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Eye on the Market | October 22, 2012 J.P Morgan The most important energy developments of 2012: how countries are planning for Independence Day Il; Is Germany making an impetuous mad dash into renewable energy? In the wake of Fukushima, Chancellor Merkel announced a plan to accelerate the closure of coal and nuclear power plants, with the goal of relying more on renewable energy to fill the gap. Germany is by far the largest user of electricity in Europe and its manufacturing to GDP ratio is high, so the consequences may be substantial. To get a sense of the potential impact, start with the first chart on Germany’s current generating capacity and output by source. While wind and solar installations have increased in recent years, their electricity output is less impactful due to wind and solar intermittency. The two largest increases in Germany’s renewable plan are offshore wind and photovoltaic (solar). Offshore wind connections are very expensive; according to Netherlands-based transmission system operator TenneT, they work out to ~1.1 million Euros per MW, and that’s just for the connection (not the wind turbine itself, that’s extra). That offshore wind connection cost is even higher than the 0.8-1.0 million per MW upfront capital cost of building new natural gas plants, using data from RWE AG (Essen) and SWB AG (Bremen). Wind is free and natural gas isn’t, so we should look at all-in levelized costs” by electricity source. As shown in the second chart, all things considered, offshore wind is a very expensive way for Germany to generate electricity, and solar is higher by another order of magnitude. The relative ordering is similar in other countries. Snapshot of current German capacity and generation Levelized cost of electricity production in Germany Percentof total USD/MWh 45% 440 m Generating Capacity 390 Electricity Generation 40% 35% 340 30% 290 25% 240 20% 190 a 140 10% 90 o% 40 0% Nuclear Coal Natural Onshore Offshore Solar Coal Nuclear Natural Gas Wind Solar Gas Wind Wind Source: BDEW Bundesverband der Energie- und Wasserwirtschaft e.V. Source: International Energy Agency, Nuclear Energy Agency and OECD. Germany is a very energy-efficient country, and has among the lowest electricity-to-GDP ratios in Europe. However, the cost of electricity to industrial consumers is already among the highest in Europe when including taxes, and for residential consumers, Germany is the highest. As a result, the proposed shift to renewable energy may further increase electricity prices for both residential and commercial users. There’s not enough data yet to measure the impact so far. Average retail electricity price in 2011: Average retail electricity price in 2011: residential segment, EUR/MWh commerial/industrial segment, EUR/MWh 250 180 ee | Mi Basic price 160 MM Basic price 200 Mi Taxes 140 Mi Taxes 120 100 80 60 40 20 0 pee, BEL ITL SPN NED POR’ CZE UK FRA GRE ITL §GER_ BEL CZE SPN- NED UK GRE POR’ FRA Source: Wirtschaft & Infastruktur GmbH & Co Planugs - Renewable Energies. Source: Wirtschaft & Infastruktur GmbH & Co Planugs - Renewable Energies. 150 100 50 Germany’s goal: raise the contribution of renewable energy from 20% to 35% by 2020, and to 80% of total consumption by 2050. The total cost of financing this transition is estimated at 800 billion Euros by DIW Berlin. The first stage, from now until 2020, is supposed to cost 200 billion Euros. At a time when commitments to save Spain and the rest of the Periphery are > Levelized costs are all-in costs which include construction, financing costs, ongoing maintenance and operations and fuel inputs costs. In Europe (unlike in the US), levelized cost numbers also include a carbon footprint estimate @ $30 per tonne of COz. 4 HOUSE_OVERSIGHT_024197