BGA Cable: The German Power Sector

The Situation

Investors in utilities, electric power production, distribution and storage, power grids, alternative transport/mobility and in power-related fields should prepare for major dislocation in the German as well as in neighbouring European markets over the coming years. Due to a politically-induced and highly ambitious double/triple exit endeavour, risks as well as opportunities for companies and investors are set to abound.

EXIT 1 – Germany’s post-Fukushima decision in 2011 to significantly accelerate its nuclear exit plans

All remaining nuclear reactors are to be shut down by late 2022 (one to be closed in 2019, three more in 2021, and the last three in 2022).

EXIT 2 – ambitious German CO2-reduction plans foresee a swift exit from fossil fuel-fired electricity production

Current demands presented by a government-convened expert commission call for a complete exit from coal-firing by 2038 at the latest (ideally by 2035), with major exit steps already to be implemented in parallel to the nuclear exit.

EXIT 3 – parallel plans for individual and public transport to switch from oil-based combustion to mainly battery technology

This third exit (from gasoline/Diesel combustion), which major political forces also want to see happen by 2030 (similar to other European countries), will create huge additional demand for electric energy from the transport sector. The substantial production gap for 24/7/365 reliable electric energy opened up by this TRIPLE EXIT from nuclear, coal and fossil-fuelled combustion engines is supposed to get closed mostly by increased renewable energy production (complemented by flexible, still-to-be-built modern natural gas backup power plants, new storage facilities, and a much more efficient German as well as pan-European grid).

For an energy-hungry advanced industrial society in a densely populated country, this TRIPLE EXIT challenge will be almost impossible to see through without major disruption and market dislocation – which will create risks as well as opportunities for investors in all affected and related areas.

Aggravating factors:

  • Germany’s recent lack of progress in the reduction of national greenhouse gas-emissions, resulting in the country missing its 2020 CO2-reduction interim target.
  • More alarming recent IPCC global warming scenarios, which would require faster de-carbonization.
  • New „rulebook” from Kattowice Climate Summit in Dec 2018 for de-carbonization (which will likely be strictly heeded in Germany).
  • The nuclear shutdown plans are largely undisputed among all current and conceivable future government parties, making them unlikely to be rolled back or extended without major political crisis.
  • With nuclear energy already getting rapidly phased out, we have seen a greater reliance on coal-fired electricity generation in recent years. The total elimination of this alternative source by 2038 would leave Germany without any significant baseload capacity – eventually leading to either facing major power outages (planned and un-planned) or huge further subsidized/public investments in alternative baseload sources.
  • Given current party platforms and publicized as well as public opinion towards climate change (and additionally “clean air” for the transport sector), we see little to no political room for softening the three sketched exit ambitions at the moment.
  • Rather, we expect any current or conceivable future government to move ahead on this TRIPLE EXIT at an accelerated pace. This would mean billion-Euro subsidies on the one hand, and strict regulation/enforcement on the other.
  • Despite the hugely favourable political climate, highly-subsidized German renewable energy production (from onshore and offshore wind facilities) is meeting growing local resistance. The concerns focus on refurbished and new onshore wind parks close to settlement areas (the main places of consumption) as well as new grid axles, which are urgently needed to bring offshore wind energy to onshore consumers. There already is a considerable backlog in the planning and construction of the necessary thousands of kilometres of cross-country power lines.
  • All problems and aggravating factors laid out above await resolution at a time where Germany is facing general political stability challenges and general uncertainty surrounding other main issues such as migration, the EU and the Eurozone, demographics, and global macroeconomic downturn risks.

Examples of affected investment areas

  • Current German utilities and grid operators.
  • Operators, developers and outfitters of efficient renewable energy production facilities.
  • Developers and outfitters of efficient and flexible grid operators.
  • Modern, low-carbon natural gas power plants (and related areas for supplying natural gas).
  • Everything related to large-scale, efficient electricity storage able to help smoothing between excess and insufficient wind and solar energy production (e.g. batteries, power-to-gas, pumped storage hydro, liquid air pressure technology, smart grid/smart pricing tech, etc.).
  • Utilities and grid operators in German neighbouring countries, which are already suffering/profiting from fluctuation in German renewable electricity production.
  • CCS storage and other alternative CO2 disposal/use technologies (allowing for more fossil fuel combustion without negative climate change impact).
  • H2-fuel cell transportation technology (as a more storage-friendly source of mobility).
  • Alternative, CO2-friendly combustion engine fuels (e.g. LNG, LPG, 2nd generation BTL biofuels, OME synthetic Diesel, etc.).
  • CO2 emission certification and trade.

Timeline

  • Today until late fall 2019: German government “Coal Commission” proposal for a comprehensive and binding plan for EXIT 2 to get intensely debated, in order to get cast into law by the end of 2019.
  • 2019: German government (CDU/CSU plus SPD, but in close cooperation with the Green party) to work out and pass (probably in the fall) a comprehensive post-Kattowice “CLIMATE PROTECTION ACT”. This act shall detail additional sector contributions for CO2 reduction (also in order to compensate for insufficient progress in recent years).
  • 2019 ff.: After the binding EXIT 1 and 2 plans, we expect another government expert commission to work on a plan and deadline for EXIT 3.
  • Fall 2021: deadline for next federal elections – that could easily result in the Green party becoming a part of a Federal government coalition (which would further accelerate the “exit” and “transition” efforts).
  • End 2021: government internal deadline for major grid expansion progress (very ambitious given minuscule progress so far.)
  • 2022: last nuclear power plants to be shut down for good. In parallel, recent government commission plan to stop the production of 12.5 gigawatts of coal-based energy by the same year.
  • 2032: major review of EXIT 2 progress and evaluation of a possible acceleration of its completion until 2035.

We expect that the discrepancy between what is politically, economically, financially, technologically, and socially possible, on the one hand, and the ideology- and interest-driven increasing pressures for more rapid and ambitious “exits”, on the other, will eventually lead to major political pressure and debate. Thus, the very likely dislocation mentioned above will probably get accentuated at some point by the political resistance met by still more ambitious plans and measures, – depending on respective political majorities.

In other words: There will be phases of acceleration and deceleration in the above development, thus aggravating the disruption.

BGA is uniquely positioned in Berlin, and well connected with decision-makers in politics and industry, to advise as this theme develops and plays out.

 Expert:

Andreas Beckmann

Andreas Beckmann

Senior Analyst
Andreas’ Bio
Since 2006, Andreas Beckmann has been an independent political analyst and consultant based in Berlin and Brussels.  He works closely with BGA partners  on numerous projects. His main areas of expertise include financial regulatory issues –particularly the manifold aspects of the Eurozone sovereign and bank debt crisis, defense and security issues on a domestic German and international level – including IT security, and the German residential real estate market.

Andreas has a combined 30 years of work experience. He served for two years as an officer cadet in the German Army, and worked more than 14  years in the academic field as research and teaching assistant in the area of applied political science. Moreover, Andreas has a record of active engagement in German party politics, including several years in party and (local level) public offices.

Education
Andreas studied Political Science, Public/Administrative/EU/International Law, and English, at Kiel University (CAU) and Penn State University (where he also worked as grading assistant) before graduating with honors in Kiel. While continuing to work as a political scientist in Kiel, Andreas also served five months in the EU Commission, and worked in the State election campaign headquarters of a major German political party.