CCNet – 24 May 2012
The Climate Policy Network
Green Energy Transition: Germany Fears De-Industrialisation
As a result of Germany's green energy transition, electricity prices are exploding. Consumers and businesses are paying the price while Germany faces gradual de-industrialisation. Economists estimate that the cost of the green energy transition will total 170 billion Euros by 2020. This is more than double of what Germany would have to write off if Greece were to withdraw from the monetary union. "The de-industrialization has already begun," the EU Energy Commissioner Guenther Oettinger has warned. --Handelsblatt, 23 May 2012
Opposition to a drilling technique known as hydraulic fracturing has slowed the development of natural gas in Europe, creating export opportunities for U.S. producers hurt by low prices and a glut of gas at home. By 2020, Europe will be using more shale gas produced in the U.S. than from domestic fracking, Wood Mackenzie estimates. --Katarzyna Klimasinska, Bloomberg 23 May 2012
Investments in renewable energy could be put on hold while European governments develop clear policies on shale gas, according to a biomass energy expert. The prospect of increasing production of cheap shale gas in Europe has impacted investors’ forward planning, Chris Moore, CEO of MGT Power told a forest industry conference in London on Thursday. “If anything, it’s going to cause a waiting period, and that’s bad for renewable energy. You’re going to see a lot of question marks on renewables and their affordability,” said Moore. --Environmental Finance, 17 May 2012
The Energy Bill constitutes a disastrous move towards a centrally planned energy economy with a high level of control over which forms of energy generation will be favoured and which will be stifled. The government even seeks to regulate the prices and profits of energy generation. –Nigel Lawson, The Global Warming Policy Foundation, 23 May 2012
At a time when most major economies are gradually returning to cheap and abundant fossil fuels, mainly in form of coal and natural gas, Britain alone seems prepared to sacrifice its economic competitiveness and recovery by opting for the most expensive forms of energy. --Benny Peiser, The Global Warming Policy Foundation, 23 May 2012
Those who doubt that market forces still have the power to transform the world aren't paying attention to America's revitalized energy sector. Prices more than policy are driving these remarkable changes. Other problems to be fixed, rising CO2 emissions, for example, will also yield to the indomitable pressure of price, if carbon is taxed. While Washington squabbled over which energy direction to take, and which energy bill to kill, the markets moved us in exactly the direction the country should go — toward cheap, plentiful energy. --Joel Kurtzman, The Wall Street Journal, 22 May 2012
1) Green Energy Transition: Germany Fears De-Industrialisation - Handelsblatt, 23 May 2012
2) European Fracking Bans Open Market For U.S. Gas Exports - Bloomberg 23 May 2012
3) Shale Gas Boom Threatens European Renewables Investments - Environmental Finance, 17 May 2012
4) Downing Street's Anti-Shale Cabal Looks Decidedly Dodgy - Bishop Hill, 21 May 2012
5) GWPF: New Energy Bill Is A Disaster - The Global Warming Policy Foundation, 23 May 2012
6) Britain Should Look To America For Real Energy Solutions - The Wall Street Journal, 22 May 2012
1) Green Energy Transition: Germany Fears De-Industrialisation
Handelsblatt, 23 May 2012
Klaus Stratmann, Thomas Ludwig, Ulf Summer and Ruth Berschens
As a result of Germany's green energy transition, electricity prices are exploding. Consumers and businesses are paying the price while Germany faces gradual de-industrialisation. Economists estimate that the cost of the green energy transition will total 170 billion Euros by 2020. This is more than double of what Germany would have to write off if Greece were to withdraw from the monetary union.
In June 2011, Angela Merkel said: "German companies just as citizens of Germany have to be supplied with affordable electricity, also in the future."
Today it is obvious that Merkel has promised too much. Energy prices in Germany are increasing dramatically - by 57 percent in just the past ten years - and not least because the state is one of the biggest drivers of cost. Taxes and duties on electricity prices have now risen to 23.7 billion Euros p.a. - an increase of just over 1,000 percent within 15 years. The levies on electricity look more like a special energy tax, which is higher than the revenue from tobacco and motor vehicle taxes combined.
