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[Episode #4] – Energiewende

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All about Germany's famed energy transition effort, the Energiewende. What it is, what it isn't (with a strong dose of mythbusting), and what the future of grid power looks like from one of the countries on the leading edge. And in the news segment: US LNG export terminals could be in trouble; China's massive push for renewables; and the latest action in oil prices.

Guest: Craig Morris, editor of Renewables International and lead author of EnergyTransition.de

On Twitter: @PPChef

Geek rating: 4

Taping date: August 27, 2015

Chris Nelder: Welcome Craig to the Energy Transition Show.

Craig Morris: Thanks for having me.

Chris Nelder: What's Germany's long term goal for the Energiewende?

Craig Morris: If you put it into a percentage we're talking about 60 percent renewable energy by 2050. And of course when I say energy I do mean not only electricity but also heat and transport fuel, motor fuels. And that is only considered possible here with a 50 percent reduction in energy consumption.

Chris Nelder: Now are they expecting to accomplish that through efficiency or what?

Craig Morris: Well efficiency is going to play a big part. But part of it is also just a numbers game really. I recently explained this in a blog post I believe it was entitled The Magic of Efficiency and I was essentially arguing that there is no magic. We don't need any kind of big breakthrough for efficiency. Right now when we talk about reducing energy consumption we are counting primary energy. So the lump of coal that goes with the coal plant. And because wind and solar don't have a difference between primary and final energy, at least in the way that the IEA counts it, we have the same number there. So we're switching from a high number for primary energy to a lower number for final energy with the same amount of energy for renewables. And so this is really just a matter of you know when you have a wind turbine you don't count the wind that is lost in the process, you just say you got a certain number of kilowatt hours and the same thing with a solar panel. You don't say we lost as much sunlight. But with coal plants you say OK we put three lumps of coal in and got one lump of electricity out and that's a 33 percent efficient coal plant. And so part of that, one big chunk of this reduction in energy consumption is just going to be that conversion from coal to solar and and of course also oil and cars. And when we switch over to electricity there. The other big pillar is going to be efficiency as we properly understand it. And that will largely come from the building sector. Now the energy sort of consumption mix in Germany is a bit different than it is in the States. In the U.S. I believe it's about 40 percent electricity. In Germany it's 20 percent electricity, around 40 percent heat and around 40 percent motor fuels. And so we're doing a lot with electricity right now. But the real progress has to come from what we're not doing. And that's the biggest criticism one of the biggest about the energy transition. But the efficiency thing that's going to come is with passiv house architecture. And that's just going to be a very slow process. We have the technology now. We've had it since the 1990s. We know that it works, and it's going to become the building standard throughout Europe in fact more or less with the requirements for what the E.U. calls nearly zero energy buildings. So by the early 2020s new buildings will have to more or less comply with the passiv house standard. And just very briefly to explain what that is. You're going from a new building in Germany today will consume about four times more energy for heating than a passive house will. And of course older buildings will actually consume something like 20 times more, like a building from maybe 1975.

Chris Nelder: Right. Interesting. Now you and Arne Jungjohann your partner in crime over there have been working on a book about the history of Germany's energy transition. Why did you decide to write that book. What's its title and when will it be out?

