Check against delivery
The energy transformation in Germany: multiple implications for Swiss utilities
Hans E. Schweickardt, Chairman of Alpiq Holding SA, Switzerland
Ladies and Gentlemen,
"The German energy transformation and its multiple implications for Switzerland". With the
focus on hydropower. This is my subject for today's conference.
I am delighted to have the opportunity to address you here in Berlin. Many thanks for the
invitation! I am a German-Swiss dual citizen. I live and work in Switzerland, for Alpiq: the
country's leading electrical utility.
I feel just as at home in Germany as I do in Switzerland. So allow me to be frank, and talk
freely and openly about the German energy transformation and its impact on Switzerland.
•
First I would like to discuss the framework in Germany and the EU;
•
then outline the status quo in Switzerland;
•
describe the situation of hydropower now and in the future;
•
and finally discuss the consequences.
1
So let's "clear the stage" for the German energy transformation. I'd like to start by
telling you in all honesty what I think of it:
Firstly: The German transformation – to use a theatrical analogy – is a work with
international resonance. For Switzerland too. The original play is being performed in
Germany, while Switzerland is hard at work rehearsing a copy. How this copy will turn out
remains to be seen, and is up to parliament.
Secondly: The German energy transformation – and this is my view - is not a comedy with
a happy ending. It is more like a drama with a potentially unpalatable outcome - for
Switzerland, too.
Thirdly: The German energy transformation is now being re-written. Because the public is
grumbling, and the play is a flop. Minister of Economic Affairs Sigmar Gabriel is directing
the new play. But everyone wants to contribute to the script: the EU, the German Länder,
political parties and lobbies.
Why does Minister Gabriel need to rewrite the play?
• Because due to high subsidies and the feed-in guarantee, solar and wind power are being
expanded far too quickly and intensively.
• This policy has upset the balance. Sometimes there is too little electricity, sometimes too
much. The grid is at persistent risk from "loose contacts".
• This policy has led to rocketing electricity bills for households and businesses. This is
becoming a serious problem.
• It is a policy that is completely distorting the market. Gas-fired power plants can no
longer operate at a profit. Old coal-fired power plants have the best chances.
• This policy is driving CO2 emissions in Germany up to new record highs. That's a fact. But
it's not what was originally intended!
2
The German energy transformation is not doing Switzerland any favours. So it's all the more
important to ask ourselves what the second large player is doing: the EU.
The EU is pursuing its 20-20-20 formula between now and 2020. How does it look?
• 20% reduction in CO2 emissions - that should be do-able
• 20% share in renewable energies – overall, this should be possible
• 20% increase in energy efficiency – highly unlikely.
In January 2014 the EU Commission presented its new work: "The 2030 Policy
Framework for Climate and Energy".
According to the script, finalised in March, CO2 emissions are to fall 40% by 2030, and EUwide, renewable energies will account for 27% of energy consumption. The share for
electricity alone could rise to 45%.
Three facts must be borne in mind:
Firstly: The instruments are weak. The European Trading System for CO2 has not really
taken off. It might be more effective again from 2021. But that's like having a stage without
any actors.
Secondly: There are no fixed targets for the member states. Instead, they must engage in
an iterative process to negotiate their national energy plans with the EU Commission. This is
vague. No-one knows if or when the curtain will rise.
Thirdly: Europe's Achilles heel is obvious: the high costs and prices for energy. The EU's
answer is: more competition, market integration, cost efficiency, and more single market.
"The message well I hear, my faith alone is weak". So cried Faust, racked with doubt, in
Goethe's eponymous tragedy.
3
Why does Minister Gabriel need to go back to the drawing board? What exactly is behind this
European Achilles heel - the high costs and prices for energy, specifically for electricity?
To put it bluntly, the problems lie with what many view as the solution: electricity from wind
and solar power.
Ecologically speaking, there are strong arguments in favour of new renewable energies. But
they also entail risks. And that's exactly the trap the EU, Germany and Switzerland have
fallen into.
Some risks are of a technical nature:
•
Electricity from solar and wind power is generated intermittently. If we in Europe want a
30% share of this weather-dependent electricity, we get 100% in good conditions but
0% when conditions are bad. It's a case of feast or famine!
•
This gives rise to an unstable system. We need much more grid capacity, and lots more
reserve, backup and storage capacities.
Other risks are of an economic nature:
•
Electricity from solar and wind power is not commercially viable because it's too
expensive. This is why it is subsidised and accorded privileges. The consequences are
twofold:
•
First, it is expensive: so expensive that while the burden on broad sections of the
economy is eased, private households bear the brunt. This puts the squeeze on
consumption and is socially questionable, but it is justified due to the threat of job
losses. A lose-lose rather than win-win situation.
•
Second: It distorts the market. Lots of sun and wind drive market prices down. And
other power plants are no longer able to work at a profit because they need to be taken
off the grid.
According to the findings of the latest EU study, electricity prices have risen dramatically.
Not because of the ratio of energy costs to total production costs, but because of higher
taxes, levies, duties and grid costs. So an intentional result rather than a coincidence.