This figure is the result of an electricity price analysis by the Federal Association of Energy and Water Industry (BDEW). It should have been a wakeup call for the Chancellor who met with the Prime Ministers of the German states in the Chancellery this week to discuss the green energy transition. The results of the meeting were meagre: the Federal Government and state governments will work together more closely in the future. Merkel announced that summit meetings will be held every six months.
"The green energy transition is a big task to which we are committed together," said the Chancellor. A Federal network planning law to expand the electricity grid should be agreed before the summer break and adopted by the end of the year.
According to Merkel, it was also agreed to harmonise the further expansion of renewable energy “with the need for base-load capable power plants." The Federal Government will soon make a suggestion towards this goal. The Chancellor also expressed the hope that there would be an agreement in the mediation process for the energy renovation of buildings and the planned cuts in solar subsidies by the government until the summer.
For industry and consumers, this is only a small consolation. Experts agree that renewables subsidies must be cut quickly. The promotion of renewable energy has become the largest single item of green taxes and levies. This year, the subsidies will increase to the highest ever annual figure of 14.1 billion Euros.
German industry, in particular, is suffering from high electricity prices. Most affected are the chemical, metal and paper industries. In the aluminium industry, the electricity costs amount to about 40 percent of total costs.
All industries complain; some companies have already closed down: the aluminium smelter Voerdal in the Lower Rhine town of Voerde recently filed for bankruptcy because of high energy prices. The U.S. chemical giant Dow Chemical currently operates 17 plants with more than 5,000 employees in Germany. "Because of the green energy transition I get increasingly critical questions from our corporate headquarters in the US about whether energy supply in Germany is still possible at competitive prices," said Germany boss Ralf Brinkmann.
Germany's de-industrialization has already begun
"The de-industrialization has already begun," Energy Commissioner Guenther Oettinger has warned in an interview with the Handelsblatt. Hans Jürgen Kerkhoff, President of the Steel Trade Association, complains: "The levels of industrial electricity prices are higher here than in most other countries."
Within the Federal Government, the concerns are growing: "The price of electricity has become the Achilles’ heel of the energy revolution. We must design it in such a way that electricity prices remain affordable," says Thomas Bareiß, energy policy coordinator of the Parliamentary Christian Democrats (CDU). Experts estimate that the cost of the green energy transition will total 170 billion Euros by 2020. This is more than double of what Germany would have to write off if Greece were to withdraw from the monetary union.
What is of particular concern is that Germany’s industry has helped the country to more economic growth compared to other countries during the recent years of crisis. Countries such as Britain envy Germany for the 22 percent share of industry in its GDP.
Therefore, policy makers face a dilemma. On the one hand, industry has to be relieved from energy costs in order not to jeopardize its international competitiveness, says CDU expert Thomas Bareiss. On the other hand, the burden should not unilaterally end up with households. "The only solution is to make the green energy transition as cost effective as possible," says the conservative politician. In this context, he criticised the federal states that had recently rejected a cut in solar subsidies by a two-thirds majority.
At the Chancellor’s energy meeting with the prime ministers of the German states, the issue of electricity prices will be high on the agenda. Merkel initially only wanted to talk about the expansion of the national grid. Maybe she did not want to be reminded of her promise from last June that the price of electricity would be affordable for industry and consumers.
Yet, the figures tell a different story. At the beginning of the liberalisation of the electricity market in 1998, government taxes and levies for all electricity consumers amounted to 2.28 billion Euros. In 2012 the figure is about ten times as high. The 14.1 billion in subsidies for the promotion of renewable energy is also the single largest item of government taxes and levies on electricity.
Taxes and levies already make up 45 percent of the electricity bill of an average private household with three people. The average household is charged 75 Euros per month, of which only 41 Euro are derived from the procurement, transportation and distribution of electricity, i.e. the actual service. 34 Euros are taxes and duties.
The tenfold increase in taxes represents only the beginning of a trend that will further accelerate significantly in the opinion of many experts. The reason: the green energy transition. If the Federal Government wants to achieve its ambitious goals, it will have to redistribute a lot of money, which it has collected from consumers. The share of renewable energy in electricity generation is supposed to increase from currently 20 percent to 35 percent by 2020 and to 50 percent by 2030.
That will incur additional costs. There are now a number of calculations and scenarios on the subject. In a report presented in early May, the management consultancy McKinsey comes to the conclusion that the total cost of the green energy transition will amount up to 175 billion Euros between 2011 and 2020. In 2020, Germany’s electricity consumers would have to bear costs of 21.5 billion Euros, costs that are caused entirely by the switch to renewable energy.
