and accelerate the transition. Germany will also need to significatively expand the electricity grid infrastructure, especially north-south transmission lines, and the build-up of renewables in the industrialized southern regions. Without these two necessary measures, Germany will hardly be able to meet its growing gross electricity demand: in 2021 the German Economic Ministry calculated a demand increase to 645-665 TWh until 2030, while the coalition agreement revisited this outlook upwards to 750Twh, if deep electrification of transport, heating, building and industrial sector as well as the build-up of hydrogen capacity was to be achieved by 2030 and a complete decarbonization of the electricity supply by 2035. For instance, the sole installation of 10 GW electrolysis capacity by 2030 makes up for 40Twh or 30% of the increased electricity demand. Conversely, even in a best-case scenario, the renewables capacity expansion remains almost unrealistic given the short timeframe. For example- additional onshore wind capacity will have to more than double as opposed to the past years, when it reached a maximum of two GW/yearly. Each Bundesland will have to dedicate at least 2% of its territory to wind parks usage, while the current average is less than 1%. All in all, to reach the 80% goal by 2030, Germany will need to achieve in less than 8 years what it has accomplished in the past 20 years.
Second, if natural gas were to be rapidly phased out due to the combined effect of lacking Russian deliveries, and the potential absence of cheap and stable supply alternatives in the short to midterm, the electricity demand is set to grow even more rapidly, making a further acceleration in renewables and infrastructure expansion almost unrealistic. Doubtless, above-the-average gas prices make renewable energy technologies even cheaper and offer momentum for deep decarbonization of hard-to-abate sectors like transport or industrial processing. However, high electricity and gas costs might also delay much-needed transformation processes, particularly in heavy industry. It should not be forgotten, that sustained high gas and electricity prices might even unleash a deindustrialization wave with side-effects not only on the employment and the social-economic stability of the country but also on Germany’s very ability to set international standards, also for green technologies like hydrogen.
Third, while coal-fired and nuclear power plants will help substitute natural gas in the electricity sector in the coming two years, the Government still assumes an accelerated carbon phase-out by 2030 and a nuclear phase-out in 2023. However, the risk of lock-in effects remains real, if stable energy security of supply should not be sufficiently guaranteed in the coming two years and the Federal Government is forced to indefinitely postpone the phase-out of coal (and to a less extent nuclear) to substitute gas in the electricity mix.
Fourth, if (non-russian) natural gas is still to retain its role as “bridging technology”, Germany will remain dependent on a very volatile and unstable market for the years to come. Unstable supply will also mean uncertain commitments from the business to further decarbonize. The global LNG market remains tight and undersupplied until 2026-27, when new projects in the US and Qatar will go on stream. Against this backdrop, in order to substitute Russian volumes, Germany can only secure supplies by diverting US LNG flows from Asia to Europe which is now emerging as a high-price, premium market. Should this winter prove to be particularly harsh, and the households’ demand inelastic, even continued LNG supplies and full gas storages might not prove sufficient to escape gas shortages for either industry or households. In this scenario, gas supply for the winter 2023/2024 might prove even more difficult to secure. Moreover, in the coming years, Germany will need not only to build LNG infrastructure on the coast, but also to expand and adapt its gas transportation network to reversed gas flows, from the traditional east-west to west-east, and potentially south-north direction. From the point of view of climate goals, building up new fossil infrastructure like LNG Terminals will only make sense if the latter is already built as “h2-ready” , i.e. able to rapidly switch to hydrogen usage and transportation. But H2-ready infrastructure can only be planned if a global hydrogen market design and ramp up emerges and if Germany solves the (import) dilemma of hydrogen molecules/ hydrogen derivatives or green electrons.
The war in Ukraine (and the energy price crisis it has contributed to aggravate), present doubtless a chance for Germany to accelerate the energy transformation needed to achieve its climate goals. However, the combination of very ambitious decarbonization targets in a relatively short timeframe, an almost exclusive focus on renewable energies and carbon-free-rather than low-carbon- technologies (like for example carbon capture or nuclear), and the uncertainties deriving from the combined effect of Russian gas phase out and a volatile and tight LNG market might seriously jeopardize not only Germany’s climate plans but also endanger the country’s industrial and socio-economic basis.
Against this backdrop, the current energy crisis has forced fiscal policy to intervene in a discretionary way. In fact, in late October the Bundestag backed the government's proposal of a €200 billion emergency aid package to ease inflationary pressures on households and businesses by funding energy price caps and subsidies until 2024. According to the key points of the plan, in February/March 2023 80% of gas usually consumed by about 20 million households and small businesses will be capped at 12 cents per KWh and limited to 9.5 cents when used for heating. To bridge the time until spring, this group will receive a down payment – one-twelfth of the annual consumption - as early as December 2022. In addition, from 1 January 2023, about 25,000 companies can now expect a price cap of 7 cents per KWh on as much as 70% of their consumption.
Berlin’s massive rescue package has triggered a lot of criticism from Brussels and some other EU capitals as the “defensive shield” could indeed disincentive energy savings while Berlin opposes a gas price cap for imports as this might divert gas flows for which Berlin can still pay a premium price. Otherwise, other capitals like Paris, Madrid or Rome have adopted similar though less bombastic emergency measures and subsidies according to their own needs and fiscal space of maneuver. Given the systemic relevance gas has for the energy-intensive industrial sector and for more than half of the country’s households, Berlin has similarly acted according to its fiscal strength and leveraged its financial reserves to prevent a possible double shock (price and supply shortage) which could trigger social discontent, political instability and have major secondary effects on European industrial value chains.
Therefore, the upcoming winter and the next two years will prove decisive and show, whether Germany will be able to radically transform its energy and industrial system and stay on track with its climate goals or will need to adjust its climate ambition to persisting fossil realities to secure energy supply, industrial competitiveness and economic welfare.
With the support of the European Commission's Representation in Italy.
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