Remember how it was when everyone was singing the praises of liberalisation? People called
for lower elecricity prices rather than prices dictated by so-called monopolies, and
liberalisation was seen as the ideal way to achieve this. I leave you to judge where we stand
today under another so-called monopoly: politics.
4
Let's now take a look at Switzerland and its electricity supplies.
I don't want to idealise Switzerland. For me it's no modern "Heidiland". Yet in terms of
electricity, it was a little like that, until recently - before the energy transformation:
When it comes to electricity, Switzerland has no CO2 problems. Production is virtually CO2free: last year it consisted of 36% nuclear power, 58% hydropower and 6% thermal,
biomass, solar and wind power.
The system works perfectly. Nuclear power and run-of-river power plants ensure stable
deliveries of electricity; reservoirs and pump storage facilities are highly flexible.
Plus: Switzerland has a balanced supply and as such can be viewed as "self-sufficient". Yet it
is fully integrated in the European system. High transit volumes (witness Italy), imports in
winter, exports in summer, round-the-clock electricity trading.
But now all that could change. You might think this is due to the much-reported people's
referendum on 9 February and its implications for Switzerland's relationship with the EU. But
you would be wrong. The vote on the people's initiative against mass immigration was an
entirely normal part of the process of direct democracy. It is part of the nature of the Swiss
form of government that the cabinet and parliament are not always right. But they have not
exited the stage after losing the referendum. They are still there and are working to
implement the people's decision. It will take some time for the legislation to be amended and
for as many people as possible to stand behind it. But the end result is always pragmatic
solutions that take the country and its people forward.
So there is no need to panic.
5
When I said everything could change, I was referring not to the vote on 9 February but to
electricity production.
Firstly, because the Swiss government has also opted for an energy transformation.
Phased exit from nuclear power, more electricity generated from solar, wind and hydro
power.
Secondly, because Switzerland too is increasing subsidies for electricity from solar and
wind power, thus exacerbating problems in the grid, and is increasing the CO2 tax,
artificially driving up the price of electricity.
And thirdly, because the decision to scrap nuclear power is likely to result in gas-fired
power plants and high imports - from coal-, gas-fired and nuclear power plants. Expensive
in economic terms, and offering no progress in ecological terms.
The energy policy is subject to the same rules as the immigration policy: the people have
the last word. So the Federal Council's new energy strategy is not yet set in stone. It is only
just making its passage through parliament.
Permit me at this point to digress once more: At the beginning of this month Federal
President Gauck visited Switzerland, and took the opportunity to discuss the forms of
government in our two countries. With all due respect to direct democracy, the Federal
President said he preferred representative democracy at the federal level, because, thanks
to a "level-headed objective debate among informed parties" in parliament, representative
democracy is better able to tackle highly complex issues and allay irrational concerns.
In Switzerland, however, my experience is slightly different: clarity and objective depth can
only be achieved on proposals in the context of intensive public debate ahead of people's
referenda. The government and parliament are forced to justify and explain their proposals.
They must present the pros and cons of each proposal for discussion. Up to the day of the
vote, voters are provided with more and more data as a basis for making an informed
decision. Cost/benefit considerations play an important role. In my experience, in the final
analysis the people's decision is well-founded, reasonable and prudent, no matter how
narrow the margin. And I expect the same outcome for any referenda on the energy policy.
6
Let's take a closer look at hydropower.
It is the backbone of Swiss electricity supplies. But the European electricity system dictates
the price. The European market price crash – caused by subsidies and the grounding of the
ETS – is spilling over into Switzerland.
The victim of this overflow is Swiss hydropower. Why?
•
Some 90% of production comes from large-scale power plants which are not subsidised.
Small power plants account for 10% of the production volume (< 10 MW). They are
expensive, and today, in the wake of the "energy transformation", they are heavily
subsidised.
•
The production costs of large-scale hydroelectricity plants is currently around 4 to 5
cents per kWh [BFE]. This makes them virtually incapable of competing on the European
market.
•
By the way, almost half of these production costs consists of taxes and fees levied by
the state: water rates, licences, compensation for reversion of property, special
measures.
•
If the flood of solar and wind power drives hydropower further down the order of merit,
it will increasingly slip into the red.
What does this actually mean?
In Switzerland, the German energy transformation threatens to push hydropower, with its
strong ecological benefits, off the stage.
A theatre critic would call this "the theatre of the absurd". And it is also damaging the heart
of the energy transformation: "Europe's green battery“.
7
"Europe's green battery" consists of the storage facilities for hydropower in Norway,
Austria and Switzerland.
The more electricity is generated from the sun and wind, the greater the importance of this
"green battery". Because it brings stability to a fluctuating system. Storage facilities are
the energy transformation‘s life assurance.
Pump storage facilities offer the best form of insurance. They continually replenish
reservoirs – a battery that never discharges.
Pump storage facilities consume more electricity than they generate. This calls for a special
business model. They use cheap electricity to pump, and deliver electricity when it is scarce
and therefore comes premium-priced. Pump storage facilities depend on the price spread.
