Germany’s Energy Disaster: A Warning for Green Dreams in Australia, By Richard Miller (Londonistan)

I was reading this piece from the Baker Institute the other day, and it hit me like a ton of solar panels and wind turbine blades: Germany, the poster child for getting stuff done in Europe, is totally fumbling its energy game. I mean, this is the country everyone used to look up to for efficiency, cranking out cars and machines like nobody's business. But now? Their energy policies are a hot mess, and it's dragging their economy down with it. Energy's the lifeblood of any country, and Germany's been playing fast and loose with it, making choices that sound good on paper but are blowing up in their face. Here I will break it down, because this is a wild story, and it's got big lessons for anyone chasing green dreams without a reality check, like Aussies under emperor Albo.

First off, Germany made a huge mistake tying itself to Russia for natural gas. For years, they were chugging along with those Nord Stream pipelines, acting like Russia was their big friend for energy.When the Russia-Ukraine war kicked off, that supply line got choked, and Germany was left scrambling. They had to fire up their dirty old lignite coal plants, yes, the stuff they swore they'd ditch to go green. Talk about irony. The Baker Institute calls this one of former Chancellor Angela Merkel's biggest flubs, and I can't disagree. Oh, and shutting down all their nuclear plants? That's another head-scratcher. Those plants were clean, reliable, and Germany yanked them offline right when they needed power the most. Now they're stuck burning coal longer than they planned, which is the opposite of their eco-warrior vibe.

To top it off, Germany's trying to swap coal for natural gas, even though Russia's not exactly sending them Christmas cards anymore. They're pitching these new gas plants as "climate-friendly" because, get this, they might someday run on hydrogen made from renewables. Someday. That's like buying a gas guzzler and saying you'll convert it to electric in 20 years. It's a stretch, and it's got environmental groups fuming, but Germany's trying to keep everyone happy while dodging the hard truth: they need reliable energy now, not in a fairy-tale future.

Germany's been all-in on this thing called the Energiewende, their big push to go renewable with wind and solar. Sounds awesome, right? Clean energy, save the planet, everybody wins. Except it's not working out like they hoped. The article lays it out plain: renewables are great on paper, but they're flaky in the real world. Wind doesn't always blow, sun doesn't always shine, and when they don't, you need backup like gas or coal plants, plus fancy batteries that cost a fortune. All that extra stuff jacks up the price, even if solar panels themselves are cheaper these days. People keep saying renewables will make electricity dirt cheap, but that's a pipe dream when you're building a whole system to cover their gaps.

And Germany's paying for it, big time. Their electricity prices are some of the highest in Europe, and it's killing their manufacturing, which is the heart of their economy. Factories need cheap power to compete, and they're not getting it. Plus, with electric cars and hydrogen plans coming down the pipeline, they're going to need way more electricity soon. That means building more power plants and grid lines, which isn't cheap or quick. I was shocked to read they've only built like 1,740 km of the 12,234 km of new power lines they need. Local folks are fighting those lines tooth and nail, nobody wants a big cable in their backyard. So now they're burying them underground, which takes forever and costs a mint. It's like Germany's stuck in a green-energy traffic jam, and the clock's ticking.

Here's the kicker: despite all the green talk, Germany's still hooked on fossil fuels, which is fine in my opinion. In 2023, oil was their biggest energy source at 35%, then gas at 24%, renewables at 23%, and coal at 16%. Do the maths, that's 75% fossil fuels. Sure, they've cut back some since 2010, but it's mostly because they're using less energy overall, not because renewables are taking over. And get this: they import almost all their oil and gas, plus a chunk of their coal. Shutting down nuclear plants made it worse, because now they're leaning harder on coal and gas to keep the lights on. They're getting gas from Norway, the Netherlands, and U.S. LNG, but, plot twist, they're still buying some Russian LNG. After all that drama, Russia's still in the mix, just sneaking in through the back door. It's like breaking up with someone but still borrowing their Netflix.

The Green Party's got a lot of sway in Germany, and they've been pushing this "no nuclear, no fossil fuels" mantra like it's a religion, which it is. They're all about phasing out dirty energy ASAP, no matter what. But their plan's got holes. They shut down nuclear plants that were pumping out 12% of Germany's electricity in 2021, even though those plants were safe and didn't spew carbon. Why? Because they think nuclear is scary, I guess. Meanwhile, France and other neighbours are keeping their nuclear plants humming, some right near Germany's border. So, Germany's importing nuclear power anyway, just without the control.

