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American and German Approaches to Energy-Climate Policy

John P. Banks and Kathryn Archer

Germany’s energy transition, or Energiewende, offers lessons for the United States, just not the ones typically cited on this side of the Atlantic. The challenges and concerns that have arisen in Germany should not be taken as indicators that the Energiewende is failed policy, or more specifically, to dismiss the importance of renewable energy.

In the past year the U.S. Government has intensified efforts to highlight climate change as a critical national policy issue. The White House unveiled a Climate Action Plan in June 2013 outlining three ways to address climate change, including reducing carbon emissions from power plants. In March 2014, the Department of Defense’s Quadrennial Defense Review 2014 concluded that the impacts of climate change are “threat multipliers.” In May, the Global Change Research Program released the National Climate Assessment, concluding that the U.S. is already experiencing the impacts of climate change, from drought, severe weather, ocean acidification and sea level rise. Then on June 2, 2014, the EPA issued its proposed rules to reduce carbon emissions from existing power plants by 30 percent by 2030.

This revitalized interest in crafting policy to address greenhouse gas emissions, in particular from the electric power sector, is in contrast to Germany which, for over a decade, has had a robust, comprehensive energy-climate policy centered on dramatically increasing the share of renewable energy in the electricity portfolio, and since Fukushima accelerating the phase-out of nuclear power. The cornerstone of the support for renewable energy is a feed-in tariff (FIT) providing a guaranteed above-market price and grid access for power generated from a renewable energy source over a fixed, long-term period (e.g. 20 years).

The results are impressive. Germany’s share of gross electricity consumption from renewable sources increased from 6 percent to 17 percent of the national total in just one decade (2000- 2010), and renewables now account for 23 percent of electricity consumption, surpassing the government’s goals: they had been projected to reach 20 percent by 2020. In addition, the country is on pace for much larger capacity additions: by 2022, it is expected that Germany will have 220 GW of total capacity, of which 90 GW will be from conventional sources and 130 GW from renewables, with wind and solar accounting for 90 percent of the added renewable power capacity.

German policymakers also point to robust investment in the country’s energy sector, job creation, a burst of renewable energy technology innovation and Germany’s status as a global leader in the renewable energy sector as positive outcomes of the Energiewende.

Nevertheless, the Energiewende also poses challenges. During a recent Brookings private roundtable with German counterparts, U.S. utility industry representatives expressed skepticism regarding the efficacy and viability of the Energiewende, reflected in the following issues and questions raised during the meeting:

  • Cost Impact on Households. Would rising household rates evidenced in Germany be acceptable in the United States? 
  • Implications for the Economy and Industrial Competitiveness. How do the costs of renewable energy policy affect long-term economic growth and competitiveness? 
  • Impact on utilities. Will traditional utilities be driven out of business? Or are new business models emerging? 
  • Fairness and equity. Would a policy in which one sector (households) bears most of the costs be politically or socially viable in the United States? 
  • Technical barriers. How is Germany overcoming technical challenges in integrating large shares of variable renewable energy, including impacts on neighboring countries? 

The Energy Security Initiative (ESI) at Brookings will be exploring these and other issues in detail in a policy brief to be released later this summer, but for now, based on our roundtable discussion and related research, we can see that Germany’s Energiewende provides several useful lessons for the U.S. as it thinks strategically about the future of its electricity industry.

  1. Setting objectives and developing national policy are important. If a country can agree politically on fundamental objectives, designing and implementing effective policy mechanisms is easier. For German policymakers, renewable energy is a pathway to achieve the environmental objective of addressing climate change, as well as to bolster economic goals (promoting a new industry, creating jobs, stimulating exports and trade), and enhance security (diversifying sources of energy). In spite of high costs, and despite the realization that elements of the Energiewende need to be reworked, Germany has rolled out a sweeping and effective suite of policies and legislation successfully, supported by a remarkable political and social consensus. In particular, it has been able to come to an agreement about the exigencies of climate change and the importance of emissions reductions, as well as reach a strong consensus on phasing out nuclear power primarily for safety concerns. Gaining a consensus on a clear policy direction is critically important and should precede and inform debates about which specific policy mechanisms to implement and how.

  2. Monitoring and course corrections are required, with solutions tailored to local conditions. Policymakers should be prepared not only to monitor continually the effectiveness of policy, but also to alter the policy as technology and market conditions change. Importantly, fine-tuning policy or market design should not be viewed as a failure.

