Energy Lessons From Germany

 | Jul 18, 2014 | 3:00 PM EDT
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Sometimes it can be a little confusing to sort out energy trends. In many cases, the industry is going in one direction while lobbyists argue for going a different direction. Such is the case with renewable energy.

Companies such as NextEra Energy (NEE), Duke Energy (DUK), Exelon (EXC) and NRG Energy (NRG) are long nuclear power plants. Yet these same companies are making substantial investments in renewable energy. In fact, more capital is flowing into wind and solar power than is flowing into new nuclear and coal plants.

At the same time, their lobbying associations are crying wolf. This week, lobbying groups Edison Electric Institute (EEI) and Nuclear Energy Institute (NEI) were pointing to a new report that warned of the dangers of renewable energy. Development And Integration Of Renewable Energy: Lessons Learned From Germany was prepared by FAA Financial Advisory (Finadvice) for EEI and others.

On the surface, Finadvice's report sounds bad for renewable energy; however, if anyone takes the time to read it, it actually presents a strong case for renewable energy. Finadvice's report begins:

"Over the last decade, well-intentioned policymakers in Germany and other European countries created renewable energy policies with generous subsidies that have slowly revealed themselves to be unsustainable, resulting in profound, unintended consequences for all industry stakeholders. While these policies have created an impressive roll-out of renewable energy resources, they have also clearly generated disequilibrium in the power markets, resulting in significant increases in energy prices, as well as value destruction for all stakeholders: consumers, renewable companies, electric utilities, financial institutions, and investors."

According to Finadvice, these are the most important lessons from Germany:

    1. Policymakers underestimated the cost of renewable subsidies.
    2. Retail prices to many electricity consumers increased significantly.
    3. Rapid growth of renewable energy reduced wholesale prices in Germany.
    4. The wholesale pricing model changed as a result of renewable energy.
    5. Fossil and nuclear plants are now facing [financial] stresses.
    6. Renewable capacity did not translate into substantial displacements of thermal capacity.
    7. Large-scale investments are required to expand transmission grids.
    8. Subsidy programs needed numerous redesigns.

Finadvice and EEI want readers to believe that what happened in Germany will happen in the U.S. Both seem unaware that it already has.

Lesson: Renewable Energy Lowers Energy Prices

Let's look first at a startling fact uncovered by Finadvice, EEI and NEI: Renewable energy actually lowers wholesale energy prices. Finadvice's report argues that Germany's wholesale energy prices were reduced because of renewable energy's "zero variable cost of production." Consequently, "wholesale prices in Germany have fallen dramatically from €90-95/megawatt-hour in 2008 to €37/MWh in 2013."

Not only did energy prices fall, so did pollution. Finadvice goes on to say, "Without a doubt, renewables have helped achieve CO2 goals. From 2005 to 2011, Germany's CO2 emissions declined by 12 percent."

Lesson: The U.S. Is Not Germany

Unlike Germany, the U.S. has abundant sources of cheap natural gas. When consumer demand for power ramps up each day, utilities normally dispatch gas turbines to serve the incremental load. Those turbines are designed to operate only for short periods. In most U.S. power markets, natural gas is on the margin most of the time.

Germany must import natural gas from countries such as Russia. Finadvice confirms the availability and price of imported gas is unreliable, unstable and expensive. Buried in Finadvice's report is their argument that, "Renewables help reduce the dependency on imported fossil fuels, thereby reducing the risk of possible price shocks."

Lesson: Governments Regularly Subsidize Energy

Finadvice's report offers snarky commentary on Germany's need to subsidize renewable energy. They warned that the U.S. might need to do the same. Here is a news flash: Every nuclear and coal-fired power plant ever built by U.S. utilities was subsidized. Every utility transmission line and distribution system depended on rich government guarantees.

Even the five nuclear power plants currently under construction by Southern Co. (SO), SCANA (SCG) and the Tennessee Valley Authority (TVA) have rich government subsidies. Combined, the total benefits from state and federal governments make Germany's renewable energy subsidies look like chump change. When all data are captured, government subsidies can be a net plus for taxpayers and consumers. This is why every state in the union continues to subsidize energy systems.

Rather than disparaging one energy source over another, a better approach is to consider all options. Like Germany, the U.S. needs more renewable energy and cleaner fossil plants. But unlike Germany, the U.S. wants more nuclear power.

In the U.S., government may need to subsidize nuclear, wind, solar and clean fossil projects. Like Germany, it is in U.S.'s strategic interest to deploy diverse resources. It is also in the nation's interest to have abundant sources of safe, economic and reliable energy.

Do not be distracted by the industry's lobbying arms. Instead, watch their money. It is flowing into renewable energy.

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