Craig Morris: That's a good question. We assume that the publisher is going to tell us what the title is. It is just an Energiewende history. And the reason we decided to write it was because this is often talked about among the energy geeks. And actually there's a bigger story here. The movement, the term itself goes back to the 1970s and you could arguably take it back to a single thing that happened in 1974 that started in 1974 when a village outside of Freiburg, Germany where I've been living since 1992 protested against plans to construct a nuclear plant. And now looking back from today we would say, OK the Germans they oppose nuclear. This makes sense. And what's the big story here? Actually if you tell the tale from back then, looking from the 60s and from the early 70s not knowing where this is leading, the whole history starts to look much broader and richer than just the Germans don't like nuclear power. It was essentially they not only wanted a nuclear plant but they wanted a lead production plant next door. And the locals were told we're going to industrialize this area and this will be good for you. And this is quite similar to what you have right now in the States with some of the conservative communities opposing fracking where they are turning around like the Germans did in specifically in 1974 in this farming village these people, conservatives, stood up and told their government, their conservative government, we don't want this. We are a farming community. We don't want to be industrialized. We have a beautiful orchards here. We have vineyards. It's a wonderful place to live. And you're going to come in here and industrialize everything and old 60 year old farmers went out and put their bodies on the line and the police came in and laughed at them and you know refused to pick them up because you push around the elderly and they can get hurt and so that was the way this started. They weren't concerned about radioactivity in fact, what we found is it's very clearly documented these people these rural farmers did not know what radioactivity was. They learned it by the end of the 70s. They learned it a little bit when Three Mile Island happened in the late 70s and then of course when Chernobyl happened in '86. So by the time Chernobyl happens radioactivity is definitely in the foreground. That's definitely the problem that Germans have with nuclear power at that time. But in the beginning it was really rural conservative communities who did not want the government to push them around and they didn't want firms that were too big to fail coming in and taking profits out of the local community out of the resources, and the locals don't get the profits. But they have to live with the impacts.

Chris Nelder: Germany has been shutting down a lot of its conventional power plants in recent years including ten nuclear plants with I think another nine to go, but have been completely replaced by renewable power and it now has a list of 57 conventional plants according to a recent article with a total capacity of 9.2 gigawatts were about 10 percent of total installed conventional capacity that it wants to close. So first, just for the amusement of our non-German speaking listeners what is the name of that list in German?

Craig Morris: The KWSAL?

Craig Morris: Yes.

What does it stand for? The Kraftwerkstillegungsanzeigenliste. I'd have to look it up again but it's a whole sentence backed into a word.

Chris Nelder: Yes, one of those famous German train car constructions. So why are these plants being considered for closure?

Craig Morris: Well let me go back to one formulation that you use when you say Germany is planning to close and you know I probably use this as well but let's just make a clear distinction here. Germany doesn't plan to do anything. These are private firms on the market. We have competition on the electricity sector over here in a way that you don't have in most parts of the United States and so these firms are essentially telling the national grid regulator, it's called the network agency. They're telling the network agency, 'OK at the prices that we could get and the hours that we could run, we are not profitable, we're going to be running at a loss so we want to close our plants. These particular plants.'

Chris Nelder: OK. So this is a private industry, telling the grid operator we're going to close these plants not the other way around.

Craig Morris: We would like to close these plants because they're unprofitable. And the process is that the network agency then goes in and says, 'Alright let's review the grid situation where you are, where this plant is, and we will let you know whether we feel that at that particular grid node or grid area whether we can let you close or not.' If the network agency tells the plant operator, 'sorry we need you you can't close.' Then some kind of compensation has to be arranged. And the funny thing is that these payments do not seem to be at least I do not know where they are spelled out very clearly. It seems that all indications are that they are insufficient at the moment. So there is a press release by E.ON where they say even with whatever payments will be made even if we get those, we would still be running at a loss. And I think the idea originally was that you might need a couple of plants but not 10 percent of the generation capacity. And so probably the entire thing is being revisited and that may be why we don't see the payments listed out in anywhere. But it's a kind of capacity market that is sort of sneaking in to the German power sector which is kind of ironic because the government specifically and explicitly opposes the idea, they've come out very strongly and clearly against the idea this year. It was debated very heavily in 2013, 2014 and then sort of in January, February this year the government said OK we're not going to do it, we will revisit it in 2017 but we're not going to do it until then. And so we're kind of in a limbo phase right now where these firms are trying to keep their plants online but receive some kind of compensation for it outside of what's called the energy only wholesale market.

Chris Nelder: Right, where wholesale power prices are now out or below 4 cents a kilowatt hour so you can imagine why those existing plants would have a hard time making their profit.

