Report

Germany's Green Elephant

Berlin is saying "nein" to nukes, and trying to run Europe's largest economy on wind and solar instead. It's not quite working.

Germany is in the middle of one of the most audacious and ambitious experiments a major industrial economy has ever attempted: To swear off nuclear power and run Europe's largest economy essentially on wind and solar power.

There's just one problem -- it's not really working.

The energy transformation, known as "Energiewende," was meant to give Germany an energy sector that would be cleaner and more competitive, fueling an export-driven economy and helping to slash greenhouse-gas emissions. On that count, the policy has floundered: German emissions are rising, not falling, because the country is burning increasing amounts of dirty coal. And electricity costs, already high, have kept rising, making life difficult for small and medium-sized businesses that compete against rivals with cheaper energy.

Less than three years after Berlin embraced its new energy policy, a shifting global energy landscape is causing a rethink of the Energiewende inside and outside Germany. Business groups representing small and medium firms wring their hands over Germany's high energy costs while Brussels frets that Berlin is subsidizing big German industry with rebates on inflated energy bills. Foreign leaders, and plenty of pundits, blame the Energiewende for Europe's inability to answer Russia's invasion of Ukraine. Utilities, meanwhile, are bleeding money, slashing investments, and shutting down power plants.

German politicians, meanwhile, can only look across the Atlantic and shake their heads. Washington has no formal or comprehensive energy or climate policy, but the United States' natural gas bonanza has led to cheaper power prices and falling greenhouse-gas emissions in recent years. Berlin has reams of pro-renewable energy policies, but prices and emissions are climbing. Germany's energy dilemma is particularly important now, because the European Union is trying to sort out its own climate and energy policies through 2030. The choice, essentially, is whether the Europe wants to be more like Germany, or less.

Dieter Helm, an energy economist at Oxford University who has advised the European Commission, said German leaders assumed that oil and gas prices were going to continue to increase, which meant that developing cheap supplies of renewable energy would give their companies a competitive advantage over the United States. That assumption has turned out to be almost entirely wrong. Flat oil prices, America's shale gas revolution, and the stubbornly high cost of renewable energy have instead left German firms reliant on more expensive forms of energy than their U.S.-based competitors.

"Now it's Europe who has expensive energy and America which has cheaper energy," Helm said.

Germany launched the Energiewende project in earnest in the summer of 2011, a few months after the disaster at Japan's Fukushima nuclear power station sealed the fate of Germany's fleet of nuclear reactors, which were providing about one-quarter of the country's total electricity. The German government decided to close down all the nuclear power plants by 2022 and replace them with renewable energy facilities. The official goal is the most ambitious among big countries: to have renewables provide 80 percent of the country's energy by 2050. Germany's green push has been building for decades, fueled by the continued electoral strength of its environmentalist political parties. Even today, Energiewende enjoys broad popular support in Germany: Over the weekend, tens of thousands of people took to the streets across the country to demonstrate in favor of renewable energy.

"I think it is going to continue somehow, because it has a long-standing tradition," said Kirsten Westphal, an energy expert at the German Institute for International and Security Affairs. She said that Russia's energy bullying of Europe could even provide more support for Germany's embrace of renewable energy, which would give Berlin a way of reducing the country's dependence on imported Russian natural gas.

By some measures, Germany's green energy push has actually been quite successful. It has more solar power capacity installed than any other country, and the third-most wind power capacity in the world, even though it's not a particularly sunny or windy country. Renewable energy so far this year has provided more than one-quarter of Germany's electricity, compared with about 13 percent for the United States, and is the only source of power with year-on-year growth. Champions of Energiewende also point to the hundreds of thousands of jobs they say that the renewable-energy push has created, contrasting Germany's healthy growth and employment record since the financial crisis with blighted neighbors.

But it hasn't come cheaply. Renewable energy has been pushed so relentlessly, in a country not blessed with renewable resources, that the bill is getting enormous. This year, German consumers will spend about 23 billion euros propping up solar and wind power, up from 13 billion euros just two years ago. That comes through a government-mandated surcharge on electricity bills for residential consumers and small and medium-sized businesses. While the government once said the surcharge would never exceed 35 euros per megawatt hour, this year it will top 60 euros per megawatt hour. Big, energy-intensive firms are exempt from the renewables surcharge, which is the reason that European Union competition officials are looking into the question of unfair state aid for those firms. Meanwhile, regular households and small and medium sized businesses have little choice but to pay the higher bills.

