Gas crisis reveals the dirty secret of the German energy transition

Created: 08/28/2022, 04:45 am

By: Ludovic Subran

Ludovic Subran is chief economist at Allianz.

© N. Bruckmann/M.

Litzka/Allianz

The Ukraine war has laid bare the failings of German energy policy.

In order to secure the energy supply even without Russian gas, there is hardly any alternative to coal and nuclear power in the short term, writes Allianz chief economist Ludovic Subran in the guest article.

But in the medium and long term, the climate-neutral energy transition is the right way - and economically tempting to boot.

Munich - The gas crisis has revealed the dirty secret of the German energy transition: It may not have been built on sand, but on Russian gas, a turnaround by the grace of Putin.

Not anymore.

But how is it going to continue: Instead of going for gas, now rely on other "smutty children" of energy production such as coal or nuclear energy - or take the flight forward, ie put everything on the renewable and clean energies card?

The government has opted for the latter and has set the goal of making electricity generation in Germany climate-neutral as early as 2035 (and not just 2045).

At first glance, this seems over-ambitious, but it is actually the only sensible way and promises high profits in the medium term.

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How do we secure our pension?

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Coal and nuclear power In the short term yes, in the long term no

Of course, in the short term, i.e. in the next two winters, we will not be able to do without coal.

And also with a view to nuclear energy, it would make sense to use the available capacities to mitigate the current energy crisis: the government should show just as much courage in the question of not switching off as in the expansion of renewables.

But in the medium to long term, both technologies are no longer competitive, and they perform miserably in a cost comparison to renewables.

In the case of nuclear energy, this is obvious, especially since the question of disposal has not yet been clarified.

Coal: Achilles heel CO2 price

But coal also has a crucial Achilles heel: the CO2 price of the European Emissions Trading Scheme (ETS).

It is currently around 80 to 90 euros, making coal unattractive for generating electricity;

for this, the price would have to fall below 60 euros – but this will hardly happen.

In this respect, the short-term (subsidized) reanimation of coal-fired power plants will not change anything about the planned phase-out of coal, coal will be “priced” out of the market sooner rather than later.

Incidentally, the ETS is also the reason why it makes no sense to play off climate protection against energy security.

Even if we now connect coal-fired power plants to the grid again, CO2 emissions will not increase: They are capped by the ETS in Europe.

But the price of carbon will rise, so other participants in emissions trading will reduce their emissions instead of buying expensive emission rights.

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Ending coal and nuclear power means quadrupling renewable capacities

A renaissance of coal or nuclear energy therefore makes little sense.

But how is the goal of climate-neutral power generation to be achieved by 2035?

After all, this implies a quadrupling of existing renewable capacities;

also a massive expansion of the power grids;

ramping up the hydrogen economy;

and last but not least, the creation of sufficient reserve capacities, for which, for example, the connection of millions of batteries from electric cars to the power grid is an option.

A mammoth task indeed.

Keys to success are integrated planning that looks at the entire system, including decentralized storage systems like car batteries, and the promised faster and easier permitting processes.

The fact that the latter is possible is shown by the provision and connection of a floating LNG terminal to the gas grid in less than a year.

Things have to continue at this pace: politics and bureaucracy will have to remain in “escape mode” for the next few years – and it’s about nothing more than “escape” from self-inflicted dependence on Russian gas.

Value-added turbo energy transition

The price of freedom is tempting.

If the goals are achieved, Germany would for the first time switch to the 1.5-degree path.

This does not yet save the global climate, but it is an important sign.

Also for the benefit of the German economy: the necessary investments would generate around 40 billion euros in additional value - an increase of one percent of GDP;

in addition, almost half a million additional jobs will be created.

So let's run!

About the author: Ludovic Subran is chief economist at Allianz SE and Allianz Trade/Euler Hermes.

Before joining the Allianz Group, he worked for renowned institutions such as the French Ministry of Finance, the United Nations and the World Bank.

He also teaches economics at HEC Business School.