    German policymakers acknowledge that the FIT policy was not responsive sufficiently to market and technological changes. As a result, proposed revisions to the law currently under consideration are intended to make policy more market-oriented, moderate renewable energy capacity additions, and have industry shoulder more of the cost. Policymakers also are focused increasingly on how to adapt market design in order to ensure sufficient flexibility to accommodate high levels of variable renewable energy.

    Even supporters of the Energiewende do not believe that other countries should follow suit with exactly the same approach, and recognize the enormous scope of the challenge. German policymakers see the energy transition as a worthwhile experiment in the global effort to address climate change, and accept that this will come at a high cost. As one architect of the renewable policy has noted, “With the Renewable Energy Act that we created in 2000, we financed a learning curve that was expensive. But the good news is that we have learned in only 13 years to produce electricity with wind power and solar facilities at the same price as if we were to build new coal or gas power stations.”

    Moreover, cultural, economic and industry differences between the two countries mean that we cannot expect every element of the Energiewende to work in the U.S. For example, the FIT is not likely to be a policy tool widely deployed in the United States. As part of Brookings’ research in recent years, we have heard considerable skepticism of this approach among key stakeholders, with concerns largely revolving around the experience with the Public Utility Regulatory Policies Act. Abundant, cheap natural gas also seems to offer one low-cost and politically palatable pathway to reduce carbon emissions significantly (i.e., a widely available alternative to coal), though over-reliance on natural gas brings its own set of challenges.

    In addition, electricity consumption of the average American household is significantly greater than the average German family of four which uses about 3,500 kWh/year, while the U.S. average is 10,800 kWh/year, making a U.S. ratepayer much more sensitive to price increases. Furthermore, despite the Energiewende’s costs, German households and politicians remain ideologically committed to the goal of emissions reduction and highly tolerant of the associated costs. The fact that alarm over climate change and its impacts have not penetrated American politics or society in the same way may be the most significant cultural difference between the two countries and may explain American disbelief that Germans could remain supportive of an increasingly costly policy.

  3. A high level of renewable penetration presents unique challenges, but is manageable. Germany has demonstrated that high levels of renewable energy penetration are possible, with limited to no impact on reliability and system stability. This is commensurate with numerous recent studies that have concluded that “proven technologies and practices can dramatically reduce the cost of operating high penetration variable renewable energy,” including at penetration levels above 50 percent, without negative impacts on reliability. A recent analysis from the International Energy Agency stated that system integration of renewables is not a “significant challenge” at penetration levels of up to 10 percent of total generation, although “minimizing total system costs at high shares…requires a strategic approach to adapting and transforming the energy system as a whole.” Cost-effective solutions are emerging for implementing this system transformation approach – some in Germany – including developing market rules that enable system flexibility, diversifying resources and expanding the geographic footprint of operations, and improving system operations. In particular, resources such as demand response, storage and energy efficiency are important tools complementing such a systemic transformation. Indeed, we are witnessing higher renewable energy penetration levels in several U.S. states. In Iowa and South Dakota, for example, wind provides more than 25 percent of total electricity generation. In short, high shares of renewable energy in the electricity mix present less of a challenge for technical integration, than for existing business models and market design. 

We don’t have to copy the Energiewende in the United States. We should, however, not let challenges raised in Germany’s experiment disparage renewable energy. Rather it is an abundant natural resource that can serve as a critical asset in meeting multiple energy policy goals: economic, environmental and national security.

On April 29, 2014, ESI hosted its second Global Electricity and Technology Roundtable, chaired and moderated by Charles K. Ebinger, Director and Senior Fellow at ESI, and Mr. Jim Rogers, Former Chairman and CEO of Duke Energy, and a Trustee of Brookings. In this off-the-record session, ESI brought together U.S. electricity industry stakeholders and German experts to share their perspectives, raise questions and discuss concerns regarding the Energiewende and its impacts. In this post, Brookings’ Nonresident Senior Fellow John P. Banks and Kathryn Archer, Economist at Keybridge, describe key takeaways from the Roundtable. Some information in this post is taken from a Brookings policy brief in progress with the working title “Transforming the Electricity Portfolio: Lessons from Germany and Japan in Deploying Renewable Energy.” The views expressed are those of the authors only.

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