A lesson in boldness - again - from Germany

Three weeks after the Fukushima disaster in Japan, Germany announced that it would close all of its nuclear power stations by the end of the decade, now six years away. Accounting for 18% of electricity generating capacity this was a brave move, all the more so for the promise that the capacity shortfall would be filled by renewable capacity.

Germany has the capability, wealth and importantly the public support for its plan, although business and the energy intensive industries must be concerned. Maintaining public support is vital as the costs of transition will be high particularly given the short time frame. Germany already has electricity prices among the highest in the EU and risen by 47% over the last two years.

The move is not without risks. As the UK worries about the possibility of blackouts caused by a lack of de-rated generation capacity, Germany has recently experienced the opposite. In June last year the wholesale price of electricity went negative as a combination of low demand and high renewable generation conspired to create an excess of electricity generation into the grid, risking the integrity of the grid. The normal balancing of the grid achieved through switching off capacity was not sufficient while the supply at any price wind, solar and nuclear continued to generate unabated.

The contrast between Germany and the UK is stark. In the UK the cost and risk would stop the plan in its tracks

Another risk is the availability of capital to invest in the new infrastructure and generating capacity. The asset values of EU utilities has fallen by $500bn dollars over the last five years as the profit margins have fallen, more than the banks lost over the same period. This limits the investment capacity of the utilities, evidenced by declining investment plans, all at a time when the need is rising.

Rather strangely and perhaps in recognition of the risks to German heavy engineering, the country has started to build new coal fired power station designed to burn lignite, just about the dirtiest and environmentally unfriendly fuel around. The use of brown coal in Germany increased by 5% in 2012 and continues to grow reflecting its economic benefit to the German utilities. It is also an indigenous energy supply and will replace the imported black coal by 2018 further improving the country’s’ annual $250bn trade surplus.

The risks aside, the ambition is impressive with Germany aiming to achieve 80% renewable generation by 2050. In doing so the country will develop the intellectual, manufacturing and engineering skills that a resource depleted world will need.

The contrast between Germany and the UK is stark. In the UK the cost and risk would stop the plan in its tracks, reflecting our trading history where the balance sheet is all important. In Germany, also a trading nation, a faith in its engineering capability, and a long-term self-interested pragmatic vision enables it to take the giant steps forward that will, more than likely help it remain the EU’s powerhouse for years to come.

Nick Cullen is a partner at Hoare Lea