Policy decisions are necessary for a transformation of our energy systems

Growing energy demands and limited supply of cheap petroleum and natural gas will almost certainly lead to further increases in energy prices, which will have a direct impact on our economies. At the same time our heavy reliance on fossil fuel based energy sources dramatically increases CO² emissions, which are a main cause of global warming (see “need for renewable energy”). We not only need additional energy supplies; the energy also needs to be clean. Ultimately we need to transform our energy system towards renewable energy solutions.

There are several renewable energy sources available today to base a transformation of our energy systems on. They differ in various key characteristics:

§         Costs of energy generation

§         Availability and intermittency

§         Overall potential to supply energy

While each of the renewable energy technologies can provide additional and clean energy, they unfortunately also have various weaknesses. For example, while wind energy is cost competitive with energy generation based on coal or gas, it is highly intermittent and there are natural limitations in where wind mills can be deployed. Solar Photovoltaic Solar is also intermittent, but there is the potential to easily cover all of the world’s energy demands. Unfortunately, it is perceived as more costly than energy generation based on coal or gas. As a result, depending on the circumstances a specific technology will be superior to others, so that a mix of renewable energy sources will optimize the overall outcome.

Germany realized early on the need for a transformation of the energy systems towards renewable energy sources, implemented change, and as a result achieved a position of world leadership in PV Solar. There are several valuable lessons which can help us (i.e. the U.S.) in the transformation of our own energy systems. (See a German’s perspective)

A major insight is that the energy markets are hugely distorted by

§         Large subsidies for fossil fuel based energies as well as nuclear

§         Ignoring externalities i.e. the real costs of our energy system

In order to make an apple to apples comparison of cost structure for energy alternatives, we will need to understand the impact subsidies and externalities have on the total costs. Below we will demonstrate that fossil fuel based energies and Nuclear only have a perceived – but not a true - cost advantage over PV Solar. This perceived cost advantage is largely the result of past policy decisions by the Governments. Also here, Germany can provide us with valuable insights, as new policy decisions favoring renewable energies have propelled Germany into its current global leadership position for PV Solar.    

Subsidies

Subsidies are financial support paid to prevent the failure of a business or to promote a desired behavior. In Germany coal mining is not cost competitive with other countries and to prevent the loss of jobs Germany has been subsidizing this industry. From 1974 to 1995 all electricity consumers had to pay the “Kohlepfennig” (Penny for coal), which was added by the utilities on top of the electricity price. Even though the name suggested a small price increase in the amount of pennies, the average increase of electricity bills was 8.5% in 1995, equaling an amount of 3,120 M Euros(1).

German subsidies for coal and renewable energies in Millions from 2001 to 2008 (2)

After the German Federal Constitutional Court declared the Kohlepfennig for unconstitutional, the Government started to subsidize coal directly in 1996. While the subsidies for coal decreased significantly during the last decade, still 2,017 million Euros were paid by the Government in 2008. Until 2010, when the subsidies are supposed to end, coal will have been subsidized with 80,000 million Euros (equaling 108,322 million US$ (3)). Quaschning, a leading German professor for sustainable energies, points out that this amount would have been sufficient to build wind mills generating 70,000MW, covering around 1/3 of Germany’s electricity consumption (4). 

Germany also subsidizes renewable energies to help achieve desired goals: By 2010 the amount of renewable energies should be 12.5% of primary energy consumption, and 20% in 2020. Most of the subsidies are applied to Solar and Biomass. Unfortunately the total amount of subsidies for renewable energies is still very small: 224M Euros ($ 303 Million) or 11% of the subsidies paid for coal in 2008. The good news is that this percentage has been increasing from 4% in 2001.

To summarize, subsidies have heavily distorted markets by favoring energy sources such as coal. Fortunately some steps have been taken to reduce the subsidies for coal while subsidies for renewable energies have been increased. While these steps are small, they certainly lead into the right direction.

Externalities

Electricity generation costs typically include the investments necessary for building a power plant and operational costs such as fuels and maintenance. However, there might be other costs, which are an end result of operating a power plant, such as environmental and health damages. These costs are called “externalities” and they are not part of the electricity bill paid by consumers – they are involuntarily imposed on others.

Externalities need to be included when the real / total costs of an energy source should be determined. Furthermore, the various energy alternatives differ greatly in the amount of externalities they cause i.e. it is essential to include externalities for an apple to apples comparison.

Unfortunately, determining external costs is very challenging. For example, how can we solve ethical questions, such as valuing the death of a person caused by the impact of global warming? It comes as no surprise that estimates differ widely and are controversial.

In any case, external costs are significant. Here are some examples (5):

·         Environmental and health damage

Damage to the environment and the health of persons are especially difficult to estimate. A few examples include damage on buildings, receding and dying forests, health damage for allergies or cancer. The health costs for cancers are most likely in the billions.

·         Nuclear power: Accidents, waste disposal and political costs

While there is disagreement about the likelihood of a nuclear accident for a German nuclear power station, the cost can be estimated to be 5,000 Billion Euros, which equals four times the gross domestic product of Germany. Liability of the nuclear power plant owners is limited to 500 million Euros, so that the remaining costs would need to be covered by the general public. Dealing with nuclear waste causes additional costs for storage but also political costs: The transport of nuclear waste to the deposit “Gorleben” caused significant public protest and demonstrations, necessitating the deployment of 30,000 police officers at the cost of 50 million Euros.

·         Global Warming

Costs of the impact of global warming are most difficult to assess. There have been increasing numbers of natural disasters, and even though it is not possible to prove with certainty that all of them were caused by global warming, the damages incurred show what kind of costs we possible can expect: Economic damages caused by natural disasters for the period from 1996 to 2005 exceeded 575 Billion US$ .