Alpiq is building a new facility - "Nant de Drance", see picture. The project is costing more
than 1.5 billion Euros and is well under way. But its economic success is uncertain.
Two other electricity utilities abruptly shelved large-scale pump storage projects in 2013
(Grimsel 3, Lago Bianco).
There are at least two reasons for this decision:
•
Firstly, the flood of subsidised wind and solar power has driven prices down and
levelled out price peaks. So the pump storage business model is no longer working as
it should.
•
Secondly, electricity from solar and wind power does not help to finance the storage
facilities, even though solar and wind-generated electricity without storage facilities is
of little benefit for supplies. We have a life assurance but are not paying the premiums
towards it.
That can't be good in the long term. At some point or other, the future will begin. Let's
take a look at the future of hydropower.
8
What kind of future awaits Swiss hydropower?
The answer is simple: a gloomy and uncertain one. This is not my answer, but that of our
energy ministry, where the mothers and fathers of the Swiss energy transformation are free
to run the show.
At the end of 2013 the Federal Office of Energy published a study:
•
according to the findings of this study, the production costs of new hydroelectricity
plants were estimated to be around 12 cents per kilowatt hour. That's twice as much as
for existing plants. That's probably realistic.
•
The study estimated a market price of around 8 cents from 2020 onwards (twice as
much as today). That's far too optimistic.
•
The result, despite this optimism: 25 large hydroelectricity plants are planned in
Switzerland. 24 of them are unprofitable.
This is a real tragedy. Here, too, the heroes have failed to save the day.
How does Switzerland deal with this finding?
•
The headline in the Neue Zürcher Zeitung was: "Hard times for hydropower".
Consternation, albeit somewhat downplayed.
•
The country's mountain regions – where most of our hydroelectricity comes from – are
concerned but inconsistent. They want water rates to be as high as possible, which is
driving production costs up even further.
•
The Energy Ministry points to unfavourable developments abroad. What's more, it
appears to be rather perplexed. It talks of new incentive models, yet all models would
entail significant disadvantages such as further market distortion and new subsidies.
Let's take stock of the German energy transformation and Swiss hydropower.
Fact number 1: Ecological hydropower is losing profitability.
Fact number 2: New hydroelectric plants will be unprofitable in the foreseeable future.
Fact number 3: New storage facilities – the life assurance for the energy transformation –
are in limbo.
9
The energy transformation as a whole is hanging in the balance. What can we do to
ensure it does not come crashing down?
Let's call a spade a spade:
Firstly: We should abolish subsidies for renewable energies. That would also put a stop to
spiralling subsidisation.
Secondly: At the same time, CO2 emissions must be managed properly at EU level:
lower volume, higher price. If politicians want more CO2-free electricity – and that's what
it looks like - then this is certainly a smart move.
But an approach based on no subsidies is full of political obstacles. Too many are now
living very well off the state bonanza which ultimately the simple, defenceless citizen has
to pay for.
If, thirdly, we are unable to abolish incentive models, we should at least change them.
And we must treat them not only homeopathically but also with antibiotics. The incentive
must be technology-netural, market-friendly, cost-effective and for a narrowly defined
period of time.
Quota models? Yes, conceivable. Investments must be made where it makes most
economic and ecological sense.
Capacity payments? No thanks, not as long as they are planned and controlled by the
state and entail more and more new subsidies, distortions and costs. Yes please, if the
necessary capacities are exchange-traded and are sold on the market at a price that is
dictated by demand and supply rather than political objectives. Tradeable products that fit
this purpose are in the pipeline.
Fourthly , I believe in the importance of the "Europisation of policies on renewable
energies", as EU Energy Commisar Günther Oettinger put it.
Because the larger the geographic area covered by the electricity system, the more
effectively can electricity from solar and wind power be integrated in the market.
10
I now come to the last act, and return to the stage on which the energy and climate policies
of the EU, Germany and Switzerland are being played out:
Fact Number One: Even after the latest revisions of the Renewable Energy Law, the
German energy transformation is heavily biased. Electricity from solar and wind power is so
heavily privileged and subsidised that the boomerang effects are piling up. Costs have
exploded, CO2 emissions are at a maximum. This was not the original idea. A clash is
inevitable.
Fact Number Two: The German energy transformation has severely distorted the European
electricity market. The collateral damage is substantial. Serious, decisive corrective action is
needed.
Fact Number Three: Switzerland is also suffering. The consequences for hydropower make
for an absurd spectacle. The energy transformation is predicated on ecological
considerations, yet the subsidies and market distortion it brings in its wake are threatening
to push hydropower - the most ecological form of electricity generation - right off the stage.
Fact Number Four: If the script is wrong, it needs to be changed. Subsidies for renewable
energies need to be abolished, and – as a "second-best" solution – incentive models must be
radically changed. Technology-neutral, moderate, and with fixed deadlines.
Fifth and last fact: Renewable energies are good – but only if they are integrated in the
market, integrated in the electricity system, and integrated at the European level. Based on
international rather than national concepts, market-driven rather than interventionist.
We're still a long way off from this. But we must get there as quickly as possible. Otherwise
the lights will go off on stage long before the performance is over.
11