That, in turn, appears to have taken its toll on an economy that lives and dies by exports. IHS, the energy consultancy, said in a recent report that German energy policies have cost the German economy 52 billion euros since 2008 because of the impact higher electricity prices have had on smaller firms. Sigmar Gabriel, Germany's energy minister, and the man in charge of making the Energiewende happen, raised eyebrows earlier this year when he warned of the risk of "de-industrialization" if Germany continues on its current path.

So what can Germany do? In the near term, the country is trying to rein in the runaway cost of renewable energy by scaling back subsidies and focusing on the most cost-effective forms of renewable energy. That means forgetting grandiose dreams of offshore wind farms in the Baltic powering industry in the Ruhr.

"It's not a make or break moment, but it's certainly an issue of slowing things down," said Westphal.

Germany is expected to present the detailed proposals for the new renewable-support scheme in April. At the same time, Berlin is trying to figure out how to spread the cost of the Energiewende more fairly among consumers and businesses, without kneecapping the industries that drive the economy.

"Policymakers are trying to find a balance: They don't want to make industry uncompetitive, but on the other hand, the cost and the speed of the renewable-energy deployment exceeded everybody's expectations," said Anna Czajkowska, a European policy specialist at Bloomberg New Energy Finance, an energy consultancy.

But more broadly, calls to jettison or fundamentally change the German energy transformation are falling on deaf ears. Some, such as energy guru Daniel Yergin and IHS, call for Germany to embrace domestic natural gas, as in the United States, as a way to curb emissions, shave energy costs, and bolster economic growth and employment. But Germany, unlike some Eastern European countries such as Romania, Poland, and Ukraine, has been loath to seriously consider hydraulic fracturing as part of its energy policy. Indeed, for more than a decade, natural gas has been an afterthought in German energy policy, despite evidence that coal is becoming the biggest beneficiary of the current German energy mix. Even the prospect of U.S. natural gas exports to Europe only summoned a lukewarm response this month from German Chancellor Angela Merkel.

Others, including Dieter Helm, wonder if nuclear power will regain favor, given both the cost of the current energy transition and Germany's dependence on imported Russian gas (and coal). But unlike Japan, which is on course to restart some of its nuclear reactors just three years after Fukushima, there appears to be little political appetite in Germany for nukes.

"Most of German society supports the phase-out of nuclear power, and deciding to change course would really be against the will of the majority of the population," said Czajkowska.

Instead, there are other options on the table. They run the gamut from reforming the electricity market to make it worthwhile for Germany's big power companies such as RWE and EON to keep running the power plants that provide base load power, to improving energy connections between European countries.

One of the biggest props to German hopes, though, is the one least likely to materialize: wholesale reform of the European emissions-trading scheme, which slaps a price tag on emissions of carbon dioxide, and which is meant to make dirty energy (like coal) less attractive than cleaner energy (like gas and wind). Since its inception, the European carbon market has been plagued by over supply: simply put, polluting pays. And that means that, for now, dirty coal is becoming more important in Germany, and makes more economic sense than natural gas.

"From a climate change point of view, Germany is perceived as the 'green man' of Europe, but it's actually the 'dirty man' of Europe," Helm said.

Carsten Koall - Getty

Report

Slow Burn

Western sanctions aren't having an immediate impact on Russia, but they could gradually make Moscow's economic woes much worse.

Though American and European leaders have yet to make good on threats to isolate Russia, the Ukraine crisis could still punish Russia's already struggling economy.

Russian President Vladimir Putin laughed off the United States' move to sanction a bank and several businessmen from his inner circle, promising to open a new account at Bank Rossiya, the first financial institution to find itself in Western crosshairs. "I personally didn't have an account there, but I'll definitely open an account there on Monday," he joked.

That kind of bravado comes naturally to Putin, and the initial sets of American and European sanctions were too weak to prevent him from annexing the Crimean peninsula and may not, NATO officials worry, be enough to dissuade him from invading eastern Ukraine.

That's not to say that the sanctions are completely toothless. They may not do immediate damage to the Russian economy, but analysts say they could turn potential investors away at a time when Russia dearly needs foreign money.

"The real potential damage to Russia's economic future is self inflicted," said Chris Weafer of Moscow-based consultancy Macro-Advisory, in a recent research note. "The real damage from a prolonged conflict in Ukraine," Weafer said, "may be to radically slow the inflow of much needed investment capital." Weafer recently cut his forecast for the Russian economy in 2014 from 1.9 percent to 1 percent growth.

