By Gerard Wynn
LONDON Oct 15 Germany's cost for upgrading its grid to bring in more wind and solar power exceeds the monetary benefits it receives from savings on fossil fuel and avoiding the damage caused by global warming.
Once the net cost of a multi-billion-euro subsidy programme is thrown in, then Germany's renewable energy policy seems to be poor value for money.
One caveat is that this calculation does not include some benefits that are more difficult to measure in monetary terms, such as energy security and avoiding air pollution and its effects on health.
Another is that the climate change cost figure is based on economic theory, using crude estimates applied to an idealised world.
Even so, the subsidy policy appears to be too generous.
The only way that Germany's policy can be made to add up is to assign a cost to carbon emissions that is much higher than economists estimate, which would imply a higher cost of fighting climate change generally.
The overwhelming majority of climate scientists say that green measures are needed to slash carbon emissions in line with targets to avoid dangerous climate change.
But support for green energy is an obvious target for cost-cutting as governments in Britain, Germany and other European countries try to curb rising energy bills.
There are some straightforward ways to cut costs and still encourage renewables such as for governments to hold competitive tenders for renewable projects rather than just providing flat-rate subsidy payments.
The signs are not all good, however, that lessons have been learned from Germany's experience.
Britain is presently locked in bilateral (not open, competitive) talks with EDF to agree on a subsidised price for nuclear power for the next several decades, while Japan recently started supporting roof-top solar power at rates double those in Germany.
In tallying the monetary benefits from wind and solar power, the fuel savings from buying less coal and gas as well as fewer carbon dioxide (CO2) emissions permits can be valued per tonne.
In a snapshot of 2012, for example, Germany's wind and solar power generated a combined 74 terrawatt hours (TWh), according to the Fraunhofer Institute.
The combined gas and coal purchases that were avoided for this amount of power can be calculated at 865 million euros at average market prices for the year (by sharing out the displaced power according to Germany's present fossil fuel and nuclear mix).
The wind and solar power also displaced some 49 million tonnes of CO2 emissions, using standard conversions for fossil fuel power into CO2 emissions.
The International Monetary Fund estimates the social costs of climate change at $25 per tonne of CO2 emissions. Using that figure, Germany's saving from its wind and solar generation last year was worth 900 million euros.
Link to IMF report:
These estimated monetary benefits added up to around 1.8 billion euros for 2012.
On the other side of the equation, Germany is expected to invest some 30.1 billion euros in high-voltage electricity transmission projects over the next decade, or an average of about 3 billion euros a year, according to the European Network of Transmission System Operators for Electricity (ENTSOE) in its 10-year development plan published last year.
Renewable power currently accounts for about four fifths of major European grid bottlenecks, ENTSOE says. That implies the need for an annual investment of 2.4 billion euros to properly integrate wind and solar power. This does not include the costs of strengthening lower-voltage local grids to accommodate solar power.
On top of the grid costs are the direct subsidies to encourage wind and solar power projects.
In Germany, wind and solar power fetches higher prices, under the 2000 Renewable Energy Act (Erneuerbare-Energien-Gesetz, EEG). Consumers pay for it through increased power bills.
The total EEG levy in 2012 amounted to 14.1 billion euros (calculated as the difference between the renewable premium and wholesale power prices), and nearly three quarters of that went to wind and solar power, or about 10 billion euros.
On the plus side, such subsidies have helped create some 377,800 jobs in the renewable energy sector, according to official 2012 data, and profits for the renewable energy industry and have driven down wholesale power prices, which has helped industrial energy consumers.
Subtracting these surpluses from the EEG payments leaves what is known as the deadweight loss, which is a measure of the inefficiency of such a policy, including its administrative costs.
According to economic theory, this loss is typically half the subsidy paid for the extra output created. That would mean this inefficiency cost was as much as 5 billion euros in 2012.
Regardless of the crude nature of figuring this deadweight loss, it seems almost certain that the subsidy entails a large net economic cost.
This cost-benefit analysis does not take politics into account.
Some policymakers and environmentalists argue that the policy was in part an industrial strategy to create a clean technology sector and green jobs.
Furthermore, it should not be surprising that the subsidy policy was too generous in its early years, given that it was one of the first schemes of its kind.
The government is now committed to making high payments for existing renewable power projects for the next 10 to 20 years.
Now that Germany has developed a mature industry, however, it can add new renewable projects far more cheaply and obtains some benefits from exporting its products and expertise.
In addition, thinking for the long term, it is making heavy capital investments now. Once these are completed and much of the subsidy payments taper away in 10 years or so, then the country will have the benefits of low fuel costs and a state-of-the-art grid system.
The task for other countries will be to achieve that mature industry at less cost to consumers by making policies most cost-effective, for example by forcing renewable energy developers to compete for support.