The Greens also believe renewables will make Germany energy-independent and a tech leader, like they'll be the Apple of wind turbines. But that's not happening. China's eating their lunch on renewable tech because Germany's labour and energy costs are sky-high. Same deal with electric cars, Volkswagen and Mercedes are struggling to compete, and they're even moving some factories to the U.S. to escape the madness. Plus, renewables alone can't keep the grid steady without backup, and batteries aren't ready to handle it all. The Greens act like it's all going to work out, but it's like they're betting the sheep station on a half-baked recipe.

This energy mess isn't just about power bills, it's tanking Germany's economy. The article says Germany's been one of the worst-performing big economies lately, growing way slower than the U.S. or even the rest of Europe. From 2013 to 2021, their GDP growth was a measly 1.23% a year, compared to 2.32% for the U.S. High energy prices are chasing businesses away, Volkswagen's cutting jobs, Mercedes is investing overseas, and BASF's shutting plants. It's a gut punch for a country that's all about making stuff. Regular folks are feeling it too, stuck with crazy electricity bills while big companies get subsidies to stay afloat.

And it's not just Germany, Europe's feeling the ripple. Germany's the EU's engine, so when it sputters, everyone's in trouble. The article points out this isn't all Russia's fault; Europe's been sluggish for years, and the Ukraine war just turned up the heat. But Germany's green obsession is making it worse, and now people are fed up. The far-right Alternative for Germany (AfD) party is gaining ground, which is great because they used to be a fringe group. High costs and economic woes are pushing folks to see the illusions of the power elites, who are running the show, into the ground.

I'm all for saving the planet, but Germany's showing us you can't just wish your way to a green future. Their Energiewende sounded like a slam dunk, but it's more like a missed shot. Shutting down nuclear, banking on flaky renewables, and ignoring the costs, it's like they forgot how to do mathematics. The Baker Institute's point is clear: you've got to balance green goals with keeping the lights on and the economy going. Germany's paying a steep price for ignoring that, and it's a warning for everyone else. You can't let ideology run the show when reality's knocking. Germany's energy disaster is a wakeup call for the West, especially Australia.

https://bakerinstitute.org/research/so-much-german-efficiency-warning-green-policy-aspirations

"Germany has been the economic powerhouse of post-World War II Europe. Over several decades, other European countries looked to Germany for ways to improve efficiency and develop their own economies. This might not be the case any longer. Indeed, when it comes to energy policy, Germany is perhaps the developed country whose recent policies are the most difficult to rationalize. As energy is central to a country's prosperity, the implications of a misguided energy policy have been far-reaching, with Germany now being one of the world's worst economic performers among major developed economies. Here we will touch on two major pillars of the German energy sector's inefficiency, and on their implications for the country's future economic performance, which will be formative for the overall European economic and energy landscapes.

Playing Russian Roulette With Energy Supplies

Relying almost exclusively on Russia to supply Germany with natural gas through the Nord Stream pipelines is likely to be considered as one of former Chancellor Angela Merkel's biggest policy mistakes, although policies aimed at shutting Germany's nuclear plants is another major error. Despite the country's strong focus on decarbonization, the disruption of Russian supplies after the onset of Russia-Ukraine war resulted in Germany having to run its lignite-fired power plants for longer than expected, providing a signal that short-term energy reliability is as important a factor as reducing emissions in the longer term.[1]

The reliability-emissions reduction conundrum is showing up in Germany's long-term planning as well. Recently, Germany has taken steps to displace coal in its generation fleet with natural gas, despite the unlikely resumption of supplies from Russia. In order to limit resistance from powerful environmental groups that oppose any kind of investment in nonrenewable energy sources, the German government has been marketing the new gas power plants as climate-friendly since they are expected to be converted to burning renewable-produced hydrogen at some point in the future.

All of this sits against the backdrop of Germany pursuing one of the most ambitious plans for renewable energy adoption in the world. However, the energy transition — or "Energiewende" in German — has not been the panacea anticipated by its proponents.

