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The Big Picture

German Coalition Eyes Speedier Energy Transition

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  • Germany’s new government has set out a green vision that seeks to balance increased climate action with the current reality of a potentially volatile energy transition.

  • Lofty but pragmatic targets point to an accelerated transition, even if technical and financing challenges lay ahead.
  • The path Germany takes could feed into the EU's transition approach.

Europe’s largest economy, Germany, will soon have a new government after the left-leaning Social Democrats, the Greens and the libertarian Free Democrat Party (FDP) sealed a coalition deal last week that put the energy transition center stage. What was agreed in a 178-page document reflects increased electoral pressure for climate action and offers a vision of what the next decade of German green direction will look like.

Tellingly, more ambitious targets emerged alongside concerns over energy pricing volatility and supply shortages — even if those concerns prompted concessions on an extended role for natural gas. The new government wants a renewable share in electricity at 80% by 2030, up from an existing 65% target (and around 45% now). Berlin hopes to achieve this through an important expansion in renewable capacity, backed up by a buildup of new natural gas-fired power plants to avoid potential supply problems.

Plans to exit nuclear power next year will remain in place and coal will be phased out “ideally” by 2030, eight years earlier than planned. It also hopes to double goals to build electrolyzer capacity needed to produce hydrogen and have 15 million electric vehicles on the roads by 2030. The coalition agreement still needs to be approved internally within each party, as Social Democrat chief Olaf Scholz prepares to take the reins in Berlin next month after Angela Merkel’s almost 16-year tenure as chancellor.

  • The new goals are both lofty and pragmatic, ensuring a speedier and broader energy transition.

The coalition’s goals were lauded as giving a needed jolt to sluggish climate action in Germany, opting to focus on measures needed to reach climate targets rather than simply increasing emission reduction targets. But the self-imposed targets are steep and technically challenging, as the amount of new renewable capacity expected to be built is exponentially higher than existing capacity. Renewables met 43% of German gross electricity consumption in the first three quarters of 2021 due to lower wind generation, compared to 48% in the same period last year. To put into perspective the scale of the endeavor, German energy and water utilities association BDEW believes 25 to 38 onshore wind turbines need to be built every week to meet the new targets, compared to the eight turbines built weekly in 2020.

But as expected in a coalition of three parties with different priorities, some of the measures showed elements of pragmatism. In what appears to be a concession by the Greens, the inclusion of the need for new hydrogen-ready gas-fired power plants will give extra life to fossil-based natural gas and ensure baseload power supply as the upcoming phaseouts become a reality. The 2030 coal exit is meanwhile conditional to a sufficient renewables buildup. A mention of “technology-neutral regulation” also opens the door for the use of blue hydrogen (produced with natural gas and carbon capture and storage), at least until green hydrogen (produced with renewable energy) is cost competitive.

  • But a lack of clarity over how to fund Germany’s new climate direction is concerning.

There was little detail in the coalition treaty on how such a massive expansion in infrastructure will be achieved. But what was clear is that the new government will have a stricter hand in the financing department, especially with FDP head Christian Lindner holding the purse strings as finance minister. The coalition said it would rule out tax increases and reinstate a “debt brake” in 2023 that was suspended due to the coronavirus pandemic, which limits the public deficit to 0.35% of GDP and restricts any additional borrowing.

Some of the new finance measures are aimed at helping hard-pressed households. The coalition will eliminate the renewable levy from electricity bills by 2023. This will shift the burden of financing renewables away from consumers and on to the federal budget, potentially making the large renewable expansion more difficult to finance. That said, new accounting rules for energy and climate funding are expected to be implemented so that any deficit does not count in the debt brake equation. The parties also indicated they avoided implementing a price on carbon dioxide for transport and heat as it would be inadvisable during a period of high electricity prices.

The contradiction between a huge green investment build-out and stricter finances will likely cause friction in the three-party grouping. Green co-leader Robert Habeck is heading an expanded “super ministry” that brings in the economy and the climate ministries as a counterbalance to Lindner’s finance ministry. The tension between party interests recalls previous interparty strife, such as when the FDP broke off coalition talks with the Greens and Merkel’s Christian Democrats after the 2017 federal elections. But it also points to how the parties and the wider public have shifted on climate action: An FDP-Green tie-up that was unworkable just four years ago now has sufficient common ground.

  • Germany could also steer EU climate ambition on carbon prices and investments.

Germany’s ambitions on the environment could also be important to help the EU’s Green Deal stay on course despite pricing volatility pressures. Berlin supported the case that the current energy crisis was short-lived and did not merit long-term changes to the EU energy market legislation. German reassessment of natural gas as a key element in the energy transition could also boost its case to be included on as a sustainable fuel in the EU’s investment taxonomy classification, expected by year’s end. Germany opposes nuclear getting the sustainable investment classification, however, despite it likely needing electricity imports from nuclear-heavy France.

The new German coalition said it also would push for an EU-wide price floor for EU Emissions Trading System (ETS) carbon prices at €60 ($67) per ton and implement measures such as a minimum national CO2 price or carbon certificate cancellations if the price goes below that level. Currently CO2 prices are trading above €70/ton. It also hopes to expand the EU ETS to cover transport and heating after 2026.

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