Germany’s energy transition will impact all of Europe – but how will it be done?

First, shut down nuclear power and heavily subsidise renewable energy, then decide on the phase out the use of coal, and now launch national emissions trading and implement a hydrogen strategy. Germany’s energy transition is a long, meandering and educational saga.

Energiewende, i.e. energy transition, is a loan word from Germany and adopted in the climate policies of other also countries. The term introduced back in the 1990s describes how Germany has often been a frontrunner in its own policy.

“The lead role in EU climate policy has varied, with different countries having the most ambitious targets at different times. Now Germany would like to see the 55 per cent emissions reduction target by 2030 be applied to all of Europe, at least. In fact, I believe that Germany will use its current EU Council Presidency term to drive this target.”

This is how Fortum’s Peter Röttgen, VP, Public Affairs Germany, assesses the impacts of Germany’s climate policy on the rest of the world.

Vesa Ahoniemi, Fortum CEO Advisor, notes that Germany has previously been Europe’s heaviest subsidiser of renewable energy production. This contributed to the decrease in the price of renewable electricity, but it wasn’t very effective in generating emissions reductions.

“Now the thinking has changed and the policy is more focused on emissions reductions. I believe that this change is also reflected at the EU level,” says Ahoniemi.

So let’s take a closer look at how the energy transition, which is also impacting the Nordic countries, has advanced and what’s ahead.

For a long time, the target in Germany was a 40 per cent reduction in carbon dioxide emissions by 2020. This target was backed by strong subsidies for renewable energy forms, like wind power. At the same time, nuclear power was being shutdown, which had been decided to gradually phase out by 2022.

“When nuclear power was shutdown, the use of coal-fired power plants grew, and, consequently, emissions increased. Consistent with the law, renewables are always the first in the production order, but now, because of the low price of gas and the high price of emissions allowances, gas-fired plants are pushing coal plants out of production, and thus emissions are also decreasing,” says Röttgen.

In Germany, big investments in renewable energy are done through an auction procedure that guarantees the winner a certain price for the electricity. A feed-in tariff, on the other hand, is applied for smaller renewable energy investments. Lately, this mechanism has significantly driven down the price of energy and electricity.

Prices dropping into negative territory from time to time hamper additional investments in renewables and in other emission-free energy forms. The subsidies for renewable energy forms haven’t been particularly cost effective either.

“The significance of the cost effectiveness of the subsidy policy will be amplified as emissions reduction targets are tightened also in other sectors, because the subsidy methods for renewable energy have proved to be relatively expensive,” Ahoniemi assesses.

Germany’s Climate Protection Law setting a new climate neutrality target for 2050 was approved last year and reflects the change in thinking. Additionally, the Climate Protection Law presents emissions reduction targets for all sectors of society – the energy sector as well as industry, construction, transportation and agriculture.

The medium-term target is a 55 per cent emissions reduction by 2030 from the 1990 level, i.e. the same that Germany is advocating as the target for the EU overall.

“The Law also mandates the monitoring of the different sectors’ CO2 budgets. If the reduction targets are not achieved, the Government will tighten the reduction process guidance,” says Röttgen.

Additionally, at the beginning of next year national emissions trading will start for those sectors that are outside the sphere of EU emissions trading. This will make Germany one of the first countries with emissions trading covering all sectors.

So will the medium-term target be achieved?

Currently, the energy sector is making the fastest progress in emissions reductions in Germany. Röttgen says that it now seems that this year’s medium-term target will be achieved, even though it long seemed doubtful.

Some of the final sprint is due to the COVID-19 pandemic, which has reduced both industrial production and consumer demand. However, also the structure of energy production has moved in a more favourable direction. Natural gas as an energy source has played a key role in this interim phase towards zero emissions.

“Gas-fired plants haven’t been competitive for a long time, but their competitiveness has recently improved. The more coal and nuclear plants that are closed, the bigger the question of how to fill the gap. A sufficient amount of renewable energy can’t be achieved overnight,” Röttgen says.

Discontinuing coal use is governed in Germany by its own law, the target of which is to decrease coal power capacity by 8 gigawatts by 2030 and to zero by 2038 at the latest. Capacity in 2019 was 22.8 GW.

In Finland, there has also been focus on Fortum’s subsidiary Uniper’s recently commissioned Datteln coal-fired plant. Environmental activists have wondered why should new coal power be commissioned when the tight environmental targets are known.

