A free-market energy blog
Random header image... Refresh for more!

Germany’s Unaffordable Wind Power ($0.07/kWh surcharge for $0.20/kWh power, anyone?)

[Update: Germany Stops Fighting Arithmetic and Ramps Up Construction of Economically Sensible Power Generation]

Two years ago we looked at the claim that wind generation can save money for power pool customers.  We found that the supposed savings could be realized only if the elephant in the room – the above-market feed-in tariffs – were ignored.

In other words, the total amount spent on electricity purchases from a power pool was augmented by the additional amounts consumers pay to fund the feed-in-tariff (FIT).  As long as wind generators can bid a low price but receive the higher FIT, then they have an incentive to underbid, thereby reducing pool prices, but not overall costs.

In addition, we looked at what an economically least cost system might look like in Germany over the next ten years.  We found that it features more coal and lignite, keeps most nuclear plants operating, and builds new gas-fired plants.

The annualized differential in total costs for Germany between the no-nukes, no coal and lots of wind forecast pushed by Germany’s Greens and an economically least cost expansion plan amounts to more than $120 billion over ten years and perhaps as much as $200 billion.  A lot of money, in other words.

Update: Since these two posts were published in 2010 Master Resource contributors have made a strong case that Germany’s overinvestment in wind and solar has harmed the nation financially without any compensating improvement in electricity supply Compounding the overreliance on wind is the planned phase-out of the country’s nuclear power plants – baseload power that will need to be replaced with something other than wind.

It now appears that Germany has made peace with mathematics and economics, and not just in the energy sphere.  The country has embarked on a major effort to build reliable power plants for the future.

Update:  The burden on taxpayers and ratepayers really hurts in a sluggish economy. The renewable energy surcharge on German electricity bills now exceeds US 7¢/kWh, taking retail prices near US 20¢/kWh.

Investing In New Generation: What Makes Sense?

If a generation resource is a good investment for its developers then it must return a profit to them.  In a normal electricity market this profit comes from supplying a segment of the demand (peak, intermediate/cycling, baseload) from a plant that is efficient technically and financially.

For existing plants and determinations of electricity costs in the here and now we can figure out the average cost of supplying electricity by calculating the weighted average cost of supply for each time period in the market every day.  If the addition of one generation source raises this weighted average without improving service quality or reliability, then it is not economical and would generally not be chosen in a well-functioning market.

But what about the future?  Electricity suppliers must invest large sums in new generation plants with the expectation that these plants will meet demand at the least cost.  This cannot be known with certainty, and mistakes are made all the time, especially when government policy and rent-seeking drive investment choices.

Transmission network operators – those responsible for supply energy and power to grid customers and in charge of the “natural monopoly” part of the power business – try to reduce the risk attendant to future supply by figuring out the least costly way to supply power and energy to their customers in the future, including the wires to transmit the electricity.  They have to take account of a long list of considerations: investment cost, fuel supply, emissions and licensing regulation, proximity to existing load centers and transmission nodes, transmission congestion – you get the idea.

The transmission system operator also has to pay attention to public policy – renewable energy mandates (“portfolio standards”), federal tax incentives (producer tax credits for wind and solar), fuel cycle limitations, feed-in tariffs, powerful politicians who do not want their vistas impaired – in a host of ways that directly impact their views of an optimal future generating system.

What Does the Wise Transmission Operator Do?

A wise investor in generation will first figure out what is economic to build? (ii) what are the physical constraints on the system? and (iii) what limitations will public policy put on otherwise least cost generation choices?

A Case Study of “Germania[i]

Let us imagine that we have a rather large and wealthy country to play with, one that currently has about 129 GW of installed generation capacity.  Further, we can imagine that this wealthy country, responding to its powerful environmental movement, has decided to (i) phase out nuclear power; (ii) limit future coal power-plant operations; (iii) build a lot (a lot!) of wind generation plants;[ii] and (iv) bring in most of its gas supply from Russia at prices linked directly to refined oil products and crude (i.e., high and volatile).

Such a country would have a great deal of baseload generation capacity – coal + lignite + nuclear – perhaps half of total generation capacity and more than 60% of total kWh generated (US has coal + nuclear capacity of about 40% and current coal + nuclear generation is about 56% of total U.S. electricity output).  Suppose further that green thinking had created incentives (FIT) that pushed wind up to about 20% of total nameplate capacity.  Most of the country’s hydro generation and imports are soaked up by wind mirroring and shadowing.  Exports have grown largely due to the need to dump excess wind generation that occurs when consumption is low – e.g., at night.  The conventional wisdom solution for this overinvestment in non-producing electricity sources is to build additional transmission and pumped storage to disperse the electricity to some other place or time (kind of like the tall stacks theory of emissions reduction).

