Germany 2020

Since the 2013 International Energy Agency (IEA) review of German energy policies, the Energiewende continues to be the defining feature of Germany’s energy policy landscape. In place for nearly a decade, the Energiewende is a major plan for transforming the German energy system into a more efficient one supplied mainly by renewable energy sources and without electricity generation from nuclear by the end of 2022. As such, the Energiewende is meant to move Germany towards a low-carbon, nuclear-free energy system by the middle of the century.

Over the last four decades, Germany’s energy supply has shifted from a clear dominance of coal and oil to a more diversified system. Nuclear energy, first introduced in the 1970s, is being replaced by more renewables, in line with Germany’s energy transition targets. Furthermore, coal, which represents the largest source for power generation today, is planned to be fully phased out by 2038.

Still, Germany is struggling to achieve its climate change ambitions, and is not on track to meet its near-term emissions reduction targets. The growth in electricity generation from renewables has lowered emissions, but the nuclear phase-out as well as higher electricity exports have offset some of the emissions benefits. That said, the government’s planned coal phase-out could help reset the country on a path to achieving its longer-term emissions targets in the electricity sector.

Nonetheless, to date, the electricity sector has been shouldering a sizeable share of the Energiewende’s costs and progress. Now, the government must refocus its efforts to achieve stronger emissions reductions in other sectors, notably transport and heating. The Climate Protection Programme 2030 recently adopted by the German government, including a carbon price in the transport and heating sectors, is an important step in the right direction. The plan is also mindful of the distributional impacts of climate policies and aims to ensure a level playing field across sectors and stakeholders. Both policy and regulatory reforms can help Germany achieve a cost-efficient, equitable and sustainable pathway to meeting its highly ambitious energy transition goals. 

Germany’s national climate change strategy is defined in the Climate Action Plan 2050, which sets out a longer-term pathway for sector-specific emissions reductions, as part of the Energiewende. Compared with the base year of 1990, the key goals are to achieve at least a 40% cut in greenhouse gas (GHG) emissions by 2020, 55% by 2030, 70% by 2040 and 80-95% by 2050, at which point the country expects to be mostly GHG-neutral. These targets are complemented with short- and medium-term targets for energy consumption and energy efficiency, and renewable energy supply.

As a member of the European Union (EU), Germany’s climate policy is guided by the framework of EU energy and climate policies: the 2020 energy and climate package and the 2030 energy and climate framework. Large combustion facilities in the power and industry sectors are part of the EU Emissions Trading System (ETS), whereas non‑ETS emissions are subject to the Effort Sharing Decision until 2020 and the Effort Sharing Regulation from 2021 to 2030.

To reach the overall GHG emissions reduction target for 2020, the federal government adopted the 2020 Climate Action Programme in December 2014. The key policy strategy areas described in the programme are the National Action Plan on Energy Efficiency, the Energy Efficiency Strategy for Buildings, transport sector measures (including mileage-based charges for road freight vehicles and federal funds for long-distance public transport), and measures in the electricity sector (to increase renewable energy, modernise fossil fuel power plants and develop more co‑generation plants 1 ).

Despite progress on lowering overall emissions, Germany is struggling to meet its near-term targets, in large part due to uneven progress across sectors, with notable challenges in transport and heating. Even with a rapid increase in renewable electricity generation, Germany’s total emissions have not experienced commensurate reductions. As of 2018, Germany had reduced its total GHG emissions by around 31% compared with 1990. So Germany remains far off its 2020 emissions target of a 40% reduction.

As such, Germany needs to expand and prepare new policies and measures that can help it reach its national GHG emissions reduction targets in a cost-effective and sustainable way. Notwithstanding the nuclear phase-out, Germany’s focus on renewable power and a planned coal phase-out (along with its participation in the EU ETS) will help ensure progress in the power sector. However, additional policies are needed to support emissions reductions outside of the power sector, notably in transport and heating.

