Energy “Planning” in Germany Damages The Economy

by | Oct 8, 2023 | Europe

Germany risks “deindustrialization” as high energy costs threaten to send new factories and high-paying jobs elsewhere.

For most of this century, Germany has dominated global markets for high-end products like luxury cars and industrial machinery, selling so much abroad that half its economy ran on exports. Jobs were plentiful and the government’s financial coffers were full and growing. Now, Germany is the world’s worst-performing major developed economy, and the International Monetary Fund and the European Union expect its economy to shrink this year as its GDP is expected to contract by 0.6 percent. The loss of Russia’s cheap natural gas brought a shock to Germany’s energy-intensive industries–the manufacturing powerhouse of Europe. Germany risks “deindustrialization” as high energy costs threaten to send new factories and high-paying jobs elsewhere. The price of gas is roughly double what it was in 2021, hurting companies that make energy-intensive goods such as glass, paper and metal coatings used in buildings and cars. Also affecting its coffers, Germany’s key trade partner, China, is experiencing a slowdown after several decades of strong economic growth.

The loss of cheap Russian natural gas needed to power factories damaged the German business model. Russia cut off most of its natural gas to the European Union, spurring an energy crisis in the 27-nation bloc that had sourced 40 percent of its gas from Russia. The German government conceded that it made a mistake to rely on Russia to supply natural gas through the Nord Stream pipelines under the Baltic Sea that were shut off and damaged amid the war with Ukraine.

Another bad decision was made in 2011 when Germany decided to shut down its nuclear power plants – plants that emit no greenhouse gas emissions. It was part of an overall energy strategy known as “Energiewende,” or “energy turnaround” that sought to replace nuclear and hydrocarbon-based energy with intermittent wind and solar energy—similar to President Biden’s “energy transition.” That decision has been questioned amid increasing electricity prices and possible energy shortages. Keeping Germany’s nuclear plants in operation would have reduced Germany’s emissions four-and-a-half times more than the government’s non-nuclear plans. After the loss of the Russian gas, the German government asked Evonik to keep its 1960s coal-fired power plant running longer. Evonik planned to shift from coal to two gas-fired generators that could eventually be run on hydrogen amid its plans to become carbon neutral by 2030.

Germany’s former coal mining region is now dotted with wind turbines—a sign of the energy transition. Germany is expected to generate more than 50 percent of its power from renewable energy, mostly wind and solar power, this year. However, to meet rising demand, renewables would have to account for 80 percent of the country’s power generation by 2030.

Clean” energy projects, however, are being slowed by extensive bureaucracy and not-in-my-backyard resistance. In the southern Bavarian region, spacing limits from homes keep annual construction of wind turbines in single digits. A 10 billion-euro ($10.68 billion) electrical line bringing wind power from the north to industry in the south has faced costly delays from political resistance to unsightly above-ground towers. Burying the line means completing the project in 2028 instead of 2022, as well as increased costs.

Chancellor Scholz called for the energy transition to take on the “Germany tempo” –the same urgency used to set up four floating liquid natural gas terminals in just months to replace lost Russian gas. While the liquefied natural gas that comes to the terminals by ship from the United States, Qatar and elsewhere is much more expensive than Russian pipeline supplies, the effort showed what Germany can do when it has to.

In 2003 to 2005, Chancellor Gerhard Schroeder instituted reforms that lowered labor costs and increased competitiveness, resulting in a “golden decade” of economic growth in Germany that lasted the decade from 2010 to 2020.  That growth and a perception of Germany’s underlying strength may have brought on complacency that resulted in the misguided decisions to exit nuclear energy, ban fracking for natural gas and bet on ample natural gas supplies from Russia. Germany is now paying the price for those energy decisions, after they failed to listen to President Trump’s warnings about growing dependency.

German Companies Cope with the Energy Price Shock

Drewsen Spezialpapiere, which makes passport and stamp paper as well as paper straws that do not de-fizz soft drinks, bought three wind turbines near its mill in northern Germany to cover about a quarter of its external electricity demand as it moves away from natural gas.

Specialty glass company Schott AG, which makes products ranging from stovetops to vaccine bottles to the 128-foot mirror for the Extremely Large Telescope astronomical observatory in Chile, has experimented with substituting emissions-free hydrogen for gas at the plant where it produces glass in tanks as hot as 1,700 degrees Celsius. The experiment has worked on a small scale, with hydrogen supplied by truck. However, the reality is that a massive quantity of hydrogen produced with renewable electricity and delivered by pipeline is needed. Hydrogen produced in that manner is much more expensive than conventional hydrogen, which is more expensive than natural gas.

Biden’s massive clean energy subsidies that are being offered to companies investing in the United States is evoking alarm that Germany may be left behind. For example, Evonik decided to build a $220 million production facility for lipids — key ingredients in COVID-19 vaccines — in Lafayette, Indiana, due to rapid approvals and up to $150 million in U.S. subsidies. German officials had showed little interest.

German businesses want the government to end uncertainty over energy prices quickly so that they can plan accordingly instead of delaying investment decisions. Government politicians are squabbling over an energy price cap and a law barring new gas furnaces that have exasperated business leaders. Evonik dismissed a recent package of government proposals, including tax breaks for investment and a law aimed at reducing bureaucracy, as “a Band-Aid.”

Conclusion

Germany is a prime example of what poor energy planning does to the economy of a country. Germany bet on cheap Russian natural gas that disappeared as a result of Russia’s invasion of Ukraine and a transition to “clean” renewable energy. It closed its nuclear plants that emit no carbon dioxide and attempted to close its coal plants, but found that it needed to extend them due to the energy crisis. It is getting over 50 percent of its electricity from renewables, but needs 80 percent due to rising demand and threats of barring new gas furnaces. German businesses want answers regarding energy price uncertainty from the government, or they may have to pursue opportunities abroad.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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