When taking office in late 2021, the German government announced plans to pass sweeping energy sector reforms in 2022. The energy crisis that erupted after the Russian invasion of Ukraine accelerated this legislation process further and necessitated additional efforts to safeguard supply security and cutting dependence on natural gas from Russia. This article summarises the ongoing rapid changes and dynamics of Germany’s energy sector.
On 8 July 2022, the German government passed the largest energy policy amendment in decades. The package, which is over 593 pages long, includes amendments to five laws that will accelerate the expansion of renewable energies. These five laws are:
- Renewable Energy Act, which now contains increased renewable capacity expansion pathways and measures to achieve them.
- Offshore Wind Act, which now contains increased tender volumes (accelerating the offshore wind build-out) and redesigned subsidy rules.
- Onshore Wind Act, which includes the new Wind Energy Area Requirements Act, introducing the obligation to make 2% of Germany’s land area available for wind power, and amends the Federal Building Code according to this area requirement.
- Federal Nature Conservation Act, which standardises and simplifies species protection assessments and measures to enable faster permitting especially of wind energy projects.
- Energy Industry Act, which contains regulations that should accelerate the grid expansion urgently needed to improve integration of renewable energy nationally.
In addition, the package contains additional provisions that the Federal Government can call upon at short notice in the event of a further deterioration of the supply situation on the energy markets. These are:
- Substitute Power Plant Standby Act: contains instruments to withdraw gas power plants from the power market to save gas in electricity production.
- Energy Security Act: expands the set of policy options the government can use to maintain energy markets and supply chains in the event of a severe deterioration of gas supply.
Germany remains committed to its existing climate and power sector decarbonisation targets
The reforms undertaken since the onset of the Russia-Ukraine conflict largely reaffirm Germany’s prior commitment to achieve climate neutrality in 2045. The package passed this week introduces new measures to advance this goal. Achieving the climate targets requires phasing out coal. Germany has set 2038 as the latest date for coal phase out, and the Federal Government hopes to completely phase out coal in 2030. While the parliament removed a draft target for 100% renewable electricity by 2035, it instead requires that electricity supply will be nearly climate neutral by 2035 and that 80% of electricity must come from renewable energy by 2030.
Germany’s coal phase-out decision stands
Germany remains committed to phasing out coal. Though Germany has delayed the retirement of coal-fired power plants next year and activated power plants in its reserve, the temporary increase in coal output will mainly substitute for gas-fired power plants, to free up gas supplies for heating in residences, public buildings and industry, where it is more difficult to replace it in the short term than in power generation. The Substitute Power Plant Standby Act governing the coal plant reactivation limits the coal reactivation until 31 March 2024. The law presents a temporary insurance in case of a severe gas shortage for heating and industry this winter. Most gas is already used for these purposes, and gas plays a limited role in the power sector.
Renewables have reduced Germany’s reliance on fossil fuels and enhanced energy security
Over-reliance on imported gas is the main cause of Germany’s present energy crisis, with a shortage of nuclear energy due to outages in half of the French nuclear fleet as a secondary factor that contributes to higher electricity prices. According to a report by ENTSO-E, an unexpectedly large outages of thermal plants have also exacerbated Europe’s energy supply crisis. Thermal power plants often rely on rivers to source fuel and extract cooling water, and they are vulnerable to outages related to high water temperatures and droughts due to climate change.
Renewable energy generation in Germany has made a huge contribution to substituting gas and strengthening its energy independence and supply security. A recent study by Fraunhofer Institute found that each GW of peak RE generation has contributed to lowering hourly wholesale power prices by Euro 4/MWh in 2022 so far. Renewables continue to scale up as planned, but this takes years. Thus far, renewables already made up around 50% of Germany’s electricity supply in 2022, it was 45% in 2021.
The reforms and amendments listed above will accelerate the expansion of renewables further. Importantly, the Renewable Energy Act now also defines renewable energy utilisation as overriding public interest and matter of national security. Together with other measures, this will accelerate permitting and planning procedures. It also creates new incentives for green hydrogen and a faster expansion of rooftop PV. The new regulations for area requirements for wind energy and acceleration of planning and permitting address problems that had hampered wind energy in Germany in the last few years. As a contribution to reducing power prices, the government has cut the renewable energy levy on the power price to 0 starting 1 July 2022, and Germany will abolish the levy from 2023 on, replacing the funds with fiscal subsidies. This measure not only underlines Germany’s commitment to clean energy while alleviating customer energy costs, it also enhances the incentive for customers to switch from fossil gas to electricity.
Cutting demand for gas is a central element in Germany’s energy security strategy
While most energy crises focus public attention on energy supplies, policies on the demand side are just as important and often more economical in the long run. Germany is rushing to adopt demand side measures to improve efficiency and reduce dependence from gas. As fossil gas and oil still account for a large share of residential heating in Germany, one important measure in the heating sector is expanding of heat pump adoption. As a highly efficient electricity-based heating technology, they allow for nearly zero-carbon heating in combination with power from renewable energy. Under the new federal government, Germany aims to have 6 million heat pumps installed by 2030. This is supported by generous subsidies (35% of capital cost, 45% if replacing an oil boiler). This expansion will be challenging, not least because heat pump manufacturers must expand production fast enough and because skilled labourers for installing heat pumps are in short supply. Heat pumps are also likely to see more application in district heating, where they can bring river water or low-grade waste heat to temperature levels suitable for the heating grid. In industry, too, heat pumps can provide process heat and help replace gas. This will need additional incentives.
Germany continues relying on markets as central allocation and steering system
While the Substitute Power Plant Standby Act and Energy Security Law contain provisions enabling the government to change market conditions for gas and coal power plants, the overarching objective is to ensure the continued function of energy market and supply chains even under deteriorating gas supply. The Energy Security Law contains new provisions that enable gas suppliers to pass on price increases to their customers beyond what would usually be possible under existing contracts. However, this is only possible after authorisation by the Federal Network Agency, which regulates gas and power networks, and within reasonable limits based on the additional cost of sourcing. Only in the most severe shortage would the Federal Government be empowered to ration gas and decide which users will still receive gas.
Through the adoption of the new energy law amendments, in the midst of a severe national and Europe-wide energy crisis, Germany has reaffirmed its climate and clean energy commitments. The reactivation of coal plants represents a temporary measure designed to shift limited gas supplies for urgent heating and industrial uses over the coming winter. Other provisions are likely to accelerate Germany’s plans to convert the power system based completely on renewable energy, and also incentivize the electrification of heating and industrial processes.
This does not imply that all is well in the German energy transition. The energy price crisis and gas supply crisis are real, and will have severe impacts on the daily life of regular people across Europe, as well as on industry. Had Germany and other European countries moved earlier to accelerate renewable energy and shift away from gas for heating and industrial uses, today’s crisis might not be so severe. It is nevertheless clear that the measures adopted by Germany to respond to the crisis are necessary, and will benefit the low-carbon energy transition in the long run.
Philipp Geres, Anders Hove, Yuxia Yin, Kevin Tu