[Column Series] Key Issues to Address in Japan's Strategic Energy Plan (No.4) Disinformation about German Electricity Tariffs and Power Imports

in Japanese

In Japan, Germany’s Energiewende is currently severely criticized with largely exaggerated and incorrect claims such as the industrial electricity prices are so high that big companies are forced to leave the country, or that Germany after phasing out nuclear power now massively imports electricity generated from reactors in neighboring countries. It is true that Germany faces challenges in its energy transition, but the country makes progress. In Germany, the share of renewable energy in electricity consumption reached 57% in the first half of 2024. If Germany achieves its target of increasing this share to 80% by 2030, the dependence on high-cost fossil fuels will be reduced, and the current issues can be overcome. At a time when Japan’s next Strategic Energy Plan is fiercely debated, biased presentations of complex facts to spread unfounded fears are no coincidence and may serve different purposes such as promoting or discriminating certain electricity generating technologies. A fair and well-informed energy debate deserves better. The objective of this short column is to present in a balanced way correct information to contribute to proper energy policy making.

 

Industrial Electricity Prices in Germany: Slightly Higher than the EU Average, not Prohibitively Expensive

A first critical observation is that prices excluding taxes for Germany largest electricity consumers (≥150 GWh/year), including heavy industries, are often like those of the rest of the European Union (EU) Member States (Chart 1).

According to Eurostat, the statistical office of the EU, for this category of consumers, electricity prices excluding taxes in Germany and the EU experienced the same trajectories from the second half of 2019 (i.e., 2019 H2), before the COVID-19 pandemic, to 2023 H2. They first significantly increased from around €5 cents/kWh to nearly €20 cents/kWh in 2022 H2, and then decreased below €14 cents/kWh.

More precisely, as of 2023 H2, electricity prices excluding taxes were €13.8 cents/kWh in Germany and €12.4 cents/kWh in the EU. This is a difference of only €1.4 cent/kWh.

Chart 1: EU and Germany Electricity Prices for the Largest Electricity Consumers 2019 H2-2023 H2

A second key observation is that the German government generally taxes electricity more than other EU Member States. So, the prices including unrecoverable taxes, which is the relevant price indicator for businesses, were €15.3 cents/kWh in Germany and €13.4 cents/kWh on average in the EU in 2023 H2. Again, this is a rather small difference: €1.9 cent/kWh.

It may be useful to remind our readers that taxes are not only costs for ratepayers, but they are also sources of income for governments. Thus, public policies redistribute taxes to optimize social welfare.

Moreover, it may be stressed that in Germany, the renewable energy (RE) surcharge has been abolished in July 2022, reducing unrecoverable taxes from 2022 H2. And when this surcharge still existed, heavy industries were largely exempted from it to support their international competitiveness. In Japan, a similar approach has been adopted and exemptions continue.

Regarding electricity price trends, it is possible to affirm with a reasonable confidence that the worst is behind for German industrial electricity consumers. This is because power exchange prices have significantly dropped from their heights reached in 2022, and because moderate prices are expected to continue in the coming years, based on future contracts (Chart 2).

Chart 2: Germany Power Exchange Prices 2019-2027

In 2022, European power exchange prices, strongly impacting electricity prices paid by industrial consumers, were very high due to a combination of negative factors. These factors obviously included the invasion of Ukraine by Russia causing coal and gas prices to skyrocket (Chart 3).¹ They also included widespread outages at French nuclear reactors, droughts penalizing electricity generation from hydropower plants, and high carbon prices (€80/ton).² In other words, a perfect storm.

Chart 3: Germany Fuel Costs of Coal and Gas on an Electricity Generation Basis January 2019- February 2024

Since then, the situation has dramatically improved with increasing electricity generation from RE, especially wind and solar power, replacing costly fossil power. Much lower coal and gas prices, rebounding French nuclear power, and lower carbon prices (€69/ton in June 2024)³ also contributed to decreasing electricity prices.

