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Renewable Energy

Plan B for the energy policy shift

High expectations, widespread opposition – the energy policy shift is making very little headway at present. What is missing is a systematic European energy policy. A commentary by Dr. Torsten Jeworrek.

06.08.2012

On the first anniversary of the energy policy shift in Germany, we are seeing an increasing number of negative headlines: photovoltaic manufacturers becoming insolvent, problems with offshore wind, delays in expanding the electrical grid, rising prices and mounting public protest against power transmission lines or wind turbines. It is as if the energy policy shift is expected to deliver everything at a stroke: pollutant-free, low-cost energy, without nuclear power, ideally generated locally using domestic technology – but not, if you please, in my back yard. The energy policy shift is in danger of being overloaded. By committing to phase out nuclear energy, we have created a situation that enjoys broad social consensus. We also want to become independent of fossil fuels so that we can meet climate targets.

The task of the century will require the effort of the century. The scale of the undertaking is much too great for national sectionalism.
Dr. Torsten Jeworrek
Member of the Board, Chairman of the Reinsurance Committee

It is high time that we asked some questions about energy policy measures and redirected them. The continuing surge in global demand for energy, coupled with the uncertainty surrounding oil and gas supplies, probably mean that prices will rise steadily. For this reason, the primary aim of our energy policy must be to uncouple economic growth from the burning of fossil fuels in order to safeguard the future viability of Germany as an economic location. This would also help to combat global warming. For these reasons, the shift in energy supply towards renewable sources represents the most important task for this century.

There is no doubt that governments need to provide the necessary stimulus, since in many cases the new technologies are not yet competitive. A total of 109 countries already share this view and have responded by creating incentive systems. But the market remains the most effective lever: competition, economies of scale and technical progress are constantly lowering the cost of the technologies involved. In order to avoid overfunding and misallocation of investments, subsidies should be based on a strict economic approach and be aimed at making the technology marketable in the short term. Even within support schemes, competition should be afforded as much room as possible: targets, rather than locations or technologies, should be promoted: the amount of electricity generated, availability or controllability – or, for example, the ability to generate solar energy even at night. This would then place greater focus on productive transnational projects – in other words on schemes that use the most appropriate technology in the most suitable location.

Investors need a reliable framework

But one thing should be remembered: subsidies only work if they are reliable. Over the last few years, the instruments used in different European countries have been repeatedly changed at short notice, in some cases based on the financial situation. This creates uncertainty and represents one of the biggest obstacles to investors. Yet creating an attractive investment climate by ensuring attractive long-term, wide-ranging conditions is precisely the job of politicians. Today, we have national, and even regional, promotional schemes in direct competition with one another for investment. In economic terms, an optimally revised energy model requires an approach above and beyond the national framework. Investors could then be spared unnecessary additional expense, and national projects that, while perhaps desirable, make little sense from a macroeconomic perspective, could be avoided.

Investments in developing markets harbour enormous risks. The involvement of the World Bank or other development banks in the financing mechanisms has proved effective at triggering investments even in less stable environments. Nevertheless, new technologies also present new kinds of risks: Can the technology deliver what it promises? Will the wind blow as predicted? Here the private insurance industry can provide greater security by assuming a portion of these risks. Munich Re has developed some innovative solutions, such as performance guarantee cover for photovoltaics manufacturers, and exploration risk insurance for geothermal energy projects.

Accomplishing the task of the century will require making the effort of the century. The scale of the undertaking is much too great for national sectionalism, but particularly after the experiences with the UN climate negotiations, it would be foolish to expect the adoption of a global energy policy.

A European energy policy

We should therefore keep a consistent focus on Europe to begin with. It is hard to understand how the movement of persons, goods, services and capital within the EU is not subject to any restrictions, while power transmission capacity between its member states is often restricted for political reasons. Taxes are being wasted if we keep spending billions subsidising solar energy from barn roofs in Germany, when we could harvest twice as much energy in southern Spain for every euro we invest. And it does little to improve social acceptance if German local authorities have to battle to exploit every possible location for wind generation, while there are still very few wind turbines on the French or Greek coastlines, despite the fact that wind conditions there are excellent.

I believe three changes are needed: firstly, the EU must be given responsibility for the overarching side of energy policy so that the electricity market can be opened up, allowing the required investments to be made where they are of most use. Secondly, a new, exclusively EU‐wide subsidy mechanism will be required to prevent misallocations and ensure that efficient locations and technologies prevail. Thirdly, for a European energy system of this kind to work, high-performance grids must be created that can expand into neighbouring regions.

Projects such as the energy from the desert project, Desertec, are moving in the right direction. The fascinating thing here is not that solar or wind energy is being generated on a large scale, but that the energy is being harvested where it is most efficient to do so and flowing to where it is needed. We need more lighthouse projects of this kind, backed by the EU. Also needed are the necessary vision and courage. Could Norway's pumped storage plants not become a storage battery for all of Europe? And could the Atlantic coasts of France, England and Ireland become the generator? It will be to everyone's benefit if we can find the courage for ventures like these and overcome the national sectionalism we see in Europe. The diversity that the continent can offer for the shift in the energy model will then become an invaluable location advantage for an energy supply system that is safe, climate-friendly, economically sensible and socially accepted. What is more: against the background of government debt and the financial crisis, projects like these, which are of an investment nature, represent an intelligent growth policy for Europe.

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