Wednesday, June 19, 2013

Green Energy: A "Boom" We Can't Afford

Chancellor Angela Merkel has done a yeoman's job navigating an almost impossible position regarding the euro,  Here's a fair historical record of the stages of the crisis. In the final analysis, she is a savvy politician with an overriding interest in getting reelected, which seems a foregone conclusion.

However, aside from the euro crisis, Chancellor Merkel made an uncharacteristically rash and politically motivated move to throw the Off switch on the German nuclear industry in March 2011; she also made commitments to the European Renewable Energy Directive which cannot be met.  What has been done to date is already distorting economic choices in Germany and driving some German companies to increase production in markets like the United States. Why?

According to a study done by GlobalData, cited in the Wall Street Journal, a German residential customer in 2012 paid 2.5x more for electricity than did the average residential customer in the United States.  Some of this difference comes from the absence of a 19% VAT tax which German retail customers pay and which is not a preferred means of taxation in the U.S.

Funding for renewables in the U.S. is provided by tax expenditures (subsidies), whereas in Germany they are billed directly to consumers.  U.S. consumers have benefited from relatively low wholesale prices of electricity due to low hydro prices and to the increased supplies of alternative gas which put downward pressure on natural gas prices.

Industrial customers in Germany pay more for their electricity, and their higher costs are threatening German competitiveness in export markets.  All of this is happening against a background of relatively stable wholesale prices for electricity.

How does this situation become more unstable?  According to the Wall Street Journal, coal and gas account for 62% of the energy used to produce electricity, while nuclear supplied about 25% in 2011; so 87% comes from fossil fuels and nuclear, leaving about 13% from other "renewables," like wind, solar and hydro.

This 13% share for German renewables in electricity production is slated to become 35% by 2020. By then the entire nuclear fleet is slated to be shut down, while subsidies for coal will be declining sharply.  No rational economic model, apart from growing taxpayer subsidies, can support this transition without severe dislocations and inefficiencies.  Even the German trade unions understand this.

No matter: for Germany, wind is their ethanol Gold Rush. Like ethanol, it won't end well.

Even the costs which are being subsidized underestimate the true costs of bringing renewables up to 35% of the inputs for electricity production.  According to the IEA,
"Furthermore, the costs of connecting (wind power) to, and reinforcing the grid, also need
to be taken into account in the process for connecting new capacity to the grid. Network
should provide an incentive for new capacity to connect where the system
needs it most."
These costs will only add to the costs passed on to German customers.  If wholesale prices start trending upward from here, expect the political backlash in German to get stronger.

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