With all of that generation capacity essentially independent of fuel price trends it is no accident that the cost of generating electricity in Germania is (i) high; and (ii) not responsive to changes in oil and gas prices.  At current world oil prices the average cost of electricity generation in Germania is about 8¢/kWh for total annual costs at generation of $56 billion.

Forget the Policy Constraints, What is the Least Cost Generation System for Germania?

With natural gas still expensive – kind of like burning oil but more efficiently – what does a least cost generating system for Germania look like in 2020, about the time the initial wave of early “teens” investments go on line?

The first thing you do is throw out the phase outs – keep the existing nuclear and efficient coal plants in operation until you have a more cost-effective substitute;

Second, phase out your highest cost oil plants – heavy fuel oil and old combustion turbines (2.6 GW)

Third, build some new, more efficient coal plants (3.8 GW) and CCGT units (4.5 GW), and nuclear (5.8 GW), reduce emissions per kWh by more than 30% in the new coal plants;

Fourth, operate existing wind (28 GW) but do not build new generation from that source.

Total annual generation cost in 2020: $54 billion at 7.5¢/kWh for average supply cost and 7.3¢/kWh for new supply, about 4% lower than current costs.

Update:  Not much enthusiasm for new nuclear plants. In fact the Merkel government has stayed with the 2022 date for phasing out nuclear in the wake of the Japanese tsunami.  Gas remains a troublesome option financially in light of the oil-linked prices for Russian supplies.

Now Get Off Your Free-Market High Horse and Rejoin Our Previously Scheduled Programming

Everyone in Germany’s power sector knows that this least cost system is simply some renegade economist’s fantasy.  Back in the “Real World of Energy Policy”, there are several important considerations that must be accommodated:

Stay clean – phase out at least 25% of older coal and lignite plants, make permitting of new coal plants difficult;

Stay green – stay the course on wind energy; and

No nukes – continue to phase out nuclear power.  Build only enough new nukes to keep the Gauls happy.

{Gee, sounds like one of the leading contenders in the U.S. for Energy Secretary to replace the egregious Dr. Chu.  But at least our guy, Thomas Steyer, coming from a hedge fund, will know a good scam when he sees it.}

Following this path will provide less electricity less reliably and at a higher cost for Germania – about $69 billion annually (at 9.9¢/kWh average cost and 10¢/kWh for new plant supply).

Less coal and lignite – existing units fall to 32 GW from 58 GW, new coal rises to 2.8 GW to make up for some of the lost legacy capacity;

Less nuclear power – existing nuclear capacity falls to 10 GW (from 19 GW), new nuclear capacity falls to 2.0 GW from 4 GW in the least cost case;

More gas – 15.6 GW of new CCGT, up from 4.5 GW in least cost case;

More wind – another 23.8 GW, for a total of 51.8 GW of wind, 32% of total nameplate capacity; and

More imports – enlarged interconnection with Benelux and Denmark/Norway is only cost effective way to shadow additional wind and meet peak demand.

Update:  Germania is likely to continue to push some expansion of wind and solar, but now their preferences have moved toward more coal plants – 26 of them – to supply the country’s baseload electricity demand after the 2022 nuclear phase-out.

Does Green Always Have to Hurt?

Easing off the green pedal a bit creates enough breathing room in Germania to generate a lot of clean electricity at a much lower cost.  A more moderate program, even with 5 GW of new wind, can be done at a far lower cost with just a few adjustments:

Slow the phase out of existing coal and nuclear plants – keep 85% of existing coal and nuclear plants in operation in 2020;

Build new coal and nuclear plants – reduce emissions per kWh and burn less coal overall, and improve the efficiency and security of the nuclear fuel cycle;

Import more – let more medium term supply come from lower cost Benelux and Scandinavian suppliers to mirror/shadow wind and follow load.

Even current oil prices do not hurt as much as in the more aggressive scenario, with $110/bbl crude oil resulting in total annual costs of $58 billion at 8.1¢/kWh average cost and 7.9¢/kWh for new supply.[iii]

Update:  New power plants under construction in Germany through 2020 total 41 GW.  Fully 40% (16.5 GW) are coal or lignite.  Gas accounts for more than 27% (11.2 GW) and wind has most of the remaining new generation at 20% (8.3 GW).  Pumped storage fills out the plant mix at just over 3 GW (7%).  Only those wind plants now under construction will be completed and no new wind plants are even in the planning stage.  This generation expansion plan represents a triumph of mathematics over ideology.

As a Great Philosopher Once Said, “A man’s got to know his limitations

In a world of unlimited wealth, where electricity can be stored and plants can be built instantaneously on a whim, a complete remake of a large power system seems feasible and even desirable to some.  Back in the real world, where everything takes time, costs money and different sources of electric power are not perfect substitutes for one another, such ambitions are difficult to realize.

