How not to do a renewables policy

The National Business Review
19 November, 2018

As the Interim Climate Change Commission decides how to implement the government’s commitment to 100% renewable electricity generation by 2035, it could learn from the renewables policy disaster unfolding in Germany.

Germany’s Energiewende (‘energy turnaround’) policy aims to reduce greenhouse gas emissions by up to 95% by 2050 by investing in solar and wind generation.

Energiewende will cost €550 billion over 20 years – at €25,000 for every household in Germany, that’s about three times the cost of the entire Apollo programme in today’s money.

But despite constructing 29,000 wind turbines and 1.6 million solar installations, Energiewende has had almost no effect on Germany’s emissions.

Germany is building wind and solar in combinations that do not allow it to retire other emissions-intensive generation. Despite investing heavily in solar and wind, Germany has had to maintain most of its coal-fired generation ready to step in to keep the lights on when the sun and wind stop.

The problem is not so much what is being built but how investment decisions are being made.

No political lever

In New Zealand, for example, investment in generation is decided in boardrooms and living rooms, strictly beyond the reach of politics. Generation receives no subsidies, leaving the government without a financial lever to pull in pursuit of its environmental goals. Investment occurs only when it is justified by the demand for electricity.

In Germany, on the other hand, investment is politically determined. Generation is heavily subsidised through a system of literally thousands of prices and feed-in tariffs, all under the control of state and federal governments.

Predictably, mixing politics with something as complicated as electricity has led to absurdities.

In 2011 and 2012, solar panel costs in Germany were (and still are) falling rapidly but political intransigence prevented subsidies from being adjusted to compensate. Solar investment boomed under these politically skewed subsidies to the extent that by 2013 Germany, a country that receives fewer sunshine hours each year than Antarctica, according to the World Meteorological Organization, had nearly 50% of the world’s installed solar capacity.

Politics intervened in wind generation, too. Turbines produce energy in proportion to the cube of wind speed – twice the wind speed, eight times the energy. But rather than allow wind investment to concentrate in windy areas, subsidies were in many cases simply increased by enough to push investment into areas without wind.

Generous subsidies flooded the electricity market, collapsing the wholesale price and jeopardising the financial viability of competing coal and gas generation. But Germany needed that generation to protect its security of supply, and so in 2016 legislation was introduced to block the exit of coal and gas generation.

All this has led to Germany maintaining two electricity systems, one based on renewable energy, the other on fossil fuels, and all funded by German households and businesses paying some of the highest electricity prices in the world. By 2016, consumers had paid a whopping €176 billion to renewables companies for electricity worth just €5 billion.

But the financial pain may just be beginning. Fluctuations in solar and wind production, and the need to carry electricity over long distances, mean Germany’s national grid may require up to €1 trillion additional investment on top of its generation investment.

Red flags don’t come bigger than this.

Germany’s mistake was not in committing to renewable generation. It was to put governments in charge of highly technical investment decisions.

Keep politics out

As New Zealand’s government considers how to implement its commitment to 100% generation from renewables by 2035, it should be careful to keep politics out of electricity and leave investment on a commercial footing.

Renewable generation has flourished under New Zealand’s commercial model, producing 82% of electricity in the year to June 2018. This share is set to increase past 90% over the next 10 years, with the pipeline of consented generation projects almost entirely made up of renewables.

The government’s commitment to 100% renewables by 2035 does not compromise the political independence of the electricity sector. Although the policy constrains investment, it preserves a level playing field among renewable technologies, and leaves investment decisions and risk where it is with the sector.

What will compromise political independence, however, is introducing generation subsidies in the form of capacity contracts, an idea supported by some officials working on the 100% renewables policy. Governments use capacity contracts to fund the construction of new generating assets. One reason for this is they believe the wholesale market will undersupply generation that runs only occasionally at peak times or in dry years.

It is not at all clear this is correct because the wholesale market funds assets that can sit idle for long periods.

But whatever the benefits of capacity contracts, their cost is to shift responsibility for how electricity is generated from the sector to the government, politicising investment. Inevitably, ministers will be expected to take a position on how much solar investment should be going into Northland, Southland, and all points in between.

That is how not to do a renewables policy.


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