Renewable Energy

Germany: The Future Cost of Electricity and the Challenges of Embracing Renewable Energy

Berlin, Germany skyline with the Spree River in foreground
Credit: JFL Photography / stock.adobe.com

My team and I have been looking at the possible solutions to the energy crisis in Europe and the differing strategies being drawn up to transition to a Net Zero energy system, many catalyzed by the global energy crisis and Russia’s invasion of Ukraine. We want to focus on Germany and compare the cost to operate a fossil fuel based grid, including expensive Rejected Energy (discussed in my previous article), with a grid that is predominantly green, including the cost to build long duration clean energy storage.

Why Germany? In April 2022, the German government announced that it would bring forward its target for reaching a fully renewable grid from 2050 to 2035, a 15-year acceleration of their energy transition. The catalyst for this move, Vladimir Putin, was perhaps an unlikely candidate, but the sands have been shifting ever since 2011 when Angela Merkel pledged a nuclear phase-out by 2022. This move was cemented when the Green party won a historic place in the governing coalition at the 2021 election.

On April 6, the German coalition government passed a raft of policy measures to support the headline announcement. This new legislation encompasses a Renewable Energy Act, an offshore wind law, an energy industry law and new rules to expedite the development of the transmission grid. The core item in the “Easter Package” is the principle that the use of renewables is of 'overriding public interest,' and thus takes priority over other matters until carbon neutrality is achieved.

It is hoped that this will remove hurdles such as local opposition, lengthy planning procedures, or conflicts with other strategic goals. In a similar vein, the package includes changes to grid rules which allow for a faster permitting process. More specifically, the plan is to dedicate 2% of land area to renewables. The package was sent to parliament, and it was approved in early July. Germany thus presents a unique test run for the raft of countries pledging to reach fully renewable grids, and being the 4th largest economy on the planet, their energy transition will represent a material permanent cut in the demand for fossil fuels. 

As we dive into the case of Germany, our aim is to understand what such a grid looks like in practice, and the likely path of investments that Germany will need to make. In particular, we are interested in the level of renewable energy penetration that will trigger the need for long duration energy storage (LDES) and, crucially, the overall wholesale electricity price once the grid reaches its 2035 milestone of 100% renewable energy. This requires estimating the levelized cost of energy (LCOE), the levelized cost of storage (LCOS), and transmission costs.

As we will show, this proved very difficult, but we are eager to at least capture the direction of travel, and to gain further insight into the cost of a fully renewable grid versus a fossil fuel powered one. 

A pathway for the EU, as modeled by Ember: bigger, cleaner, cheaper

Before we get into the specific case of Germany, we would like to give context and discuss the overall pathways for the EU member state countries. Germany is accelerating their energy transition to move away from Russian fossil fuel dependency, but the entire block is committed to decarbonization. We summarize the findings of Ember, an UK based energy research group, to highlight the level of investments required, the composition of the clean assets to be developed, and the major milestones and investment requirements.

Ember started its operations in 2008, after identifying coal power as Europe’s biggest climate problem. The data-driven policy advocacy not-for-profit group has recently released three scenarios for the EU energy transition, a massive modeling exercise.

Ember modeled and published in June three scenarios, and the results show that Europe can decarbonize its power supply, grow its electricity generation capacity, add stability to the economies by not being subject to fossil fuel volatility, while reducing the overall cost of electricity. The decline in electricity costs takes place in all of the three cases modeled.

The transition is based on solar, onshore wind and offshore wind accelerating development rates. In the least-cost case, solar + wind will provide 70 to 80% of all electricity generation in 2035, with annual growth in solar + wind growing 4 times by 2025. Over 2025 to 2035 S+W annual additions should be over 100 GW to 165 GW (vis a vis the 24 GW annual additions recorded between 2010 and 2020). In the least cost case by 2035 wind installed capacity quadruples to 800 GW while solar grows 5 to 9 fold, growing to 800 GW to 1,400 GW. 

In all cases modeled by Ember, interconnection across countries increases, coal is phased out, Europe’s fossil fuel consumption decreases materially, and a green hydrogen economy develops. The three cases are summarized below:

  • Stated Policy: Energy system evolving in line with existing government plans until 2035;
  • Technology Driven: A medium ambition pathway, in line with Paris Agreement 1.5C reaching Net Zero by 2050;
  • System Change: The highest ambition case, also in line with Paris Agreement 1.5C but reaching Net Zero by 2040;

Solar + Wind becomes the predominant source of electricity supply for Europe in each pathway. The difference in each case is the speed of which the key renewable energy sources are developed. In 2019 S+W represented 17% of electricity generated across the EU, in the Stated Policy S+W would reach 52% in 2035, while in the Technology Driven the two technologies would generate 68% and, in the System Change it would produce 78%.

