Marc Hölling is the manager of an ArcelorMittal steel manufacturing plant in Hamburg. Photo: Andy Marso
This article orginally appeared in the Topeka Capital-Journal. The Capital-Journal maintained control over all editorial decisions.
BERLIN — On a recent Monday morning, Jan Peter Klatt sat in his office in Germany’s Ministry for Economic Affairs and Energy and strained to hear a recording of an interview with Kansas Sen. Forrest Knox, R-Altoona.
Knox was making one last unsuccessful pitch to repeal Kansas’ renewable energy standards by citing Germany, where he said the transition from fossil fuels to renewables was “de-industrializing” the nation.
“It isn’t,” Klatt says. “And especially it wouldn’t be de-industrializing for the States (now). We have to differentiate between the past and the future.”
The future German leaders imagine is one in which their innovations in solar and wind energy enable them to produce enough domestic electricity to power their nation cheaply and reliably regardless of international instability in a power-hungry world.
Klatt, an expert on the renewable transition’s economic impact, said those innovations are arriving, but Germans have shouldered a “high financial burden” in pioneering them.
Germany entered into long-term agreements to subsidize investments in renewable energy and the cost has ballooned as more providers have taken advantage. Leaders envision costs decreasing as the agreements run out and the renewable energy infrastructure remains, but it will be awhile.
While industry has been largely protected from the cost increases and isn’t leaving the country in droves, Knox is correct in that energy-intensive manufacturers are worried about the reliability of the new energy grid and what will happen to their bottom line if they lose renewable surcharge exemptions and are forced to pay full freight for electricity.
For years environmentalists in the U.S. have pointed to European nations like Germany as models for the move to a post-fossil fuels industrialized world. But the consequences of Germany’s aggressive push for a renewable revolution — the Energiewende — have some lawmakers abroad like Knox casting the country in unfamiliar territory: as an example of what not to do.
Klatt works for an energy division recently merged with economic affairs under a Parliament that, at the end of June, made changes to the Energiewende aimed at reducing costs.
While those could be seen as tacit admissions that Germany went too far, too fast in pursuit of renewable energy, Klatt and others say the short-term investments will pay off big in the long run and the Energiewende’s labor pains paved the way technologically for states like Kansas, with its goal of gleaning 20 percent of its electricity from renewable sources by 2020.
Germany has already reached 20 percent, and plans to go much further. But the path has caused pause for some even within this more green-minded nation.
Residents bear cost burden
One wall of the office of German legislator Oliver Krischer is adorned with a collage of pictures of his family camping, fishing and bicycling. Another wall is covered by a bookshelf with titles like “Global Energy 2008-2009” and “Clean CO2: Large Scale Enhanced Gas Recovery.”
Krischer is a spokesman for the German Green Party on energy economics. While the Greens remain a fringe political party in the U.S., in Germany’s multi-party system they have grown into a force — albeit a minority one.
Krischer, one of 63 Greens in Germany’s 631-person legislative branch, the Bundestag, explained recently how Germans found the political will to embrace a renewable energy goal so audacious as to make Kansas’ seem puny: to glean 80 percent of their energy from renewables by 2050.
“Germany pays 90 billion Euros ($121 billion) a year for imports for oil and gas and coal and we want not to pay the money to Mr. (Vladimir) Putin or to the kings of Saudi Arabia,” Krischer said. “We want that this money remains in Germany and Europe for our working people, for our companies and for our people who want to invest in renewables — windmills, solar panels and so on — in their area.”
To make it happen, Germany approved in 2000 a very different plan than Kansas, which simply mandated its utility companies reach the 20 percent mark by 2020.
The Germans established a “feed-in tariff,” added to the cost of most electricity bills, that paid companies a premium for every kilowatt of renewable energy — mostly wind and solar, but also biomass, hydropower and geothermal — they fed into the grid.
Germany soared from 6 percent renewable energy in 2000 to 20 percent renewable energy by 2011 and about 25 percent this year.
Krischer called the tariff “the most important driver” of the quick change.
“It gave the people who invested in windmills, solar power plants, biogas and so on, security, because they got a fixed amount of money over 20 years so they were able to plan and do the investments, but at the moment the feed-in tariffs have went down very, very strongly,” Krischer said.