Craig Morris: Right. I recently saw an estimate just to give you an idea, a nuclear plant, you know an old nuclear plant can run at a marginal cost of 2.5 cents but, so that would still be profitable even at 3 cents, but the government as part of the deal from 2010 decided to impose a tax on fuel rods and that adds 1.4 cents to the kilowatt hour. So a nuclear plant in Germany now needs 3.9 cents just to break even. And coal plants we have very cheap lignite over here. This is a kind of coal that you don't really use much in the States because we have a better quality in the States. You know we have actual coal that looks like a rock. They have coal over here that looks like a dead tree, and it's full of water and it has to be pre-baked and you have to really dry it before you can even put it into the plant. But we have tons of it over here and it's dirt cheap because it's just dirt that catches fire. It's actually one level up from peat is essentially what it is. So it's somewhere in between peat and the kind of rock coal that we're used to thinking of. And so that's very cheap. The other thing is that natural gas over here is relatively expensive. And, Europe is extremely well networked with natural gas, so you have these really low prices in the fracking boom in the States, but that was partly because there was a surplus in certain areas and you couldn't get it to California because you don't have a nationwide gas network. If somebody over in Europe decided to frack and we had 50 percent more gas all of a sudden, prices might not even budge because we can trade over here. I know that we trade with North Africa we get a lot of our gas from North Africa, but it goes from North Africa to Russia. So we're just in the middle of this gigantic gas network that's built up over here. So the kind of price fluctuations that you saw in the States simply would not be possible over here. So gas is expensive and would remain expensive.

Chris Nelder: Yeah, that's a really interesting point to make I think unless you really know the typology of gas network over there its sort of hard to imagine how and why gas prices have stayed so high. Especially when we've been so low over here. So with all these power plants being closed I mean obviously the grid operator is becoming concerned about it. Are they worried about the reserve margin falling to a too low a level, and how they intend to deal with that?

Craig Morris: Well it's not just the network agency that's worried about that. The whole sector is basically facing a situation right now where investments in new plants seem nonsensical. It just seems like a bad idea. And you know you're going to have closures and then a lack of replacements. And so your overall installed dispatchable capacity, the secure capacity, is going to diminish. And since Germany is largely going renewable with wind and solar we won't have more things that we can actually switch on. So we have hydro, but the level of hydro power we have now is hardly unchanged since 1990 and it won't change in the future much. Biomass went up considerably in the power sector. But it's finished. We are practically building nothing now. And essentially society and the government, we've reached a point where we've decided over here in Germany that we've used most or all of the sort of you know residue from the wood sector and in the larger sense of the term, there isn't any more residue left and we don't want more energy crops. We have a lot of canola oil over here for diesel and then we grow corn and take the entire plant before the fruit has even really formed and we use the whole plant in biogas units for heat and electricity. But we've reached a point over here where we've decided that's enough. And anything else you know if we continue going this way it's not going to be sustainable. You're going to start cutting into unused land or you're going to take up farmland which is going to increase food prices and so biogas is over. We don't really have geothermal capacity to speak of for power generation and what are we left with? We're left with wind and solar and you can't switch them on. So this discussion over here about the adequacy of dispatchable capacity going forwards especially around the time we switch off our last, I think it's now eight nuclear plants, we closed one down this year. I believe it's eight now. I might be wrong about that, but we're going to close them down in 2021, 22 at the end of 22. And so by that point we will have roughly another 10 percent of our total generation capacity go off line and you would want to replace that with something you know that you can switch on or that runs more or less all the time. And that incidentally is also one of the reasons why Germany is really pushing for offshore wind, the capacity factors of offshore wind are up in the 40s over here which is phenomenally good for Germany. The onshore, the national fleet, this will be a number that anyone used to seeing those figures for America will just laugh at, the National German fleet of wind turbines has the capacity factor below 20 percent. So we're doubling the capacity factor just by putting the things in the water.