Reconciling Aspirations With Reality

The fundamental principles of economics are hard to escape. When demand exceeds supply, prices rise. The German economy is very dependent on the manufacturing sector as an engine of growth, and high energy prices are damaging for industry. Moreover, electricity prices in Germany are unlikely to decline any time soon as the adoption of electric cars and the planned expansion of hydrogen production will significantly increase future electricity demand. This will require significant growth of new generation capacity that will need to be demand responsive.

The popular view in Germany — arguing that a faster switch to renewable power should make electricity cheaper since levelized costs for renewable energy have been declining — appears unfounded. Given intermittency-related limitations associated with wind and solar, maintaining a reliable energy system requires additional investments in a mix of energy sources that can dispatch when needed — such as natural gas and batteries — as well as infrastructure to transmit new power sources efficiently. As a result, levelized renewable generation costs are only a fraction of the costs associated with the transition to renewable energy.[2] Large-scale battery storage and gas-fired or even coal-fired power plants need to be available and utilized when renewable energy production falls short due to the vagaries of the weather, which contributes to higher total system costs. To be clear, high energy prices in Germany have been part of the energy transition debate even before the energy crisis resulting from Russia's war on Ukraine. Selected energy-intensive companies have enjoyed subsidized electricity prices to ensure competitive production. But smaller businesses and households are subject to electricity prices that are among the highest in Europe.

Despite the strong push for renewable energy, fossil fuel continues to be a large part of German electricity production. As of 2023, oil is still Germany's largest domestic energy source (35.2%), followed by natural gas (23.9%), renewables (22.8%), coal (16.0%), and everything else (2.2%).[3] So, fossil fuels account for 75% of Germany's energy use, which is down from 81% in 2010, when Energiewende received legislative support. To be clear, the consumption of fossil fuels has declined by about 24% over the last 10 years, but that is largely in line with the observed reductions in overall energy use in Germany.

On the production side, Germany is almost entirely import dependent for its oil and gas needs, but it produced a little more than half of the coal it consumed on an annual basis in 2023.[4] Germany also imports coal for power generation and steel production. Ironically, the closure of Germany's entire nuclear fleet, which was finalized in 2023, is likely to keep its coal plants active for some time, or at least until sufficient gas-fired capacity can be brought online, which will serve to increase the country's overall import dependence.

Pipelines from Norway and the Netherlands plus liquified natural gas (LNG) from the U.S. have become Germany's main sources of natural gas supply. But, while the EU imposed sanctions on oil imports from Russia, no such ban was placed on LNG deliveries. As a result, Russia's LNG deliveries to Europe in 2023 were on par with those from Qatar and Algeria. Thus, the EU has partially substituted Russian pipeline gas with more expensive Russian LNG. Given the connectedness of the EU gas market, this has direct implications for Germany. Moreover, this trend is expected to continue in the coming years, which will likely stoke ongoing debates centered on energy security and transitions.

Prevailing Political Arguments and Their Shortcomings

Given its ability to make or break governing coalitions in Germany, the Green Party has had a remarkable influence on the country's energy policy in recent years. The priority to phase out nuclear energy and fossil fuel as soon as possible and at any cost has been at the heart of the party's political agenda. At the same time, other than the ideological belief that renewables will solve all of Germany's energy problems, there has not been a clear plan on how to deal with limitations imposed by intermittency, limited storage, and tight electricity transmission. Through political discourse, this ideological belief has also penetrated large parts of German society, who deem the phasing out of all nonrenewable energy sources almost as an existential necessity.

In 2021, nuclear energy accounted for about 12% of Germany's annual electricity production.[5] Despite their strong safety record and the increased geopolitical uncertainty associated with other forms of energy, these nuclear plants were shut down prior to their scheduled end-of-life, right around the time when they were needed the most. To make up for this loss, Germany's utilities must now rely on coal-fired and gas-fired plants to bring dispatchable power to the grid whenever intermittent renewable resources — wind and solar — are not available. As noted above, the cost of back-up generation resources that are required to bring grid stability when intermittent resources are present is not factored into levelized cost of electricity (LCOE) calculations.