2) European Fracking Bans Open Market For U.S. Gas Exports
Bloomberg 23 May 2012
Opposition to a drilling technique known as hydraulic fracturing has slowed the development of natural gas in Europe, creating export opportunities for U.S. producers hurt by low prices and a glut of gas at home. By 2020, Europe will be using more shale gas produced in the U.S. than from domestic fracking, Wood Mackenzie estimates.
Fracking, as the practice is known, was temporarily suspended in the United Kingdom after it was linked to a series of earthquakes. Bulgaria and France -- home of the continent’s largest estimated reserve -- outlawed it over environmental concerns. Some other countries are poised to impose moratoriums on the process, in which water, sand and chemicals are pumped underground to free gas trapped in rock.
This opposition, along with a projected growth in demand driven in part by Germany’s plan to phase out nuclear power, has created opportunities for U.S. gas producers such as Exxon Mobil Corp. (XOM) (XOM) Imports to the European Union are projected to grow 74 percent by 2035 as Italy, Poland and Lithuania build terminals to receive tankers carrying gas in liquefied form.
“Europe’s an obvious market for such U.S. LNG exports,” said Daniel Yergin, an energy analyst and Pulitzer Prize-winning author of books chronicling development of the global energy industry.
Europe has an estimated 639 trillion cubic feet of shale gas resources, according to the U.S. Energy Information Administration. That is more than four times the reserves of the Marcellus Shale formation from New York to Tennessee that has fueled much of the fracking boom in the U.S.
France, Poland Supplies
Much of Europe’s gas, however, lies under Poland, where Exxon Mobil said early results suggest extraction may be unprofitable, and France, which outlawed fracking in July after environmentalists and wine producers raised alarms about water pollution.
Also working against fracking in Europe: a population density that leaves many countries without the open areas in which drilling can be accomplished, and a lack of pipelines to move the gas to customers, said Octavio Simoes, president of Sempra LNG based in San Diego.
“In the United States, you had what you call a perfect storm,” Simoes said in an interview. “You had highly qualified people who have been doing it for a long time, a lot of developed support maintenance equipment suppliers, that could easily provide everything that shale developers needed, you also had plenty of land with few inhabitants.”
Not so in Europe, where environmental concerns about fracking persist even after a study commissioned by the EU concluded that current legislation is adequate to protect the environment.
Bulgaria banned hydraulic fracturing in January, and withdrew a license granted to Chevron Corp. (CVX) (CVX), after hundreds of protesters marched in Sofia to oppose the technique, fearing it will pollute the water and soil in the nation’s most fertile farm region of Dobrudja, where Chevron was planning to drill.
The Czech Environment Ministry is preparing a moratorium on new shale gas exploration licenses to adjust its legislation and eliminate legal risks, the ministry said on May 8.
Romanian officials said on May 21 the nation may lift its moratorium if environmental concerns can be resolved.
Cuadrilla Resources Ltd., a U.K. shale-gas explorer that suspended drilling in northwest England after minor earthquakes linked to pumping operations, expects to resume work this year. The company says it’s found more natural gas trapped in U.K. shale rock than Iraq has in its entire reserves.
Dependence on Russia
While the Polish government supports fracking, seeing it as a way to reduce dependence on supplies from Russia, the national Geological Institute slashed the U.S. estimate of gas reserves 85 percent to 768 billion cubic meters (27 trillion cubic feet).
“We do anticipate some shale gas to come out of Poland, but the initial results don’t suggest it’s going to be a game changer,” Noel Tomnay, head of global gas research at Wood Mackenzie Ltd., said in an interview from Edinburgh.
By 2020, Europe will be using more shale gas produced in the U.S. than from domestic fracking, Wood Mackenzie estimates.
According to the International Energy Agency, the 27-member EU’s dependence on gas imports will increase to 86 percent in 2035 from 61 percent in 2009, and the volume of imports will rise 74 percent.
Yergin, who wrote “The Prize,” a history of the oil industry, and its sequel, “The Quest,” said Europe may not yet realize how much natural gas it will need in the future.
“Gas is going to become a bigger part of energy mix,” he said. “One consequence of Germany turning off its nuclear plants is increased natural-gas use.”