The tariffs dropped precipitously recently, but because of the 20-year contracts locked in at previous rates, the amounts German consumers pay continues to rise.
Krischer’s party opposed a move earlier this summer by a coalition led by the ruling Christian Democratic Union to fundamentally change how the tariffs are awarded.
Since 2000, the feed-in tariffs were based on the amount of the investment in renewable production, not the market price of the energy produced. Joachim Pfeiffer, a Christian Democratic Union Bundestag member, said that distorted the market.
“Due to the 20 years state-guaranteed feed-in remuneration, the EEG did not stimulate incentives for innovations,” Pfeiffer said via email. “Therefore the innovation ratio in the renewable energy segment unfortunately is low — particularly harmful for a young technology industry.”
It also created a financial burden in renewable surcharges, Pfeiffer said, that averaged almost 300 Euros ($402) per German when split among the country’s 82 million residents.
“The system went beyond the scope of the costs,” Pfeiffer said. “The consumers — both industry and private households — were burdened with 24 billion Euros ($32 billion) in 2013 for the EEG apportionment. A development I would have liked to prevent.”
In Kansas, there were no special price mechanisms, just a renewable energy mandate placed on the utility companies, to be either absorbed by those companies or passed on to ratepayers. Utility rates are regulated by the Kansas Corporation Commission, which is required to annually report the cost of the Renewable Portfolio Standards. KCC reports that less than 2 percent of the wholesale electricity rate in the state is due to RPS.
Germans see the cost of Energiewende each time they receive their itemized utility bills, and appetite for reform grew as the renewable surcharge approached the equivalent of about 8.5 cents U.S. per kilowatt hour last year.
The recently passed reforms will lower the feed-in tariffs on new renewable investments and create an “auction” system in which companies will bid on tariffs, therefore tying renewable expansion to market prices to some degree.
But because of the 20-year guarantees, Germans might not see their energy bills go down any time soon.
Felix Matthes, research coordinator for Energy and Climate Policy at the Öko Institute in Berlin, said he believes the Energiewende will eventually pay off for residential consumers with lower overall prices, but the original tariffs stayed in place too long.
“I think the government has reacted too late,” Matthes said. “I think they should have done this two years ago.”
Krischer says the original tariffs have already produced an environment in which it is now cheaper to provide solar and wind energy domestically than importing oil and coal. The costs now, Krischer says, are tied to the innovations that brought the renewable technology to that point.
“What people in Germany have to pay now are the costs of the past,” Krischer said.
There is also a bit of context that he and other fans of Energiewende like to point to: even with the tariffs, the average German family still pays a lower percentage of its income on electricity than the average American family.
But that is largely because German families use far less electricity than their American counterparts.
Reducing use is less of an option for some of Germany’s most energy-intensive manufacturers.
Industry wary of renewable shift
At an ArcelorMittal factory in the harbor of Hamburg, a pile of scrap metal arrives on a conveyor belt and is dumped into a 3,000-degree (F) electric arc furnace, creating a light show of sparks and a deafening roar.
Plant manager Marc Hölling says the arc furnace is one of the first steps on the scrap metal’s journey to become reusable metal rods, a process that at his plant uses 830 million kilowatt hours of electricity a year, or about as much as a German city of 150,000 people.
Hölling, a chemical engineer, says that if there were an easy way to produce the same number of rods with less electricity, he would do it. Energy costs, after all, make up about 21 percent of the plant’s costs.
“Twenty percent of your production costs you cannot influence, you’re depending on your local market,” Hölling said. “So this is a tough situation.”
Hamburg’s steel plant is a “mini-mill” by the standards of ArcelorMittal, the world’s largest steel producer. The 1 million tons of steel rods it produces each year represent about 1 percent of the company’s global total.
Hölling’s location is one of more than 2,000 heavy energy users in Germany who gained a partial exemption from the renewable surcharges by arguing that having to pay it would cripple their operations.
The cost of the exemptions, about 5 billion Euro ($6.7 billion) last year, is passed on to the rest of the ratepayers and that has been controversial.
“Certainly we have a discussion between citizens, between people and industry, because the people say that’s not OK that industry doesn’t pay, that we have to pay much more,” Krischer said. “That’s always a discussion.”
Hölling says for his plant, the math is simple: it made about 18 million Euro ($24 million) in gross revenue last year — before deduction of interest, tax and amortization. If its surcharge exemption was removed, Hölling says, the plant would pay an additional 50 million Euro ($67 million) for electricity.