Chris Nelder: Just by going offshore. Interesting. So the concern about the reserve margin is a real one that still has to be sorted out.

Craig Morris: The concern is real. But you know there is a debate about whether this is being overblown. You have a lot of proponents of renewables saying there are other options, we can start to use storage. We can do a lot of demand shifting but there's certainly discussion going on. And again part of it is also related to particular parts of the grid. So I think most of the nuclear plants going off are in the south and so there's a concern particularly in southern Germany, and you've probably, anybody who follows the reports on Germany is probably familiar with the debate we're having about power lines from the north to the south. For offshore wind in particular. And that's also part of that because the nuclear plants will disappear in the south and we're building all this wind in the north. So the problem if we continue to do that is just going to increase.

Chris Nelder: Unless you get on it and build that additional transmission capacity.

Craig Morris: Build the transmission capacity, or do something radically different which is not being proposed right now which is in line with the original idea of the Energiewende which is kind of people taking it into their own hands. On the one hand you have the grid experts, and I am convinced I've spoken to enough different people with enough different angles on it. I am convinced that the people who have seen the data nobody understands the data from the grid. That's the thing. And so the people who have seen it long enough and studied it long enough to understand it. Everybody says, yes we need these power lines. And then there's kind of the community level that says look you're just taking the sector away from us. You're building these huge wind farms offshore and it's the utilities that are doing it and you're telling communities that they can't build anymore. You know we've got something like 24,000 wind turbines over here, and only I think about what is it 5 or 7 percent have been built by the conventional utilities like the big four, the big guys. And so this has really been a community sort of grassroots movement to an extent that I think a lot of Americans just in the U.S. renewables sector probably would be surprised about. And these people are saying let us build our own projects. And if we create too much wind in one place let's look at this from the point of view of 2050 and count backwards, and not do what you're doing and say well what's the next step that we need to take to fix the problem we have now which may be you know maybe one good idea then would be building grid lines, and they're saying no, no, no count back from 2050. You want to take electricity and use it in the transport sector. You want to take electricity and store excess electricity as heat. We can do that, and we can start it on this kind of community level so if our wind farm, if there is excess electricity and you want us to curtail power then maybe we connect it to a community hot water storage facility with a district heat network. These things take time to build, a district network is a real community project. And so these things are things that we need for 2050. The big experts are not talking about them, they're talking about other things. And so we have a real clash of visions over here between the community people who have pushed this thing all along. And the energy sector experts who have now discovered that they can't get around the Energiewende anymore and so they're pushing their ideas in.

Chris Nelder: Interesting interesting. So this raises the important question about grid reliability. At times Germany was able to accommodate a really high percentage of variable power from wind and solar on its grid which critics had said was impossible and would lead to blackouts. Yet, now Germany has the most reliable grid in Europe. So how have they pulled that off?

Craig Morris: Yeah we had 12 minutes. I mean it was astonishing. We've had 15 minutes of grid downtime a year since about 2006, I think it started off at about 20 minutes and then it went down for years to about 15 minutes and then this year the data just...

Chris Nelder: 15 minutes over the course of a year?

Craig Morris: Yeah, and this is a particular metric called SAIDI. The power outage has to be three minutes long. Natural disasters are not counted so if a blizzard comes in on New England and wipes you out for a week you're still good as far as SAIDI's concerned because that wasn't really the grid operators fault. These have to be things that are somehow should be under the control of the technicians. How did Germany do it? We do have sort of skyrocketing redispatches right now. So that's obviously one thing that the critics would point out. I do have an I.T. expert who works in the sort of grid sector and he believes though that a lot of the redispatches are based on price. So a utility that has several power plants might find a reason, you can't do this legally, you have to have a technical reason to have an unplanned outage. So they, he charges that the spike is at least partly due to some of these plant owners saying, OK let's take out this plant and buy off the power exchange because it's gotten so cheap. And he's looking at the data trying to show that this happens too often at the same time that the prices go down. And then suddenly all these coal plants fail. So he thinks there's actually a financial reason behind it, but otherwise we really have not needed to completely redo the grid or anything. We're planning on building a couple of thousand lines of ultrahigh voltage lines but we have tens of thousands. So it's actually a very small amount to be adding. All of this was built for the conventional sector. And so we built tens of thousands of lines to have these central coal plants and nuclear plants and gas turbines and nobody really talked about it back then. But now we need to build a couple of thousand for renewables. And this is apparently some kind of a big issue. So I think other things that we do over here we have quite a bit of underground cables and that also tends to be more reliable. But there hasn't been anything done that's really unknown in the U.S..

