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Green Energy: Don’t Envy Germany

Saturday, April 23, 2011

Germany’s promotion of renewable energies is commonly portrayed as setting a standard for the rest of the world. It is instead a cautionary tale.

I recently studied the question of whether the whole “green energy leads to green jobs” paradigm has any merit, by studying how things have worked out in Europe, where it has been tested extensively. In this article, we focus on Germany (I’ve previously covered the Netherlands and the United Kingdom).

Germany’s foray into renewable energy started in earnest in 1997, when the European Union adopted a goal of generating 12 percent of its electricity from renewable sources. Germany’s method for achieving such targets was instituting a “feed-in law,” which required utilities to purchase different kinds of renewable energy at different rates. In a study of the impacts of Germany’s aggressive promotion of wind and solar power, Manuel Frondel et al. noted that the German feed-in law required utilities buy solar power at 62 cents per kilowatt-hour, far above the normal cost of conventional electricity, which was between 3 and 10 cents. Feed-in subsidies for wind power, they observed, were 300 percent higher than conventional electricity costs.

Manuel Frondel et al. found that implementing wind and solar power raised household energy rates by 7.5 percent.

Needless to say, this massive subsidization of wind and solar power attracted a lot of investors: after all, if the government is going to guarantee a market for several decades, and set a price high enough for renewable producers to make a profit, capital will flow into the market. Germany became the second-largest producer of wind energy after the United States, and its investment in solar power was aggressive as well.

But, according to Frondel, things haven’t worked out as Germany’s politicians and environmentalists said they would. Rather than bringing economic benefits in terms of lower cost energy and a proliferation of green energy jobs, Frondel found that implementing wind and solar power raised household energy rates by 7.5 percent. Further, while greenhouse gas emissions were abated, the cost was astonishingly high: more than $1,000 per ton for solar power, and more than $80 per ton for wind power. Given that the carbon price in the European Trading system was about $19 per ton at the time, greenhouse gas emissions from wind and solar were not great investments.

Frondel concludes that:

German renewable energy policy, and in particular the adopted feed-in tariff scheme, has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into the country’s energy portfolio. To the contrary, the government’s support mechanisms have in many respects subverted these incentives, resulting in massive expenditures that show little long-term promise for stimulating the economy, protecting the environment, or increasing energy security.

In the case of photovoltaics, Germany’s subsidization regime has reached a level that by far exceeds average wages, with per-worker subsidies as high as €175,000 ($254,000). As Frondel and his team write in their report:

In conclusion, government policy has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into Germany’s energy portfolio. To the contrary, Germany’s principal mechanism of supporting renewable technologies through feed-in tariffs imposes high costs without any of the alleged positive impacts on emissions reductions, employment, energy security, or technological innovation.

Policy makers should thus scrutinize Germany’s experience, including in the United States, where there are currently nearly 400 federal and state programs in place that provide financial incentives for renewable energy.

Although Germany’s promotion of renewable energies is commonly portrayed in the media as setting a “shining example in providing a harvest for the world” (The Guardian 2007), we should instead regard the country’s experience as a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits.

Germany is finding it hard to continue subsidizing wind and solar power at existing levels. In May, the German parliament cut back the subsidy for domestic rooftop solar photovoltaic systems by 16 percent, with free-standing systems cut by 15 percent.

Kenneth P. Green is a resident scholar at the American Enterprise Institute.

FURTHER READING: Previously in this series, Green wrote “Renewable Energy Fails to Green the U.K. Economy” and “A Dutch (Re)treat.” He’s also discussed “Obama’s Energy Blueprint: Same Silliness, Different Day,” “President Obama's Flawed Energy Blueprint," “The Green Jobs Myth,” and “Empowering the Free Energy Markets.”

Image by Rob Green/Bergman Group.

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