You cannot please everyone – my interview with Professor Everett about German Energy Policy

*** ATTENTION: Shameless self-marketing ***

In September, I published my first article for the Konrad-Adenauer-Foundation’s blog. It asked why there is no Silicon Valley in Europe and was also published in the Huffington Post. However, when I told my non-German-speaking friends, they asked whether I could present an English version. Then, I was kidnapped by Corporate Finance, but I could eventually free myself and here I present my newest article, an interview with my Professor about the German energy policy, in English.

The German version can be found here

He teaches Petroleum in the Global Economy at The Fletcher School and at Georgetown. After  graduating from Fletcher, he started working for Exxon Mobile. It is a priviledge to be tought by him.

Professor Everett teaches Petroleum in the Global Economy at The Fletcher School and at Georgetown. After graduating from Fletcher, he started working for Exxon Mobile. It is a priviledge to be tought by him.

First lesson of strategy: You cannot be everything to everyone. Nevertheless, that is what German politicians seem to try. Please the environmentalists, stay competitive for companies, stand the ground versus an expansionist Russia, encourage innovation, save jobs and keep energy prices affordable. Bruce Everett has worked for more than thirty years at Exxon Mobil, has a degree in international relations and teaches the class “Petroleum in the Global Economy” at The Georgetown University and The Fletcher School of Law and Diplomacy. I spoke to him and asked for his – American – take on the German energy policy.

Franziska: When it comes to technology development, you are – out of a German perspective – a radical economist opposing government regulation. You think that solar and wind, the two technologies Germany is betting on for its future energy security, are inferior technologies. Could you explain what you mean by that?

Everett: It is not at all clear that the low-carbon advantages of renewable power offset their very high cost and performance problems.

 

Could you elaborate on that?

First and foremost, these technologies are expensive.  A nuclear, coal or natural gas power plant can operate 90% of the time and can provide power to the grid regardless of the time of day or weather.  Renewable power, on the other hand, generates electricity only when nature offers it.  To be specific, one Watt of natural gas plant capacity can generate about 7,900 kWh of electricity per year (24 X 365 X 90%).   One Watt of solar power generating capacity, which is much more expensive than gas, can only generate 1,300 kWh per year (24 X 365 X 15%).  A Watt of wind power can generally produce only about 2,200 kWh per year (24X 365 X 25%).  Furthermore, these kWhs do not come when consumer demand requires them, but only when the Sun is shining or the wind blowing.  Most wind power comes at night, when consumer demand is low.  Since there are no economically viable storage options for electricity, the mismatch of demand and supply requires fossil fuel back-up capacity.  Finally, both solar and wind power can come and go quickly, which makes it difficult for power companies to maintain the precise voltage and frequency so critical to sophisticated electronic equipment.

 

So, do you think the Energiewende is doomed?

Without technological breakthroughs (which are possible but by no means assured), Germany is likely to face some difficult trade-offs between renewable expansion and economic growth. German consumers already pay 2-3 times more for electricity than Americans do, and German businesses are increasingly worried about rising electricity prices.  Natural gas is produced domestically in the US and thus relatively inexpensive.  Germany must import most of its natural gas at high prices.  Without nuclear, the only relatively low cost option for German power production in the near term is coal.

 

The Financial Times, in an article from last month, has called the decision to shut down nuclear plants, “a huge mistake”. Do you agree?

It’s not correct to say that the decision to shut down the nuclear plants is “a huge mistake”.  Public opposition to nuclear power plants is high in Germany, and democratic countries respond to the wishes of their people.  This action does, however, come at a cost.

 

Yet, in official documents the government says that the prices for private households will only increase by 1,5cents per kWh, and that they have found a very good way of compensating energy-intensive business with tax deductions. That does not seem so expensive.

An increase of 1.5 cents per kWh may not be large in itself, but it comes at a time when other policies, such as the Energiewende program, are also leading to higher electricity prices.  In evaluating the overall cost of German energy policy, we need to bear in mind that tax deductions and subsidies, whether direct or indirect, cannot reduce the overall cost to German society.  Such policies simply shift costs from some consumers to others or from consumers to taxpayers.

 

A topic closely related to Germany’s energy policy is the current crisis with Russia: So far, gas has been kept out of any sanctions for Russia. Do you see a chance that Germany/Europe could get its gas demand from another source?

The world has a large amount of undeveloped natural gas.  There is no question that Germany could find all the gas it needs from non-Russian sources, but only at a cost.  Unlike liquid fuels, which are inexpensive to transport, natural gas requires expensive infrastructure in the form of liquefied natural gas (LNG) systems or long-distance pipelines.  Russian gas is currently priced at the German border at about $10 per million British Thermal Units (MBtu).  New LNG projects, such Western Australia, are commanding prices closer to $15 per MBtu and require the investment of tens of billions of dollars.

The primary advantages of Russian gas are its relatively low price and large scale.  The issue for Germany is whether the security and geopolitical problems associated with purchasing Russian gas outweigh its cost advantages.

Thank you very much, Professor, for taking the time to speak to me.

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