More recently, in March 2019, the government formed a so-called climate cabinet, headed by the chancellor, to arrive at a consensus on a new package of emissions reduction measures to meet 2030 targets. Based on the climate cabinet’s proposals, the government on 9 October adopted the Climate Action Programme 2030, which includes a phased carbon pricing system for certain sectors not covered by the EU ETS (heating and transport), a tax break and other increased incentives for energy-efficient building renovations, higher subsidies for electric vehicles (EVs), and greater public investment in public transport. The government also agreed to use some of the revenues from the new carbon pricing system to lower the costs for households and companies by providing tax relief and a reduction in fees on electricity prices. The package represents a clear step in the right direction towards Germany meeting its 2030 targets.

To date, Germany’s Energiewende is clearly visible in electricity generation, where it has been effective in increasing renewable electricity generation. While coal (mainly lignite) remains the largest source of electricity, renewables have mainly replaced a large share of nuclear over the last decade. In 2017, wind power surpassed both nuclear and natural gas to become the second-largest source of electricity generation. Continued growth in renewables in line with Germany’s energy and climate targets will require a number of measures for advancing electrification and system integration of renewables, including improvements to taxation and market regulation, and expansion of the transmission and distribution infrastructure, including improving its functionality.

As a core plank of the Energiewende, Germany plans to further expand the role of renewables in electricity generation. Specifically, in the 2010 Energy Concept, the country aimed for renewables to account for 35% of gross electricity consumption by 2020 and overachieved this with 38% in 2018 and 44% in the first half of 2019. The German government initially planned to further increase the share of renewables in electricity to 50% by 2030, 65% by 2040 and 80% by 2050. But according to the new coalition agreement of March 2018, as affirmed by the climate cabinet, the government is now planning to speed up the growth, to reach a share of 65% renewable electricity by 2030 (contingent on a corresponding expansion in grid capacity).

Reforms to the Renewable Energy Sources Act in 2014 and 2017 created a welcome overhaul in renewable energy funding towards more competition and greater cost efficiency, limiting the previous system of fixed funding rates, which became too costly and less necessary as the deployment costs of wind and solar came down rapidly. The renewable energy sources with the largest capacity additions – onshore and offshore wind energy, large photovoltaic systems, and biomass – are now required to compete in auctions, where only the cheapest offers are awarded contracts.

Germany has taken steps to reform its electricity market regulation to ensure smoother system integration of variable renewable generation, notably with the passage of the Act on the Further Development of the Electricity Market in 2016. Still, more challenges loom as renewable power is poised for additional growth.

Most wind capacity is located in northern Germany, whereas most demand comes from metropolitan and industrial areas in the south and west of the country. Due to increased generation from wind and solar, network constraints preventing transmission from the north to the south, delays in grid expansion, and the fact that Germany has only one bidding zone, northern states are facing power surpluses and southern ones are experiencing deficits, an imbalance that will worsen as the last of the country’s commercial nuclear power plants in the south and northwest close and wind comes online in the north. The imbalance has resulted in “re‑dispatch” measures in the south (where grid operators order power stations to ramp up output to compensate for procured electricity that cannot make it south) and curtailment in the north (where grid operators order generators to shut down to avoid congestion), costing consumers hundreds of millions of euros annually.

Connections to carry wind power from the north to the south are insufficient. Public opposition to north-south high-voltage transmission lines has slowed down construction of new overhead lines considerably and eventually forced costlier underground construction of interconnectors; public opposition remains an impediment to the siting of necessary infrastructure. Delays to grid expansion experienced thus far have generated significant congestion management costs. As such, grid expansion is a stated priority for the government.

Beyond nuclear, the government also has a strategy to phase out the use of coal-fired power generation to help meet emissions targets. To reach a broad social consensus on the coal phase-out plan, the federal government established a Commission on Growth, Structural Change and Employment in June 2018. The commission presented its report in January 2019, with a recommendation to completely phase out coal power by 2038 at the latest. As sub‑targets, the commission recommended decommissioning at least 12.5 gigawatts (GW) of coal-fired power plants by 2022 and 25.6 GW by 2030. Furthermore, the commission proposed that coal mining regions receive EUR 40 billion in transitional assistance.

