Lessons for U.S. utilities from the German Energiewende
- July 30, 2014
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Energiewende has become one of the most talked about topics in the utilities industry and perhaps one of the most notorious.
It has also become the example of how not to do energy policy. And while this may be true in many respects, the strategy has been successful in certain areas, least of which is providing learnings for other countries.
[Editor’s note: Find background and more information on the Energiewende plan--- Energiewende is German for “energy transition”---by clicking here.]
Germany was the first mover with an ambitious national energy transition agenda, and as with most things untested, there is always an expectation of some challenges and unintended consequences.
Today, most experts would argue that the Energiewende tried to do too much, too fast. The drive for renewables growth, supported with generous subsidies, has led to an explosive growth in solar power, which now makes up more than 20 percent of installed capacity. This was combined with an aggressive mandate for nuclear decommissioning in the wake of the Fukushima disaster.
In addition to creating a number of unintended consequences, this agenda failed to achieve many of its original objectives.
Firstly, German consumers are paying twice as much for electricity as their U.S. counterparts and prices for industrial customers have risen by more than 30 percent over the last four years.
Secondly, German utilities have lost more than half their market capitalization in recent years, while U.S. utilities are still achieving fairly healthy returns on equity.
Thirdly, the Energiewende has inadvertently driven up Germany’s carbon emissions, since the country has been relying on its own lignite coal resources and cheap imports from the U.S. as back up load, when the nuclear moratorium was introduced.
Many countries, including the U.S., have been watching Germany’s experience closely as they manage through a transition to a greener energy system. The U.S., however, does exhibit a major structural difference to Germany - the unexpected shale gas boom, which has been the single largest contributor to CO2 emission reductions. That said, all countries that have enacted policies to encourage the growth in renewables have one thing in common - projections have significantly exceeded original forecasts as technology costs have plummeted at a much faster rate than expected.
For this reason utilities and policy makers should take into account key lessons from the Energiewende, both at a system-wide and at a company level.
At a system-wide level, this means more integrated policy planning that takes into account long-term impacts across the entire energy value chain. This includes the impact on the generation mix, on wholesale and retail prices (and their impact on the economy), and on the operations and reliability of the grid. Integrated planning must also consider the effects of tariffs such as net metering on the economic viability of the grid, interdependency of future technologies such as storage and the likelihood of potential reduced usage of the grid if consumers start to utilize it simply as a source of peak or backup power.
This system-wide scenario planning must be a result of collaboration between policymakers, regulators, utilities and consumers in order to arrive at a balanced solution.
At a company level, it is clear that the rapid growth in distributed generation will require a different operating model that not only allows utilities to manage a more complex and distributed grid but also positions utilities to be an active participant in the transformation of the grid.
From an operational perspective, the growth in distributed generation places significant stress on the networks. Utilities will need to upgrade their use of analytics and advanced distribution management systems in order to operate a much more complex asset base. For example, in Germany, as much as 70 percent of solar power is connected to the low voltage grid. So, not only are utilities not generating any revenue from solar, they need to fund substantial upgrades to a distribution grid that was not designed for a distributed and intermittent power model.
From a financial and commercial perspective, utilities need to develop a long-term plan to manage the effects of reduced centralized demand and, if possible, become a participant in the provision of new services to its customers, such as distributed generation, storage and microgrids, to complement traditional grid based offerings.
In Germany, utilities have been slow to invest in renewables and own only about seven percent of total installed capacity. And while solar penetration in most U.S. states is still relatively low, our analysis shows that the entire country is likely to be at grid parity by 2030, especially as solar prices continue to drop.
Additionally, our latest research shows that U.S. consumer interest in residential solar installations is expected to increase from six percent to 43 percent in the next five years. And while specialized providers are still the default choice for consumers, utilities are a very close second. Despite their entrance into the energy market, retailers, phone and cable companies and online service providers rank much lower.
Utilities are well positioned to capture these new revenue streams, and even though they currently lack the necessary regulatory support, scale and core competencies to effectively respond to this opportunity, especially in non-competitive states, many are finding ways to enter new and adjacent markets through partnerships, acquisitions and unregulated entities.
The pain felt in Germany can certainly be avoided here, but utilities need to realize the opportunity and get ahead of these developments by engaging with policymakers to reshape the regulatory framework. Utilities also need to develop a long-term commercial assessment of how they will operate in a world where consumers have much more diverse requirements and options to address their energy needs.
Jack Azagury is global managing director of Accenture Smart Grid Services. Follow Accenture Smart Grid Services on Twitter.