That is one reason why U.S. liquefied natural gas terminal owners such as Cheniere Energy Inc. (LNG) (LNG) and Dominion Resources Inc. (D) (D) are lining up for permits to export the fuel.
3) Shale Gas Boom Threatens European Renewables Investments
Environmental Finance, 17 May 2012
Investments in renewable energy could be put on hold while European governments develop clear policies on shale gas, according to a biomass energy expert.
The prospect of increasing production of cheap shale gas in Europe has impacted investors’ forward planning, Chris Moore, CEO of MGT Power, a UK-based large-scale biomass developer, told a forest industry conference in London on Thursday.
Until clear policies emerge on whether countries will allow the exploitation of shale gas reserves, investments in biomass and other renewables might be put on hold, while investors whether better opportunities lie in shale gas than renewables.
“If anything, it’s going to cause a waiting period, and that’s bad for [renewable energy],” Moore told Pöyry’s Forest Industry: Challenges and Opportunities conference.
Currently, most shale gas operations are concentrated in the US, but deposits have been found in Europe and Asia, creating investment opportunities...
“You’re going to see a lot of question marks on renewables and their affordability,” said Moore.
4) Downing Street's Anti-Shale Cabal Looks Decidedly Dodgy
Bishop Hill, 21 May 2012
As we saw yesterday, some details of those invited to the Downing Street seminar on prospects for shale gas in the UK have now been revealed. The involvement of only the oil and gas majors, whose investments in conventional gas are threatened by shale developments made the seminar look decidedly dodgy.
No Hot Air blog has now obtained a comment from Cuadrilla Resources, the company that is at the forefront of efforts to develop a shale gas industry in the UK.
No, we were not invited. Nor were we consulted about potential shale gas production in the future. I was surprised to see negative statements from people who have never seen our core data or open hole log data. They may consider getting their facts in line next time since this is such an important issue to the country.
This makes the seminar look like a sham. I wonder which civil servants were responsible for issuing the invitations?
5) GWPF: New Energy Bill Is A Disaster
The Global Warming Policy Foundation, 23 May 2012
With the publication of its draft Energy Bill, the government has announced its intention to reverse the course of energy deregulation.
The Global Warming Policy Foundation warns that any attempt to turn back the clock to the dark period of centralised energy planning will not only damage Britain’s economy, but will almost certainly end in failure, just like other attempts to impose a centralised system of energy controls have failed in the past.
Nigel Lawson, the GWPF's Chairman, who as Energy Secretary was the architect of Britain's energy market deregulation in the 1980s, warned:
"The Energy Bill constitutes a disastrous move towards a centrally planned energy economy with a high level of control over which forms of energy generation will be favoured and which will be stifled. The government even seeks to regulate the prices and profits of energy generation."
The government bases the case for green - and more expensive - energy in large part on the assumption that gas prices will significantly rise in the future. This argument is no longer credible in the light of the growing international abundance of shale gas, not to mention the likely shale gas potential in Britain itself.
North American gas prices have dropped from $15 per million British thermal units to below $2 in just 7 years. This price collapse is an indication of things to come in Europe, once its own vast shale deposits are allowed to be extracted.
"At a time when most major economies are gradually returning to cheap and abundant fossil fuels, mainly in form of coal and natural gas, Britain alone seems prepared to sacrifice its economic competitiveness and recovery by opting for the most expensive forms of energy," said Dr Benny Peiser, the GWPF's director.
In any case, the complex and inconsistent measures of the draft Energy Bill are unlikely to provide investors with the certainty they require to make substantial investments.
The proposed contracts for difference (CfDs) are extremely complex and convoluted. Neither the profit guarantees offered for different technologies nor the duration of CfDs is known. The government has not provided any numbers and price guarantees for its favoured green technologies. Investors are therefore thrown into limbo since they cannot calculate whether expensive renewables or nuclear reactors are viable and can compete with less expensive conventional power plants.
This lack of clarity will inevitably lead to constant government amendments and continual intervention, which will act as additional barriers to new entrants in the UK electricity market.
In light of government indecision and investors’ uncertainty, the Energy Bill proposes to give the Secretary of State the exclusive authority to offer green energy companies 'letters of comfort,' promising them that they will be guaranteed profits once the specifics of CfDs are finalised and introduced. This is both arbitrary and unconstitutional.