As there is currently excess generation capacity, and the government has a target to decrease overall energy consumption, it is yet unclear how much and where new capacity will be needed to replace the capacity that will be phased out. Given the environmental and climate goals of the government, it is most likely that renewable capacity will need to be added to the generation mix to replace capacity closures (along with increased utilisation of gas-fired capacity), further supporting the case for an increased focus on transmission grids and system integration of renewables. Moreover, the government will also need to address recent social acceptance and permitting issues affecting Germany’s onshore wind sector, as well as repowering of ageing wind facilities. 

Despite Germany’s progress and plans to achieve emissions reductions in the power sector, the government recognises that more progress is needed in other sectors, notably in heating and transport, in order to meet overall carbon reduction targets.

Transport, in particular, has been the biggest laggard on emissions reductions and the most significant impediment to Germany meeting its GHG targets. Moreover, Germany’s heavy reliance on diesel vehicles in road transport has contributed to rising air pollution, especially nitrogen dioxide emissions.2 In addition to efficiency improvements in line with EU requirements as well as promoting EVs, the Climate Action Plan 2050 also identifies local public transport, rail, cycling, walking and digitalisation as playing important roles in achieving climate targets in the transport sector. The government launched a task force on emissions reduction in the transportation sector, called the National Platform Future of Mobility, to make recommendations on addressing transport sector emissions. Moreover, the government has decided to implement a carbon price on transport emissions, which would raise fuel prices and help motivate improvements in transport efficiency.

Beyond transport, heating – which accounts for over 50% of final energy consumption and around 40% of emissions – remains a sector in which the government is still in the process of formulating a decarbonisation plan. Germany’s heating sector is highly dependent on fossil fuels (25% oil heating in the residential sector, in part due to low taxation on heating oil), and a large share of co‑generated district heating is produced from fossil energy sources. As a first step, increasing energy efficiency, not just in new buildings but also through higher rates of renovation, will be essential. Moreover, using more renewable energy in heating systems will form a critical plank of decarbonising Germany’s heating sector. Given Germany’s rapid growth in renewable electricity, there is an attractive opportunity to both increase the direct role of renewables in heat generation and pursue sector coupling, to use more renewables-based electricity for heating. However, high electricity costs, driven by levies, charges and taxes (including the Renewable Energy Act surcharge to subsidise renewables) are impeding opportunities to use more electricity in the heating sector, especially in a context of low taxation on fossil fuels.

The Climate Action Programme 2030 contains important measures for the heating sector, such as tax relief for energy-efficient refurbishment of buildings; a premium for exchanging oil heaters for new, efficient heating systems; and the expansion of heat grids and district heating with a view to integrating renewable energy sources into heating networks (especially in densely populated areas). As the intended carbon tax will also apply to heating emissions, it will bolster existing energy efficiency efforts in the sector.

Germany has diversified oil supply sources, a well-connected supply infrastructure, a liberal market and high oil emergency reserves that all contribute to maintaining the country’s strong security of oil supply. More progress on fiscal incentives, such as subsidies and tax differentials for low-emissions vehicles and associated infrastructure, can further support Germany’s oil security as well as the low-carbon transition by reducing demand for oil in the transport sector.

Germany has also ensured a relatively high level of natural gas supply security, despite a heavy reliance on imports (93% of supply). The Russian Federation is by far the largest gas exporter to Germany, followed by the Netherlands and Norway. Although the German government is focused on a massive expansion of renewables, the phasing out of both nuclear and coal generation will increase Germany’s demand for natural gas in power generation, including as a backup fuel source for renewables; hydrogen derived from renewable sources holds potential as a longer-term solution. The uptick in demand will increase Germany’s already-high call on natural gas imports. Moreover, at the same time that Germany’s own production of gas is small and declining, its gas imports from European sources are also set to fall in the coming years, especially from the Netherlands, where production from the Groningen field is declining and due to fully terminate by 2022 at the latest. As a result, security of natural gas supply is a top concern for the government, and diversification of gas supplies – including through the direct import of liquefied natural gas (LNG) – will become more important. Notably, the increased use of natural gas in electricity generation, especially to meet peak electricity demand, will also increasingly tie electricity security to gas security.