A desire for independence drives the energy shift in Germany

Germany’s green transition may be carried much past its conclusion by the scramble for energy sovereignty ignited by Russia’s invasion of Ukraine.

Germany’s energy dependence has come to light due to the potential stoppage of Russian gas shipments. More coal has been used to generate electricity as a short-term solution, increasing concerns that the nation’s shift to a greener economy may falter. But for the following three reasons, this is unlikely:

The EU’s carbon trading scheme limits CO2 emissions; thus, increasing the amount of coal used to generate energy won’t grow (EU ETS). However, increased coal use will raise CO2 pricing in this system, reducing CO2 emissions in other industries covered by the EU ETS.

Prices under the EU ETS will continue to be higher than those required for coal to be competitive in the power market. While current fees range between EUR80 and EUR90 and are anticipated to grow further, coal requires EU ETS pricing below EUR60.

Even though this goal has not yet been codified in law, the German government remains committed to eliminating coal by 2030. It is improbable that coal would outstay its welcome as a replacement for Russian gas given the rising EU ETS pricing; coal will be priced out of the market.

What will it take to expand renewable energy capacity by a factor of four by 2035?

In Germany’s “Easter package,” which envisions green energy making up 80% of gross power consumption by 2030 (up from 42% currently and a previous aim of 65%), the groundwork for expanding renewable energy capacity was put down. Additionally, domestic electricity production is anticipated to be almost carbon neutral by 2035. Germany is adhering to the International Energy Agency‘s (IEA) guideline for a climate-neutral electricity supply by 2035, which was also jointly stated by the G7 at its most recent conference in Elmau, Germany.

The climate-neutral power system in Germany has a positive impact on jobs and economic growth.

Up until 2035, it will cost an average of EUR28 billion per year to increase renewable electricity capacity. This will result in annual value addition of EUR40 billion, which is 1.4 times the investment or 2.7 times the government’s fiscal support. On the other hand, this may be a benefit or a curse. This will be an extremely welcome economic stimulus if the economy continues sluggish. However, suppose the economy resumes its upward trend, or the recovery of the world’s supply chains is slower than the expansion. This might increase price pressure on scarce resources, leading to inflation or even a wage-price spiral.

Author: Swastika Jha

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