Costs of natural disasters (6)

Based on a scientific assessment for the external costs of energy created by Hohmeyer (7), who also created one of the first comprehensive studies in this field, we can compare the real costs of the various energy alternatives. Hohmeyer provides a bandwidth for external costs, which allows us to create a best case and worst case scenario. The best case describes the lowest total cost for an energy source, while the worst case describes the highest total costs. 

True costs of energy including externalities (8)

When including all of the costs for energy generation, the costs for PV Solar are very competitive with energy generated with natural gas or coal. In fact, PV Solar is substantially cheaper than energy created based on coal, when looking at the worst case. Thus it is not true that PV Solar is more expensive than our current energy sources, it is more a question of who pays the bill for costs such as externalities. 

Who has to pay for external costs - consumers of energy or the general public – can be a policy decision. Again, it becomes apparent, that policy decisions by the respective Governments have a major influence on what kind of energy we perceive as economical and consequently which energy is available for consumption.

Outcome of the German policy decisions

Germany realized early on that coal and gas create green house gases, high external costs and in the case of natural gas a political dependence on Russia. steps were taken to reduce and finally eliminate subsidies, which distort markets in the favor of those undesirable power sources. 

Nuclear energy faced significant opposition from Germany’s general public and as a result Germany decided to fade out nuclear power plants.

Those decisions necessitated that alternatives i.e. renewable energy sources need to be promoted. Germany introduced the “Erneuerbare Energien Gesetz (9)” (Renewable energy law), which at its core guarantees a fixed feed in tariff for renewable energies such as wind and solar for a certain amount of time. Furthermore, the feed in tariff for new installations is reduced by a certain percentage point every year to encourage innovation in the area of cost reduction.

The intent of the law is to make renewable energy sources the natural choice, “as people obey the logic of short – term self – interest, cost and efficiency” (10). As the installed capacities increase, costs will be reduced as economies of scale kick in: In the past, doubling the installed capacities of PV Solar resulted in a cost reduction of about 20%.

At one point renewable energies may get so cheap, that they become the preferred choice of consumers, even without tax credits, subsidies or other supportive policy decisions.

The outcome in Germany is stellar (11):

§         Renewable energies provided 14.5% of the gross energy consumption in 2007, up from 6.2% in 2000

§         Wind power grew by more than 500% from 2000 to 2005, and it provided 6.4% of the gross energy consumption in 2007

§         Even though PV Solar only provided 0.1% of the gross energy consumption in 2007, it grew by 5,400% from 2000 to 2005

To summarize, policy decisions are necessary to help us in our transformation towards renewable energy sources. Germany’s renewable energy law has been incredibly successful and provides valuable insights. The U.S. Energy Improvement and Extension Act of 2008 is a very important step, but there is still a long way to go…

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1 Informationszentrale der Elektrizitaetswirtschaft e.V. (IZE): Was kommt nach dem Kohlepfennig. In: Stromthemen 2/1995, p. 1-2.

2 a) Bundesministerien der Finanzen, Neunzehnter Subventionsbericht, Bericht der Bundesregierung ueber die Entwicklung der Finanzhilfen des Bundes und der Steuerverguenstigungen fuer die Jahre 2002 – 2004

b) Bundesministerien der Finanzen, Einundzwanzigster Subventionsbericht, Bericht der Bundesregierung ueber die Entwicklung der Finanzhilfen des Bundes und der Steuerverguenstigungen fuer die Jahre 2005 – 2008

3 Assuming an exchange rate of  1 Euro equals 1.35403 US Dollars as of 10/11/2008

4 Quaschning, V., Regenerative Energiesysteme, Hansen, 2007, p. 326

* Bergbau darunter Absatz und Stilllegunshilfen fuer die Steinkohleindustrie

** Rationelle Energieverwendung und erneuerbare Energien

5 Based on Quaschning, V., Regenerative Energiesysteme, Hansen, 2007, p. 328-330.

6 Translated based on graphic in: Munich RE Group, Edition Wissen, Topics GEO, Jahresrueckblick Naturkatastrophen 2005, p. 13

7 Hohmeyer, Olav, Ausarbeitung zum aktuellen Sachstand der wissenschaftlichen Debatte um externe Kosten. Im Auftrag der SPD-Fraktion des Deutschen Bundestages, Flensburg, Feb 2002.

8 Assumptions:

q      Energy generation costs (German costs, 2007, currency exchange rate of Euro1 = $1.34 for June 30 2007)

• Coal: 0.06 – $0.09 $KWh
• Gas / Steam: 0.04 – 0.08 $KWh

q      PV Solar: 0.1258 - 0.2792 $KWh

• Best case: Grid – connected, residential PV Solar w/ 3% interest rate
• Worst case: Commercial, PV solar w/ 12% interest rate
• Based on 1KW installation w/ thin film PV Solar from NanoSolar at cost of $1,000 KWh and $3,000 installation costs
• 25 year useful life for PV panel

• California

  solar incident of 5Kwh/M²/day

q      Energy price increase not considered

q      Note: Hohmeyers study is based on German Marks (DEM), which is now obsolete and which was replaced with the Euro (EUR) on January 1, 1999. 1DEM is equivalent to 0.51Euro

9 The text of the EEG law can be found at http://www.bmu.de/files/pdfs/allgemein/application/pdf/eeg2009.pdf

10 Bradford, T., Solar revolution, MIT, 2006, p. 7

11 http://www.volker-quaschning.de/datserv/ren-Strom-D/index_e.html