Germania set up too many targets on too short a time frame.  The result was a series of conflicting mandates and constraints – close it down; no, we need it, keep it open; will the Jutes cooperate on supply? What happens to our gas supply when “bad weather” rolls in from the East (as it eventually does in Germania)?

A cleaner, greener power supply system is possible over a longer period of time at a far lower cost than a crash program.  Orderly replacement of older coal plants with more efficient and cleaner new ones makes sense given the country’s resources, geography and demand patterns.  As in the US a crash program to overhaul the system will ultimately force increased reliance on older, less efficient coal plants; it ignores microeconomic rationality for chimerical goals and wastes a lot of money and energy in the process.  Or to paraphrase a revered Soviet philosopher, “you may not be interested in markets, but markets are interested in you.”  Germania ignores market forces at its own peril.

Update: Germania has accepted the realities of power plant costs and performance limitations and has hedged its heavy renewable energy bets in favor of gas and coal.  Even with this approach Germania may face poor returns from its gas plants as they will operate of lower than optimal capacity factors to buffer and shadow a higher wind generation capacity.

————————————–


[i] The simulations in this section come from a model of least cost generation that endogenizes some categories of risk The model is called “Port Opt for Generation”.  This program is a medium term optimization that includes time of day demand, wind shadowing, generator characterization, imports/exports and a variety of parameters with regard to coal, nuclear, hydro and HFO use and construction/phase-out.  Different risk parameters, including oil prices, technology prices and operational characteristics can be modeled explicitly.

[ii]  In spite of the constant claims to the contrary, wind’s contribution to output has never even approached the claimed levels of 25-30% for onshore wind and 35%+ for offshore.  From 1995 through the end of the last decade Germany’s wind capacity factor has improved from 7.5% to just over 14% today.  This means that the average kWh from wind costs about twice as much as the claimed figure, given the low output per installed MW of capacity.

[iii]  The cost of new supply is below the average cost of supply by about 7% for this moderate scenario, while the “Green” future shows new supply above average cost by about 2-3%.

20 comments

1 Germany’s Unaffordable Wind Power ($0.07/kWh surcharge for $0.20/kWh power, anyone?) » coalitionoffreedom.com { 02.21.13 at 1:22 am }

[...] Unaffordable Wind Power ($0.07/kWh surcharge for $0.20/kWh power, anyone?)21 Feb 2013JonBy Donald Hertzmark [Update: Germany Stops Fighting Arithmetic and Ramps Up Construction of Economically Sensible Power [...]

2 intrepid_wanders { 02.21.13 at 3:17 am }

I really liked how your post started, but, wow… the updates need to be updated… otherwise do not adjust to to the adjustments.

Obvious case, the nukes should be the last system to be brought down after EVERYTHING else. This includes the wind turbines, for they shall break, explode, annoy everyone that has to sustain these systems. Solar (PV) will be the same thing, but it will last almost twice longer than wind. Solar, thermal, I have no idea. I am sure that Germania has little to worry about thermal solar power.

Again, I found the original report (non-updated) to be more accurate “projection” than the adjustments. The “poor returns” on gas are going to be MORE a pinch point and it will be a decision between “evil, dirty coal” and a “nuclear transition” (Apparently, in Germania, Greenie-Pieces has it’s rough hands on the balls of the Chancellor Murkal) , which, opposition has one more go before routing. Physics seem to be setting in ;)

3 Jon Boone { 02.21.13 at 2:41 pm }

No nation better illustrates the problems with today’s electricity regimen than Germany as it is bookended by macroeconomics and microgeopolitics. Despite the fact that reliable, secure electricity is the cornerstone of all economic activity, politicians have blithely transformed its production into an “instrument for public policy,” whereby electricity would be the means of helping the world save itself from a remote, highly hypothetical climate catastrophe.

In the process, they artificially created a shortage of supply while mandating that new supply be principally in the form of fluctuating “renewables” like wind and solar that serve to increase the sense of demand. There is not a shred of empirical evidence–in Germany and anywhere else–that there is less coal or natural gas burned per unit of electricity produced as a specific consequence of wind technology, for example. Quite the contrary. There is evidence that wind flux–as “negative demand” at a massive scale as in Germany–essentially adds to the phenomenon of demand volatility.

Decreasing supply coupled with increasing demand has precipitated pious calls for more conservation on the part of consumers, which ensures increased prices–and conjures up a smart grid/smart meters industry that would sanctify–and cement–conservation policy. The world being saved by an increasingly scarce resource monitored by high tech devices has become an iconic political meme, complete with marvelous self reinforcing feed back loops.

Using questionable environmental justifications to transform electricity production into an instrument of policy beyond its primary purpose of providing reliability and affordability is despicable. Conning the public into believing, falsely, that electricity must be a scarce resource to be husbanded as a sacred trust is disgusting. The profiteering involved in all this makes Al Gore seem a piker.

