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German elections: It is the journey that counts

22 Sep 2017, 4.15 pm GMT

German elections: It is the journey that counts

London, 22 September (Argus) — Germany has spent the first decade of this century debating ways to lift renewable energy out of a niche position and the future of nuclear power. The country's energy policy debate has moved on to how decarbonisation can be achieved in a cost-efficient manner that allows the market to develop new business models, trading instruments and strategies.

All mainstream parties agree on the destination — close to full decarbonisation of the economy by 2050 — which will inevitably bring about the gradual decline of fossil fuels for power generation and in other sectors.

But parties in a position to become part of the next government, which will be elected on 24 September, disagree on the journey to 2050 with the first milestone for greenhouse gas (GHG) emission cuts fast approaching.

An overview of the key points likely to be on the next government's agenda and how it could impact Europe's biggest power market follows below:

The 2020 target and beyond

Germany is almost certain to miss its target to reduce total GHG emissions by 40pc in 2020 against a 1990 base line under the status quo. German think–tank Agora Energiewende earlier this month projected that the country will fall short of the target by 9-10 percentage points. While the environment has dismissed this assessment as "extremely negative", it agreed that the next government needs to introduce additional measures.

Angela Merkel is almost certain to secure a fourth mandate on Sunday. Having been in office since 2005, the credibility of her climate protection policy is likely to be judged on just how close German can get to the 40pc reduction goal. Merkel has repeatedly said that she will initiate talks next year across all sectors on which additional measures could be introduced to close the gap to the 2020 target.

But it remains unlikely that Germany will introduce a phase-out from lignite and coal-fired generation within the next four years as Merkel has stressed that replacement jobs for lignite miners in east and central west Germany need to be found first. The SPD, Merkel's current and probable future coalition partner, shares that position.

Measures in the energy sector to meet the 2020 target will most likely be cosmetic rather than far reaching, especially since Merkel will need to convince some of her own party members of the importance of the 40pc cut with Joachim Pfeiffer, the CDU/CSU economic and energy policy spokesman in the Bundestag lower house of parliament, recently lamenting "targets fetishism".

Only a CDU/CSU coalition with the FDP and the Green Party, in an effort to prevent a repeat of the grand coalition with the SPD, could bring about more significant changes in the near-term that could alter the German generation mix in wholesale power prices in 2018-20. The FDP is firmly against a coal phase-out, but might have to compromise in such a scenario, as the Green Party has declared efforts to reduce coal and lignite power generation as a red line in possible coalition negotiations.

The European context

The present government has put its energy policy on a more European-friendly footing — Germany in 2015 signed an agreement with other EU countries to increase co-operation in security of supply and market design, following a haphazard nuclear phase-out decision in 2011.

Major sticking points for the next government include its position on the so-called EU winter package on energy. The next coalition, no matter which parties it will include, is likely to oppose a proposal in the winter package to hand the final say on power market bidding zone configurations to the European Commission as this would strip Germany of veto rights should the EU decide to split the German power market into more than one price zone. The latter is likely have a detrimental impact on liquidity in Europe's biggest power market.

Further down the agenda, are cross-border auctions for renewable energy. Germany has held joint solar photovoltaic (PV) auctions with Denmark and is exploring the possibility of joint auctions for renewable energy with France.

The CDU/CSU, SPD and FPD support reforms to the EU Emissions Trading Scheme (EU ETS) but do not back an EU-wide, or national, floor price, leaving just the Green Party to argue for the latter and making it unlikely that the next government will significantly alter its position on CO2 pricing under the EU ETS.

The EEG

While the Green Party agrees that certain reforms to the renewable energy act (EEG) are necessary it wants Germany's flagship subsidy scheme to continue.

A CDU/CSU coalition with the SPD, or a CDU-CSU –FDP link up — should the latter gain a majority on Sunday — is likely to work towards an alternative funding system for renewable energy.

Alternatives being debated involve distributing the cost of subsidising renewable energy, which has so far been shouldered exclusively by non-exempt power consumers — more evenly across more sectors. This, in turn, could gradually increase the attractiveness of the electrification of the transport and heating sectors, and as such lift demand for power.

Towards a high-electricity society

But the impact of this is likely to be medium rather than short-term, as it might take the next government the better part of the next four years to decide on ways to incentivise the use of renewable energy for transport and heating — so-called sector coupling. The FDP is against a ban of specific technologies, such as combustion engines, while the CDU/CSU and the SPD acknowledge the role of gas in the heating sector, especially in the short-term. While sector coupling is a buzz word in the current energy policy debate and is supported — to varying degrees — by all major parties, it is unlikely to kick in significantly until later next decade.

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