The IEA praises Germany’s commitment to sound energy policies and now urges the government to reconsider the phase-out of nuclear power and to focus on energy market reform and climate policy

(Berlin) — 4 June 2007

“As one of the largest energy markets in Europe and the third-largest economy in the IEA, few countries have quite the same impact on European or even global energy policy,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Berlin at the launch of Energy Policies of IEA Countries – Germany 2007 Review. “This importance is only further underlined by the country’s simultaneous presidencies of both the G8 and the European Union – presidencies Germany is using to promote sound, sustainable energy policy in Europe and around the world.”

“Building on its already sound foundation, we turn now to challenges the country is facing and actions the country should undertake to respond to them,” Mr. Mandil said. “Key among these challenges are the announced nuclear phase-out, reform efforts in electricity and natural gas markets, and overall climate changes policies.”

Nuclear phase-out
At the start of the decade, an agreement to phase out nuclear power was reached, one that will culminate with the last reactor shuttered in about 15 years. A significant piece of Germany’s energy mix, nuclear supplies 12% of German energy and one-quarter of its electricity generation. Losing the nuclear option will have significant impacts on energy security, economic efficiency and environmental sustainability. Eliminating nuclear from the supply portfolio will reduce supply diversity, increasing reliance on energy imports, particularly natural gas, which is not diversified enough. Shutting down productive assets before their useful lifetime will also impact economic efficiency, requiring additional near-term investments in new capacity that could otherwise be avoided. Finally, generation from nuclear power is free of greenhouse gas emissions. While additional renewables capacity, along with energy efficiency gains, could certainly make up some of the resulting gap, there will be greater reliance on carbon-emitting fuels. Without a doubt, a phase-out will limit Germany’s full potential to reduce its emissions. The IEA urges the government to reconsider the decision to phase out nuclear power in light of these adverse consequences.

Electricity and natural gas market reform
The IEA is pleased to see that Germany is now making significant progress to reform its pivotal electricity and natural gas markets. A very important step was taken when Germany installed an energy market regulator, the Bundesnetzagentur, in 2005. Since then, important changes have been made to both electricity and natural gas markets, allowing Germany to harmonise with its European partners. The recent pace and direction of change have been a great improvement over the past five years, yet substantial challenges remain. The greatest of these is the dominance of large incumbent companies at all levels of the electricity and natural gas markets.

Within the power market, E.ON, RWE, EnBW and Vattenfall have 70% of German capacity and produce an even greater share of the electricity. In the gas sector, it is difficult to compete nationwide as E.ON and Wingas together supply 66% of German demand. In both power and gas, these dominant companies have extensive cross-ownership of municipal utilities (Stadtwerke) and regional sales companies – relationships that affect competition at all levels. These companies also own and operate the electricity and natural gas transportation networks. Legal unbundling rules are in place in both sectors, but they are not sufficient to prevent companies from using their ownership of network infrastructure to favour their own affiliated companies.

We urge the government to introduce separate independent system operators to manage transportation assets so that all market participants – including existing and potential new entrants – play on equal footing and help drive competition. Independent system operators for natural gas and electricity networks do not require ownership unbundling, but do provide the right incentives for companies to operate competitively.

Climate change policy
Climate and environmental policy is a cornerstone of Germany’s energy policy, clearly evident from its progress towards meeting its Kyoto Protocol target, its actions to increase renewable energy supplies and its efforts to make efficiency a priority at all levels of the government. Nonetheless, the government can better align its policies so that it gets the greatest benefits of efforts to reduce emissions. Looking beyond the nuclear phase-out, other policies endanger its climate policy efforts, such as the use of the European Union’s trading scheme for carbon dioxide to protect and promote coal-fired power generation. Furthermore, the feed-in tariffs provided to renewable electricity generation sources do not provide long-term signals to lower costs – incentives that would allow more renewables to be procured from the same pot of funds. In particular, the high feed-in tariffs for solar photovoltaics can be up to ten times higher than those provided to wind and even higher than investments in efficiency, diverting money away from other policies where it would have been better employed to reduce greenhouse gas emissions.

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