“We would be gone,” Hölling said. “Basically, that’s it.”
With the plant would go the 570 jobs ArcelorMittal provides in Hamburg right now, probably, Hölling says, to a country with looser environmental and labor laws.
Hölling’s plant retained most of its exemption through the recent reforms, but saw its renewable fee raised from about 415,000 Euro ($557,000) to 860,000 Euro ($1.15 million).
Cost isn’t Hölling’s only concern with the transition to renewable energy.
His production operation relies on a steady, strong stream of electricity and he and others in industrial manufacturing worry that won’t remain in place in an electric grid increasingly reliant on strong winds and sunny skies.
Hölling acknowledged that there have been no blackouts yet, but “in 2012, it was rather close.”
“It was in February, it was very, very cold and therefore for two or three days I think everything that could produce electricity was in operation,” Hölling said. “So this was a critical situation.”
Hölling’s company isn’t alone in its concerns about energy prices or the grid.
Peter Willbrandt, CEO of Hamburg-based copper producer Aurubis said via email that even with its exemption, energy costs are higher in Germany than most places and the fluctuating energy supply is concerning.
“For years now Aurubis has increasingly been taking measures — investments of double-digit millions — in order to prevent irreversible damage in the event of potential blackouts or brownouts: risks amounting to tens of millions of euros,” Willbrandt said.“Since any lengthy power outages will, for instance, lead to the copper and the sulfuric acid freezing.”
The German newspaper Der Speigel reported in August 2012 that Hamburg manufacturer Hydro Aluminum had invested 150,000 Euros ($201,000) in backup batteries to hedge against power loss and Hölling said ArcelorMittal has also invested in backup generators to allow it to power down its plant safely.
Pfeiffer, the CDU parliamentarian, said the number of interventions like “speed regulation” and “re-dispatch” that German utilities have had to undertake to prevent blackouts have grown tremendously in recent years.
“The existing grids are not yet qualified for the uncontrolled feeding of generated renewable energy endangering the grid stability and more frequently leading to the verge of a grid collapse,” Pfeiffer said.
Germany is also intent on phasing out nuclear power, so that is becoming less of an option as a backup source when wind and solar power isn’t steady. Hölling said the intent was to replace that with natural gas backups, but those plants aren’t needed enough to be profitable.
“I would like to have these gas-fired power plant, but they are losing money like hell,” Hölling said.
Germans, therefore, find themselves subsidizing not only the renewable energy, but also paying to ensure their utility companies can reroute power quickly to avoid blackouts.
The grid concerns seem to have cropped up shortly after Germany passed 20 percent of electricity from renewables in 2011.
Klatt provided a report from the International Energy Agency on integrating renewables into the grid. The report, “The Power of Transformation: Wind, Sun and the Economics of Flexible Power Systems” stated that it is “not a significant challenge” to integrate up to 10 percent renewables into modern grids, and that while challenges increase above that level, adherence to a few basic principles of power distribution can compensate and even “shares of 25% to 40% can be achieved from a technical perspective, assuming current levels of system flexibility.”
No Kansas manufacturers have testified about grid instability as the state has crept toward 15 percent renewables on its path to 20 percent.
Don Ford, renewable business solutions director for Westar Energy, said his company has had no complaints about grid reliability and he is confident it will be able to maintain that record as the state marches toward the 20 percent by 2020 goal.
"One of the things utilities have continually done is we tend to meet challenges head-on and somehow, some way figure out how to supply our customers,” Ford said.
But Ford's confidence comes with a caveat: it takes investments to meet those challenges.
“The responses that have to be done cost money, and somebody does have to pay the bill,” Ford said.
It is the same in Germany, where Tobias Knahl, the Hamburg Chamber of Commerce’s expert on energy matters, said managing and updating the grid to ensure a steady energy supply will be important to industry going forward.
“I don’t think we have any serious problems right now, but on the other hand, the energy system is getting more complicated,” Knahl said.
According to Krischer, “There are no indications that industry in an important amount is leaving Germany.” Electricity costs are just one factor in a business’ decision about where to locate, with workforce readiness, infrastructure soundness and tax structure also playing strong roles.
