A few days ago The Wall Street Journal published an opinion article about the “Berlin’s renewable energy fiasco”, whose main message, as you can guess, is the failure of Germany’s pioneering Energiewende (energy transition). Let’s review its two main arguments:
1.1. “The renewables never seem to fall in price the way boosters promise”
Figure 1 shows the evolution of Photovoltaic module prices. They have been declining over the last 40 years at a learning rate of around 20% (Fraunhofer, 2013). This would not have been possible if support policies had not been carried out when costs were still high. Further support will therefore translate into further cost decline (around half price in 20 years according to the conservative estimations of the IEA, 2014) and consequently lower electricity prices in the future.
Figure 1. Photovoltaic module prices and projection to 2035 based on learning curve ($/Watt; note that the axes are in logarithmic scale).
Source: IEA, 2014
1.2. “Germany has spent some €200 billion ($228.09 billion) since 2000 transforming its energy industry into a green dream” and “market distortions caused by overreliance on expensive but undependable power”.
Assuming the €200 billion figure in 16 years and ignoring discounting, that is €12.5 billion a year. According to Ecofys (2014), the external cost of electricity and heat generation in Germany is the highest of Europe accounting for more than €40 billion a year. That is assuming a €50 Social Cost of Carbon (SCC) per ton of CO2, which appears to be too optimistic provided the latest developments in earth and climate sciences (such as this, this, this and this). Indeed, a recent article published in Nature Climate Change suggests a lower bound for the SCC of at least 125$1995/tCO2 (i.e., ~149€2015/tCO2), that is almost triple the cost considered by Ecofys.
Rather than market distortions caused by renewables, we should talk about the market failures derived from those externalities, which cause damages for the value of more than 3 times the cost of the current support levels, even with very conservative estimates.
Figure 2. Total external cost of energy (electricity and heat) per EU Member State in 2012 (in billion €2012), considering a Social Cost of Carbon of 50 €/tCO2
Source: Ecofys, 2014.
1.3. “By favoring solar, Berlin would be picking the power source that most exacerbates the problems with the energy transformation. It’s the most expensive.”
Again, it is the most expensive only because fossil fuels have externalized environmental costs. Therefore, it is not the case that coal and gas are cheaper, but rather that part of their real cost is not reflected in their market prices and therefore will be paid by other agents, such as third people (e.g. through illnesses related to pollution), or future generations (e.g. due to the future damages of climate change); not to mention other unquantifiable ecological damages such as biodiversity loss or ecosystems degradation.
Consequently, when we take into account external costs of fossil fuels, we find that solar is indeed a cheaper option. Moreover, bearing in mind its future expected cost development and the abundancy and spread of the solar resource, solar becomes not only an affordable energy source in the present, but a wise investment decision for the future.
Figure 3. Levelized Cost Of Electricity (LCOE) of different generation technologies (€/MWh) taking into account externalities other than climate change and a Social Cost of Carbon of between 50 and 150 €/tCO2
Source: own elaboration based on Ecofys, 2014.
- Deindustrialization: “[…]soaring electricity prices push industries overseas and bankrupt households. Job losses run to the tens of thousands”.
As in any economic transformation, there are sectoral shifts. It is obvious that jobs will be lost in the fossil fuel sector, but others are created in the renewable sectors. The main argument, however, is that higher electricity prices are causing a decline competitiveness of the German industry and therefore leading to deindustrialization. Although labour impact of renewables needs to be analysed in detail, the general picture depicted by the Manufacturing Purchasing Managers’ Index does not indicate such a negative trend in the manufacturing sector caused by soaring electricity prices.
Apart from the international economic crisis in 2008-2009 and the short relapse in 2012, we do not observe a downwards trend in this indicator which assesses the general performance of the manufacturing sector. Indeed, the unemployment rate has reached its lowest value (4.2%) in Germany since the reunification (Figure 4).
Figure 4: Germany Manufacturing Purchasing Managers’ Index and Unemployment rate.
Renewables have a twofold effect on electricity prices: whilst on one hand they contribute to reducing the pool price of electricity, retail prices increase due to the cost of support policies. In the long term, as long as support levels decrease, the retail price will tend to stabilize again whilst the decreasing effect in the wholesale market will prevail.
Finally, although certainly higher electricity prices harm competitiveness as is conventionally understood, they better reflect the real cost of energy, and incentivize energy efficiency, which is another objective defined in the EU strategy 2020. Moreover, when dynamically understood, environmental standards can even improve competitiveness. As Porter and van der Linde puts it: “Properly designed environmental standards can trigger innovations that lower the total cost of a product or improve its value. Such innovations allow companies to use a range of inputs more productively—from raw materials to energy to labor—thus offsetting the costs of improving environmental impact and ending the stalemate. Ultimately, this enhanced resource productivity makes companies more competitive, not less.”
The above discussion does not mean that solar is the panacea. Other measures (such as smart consumption and energy efficiency) and technologies will be needed to achieve a sustainable (in economic and environmental terms) energy supply. But it is clear provided the abovementioned evidence, that solar will be a significant part of the solution.
Ecofys (2014). Subsidies and costs of EU energy. Final report
Fraunhofer (2013). Levelized cost of electricity. Renewable energy technologies study.
IEA – International Energy Agency (2014). Technology roadmap. Solar photovoltaic energy.
van den Bergh and Botzen (2016). A lower bound to the social cost of CO2 emissions. Nature Climate Change 4, 253–258 (2014).
 A 20% learning curve means that cost declines by 20% for each doubling in modules production.
 The Markit Germany Manufacturing Purchasing Managers’ Index measures the performance of the manufacturing sector and is derived from a survey of 500 industrial companies. The Manufacturing Purchasing Managers Index is based on five individual indexes with the following weights: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent), with the Delivery Times index inverted so that it moves in a comparable direction. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month; below 50 represents a contraction; while 50 indicates no change.