“All coal-fired power plants have a shared emissions budget, all emissions are calculated, and power plants are removed from the system year after year. The process doesn’t depend on one particular power plant, as long as the emissions reduction target is met. On the other hand, it isn’t just a matter of emissions, but also of security of supply. One power plant cannot be treated separately from the entity. Datteln is a very efficient and flexible power plant, and it must be seen as one among all the coal power plants,” Röttgen says.

According to Röttgen, in terms of their emissions reduction, all the other areas of society are in a more challenging situation than the energy sector.

“Decarbonisation of industry requires a huge amount of clean energy. Therefore, I believe that’s where the focus will be in the upcoming years – on that and on transportation, heating and, particularly, the industrial sector.”

So Germany’s ultimate zero emissions target will be achieved in phases. Since the target is net zero – and not, e.g., an 80 per cent emissions reduction – hydrogen technology is needed: it can also help remove the last 20 per cent of carbon emissions. Germany’s climate policy also includes a hydrogen strategy.

Also other energy forms to support electricity

“People in Germany were previously considering a completely electricity-based solution, but an active debate of the matter determined that it isn’t possible. Other forms of energy, like gas, are also needed, so the future energy system will be a combination of clean electricity and hydrogen,” Röttgen explains.

Synthetic fuels can be made from hydrogen using power-to-x technology, which is electricity-intensive.

The German government’s hydrogen strategy includes a 9-billion-euro subsidy package to advance the technology. The goal is to commission 5 gigawatts of hydrogen production by 2030 and another 5 gigawatts by 2040 at the latest.

The climate friendliness of hydrogen varies according to different production forms. Grey hydrogen is made from fossil natural gas, so it generates hydrogen and carbon dioxide. Blue hydrogen is also made from natural gas, but the generated carbon dioxide is captured and stored. Green hydrogen is made by breaking down water into hydrogen and oxygen with renewable electricity.

The ultimate goal of the hydrogen strategy is to produce hydrogen with renewable electricity, but, here too, intermediate steps are needed. According to Röttgen, Germany’s own renewable electricity production is not capable of fulfilling this need.

Natural gas is an important enabler also on the pathway to completely clean hydrogen technology. Additionally, natural gas pipelines are infrastructure that is suitable also for transporting hydrogen.

Germany’s hydrogen strategy wasn’t created solely for climate reasons, it is also linked to the need for industrial reform and business opportunities.

“The demand for hydrogen is so high in Germany that it also has an import demand that has been recognised in the national hydrogen strategy,” Röttgen says.

Uniper is a hydrogen sector pioneer

Röttgen notes that hydrogen technology is of interest also to Fortum and Uniper.

“On one hand, we see opportunities to produce hydrogen in the Nordic countries; on the other hand, Uniper is a pioneer in the hydrogen sector. Uniper knows the technology and it has experience in the international natural gas business. It can produce these services for its industrial customers.”

Vesa Ahoniemi compares the hydrogen strategy to how state aid was used to create today’s profitable wind power production.

“Germany sees that there is an ongoing global competition in new technologies, and it has brought this same way of thinking to the entire EU level – that Europe must take a global lead role in the production of clean hydrogen, for instance. A backdrop to Germany’s thinking is also the protection of its own industry from high energy prices, which the pricing of carbon dioxide can lead to.”

Ahoniemi, too, sees opportunities in the hydrogen strategy for the Nordic countries, where the economy is more electrified than that of Germany; the electricity is produced in a cleaner way and the electricity system is more flexible. If there is a lot of electricity on the Nordic markets, less hydropower is produced, and industry is also helping with the flexibility.

“So, in principle, it would be possible to produce economically priced electricity also for Central Europe or to produce hydrogen with local clean electricity to be exported there.”

However, a challenging piece in the equation is the rather distant location of the Nordic countries from Central Europe.

“There is no gas pipeline network that could transport hydrogen produced with local wind power to Central Europe. And the electricity transmission networks are too few. How can we build the infrastructure fast enough?” ponders Ahoniemi.

“On the other hand, building infrastructure fast enough is a challenge also for electricity grids. Transmitting energy as hydrogen gas instead of electricity is tens of times more efficient, so I believe that a hydrogen infrastructure will become more common in the future.”

Article was originally published in Finnish in MustRead media portal.

peter-röttgen

Peter Röttgen

Vice President, Public Affairs, Germany
FortumDeutschlandSE@fortum.com

Vesa Ahoniemi

Vesa Ahoniemi

CEO Advisor
vesa.ahoniemi@fortum.com

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