Investors' cooling interest in Russia could make it more expensive for Russia to borrow money in international markets. Rating firms Standard & Poor's and Fitch Ratings both downgraded Russia's outlook from stable to negative, after the U.S. rolled out new sanctions Thursday. The Russian Finance Ministry has said it might delay plans to sell $7 billion in Russian sovereign bonds this year. Russian Finance Minister Anton Siluanov acknowledged Friday that Russia's borrowing costs are going up.

"The imposed sanctions are definitely negatively affecting the general perception of our country's economy," Siluanov said to reporters in Moscow, according to Bloomberg.

The falling value of Russia's currency could also be a source of pain. Companies that have borrowed money abroad and Russians planning their summer vacations could be forced to pay more, if the ruble continues its decline. It has fallen nearly 10% against the dollar since the beginning of the year.

The impact on Russia's stock market is harder to gauge, but there were initial signs sanctions were having at least a minor impact. The Russian benchmark Micex index fell almost 3 percent Friday, a day after President Obama blacklisted 20 top Russian officials and businessmen. The U.S. sanctions on Bank Rossiya were Washington's first against a Russian financial institution, and the move caused Visa and Mastercard to stop processing payments for the blacklisted bank and three of its affiliates Friday. Moscow responded by barring an array of powerful lawmakers and Obama administration officials from entering Russia. Putin indicated that he didn't think Russia needed to pursue other forms of retaliation, but Russian Deputy Foreign Minister Grigory Karasin said Russia was considering additional measures, according to Reuters.

That was the second exchange of sanctions and mocking responses between the U.S. and Russia this week, after Moscow annexed Crimea, the Ukrainian province that voted to breakaway from the country on Sunday. Obama upped the ante Thursday by laying out a plan for a broad trade blockade that - if carried out -- could cripple Russia's energy or banking sectors. The U.S. is unlikely to go down that road unless Russia moves to take over broad swathes of eastern Ukraine. Even if the U.S. acted, meanwhile, it's not clear Europe would follow. The continent's leaders' have expressed clear reluctance to levy broad punitive measures on Russia because of the boomerang effect they'd have on European trade.

While the back-and-forth over Russia's annexation of Crimea has at times hit the volatile Russian stock market, broader indicators about the Russian economy could be more worrisome. Russian stocks plunged 10 percent after Russia invaded Crimea, for instance, but bounced back immediately on the weak response from the West. The bigger concern for Russian leaders could be that the unrest makes bankers and money managers reconsider Russia as a place to make long term investments.

In the first two months of this year, investors have already moved more that $30 billion out of the country because of the standoff, Weafer said. That compares to $63 billion in all of 2013. Part of that amount is just the regular flow of money from cross-border trade, but Weafer estimates that at least a quarter of it is personal wealth.

"Russia has two problems: one is attracting foreign investment and the other is convincing Russians to keep their money in Russia and invest it there," said Weafer, speaking on the phone from Abu Dhabi.

The new sanctions against businessmen and politicians close to Putin haven't shut down the Russian economy, but they are making a bad situation worse by slashing the value of the ruble and making foreign investors think twice about putting their money into Russian companies.  

The value of the ruble could be the most important indicator inside Russia, said Weafer. He said Russians are extremely sensitive to currency fluctuations because of memories of shocks in the 1990s that crushed the ruble, including the 1998 banking crisis when Russia had to default on its debt.

"You cannot walk down a street in a Russian town without being aware of what the currency rate is," Weafer said. "The yellow currency exchange signs are as familiar as the golden arches in the U.S."

Win Thin, global head of emerging-market currency strategy at Brown Brothers Harriman, had a slightly more optimistic view. He said the Russian economy could muddle through at a growth rate of 1 to 1.5 percent and investors would likely move on -- as long as Putin doesn't go any further.

"If he's stopping at Crimea, which I think he is, then I think people just kind of forget about it," Thin said.

After all, Russia is still considered an emerging market, so investors may expect a bit of volatility.

"The Russian economy is like a large old tanker," said Mujtaba Rahman, head Europe analyst at risk consultancy Eurasia Group. "These developments are tantamount to more rust, but, at current, are unlikely to represent a serious inflection point."

KIRILL KUDRYAVTSEV/ AFP/ Getty Images