An additional challenge concerns the transmission of electricity; again, the cost of additional transmission for renewables is typically ignored by those claiming low levelized costs of renewable power. The green energy transition of the size and scope undertaken in Germany creates a significant challenge since large amounts of green energy need to be transported from coastal regions in the north to the large demand sinks in urban and manufacturing areas throughout Germany. It is projected that the size of Germany's grid will have to double as a result.[6] Yet, only about 1,740 km out of the estimated needed 12,234 km of new power lines were completed as of June 2023.[7] As in many places around the world, the construction of new transmission lines faces local opposition. For instance, the new electricity line bringing wind power from the north to industry in the south has faced resistance by local communities. As a result, the line will have to be underground, delaying its completion and increasing costs. It seems that the not-in-my-back yard resistance is a powerful force, even in Germany.

The forceful antinuclear and antifossil fuel stance of the Green Party and some of the Social Democratic Party of Germany appears to boil down to one or more of the following arguments:

First, a full and speedy transition to renewables is considered essential in order to fight climate change, which is viewed as an existential threat.

Second, nuclear energy is viewed as fundamentally unsafe.

Third, it is believed that a speedy and full transition to renewables is the fastest way to German energy independence.

Fourth, proponents often advocate that a first-mover advantage will both make Germany a technology leader in renewable technologies and provide an effective moral example for other countries to follow.

There are several problems with these arguments.

To begin, Germany is already quite energy efficient and creates a relatively low yearly flow of carbon emissions. In fact, Germany accounts for 1.5% of global emissions and 15.6% of European emissions. Moreover, emissions in Germany have declined by about 24% over the last decade, meaning the lowest-cost emissions reductions have largely already occurred.[8] Hence, actions Germany takes have relatively little impact on global emissions, while potentially imposing a significant cost.

Paradoxically, as it produces no carbon emissions, nuclear energy could be an important tool in the fight to reduce emissions. Nuclear energy in Germany has an excellent safety record, and several of Germany's close neighbors have plans to pursue nuclear energy production for decades to come, with some of these power plants to be sited very near the German border. While nuclear power will continue to be imported to Germany, the plants themselves will not be under the control of German electricity authorities.

Regarding energy independence, it is a notion that has persisted in import-dependent nations for decades, and policies championing domestic energy sources have been advocated accordingly. This has not been solely in the interest of renewables; it was a root for expanded use of coal in the past, in the Germany as well as countries such as the U.S. The idea that a rapid scale-up of renewable energy sources, in and of themselves, can lead to energy independence is problematic. Intermittency alone requires other resources to be available to balance the grid, which requires dispatchable sources of power that can be maintained for significant periods of time. Moreover, a significant fraction of energy is not electricity; it is heat. This disqualifies battery storage from being able to handle the entirety of the issue, at least until long-duration storage options are available and scaled and everything is electrified. Neither of these is likely to be a reality in the near term, and cost is a consideration. Admittedly, one could argue that dependence on foreign-sourced natural gas and LNG, oil, and coal compromise Germany's energy security, but sources of supply matter and dependence on Russian gas has declined. Dependence on foreign-sourced fossil fuel is likely to remain for a while. The portfolio of supplies also matters, and the emergence of the U.S. a major gas supplier has significant energy security benefits.[9]

Lastly, due to labor costs, a rigid regulatory regime, and expensive input prices, the development and production of renewables are already taking place outside Germany. It is unlikely that Germany will be able to compete with China in renewable technology manufacturing in the future. These same high energy and labor costs threaten the German auto industry's hopes to expand production and export of EVs. The lack of key minerals, processing capability, and supply chains needed for EV batteries also means high dependence on China-dominated supply chains.

What It All Means: Political Economy and Winds of Change?

The resulting backlash and general dissatisfaction with the experience of the past several years have boosted support for Germany's extreme-right Alternative for Germany (AfD) Party, which is poised to be a powerful contender to lead Germany in the future, something that was unthinkable a few years back. Several German businesses appear to have had enough and have announced plans to close and/or relocate at least part of their operations outside the EU. Volkswagen and Mercedes are examples of companies that have taken steps to address rising costs and made significant new investments in the U.S. recently, and industrial player Badische Anilin und Soda Fabrik (BASF) announced layoffs and plant closures in 2023 due to high energy costs.[10] The trend is expected to continue and has sent shockwaves through Germany, which has historically prided itself on being the manufacturing powerhouse of the EU.