Moreover, it is doubtful that what is proposed is actually workable, let alone economically viable. After all, similar interventions in the past have proved inept and uneconomic. They will almost certainly prove to be highly unpopular when the costs of these measures are reflected in energy bills.
6) Britain Should Look To America For Real Energy Solutions
The Wall Street Journal, 22 May 2012
Those who doubt that market forces still have the power to transform the world aren't paying attention to America's revitalized energy sector.
Four years ago, oil prices climbed to about $145 a barrel world-wide. The impact on the U.S. economy was devastating. Consumers who paid between $2.50 and $3 for a gallon of gas in 2007 paid as much as $5 a gallon in 2008. For many Americans, the high cost of commuting to and from work meant choosing between paying the mortgage or paying for gas. Many chose the latter.
But eventually prices did what they're supposed to do in a market economy—they prompted the development of new sources of oil as well as oil substitutes. Some companies began drilling new oil wells using new technology including 3D seismic imaging and directional drilling. In 2002, when oil prices were in a trough, there were roughly 800 oil-drilling rigs operating in the U.S. Today, there are roughly 2,000. The last time we had that many rigs drilling for oil was 1985. In addition, energy companies went after and found more offshore oil, and far more "unconventional" oil from shale, tar sands and long-abandoned wells than most people thought possible.
The results of these efforts have been impressive. Since 2008, domestic oil production has increased 12%, while imported oil has fallen to 45% of total consumption from 61%. Four years ago, when prices were high, the U.S. was on track to spend nearly $1 trillion on imported oil each year. Lower prices and falling demand mean we are likely to spend $350 billion this year—still high, but falling.
Not surprisingly, companies also sought opportunities developing cheaper alternatives to oil. Chief among these fuels is natural gas, which is a cleaner fossil fuel than oil and coal. In 2008, estimates were that the U.S. had just 12 years of natural gas reserves left. Plans were being put in place to import liquefied natural gas from the Middle East, perhaps even Russia, to meet future demand.
But high energy prices prompted companies to develop new technologies. Hydraulic fracturing—drilling deep vertical wells then drilling horizontally to release natural gas from shale rock—was perfected. Because of that, natural gas reserves increased dramatically while prices fell. In 2008, natural gas sold for about $12-$14 per thousand cubic feet. Now it sells for about $2 per thousand cubic feet. Instead of supplies lasting only 12 years, there is now sufficient natural gas for at least 100 years.
Rather than importing natural gas, the U.S. may begin exporting it. Since natural gas is sold in local rather than global markets, price differentials between countries are high. Average futures prices are about $9.50 per thousand cubic feet in Europe and about $16 per thousand feet in Asia, versus $2 in the U.S. Pricing differences this big will make exporting natural gas lucrative, perhaps even balancing our perennially in-the-red trading account.
Right now, natural gas is so abundant and cheap that some worry the U.S. and Canada, which has large reserves north of those in the U.S. Midwest, may soon run out of storage capacity. Some companies have even announced plans to curtail drilling due to falling prices and oversupply.
But here the price-mechanism is again at work. Trucking companies and fleet operators, wanting to take advantage of low natural-gas prices, are looking into converting trucks from diesel to natural gas, cutting their fuel bills by half. Passing the bipartisan Natural Gas Act (HR1380 in the House and S1863 in the Senate) would facilitate and accelerate this process by providing tax credits for the cost of conversion and for building natural-gas fuel stations, increasing demand even further.
High energy prices have transformed the American energy landscape. A study released last December by the Congressional Budget Office indicates that new oil and gas finds, combined with traditional sources of energy, including cheap-but-dirty coal, has transformed the U.S. from an energy has-been to a heavyweight. According to the CBO, total U.S. energy reserves now exceed those of all other countries, including those in the Middle East. The U.S. is so energy rich there's little to prevent us from achieving energy independence.
Prices more than policy are driving these remarkable changes. Other problems to be fixed, rising CO2 emissions, for example, will also yield to the indomitable pressure of price, if carbon is taxed. While Washington squabbled over which energy direction to take, and which energy bill to kill, the markets moved us in exactly the direction the country should go—toward cheap, plentiful energy.
Mr. Kurtzman is executive director of the Center for Accelerating Energy Solutions at the Milken Institute.