Thursday, September 25, 2014

WSJ: Germany's Coal Binge: Green energy mandates have achieved the opposite of their intent

Germany's Coal Binge

Green energy mandates have achieved the opposite of their intent

Berlin's "energy revolution" is going great—if you own a coal mine. The German shift to renewable
power sources that started in 2000 has brought the green share of German electricity up to around
25%. But the rest of the energy mix has become more heavily concentrated on coal, which now
accounts for some 45% of power generation and growing. Embarrassingly for such an eco-conscious
country, Germany is on track to miss its carbon emissions reduction goal by 2020.

Greens profess horror at this result, but no one who knows anything about economics will be
surprised. It's the result of Chancellor Angela Merkel's Energiewende, or energy revolution, a drive
to thwart market forces and especially price signals, that might otherwise allocate energy
resources. Now the market is striking back.

Take the so-called feed-in tariff, which requires distributors to buy electricity from green
generators at fixed prices before buying power from other sources. Greens tout the measure
because it has encouraged renewable generation to the point that Germany now sometimes
experiences electricity gluts if the weather is particularly sunny or windy.

Yet by diverting demand to renewables, the tariff deprives traditional generators of revenue and
makes it harder for them to forecast demand for thermal power plants that require millions of
euros of investment and years to build. No wonder utilities favor cheaper coal plants to pick up the
slack whenever renewables don't deliver as promised.

Mrs. Merkel's accelerated phase-out of nuclear power after the 2011 Fukushima disaster in Japan
has had a similar effect. Shutting profitable nuclear plants deprives utilities of revenue and saddles
them with steep decommissioning costs, which makes cheaper coal more appealing.

To top it off, Berlin has imposed a moratorium on fracking. By preventing exploitation of ample shale-gas reserves, the ban leaves Germany more exposed to strategic pressure from gas exporters (read: Russia) and raises the cost of gas relative to coal. This is another reason cheap, local coal is back in favor.

Ordinary Germans foot the bill for these market distortions, having ponied up an estimated €100 billion ($129 billion) extra on their electricity bills since 2000 to fund the renewable drive. The government estimates this revolution could cost a total of €1 trillion by 2040.

Berlin is scaling back some taxpayer subsidies for green power. But Germans still also pay for the
energy revolution when job-creating investment goes to countries with lower power costs, as
happened earlier this year when chemical company BASF said it would cut its investments in
Germany to one-quarter of its global total from one-third, and when bad incentives skew
generation toward dirtier coal instead of cleaner natural gas.

None of this is what environmentalists promise voters when they plug the virtues of a low-carbon
future. Germany's coal renaissance is a cautionary tale in what happens when you try to substitute
green dreams for economic realities.

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