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What happens when sustainability targets come due

Rod Morrison
Rod Morrison
Editor, Project Finance International, Refinitiv

What lessons can be learned for countries embarking on the energy transition from the experiences of Germany, which has seen high electricity prices as it tries to meet  sustainability targets?

  1. We have seen sustainability target inflation over the last few years and right now plenty of governments and companies are announcing plans focusing on 2030 – a date near enough to be meaningful but far away enough not to be hurtful, right now.
  2. However, one major economy – Germany – is coming up to its sustainability targets due date, 2022, and its experience is salutary.
  3. Other countries undertaking the energy transition to more renewable sources need to learn the lessons from Germany’s experience and plan accordingly.

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This article was originally published in PFI, 8 April 2021.

The German government started its Energiewende energy transition programme formally in 2010 and, following the Fukushima nuclear disaster in Japan in 2011, decided to incorporate the phasing out of nuclear power by 2022.

Going for a massive increase in renewables and phasing out nuclear at the same time was too ambitious. The nuclear phase-out target is on the way to being met but coal and gas plants have remained on the system to keep power supplies up.

Even in a binary world, choices and compromises have to be made.

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Sustainability targets and the energy transition

Interesting then to read the Federal Audit Office’s report released last week on the energy transition, snappily entitled “to implement the energy transition in terms of security of supply and affordability of electricity”.

The report is generally critical of the Federal Ministry for Economic Affairs & Energy (BMWi), which is in charge of the transition process. But its final conclusion is perhaps most startling.

BMWi needs to “determine what it understands by cheap and efficient supply of electricity to the general public. It must set up on the basis of indicators at what level electricity is considered cheap, strive to fundamentally reform the system of state-regulated energy price components. Otherwise there is a risk of competitiveness for Germany and to lose acceptance for the energy transition.”

Ouch. Yes indeed, the general public is going to have to pay.

A high price for renewable energy

The FAO report detailed how the general public is paying and why it came to the conclusion that acceptance of the energy transition could be lost.

“In no other EU member state are electricity prices for typical private households currently higher than in Germany. They are 43 percent above the EU average. Also, for commercial and industrial customers with a power consumption between 20 and 20,000MWh per year German electricity prices are at the top.

“The electricity prices for large consumers with more than 150,000 MWh per year, however, are below the EU average. The drivers of high electricity prices were and are the state-regulated price components, in particular the Renewable Energy Surcharge.”

Germany jumped the gun when it came to energy transition, so as a pathfinder it found various teething problems other countries can take on board.

In addition, renewable energy costs have fallen dramatically over the last decade, meaning renewable subsidies will not be so great going forward. That said, in a market such as the UK, renewable subsidies reached £10bn in 2020/21 and they, plus other policy-related fees, account for 30 percent of the electricity bill.

Getting renewable power to the customer

The prospects for transition affordability look good on one level – renewable generation costs are coming down fast – but on the other hand they look challenging, market-balancing mechanisms, storage and a massive investment in transmission are needed around the world to get the new power to the consumer.

In addition, a lot of new investment is needed in other transition areas such as transportation – an area even the pathfinding Germany has yet to tackle in a big 2030 target way. Plenty of work is being undertaken in the electric vehicle (EV) sector, but the challenges over and above the cost issues are immense.

Demand for renewable assets is increasing as public support for the energy transition continues to grow. But even renewable developers see the risks of taking the public for granted.

The overwhelming success, in monetary terms, in the recent auction for leases for offshore wind sites in England and Wales caused alarm. Payments will reach £880m pa before any construction starts.

Who will pay for the renewable energy projects?

“Someone is going to have to pay and it’s probably, at least in part, the consumer,” Duncan Clark, Orsted’s UK head, told Reuters. Orsted, of course, did not get a licence and did not pay the fee. But Mark Lewis, chief sustainability strategist at BNP Paribas, said the option fee would add around 35 percent to project development costs, assuming today’s building costs. The Scottish leasing round will be less ambitious but will still raise £880m in total.

The FAO report is really worth a read for those thinking not just about setting ambitious sustainability targets but in addition how to manage them in the real world.

“The purpose of the law [the Energy Industry Act] is the most secure, inexpensive, consumer-friendly, efficient and environmentally friendly wired supply for the general public with electricity and gas, which are increasingly based on renewable energies.” Indeed.

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