The price environment and associated economic malaise are not unique to Germany; they are affecting all of Europe. Moreover, they are not the result of Russia's invasion of Ukraine. That violation of sovereignty has certainly inflicted a significant humanitarian crisis and deepened issues on the continent. But meagre economic performance and relatively high energy prices were features of EU economies prior to the Russian invasion of Ukraine. According to World Bank data, from 2013–21 in inflation adjusted terms, the average annual growth of GDP in the U.S., EU, and Germany was 2.32%, 1.57%, and 1.23%, respectively.[11] So, growth in Germany has not only been lower than that of the entire EU, but it has also been significantly lower than the U.S. for a decade. The invasion served to bring a brighter light on issues that were already bubbling under the surface.

Political economy considerations in Germany have made the green transition an ideological affair. When technological and market constraints are ignored in favor of unrealistic aspirations and dogma, reality has a way of kicking back. In Germany, this has resulted in persistent economic underperformance, the fear of growing industrial weakness due to high energy prices, and the potential of political instability through the rise of the extreme right. Given that, especially after Brexit, Germany is at the core of Europe, the consequences for the EU and for the entire continent are far-reaching. To be sure, there is nobility in striving for better environmental outcomes, but if economic health is sacrificed, the backlash will be palpable. How things are playing out in Germany is a reminder that balance matters.

Notes

[1] For more on the impact of the cut in Russian gas supplies on the EU and Germany, see Gabriel Collins, Anna B. Mikulska, and Steven R. Miles, "Winning the Long War in Ukraine Requires Gas Geoeconomics" (working paper, Rice University's Baker Institute for Public Policy, August 4, 2022), https://www.bakerinstitute.org/research/winning-long-war-ukraine-requires-gas-geoeconomics; Collins, Kenneth B. Medlock III, Mikulska, and Steven R. Miles, "Strategic Response Options If Russia Cuts Gas Supplies to Europe" (Houston: Rice University's Baker Institute for Public Policy, February 11, 2022), https://doi.org/10.25613/32SK-5588; and Medlock, Mikulska, and Luke (Leelook) Min, "Natural Gas Balance in Europe: Germany as a Case Study" (Houston: Rice University's Baker Institute for Public Policy, December 7, 2022), https://doi.org/10.25613/8SKH-J217.

[2] This point is expounded in multiple publications. See, for example, Robert Idel, "Levelized Full System Costs of Electricity," Energy 259 (November 2022): 1–11, https://doi.org/10.1016/j.energy.2022.124905.

[3] Energy Institute (EI), Statistical Review of World Energy, 2024, https://www.energyinst.org/statistical-review.

[4] International Energy Agency, "World Energy Balances," https://www.iea.org/data-and-statistics/data-product/world-energy-balances.

[5] Percentages are calculated from data in the EI's 2024 Statistical Review of World Energy.

[6] Vera Eckert, "Germany Needs to Double Its Renewable Energy Output-Grids," Reuters, last updated January 29, 2021, https://www.reuters.com/article/idUSL1N2K410K/.

[7] International Trade Administration, "Energy," in "Germany — Country Commercial Guide," last modified December 6, 2023, https://www.trade.gov/country-commercial-guides/germany-energy.

[8] EI.

[9] See, for example, Medlock, Amy Myers Jaffe, and Meghan O'Sullivan, "The Global Gas Market, LNG Exports and the Shifting US Geopolitical Presence," in "US Energy Independence: Present and Emerging Issues," ed. Jaffe, special issue, Energy Strategy Reviews 5 (December 2014): 14–25, https://doi.org/10.1016/j.esr.2014.10.006.

[10] See, for instance, "What If Germany Stopped Making Cars?," The Economist, July 31, 2023, https://www.economist.com/business/2023/07/31/what-if-germany-stopped-making-cars; and "Germany's BASF to Shed 2,600 Jobs in Cost-Cutting Drive," Associated Press, February 24, 2023, https://apnews.com/article/basf-se-germany-business-98a44b0766efea7c85ce0da22a30d827.

[11] Growth rates are calculated from the World Bank's "World Development Indicators" (https://datatopics.worldbank.org/world-development-indicators/).