Most of Germany Net Imports of Electricity are Based on Renewable Energy

In 2023, for the first time since 2002, Germany turned into a net importer of electricity (9.2 TWh or 2% of the country’s electricity consumption (i.e., generation + imports – exports)).⁴

In the first half of 2024 (2024 H1), Germany net imports of electricity reached 11.2 TWh or 4% of the country’s electricity consumption. The country from which Germany net imports of electricity was the highest was France (6.3 TWh). However, France is not the only from which Germany was a net importer of electricity.

Other countries included Denmark (4.6 TWh), Switzerland (2.5 TWh), Norway (2.4 TWh), Belgium (1.5 TWh), the Netherlands (1.1 TWh), and Sweden (1.0 TWh). Net imports from France and these six other countries totaled 19.5 TWh. In the same period, Germany was a net exporter of electricity to Austria, Poland, Luxembourg, and the Czech Republic (8.2 TWh in total).

In Europe, cross-border electricity trade flows are based on power exchange prices. Electricity flows from the countries with the lowest prices to the countries with the highest prices. Trade is constrained by the available interconnection capacity between countries.

Power exchange prices are the results of the implementation of the merit order principle (i.e., power plants are ranked in ascending order of marginal costs until demand is met, and the market price is set by the last power plant called upon).

Typically, RE with close-to-zero marginal costs are dispatched first, then nuclear power follows, and fossil power brings up the rear.

To summarize, cross-border electricity trade prioritizes cost efficiency which is best delivered by RE. And the current German power system is less efficient than those of other countries which rely less on fossil power.

Chart 4 shows both the quantity of electricity that was net imported from France, Denmark, Switzerland, Norway, Belgium, and Sweden (left axis), as well as the electricity generation mixes of these six countries (right axis) in 2024 H1. It also indicates power exchange prices in these countries, all lower than those in Germany (€7.0 cents/kWh).

Electricity generation data for the Netherlands being insufficiently detailed, this country is excluded from the rest of our analysis. This exclusion does not compromise accuracy because the Netherlands accounted for a mere 6% of Germany net imports of electricity in 2024 H1.

Chart 4: Germany Net Imports of Electricity by Country and Electricity Generation Mix of These Countries 2024 H1

Among the six countries considered, in 2024 H1, only France had a very high share of nuclear power in its electricity generation mix (68%), but also a 28% RE share. And France accounted for “only” 35% of Germany net imports. Conversely, in Denmark, Switzerland Norway, and Sweden, the share of RE ranged between 65% and 99% (both Denmark and Norway did not generate any electricity from nuclear power). Together, these four countries accounted for 57% of Germany net imports of electricity.

If we assume that Germany net imports are proportionally based on the electricity generation mix of each country, then the shares of RE, nuclear, and fossils in Germany net imports were 59%, 33%, and 8%, respectively (the Netherlands, which is excluded from this calculation, has only one operational nuclear reactor of 482 MW, Borssele, that generated 3% of the country’s electricity in 2024 H1).

This allows us to conclude that most of Germany net imports are based on RE.

In Europe, on a levelized cost of electricity basis, onshore wind and solar photovoltaic are the most cost competitive new electricity generating technologies, and they also have the lowest marginal costs, making them unbeatable. As they keep growing, they will more and more frequently set market prices displacing nuclear and fossil power.

In France, this market dynamic already pushes nuclear reactors to regularly ramp down their output, and even sometimes to temporarily shut down.⁵

Germany targets 80% of its electricity consumption to come from RE by 2030. With very high shares of cheap RE, the German power system will be more cost competitive by the end of the decade. Therefore, it is likely that some of the current unfavorable cross-border electricity trade relationships of this country will improve. For examples, Germany net imports from France may decrease, or Germany could even return as a net exporter of electricity to France as it was uninterruptedly between 2012 and 2022.

Conclusion

Germany is confronted with some transitory challenges which will be overcome thanks to renewable energy’s further expansion. In this regard, one may positively note that in 2024 H1, RE remarkably met a record 57% of the country’s electricity consumption (Chart 5).

Chart 5: Germany Electricity Consumption Mix 2024 H1 (%)

More RE deployment will reinforce the German economy by reducing its dependence on costly fossil fuels. And it will also benefit the country’s environmental and energy security goals.

Finally, this progress will also benefit to the Germany industry which will be better positioned to serve the needs of people and companies in the global market aiming for decarbonization.