But Hölling said the energy policies are a factor in expansion decisions pointing to Austrian iron manufacturer Voestalpine’s decision to build a new 550 million Euro ($739 million) plant in Corpus Christi, Texas.
Hölling said that in 10 years maybe Germans will be able to say “look at our cheap renewables,” but at present the country’s electricity bills are high and the continued push for renewables is less a practical plan and more about Germany being a “showcase” for a post-fossil fuel world.
“In Germany, Energiewende is kind of a religion,” Hölling said. “People are very, very emotional about it and it’s hard to make a proper discussion about it."
The next generation of renewables
In a white-walled office building next to an ancient church in central Stockholm, Swedish Bioenergy Association president Gustav Melin holds up a jar full of ground olive pits to show a visitor.
Yes, Melin confirms, olive pits are one of many organic substances that can be burned to make energy.
Melin, seated behind his desk in a spare office earlier in the day, said Germany went about its energy transition incorrectly, distorting the market to such a degree that they’re paying for renewable energy that, at peak production times, is more than the country can use.
“Germany pays 10 times more for renewable energy than we do in Sweden,” Melin said, speaking specifically of the tariffs.
Sweden gives its electricity providers renewable energy certificates that change in value depending on how much renewable energy is on the market.
Melin’s country gets almost 60 percent of its electricity from renewable sources, one of the highest percentages in the industrialized world.
The Swedes benefit greatly from hydroelectric power — a constant, controllable stream of renewable energy. But they have also harnessed the power of bioenergy burned from organic material that now accounts for about 9 percent of the country’s electrical supply.
Sweden’s biomass electricity comes mainly from wood byproducts and goes mainly to power the forestry industry. The goal is a sustainable loop of trees grown for paper pulp made in factories fueled by the leftover wood.
When told Kansas doesn’t have much in the way of forests, Melin ticked off a number of other substances currently being burned for electricity, including sunflower husks. When told Kansas is known as the “Sunflower State,” Melin smiled.
“In Ukraine I’ve been negotiating contracts with factories that produce sunflower oil,” Melin said. “I was not interested in the sunflower oil but in the pellets that they produce from the husks. Some years ago they wasted all the husks. Now they use the husks for their own energy production in the factory.”
While wind has driven much of Kansas’ push for 20 percent renewable electricity thus far, biomass is entering the mix as well.
Abengoa Bioenergia, a Spanish company, began construction of a plant near Hugoton in 2011 and it expects to be online soon, creating 22 megawatts of biomass electricity from a “mixture of agricultural waste, non-feed energy crops and wood waste,” according to the company’s website.
Kansans will benefit from biomass innovations in Sweden, just as they benefit from wind and solar competition in Germany.
In a Berlin café a few hundred meters from the Brandenburg Gate, Matthes, the Öko Institute researcher, recently showed a foreigner how a smartphone app allows him to choose from among 120 electricity providers in the city. He scrolled through dozens of options, able to compare prices and energy mixes and even switch providers at the tap of a touchscreen.
Germany liberalized its electricity sector in 1998 and the Energiewende has further decentralized the grid, allowing Germans to pay small companies or even regional co-ops for their energy. That has allowed energy dividends to stay local, rather than going to a few large companies with regulated regional monopolies — the system previously in place in Germany and still in place in the U.S.
Germany’s continued energy revolution will depend in part on smart grids that route power where it is most needed and smart appliances like dishwashers and clothes dryers that can be set to kick on at times of low use on the grid.
Germany, Matthes said, will be at the forefront of that innovation, because it has to be. With fewer natural resources compared with its economic counterparts like Russia and the U.S., Germany has long relied on adding value to raw products.
Germans will continue to march toward 80 percent renewables, he said, with faith they will be able to upgrade their grid along the way to handle it.
“This is a technology-optimistic country because the whole economy is built on innovation,” Matthes said. “This is the explanation for its success and there is a deep belief that this can be managed.”
Matthes said thanks to innovations in wind and solar, the base price of renewable energy is now “extremely competitive” with fossil fuels in Germany, and as the old tariffs expire Germany will have a competitive advantage in having invested in a comprehensive, domestic energy plan.
In the short term, Klatt said, places like Kansas can benefit from Germany’s investments.
“Yes, it was quite expensive, but as I already said, we paid the learning curve," Klatt said, "and I would say Germany produced something like a public good."