Mean Mrs Merkel

On Monday an interesting meeting of minds took place at an energy conference in Essen, Germany, on the eve of the big annual E-World Exhibition. The idealistic German energy world view brushed with more pragmatic outside views. With instructive results.

Speaking from Berlin through a video screen, German Environment Minister Peter Altmaier ("I am the son of a coalminer") made it clear to the high-level audience in Essen that the Merkel government remains fully committed to the Energiewende. But it is planning two types of reform measures. First (as we discussed in this newsletter last Monday), it is proposing short-term measures to curb the exploding costs of renewable energy subsidies. Altmaier was adamant that something has to be done about electricity prices: "We cannot afford another double-digit rise in electricity prices this year after the one we had last year", he said. "We cannot go on like this."

Secondly, the government is preparing a structural reform of the EEG, the Renewable Energy Law that is the spendthrift villain in this piece. The new EEG envisioned by the Merkel government will not just be aimed at stimulating renewable energy, but will focus on, as Altmaier put it, "marrying renewable and conventional energy" into a stable integrated system. That, he said, is the big challenge for the future.

But Altmaier left no doubt that the Energiewende will continue. As Arndt Neuhaus, Chairman of the Board of RWE Deutschland, expressed the German consensus later during the debate: "The Energiewende is irreversible (unumkehrbar)".

Tuomo Hattaka, the Finnish CEO of the German subsidiary of Swedish energy company Vattenfall, was not going to attack this German Dream head-on. As chief of a company with large operations in Germany, he could not do that. "I did not come here to whine", he said. "It's been 18 months now since the Energiewende kicked in. We survived."

But Hattaka did at least raise the question whether the Energiewende is achievable without endangering the survival of German and European industry. His answer was: "yes, it is. But it will be a balancing act." He said the transition will be expensive and time-consuming. He noted that a "capacity crunch" is still possible. He also frankly predicted that "electricity prices in Germany and Europe will continue to rise up to 2020 and beyond."

Significantly, when Hattaka was asked by someone in the audience what the Nordic countries are doing to make a decarbonized future in Europe possible, his real feelings showed through: "We are doing plenty of things", he said, "but it is important that when we expand renewable energy we don't do it the way it was done in Germany: unrealistic (realitätsfremd), totally disconnected from the market."

Unlike Hattaka, Laszlo Varro, Head of the Gas, Coal and Power Division of the International Energy Agency (IEA), did not feel inhibited from shattering the German consensus in Essen. About the generous German support for renewable energy, he wondered: "After €100 billion of subsidies, this is still an infant industry?" He noted that apart from the UK no other country was as ambitious in its decarbonisation goals as Germany, "but the UK does it with nuclear power". He also said that for 500 hours per year, "there is no wind in Germany and the UK at the same time."

And he had more reality checks to offer. He said the IEA does not expect the US shale gas revolution to be repeated in Europe. "Russia will remain the dominant energy supplier." He noted that the carbon price in the European Emission Trading Scheme (ETS) is effectively zero. "The only reason why there still is a positive price is because of the expectation that something will be done to repair the ETS." What was urgently needed, said Varro, is "a properly functioning ETS and a properly functioning gas market".

Wham! Questions? Varro got no questions.

So what about Brussels? How does the European Commission view the Energiewende? Philip Lowe, Director-General of Energy, right-hand man of German Energy Commissioner Günther Oettinger, showed himself to some extent aligned with the Energiewende. He said that renewable energy will become the most important source of electricity ("There is no such thing as cheap nuclear energy", he added parenthetically) and that the "decarbonisation agenda is the driver of the market in the long run".

He also implicitly backed Altmaier's proposed cutbacks of renewables subsidies. "The whole idea of subsidies for renewables", he said, "was to get them to be scaled up, so that costs could be brought down. This has succeeded, so now subsidies can be reduced. Those who complain about this cannot expected to enjoy windfall profits."

Of course this last statement could also be interpreted as implicit criticism of German policy, in the sense that the Germans have been too generous with their support. Lowe politely informed the German audience that the Zeitgeist has changed, certainly outside Germany. A few years ago, climate change had priority, then came competition and security of supply concerns. Now, he said, the order is reversed.

But Lowe's (and Brussels') biggest problem with German policy is its unilateralism. "Support schemes must be made more European as well as more market-based", he said. "Very little progress has been made so far" on harmonization, he added.

Nevertheless, Lowe, who speaks German well, tried to put a positive spin on things. He said the "first benefits of the internal market" are already being felt. He more or less proudly remarked that "wholesale electricity prices are converging in North West Europe". In other words, despite the lack of harmonization in renewable energy support schemes (and the wreckage of the ETS), progress was being made. He might well have said: "the internal market is irreversible."

Unfortunately, what Philip Lowe apparently does not know yet, is that, although prices in the North West European electricity markets did converge for many years, they no longer do so at this moment. Indeed, starting last year, they have been steadily diverging!

This is the startling message that was given to me recently by Bert den Ouden, CEO of the international gas and power exchange APX-Endex and one of the architects of the North West European market integration. In an interview I had with him for EER, which we are publishing today, Den Ouden sounds the alarm over the internal energy market. He notes that unilateral policies (and not just the German ones) are "splitting apart" European power markets. The internal market is going in the wrong direction, warns Den Ouden, at very high cost to the energy users.

Indeed, the chief of APX Endex calls on policymakers to agree to an "EU Energy Stability Pact". If no measures are taken to connect markets - above all, to integrate the Energiewende into the EU internal market - he fears that the system could break down.

What this means, then, is that the internal market is not so irreversible as policymakers like to think. Could the same go for the Energiewende itself?

(Respond? karel.beckman@europeanenergyreview.eu)