Ballooning costs threaten Merkel's bold energy overhaul

BERLIN/FRANKFURT Wed Aug 28, 2013 7:13am EDT

1 of 3. File photo of German Economy Minister Philipp Roesler posing for media in front of windmills of the wind farm BARD Offshore 1, located 100 kilometres north-west of the German island of Borkum, August 26, 2013.

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BERLIN/FRANKFURT (Reuters) - Angela Merkel's "green revolution" risks becoming a victim of its own success.

Seduced by generous subsidies, Germans are embracing the ambitious project with such fervor - installing solar panels on church roofs and converting sewage into heat - that instead of benefiting from a rise in green energy, they are straining under the subsidies' cost and from surcharges.

Merkel's ambitious experiment to wean Europe's biggest economy off nuclear and fossil fuels is being closely watched around the world. Should it work, others will follow. But her priority if, as expected, she wins a third term on September 22 will be finding a way to cap the rising cost of energy.

"Germany's dilemma is how to keep industry's energy prices low enough to remain competitive and meet ambitious (green) targets while also maintaining a balanced budget," said Will Pearson, head of global energy at the Eurasia Group in London. "Addressing these will pose a political challenge."

So attractive are the incentives, or feed-in tariffs, that the rapid expansion of renewable power has driven up the surcharges which fund them and are paid for by consumers. The charge rose by 47 percent this year alone.

Both households and industry are feeling the pain and exporters complain that the energy shift has driven up power prices so much that their competitiveness is being eroded.

Cost worries aside, polls show broad public support for the shift, announced by Merkel after Japan's Fukushima disaster in 2011. Responding to public fears, she accelerated Germany's nuclear exit and introduced targets for renewables to make up 35 percent of the power mix by 2020 and 80 percent by 2050.

Given that consensus, the struggling opposition finds it difficult in the election campaign to present energy policies that differ significantly from those of Merkel's conservatives.

No one advocates a dismantling of the project.

"The energy transformation is a bit like putting man on the moon - it offers Germany huge opportunities for future decades. I have nothing against the idea," said Peer Steinbrueck, the Social Democrat (SPD) candidate for chancellor. "But Mrs Merkel is messing up the implementation and we will change that."

The SPD, which introduced the first incentives for green energy more than a decade ago when it ruled with the Greens, wants to help consumers by cutting energy taxes.

GRASS ROOTS

While politicians squabble over how to keep a lid on costs - put at 1 trillion euros ($1.34 trillion) in the long run by the environment minister - voters are taking matters into their own hands.

Take projects like GruenEnergie, a scheme launched two years ago by city utility Stadtwerke Guetersloh in western Germany under which the local cooperative bank and turbine maker Enercon each match citizens' investments in a nearby wind park.

After just three weeks, it had raised enough, mainly from locals offering between 1,000 and 25,000 euros, to fund a park which produces power for 2,400 households a year. The project has expanded to buy a solar park in eastern Germany.

Investors get dividends from the project linked to the guaranteed prices paid for the power generated by the turbines

"Customers are motivated by an investment in green energy which is considered trendy," said the utility's head of energy services, Uwe Poeppelmann.

Such grass-roots activism is, say experts, one of the most striking results of Merkel's energy shift.

Some 1.3 million solar photovoltaic units are on stream, mostly owned by single households, and about 23,000 wind plants have been bought, mainly by groups of farmers who club together.

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Charts showing co-operative development and distribution in the 16 states and areas of activity:

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However successful she has been at fostering a new culture, Merkel would face tough decisions in a third term: namely how to reform a subsidy system which is a victim of its own success.

Households take a direct hit on their electricity bills and do not expect this year's jump in the surcharge to be the end of it - creating a source of anxiety for voters.

"Surveys show people are concerned that the costs of the energy transformation will drive down living standards," said Emnid pollster Klaus-Peter Schoeppner.

INDUSTRY ANGRY

Export-oriented German industry, already disappointed that shale gas is being shunned due to environmental fears, is angry about high energy costs, although exemptions help many firms in the cement, steel, paper and glass sectors.

Although wholesale power prices have plunged by about a fifth this year due to renewable supplies, end users have to pay the second highest prices in Europe thanks to fees and charges.

"Energy-intensive industry, which employs over 900,000 people, will have to leave Germany in the medium term if it does not get sustainably competitive energy prices," said the head of the BDI industry association last month.

Utilities like E.ON and RWE, hit by plunging prices for wholesale power which they sell, are also piling on pressure to reduce green incentives. Some have threatened to shut thousands of megawatts worth of plants unless there is a big rethink.

Merkel, who has promised to change but not abolish the incentive system right after the election, faces a delicate balancing act to ensure renewables continue to grow and keep consumers happy. Much will depend on her coalition partner.

If she renews her alliance with the business-friendly Free Democrats, who want a radical overhaul of the Renewable Energy Law, deep cuts to feed-in-tarifs may come. But if she switches to a "grand coalition" with the SPD, her scope may be smaller.

Whether her next coalition is centre right again or centre left, Merkel is set to scale back exemptions from the renewable surcharge and grid fees, as the European Union has urged.

She also needs to boost offshore wind, which was meant to be part of the energy switch but has proved costly, and the power grid needs to be expanded by up to 4,600 km and overhauled to cope with bursts of supply from renewables. But some local communities fiercely resist more power masts. ($1 = 0.7466 euros)

(Writing by Madeline Chambers; Editing by Stephen Brown/Jeremy Gaunt)

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