The table below shows the key outcomes in each of the cases:

Summary of Three Cases Modeled by Ember – Figures as of 2035, for EU27

Table

Source: Ember Report on New Generation

There are a few key points to summarize, as they are critical elements of how the new clean capacity is to be added while retiring the high emissions assets:

  • Coal capacity: Total coal capacity in the EU was 140 GW in 2020 (according to Europe Beyond Coal Germany commissioned a new coal plant in 2020, followed by Poland and Greece in 2022). In the Technology Driven pathway coal shrinks to 28 GW by 2030 and in the System Change it is completely phased out. In the Stated Policy some new coal takes place in the Western Balkans but coal capacity is still reduced by 2035, by 75% so coal energy capacity gets to 35 GW;
  • Electrification of heat and transport: Ember forecasts new electricity needs from electrification of transport and heat to total 660 TWh by 2030 (18% of demand) in System Change, while representing 420 TWh (11% of demand) in Technology Driven case;
  • Nuclear does not compete: The size of the nuclear fleet in 2020 was 121 GW and is reduced according to decommissioning plans of the different member states and no new nuclear capacity is assumed because nuclear is just not price competitive with renewables + LDES;
  • Hydrogen turbines: Are assumed from 2030 onwards, and in all three pathways are assumed to operate as peaking facilities, at capacity factors that range from 7% to 15% in 2040;
  • System with increased interconnections: In the Technology Driven case, the largest projects connect France to the UK, France to Belgium, Spain to France, Germany to Poland, and Norway to Sweden. In the System Change there are additional connections between France and Germany, the Netherlands and Norway;
  • LDES solutions: Are assumed as batteries for hours, pumped hydro for days, and hydrogen for cross seasonal storage (months of capacity). The battery solutions include V2G;
  • Pumped hydro: Follows national plans, with a capacity growing from 14 GW in 2020 to 61 GW in 2035;
  • Batteries replace fossil fuel peak plants: A ratio of 10% of batteries to solar capacity was applied as the figure that economically optimizes the investment. Almost 100 GW of utility scale battery storage is added to the system by 2035 in the Technology Driven case. In this pathway, by 2035 the total battery storage reaches 842 GWh, representing 7% of average daily demand of electricity;
  • The primary consumption of fossil fuels in the EU27 is forecast to drop by 38% to 50% by 2030 in the two more aggressive cases, compared to a 25% reduction in the Stated Policy case. The clean power pathways could deliver a drop of 33% to 45% in Natural Gas consumption in the EU block by 2030;

Electricity costs can become cheaper in a decarbonized and expanded EU Grid

The total systems cost to build the EU grids as modeled by Ember by 2035 include operational and investment costs relating to electricity supply, additional transmission (including interconnections), plus costs related to hydrogen supply and additional costs related to electrification of industry, transport and buildings. In the Stated Policy case the overall investment required would be ca. €8.1 trillion, while in the Technology Driven case it drops to €7.62 trillion and to €7.14 trillion in the System Change pathway.

The fact that the overall cost is lower in the most aggressive case may seem counterintuitive, but it is because in the Stated Policy case fossil fuel utilization is prolonged and expensive nuclear assets continue to operate, limiting the deployment of price competitive solar and wind.

Lastly, we come to a crucial point of this exercise, which is the forecast of what is the overall cost of electricity supply mix, from 2020 to 2050 in the three pathways that Ember has modeled. We would like to emphasize Ember’s results: in all pathways the average electricity costs decline as inexpensive wind and solar progressively dominates the system. Including the cost to run electrolysers to create green hydrogen for clean energy storage purposes (Ember refers to that as “P2X”) average cost of electricity across the EU27 countries would drop from €80/MWh in 2022 to ca. €50/MWh.

The noticeable discrepancy across the three cases would take place around 2035 as the cost to run the P2X storage would drive the overall cost of electricity 23% to 30% below the Stated Policy case.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Gabriela Herculano

Gabriela (Gaby) Herculano has over 25 years’ experience in finance and in energy. She grew up in Brazil, is also a proud citizen of Portugal and has lived and worked in the U.S., Singapore and the UK. Gaby started her career in equity research, covering the Latin American electric utility sector at Lehman Brothers. After business school, she moved into the buy side, where she worked at greenfield project finance and M&A at energy developer AES Corporation and as an Executive Director at GE Capital’s Energy Financial Services team in London.

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