Until regulatory agencies and responsible experts join hands in insisting that electricity should be an abundant resource available to any society, in the way that water and air are available to individuals, craven politicians and their corporate parasites will continue to push this toxic meme. It is now poisoning the intellectual wells of virtually all modern polities, particularly in the United States.

4 Rob de Vos { 02.21.13 at 4:04 pm }

Modern Germany is so overreacting on the issue of energy that it seems to have lost contact with downtoearth solutions. Although there has always been a strong German ‘alternative’ green movement , the reaction of German government on the debacle of the Fukushima plant (disaster without victims) was so over the top. Nine years of overrated subsidies on wind and photovoltaic energy has brought the country up the point of no return. My guess is that the German people soon will punish the gouvernment for its foolish behaviour by turning away from the present political elite.

5 The DC Post » Our real man-made climate crisis { 03.06.13 at 7:00 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

6 Perfect Storms – How Leftists Use Climate Lies to Push Fear, Power and Theft at US Action News { 03.06.13 at 7:06 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

7 Our Real Man-made Climate Crisis { 03.06.13 at 11:52 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain andGermany. [...]

8 Our Real Manmade Climate Crisis - Capitol Hill Outsider { 03.06.13 at 3:24 pm }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

9 Our real manmade climate crisis | EPA Abuse { 03.07.13 at 6:27 pm }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals, and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

10 HACER Weekly News Report USA | US: Our Real Manmade Climate Crisis – by Paul Driessen { 03.08.13 at 1:20 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

11 Our real manmade climate crisis | Watts Up With That? { 03.08.13 at 6:31 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

12 Religio-Political Talk (RPT) John Kerry vs. `The World` { 03.08.13 at 8:58 am }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

13 Our real manmade climate crisis - Eco-Imperialism { 03.09.13 at 6:20 pm }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

14 Recent Energy and Environmental News – March 2013 | PA Pundits - International { 03.18.13 at 5:02 am }

[...] Germany’s Unaffordable Wind Energy. [...]

15 Our Real Manmade Climate Crisis | Jefferson Policy Journal { 03.20.13 at 6:33 pm }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

16 In Honor of Tomorrow’s Earth Hour: Further Exposing Global Warming Hucksters | Roanoke Tea Party { 03.22.13 at 12:37 pm }

[...] Excessive EPA rules have closed numerous coal-fired power plants, and the agency plans to regulate most of the US hydrocarbon-based economy by restricting carbon dioxide emissions from vehicles, generating plants, cement kilns, factories, malls, hospitals and other “significant” sources. Were it not for the hydraulic fracturing revolution that has made natural gas and gas-fired generation abundant and cheap, US electricity prices would be skyrocketing – just as they have in Britain and Germany. [...]

17 Ferdinand E. Banks { 03.28.13 at 10:39 am }

What wrong – doesn’t anybody read German any longer?

There was some kind of poll in Germany that paid attention to energy and environment, and after Angela and her foot soldiers looked at it, they decided to announce that they were dumping nuclear. The last time I read a German newspaper, one of the leading environmentalists in Germany called Angela’s program “crazy”.

Of course, for your information, the alternative to nuclear will mostly be imported electricity. In fact a gentleman from Belgium informed me that if Angela carries out her program, electricity is his country might have to be rationed. I then informed him that he doesn’t need to worry, because Germany is the last country in Europe that will go through with an unadulterated nuclear retreat.

18 How safe is European nuclear power? - Page 61 { 04.19.13 at 2:42 am }

[...] is causing a lot of problems. The government has to again intervine in a supposedly free market. Germany’s Unaffordable Wind Power ($0.07/kWh surcharge for $0.20/kWh power, anyone?) — M… German talks on curbing energy price increases falter | Reuters Re cannopt find the quote? Not [...]

19 Bas { 08.19.13 at 9:48 am }

Knowing Germany and reading their papers, this story is to far off to be taken serious.
Germans state that their ‘Energiewende’ is one of the reasons their economy does better than any other EU country!

The ‘Energiewende’ is the scenario developed in the nineties, after spending ~$200mln on studies to find the optimum, for the transition towards >80% renewable in 2050, incl. the phase-out of nuclear before 2023.

Especially Solar is now ahead of that scenario, so the transition speed is reduced as grid adaptation is not ahead (they have also the NIMBY problem for new power lines).

German public support for the ‘Energiewende’ is rising last years!
>90% of parliament support it. The only discussion is whether the targets should be raised towards >90% renewable in 2050.

It would be good if someone that reads German papers regularly, write about this.

20 Cog { 08.19.13 at 11:07 am }

Ideology would be assuming $0, as a price for carbon dioxide. You could have at least inferred its price from an analysis that presumes free wind is uneconomic in the long term. Also, there’s no difference between “profit” and “cost”, to the electric consumer, who pays for them both.

Leave a Comment