Chris Nelder: Well isn't better forecasting or modeling of the weather and that kind of thing an important part of keeping the grid reliable?

Craig Morris: Yeah, if we have that. I don't know too much about this but I wrote about this a year or two ago and I actually got a letter or an e-mail from somebody who works on forecasting in Germany and she said you're off your rocker here. We're trying to learn from the States and apparently in the U.S. the forecasting for wind turbines... see the thing is it's not published in the States because it's the utility talking to the grid owner and maybe that's the same company and maybe the utility's involved in the wind farm. This is kind of shared data within a bigger sort of business entity, whereas in Germany everything would have to be out in the open.

Chris Nelder: Right. So it's sort of considered proprietary technology or proprietary data in the States?

Craig Morris: Proprietary data in the States but because maybe it's proprietary the Germans apparently look on what the U.S. has and thinks if we could only have that. And what you get over here is open and transparency and all that but apparently it's not as good as what you're used to in the States. Now that is a year or two old but it was somebody who wrote to me from one of the forecasting groups over here and said sorry you just got that wrong.

Chris Nelder: Interesting. Well I mean I think most people especially critics look at the high percentage of renewables on the German grid and reliability going up and just saying how is this possible? Especially when so much dispatchable power is going away.

Craig Morris: Yeah. One of the points of criticism that you often hear then if they complete the sentence they will say it's because they're dumping this on on foreign countries. And the reality of it is power exports do increase when there are high shares of wind and solar. The signal that goes out is a price signal. It's not a signal where the grid is saying OK my Hertz frequency is messed up. Can you save me here? Its just a price signal. So there's not a technical signal that goes out it's a market signal. And the market signal is a factor not solely of the share of wind and solar. It is the combination of must run capacity with wind and solar. So you had this spiky renewable electricity and then you have this other stuff that's like a slab of concrete and doesn't want...

Chris Nelder: The so-called baseload generation from these conventional plants.

Craig Morris: Right. It's not just the baseload though it's the must run share of the baseload. So the baseload plants can also go down a little bit. But you know it's like when you start your car, if the thing's running at 800 rpm which is you know what it's going to run at. If you want it for some reason for it to run at 600 the car just doesn't do that. And it'll go up to 2000 when you get the gas, and so each type of power generation plant has its own level of must run capacity. And when you add up this share of base load, and it's going to be lower than your actual baseload production, that's kind of the crunch point where the power plants say look I can't go down anymore.

Chris Nelder: Unless I just turn off completely.

Craig Morris: Yes. But then you can't come back on right away necessarily.

Chris Nelder: Exactly. So I'm glad you brought up this question of power exports because you've explained in several articles that a big part of the reason why Germany is burning more coal, or at least up until 2014 when that increase in coal consumption started to level out and fall was because it was exporting so much power to neighboring countries. So how would the generation mix be different in Germany if it weren't exporting that coal fired power?

Craig Morris: If Germany were an island?

Chris Nelder: Yeah.

Craig Morris: If Germany couldn't export to other countries the problems that we're going to have in 2020 or 2025, we would just be having them now. In fact just this weekend I wrote a piece this morning about August 23rd, we reached a share of renewables probably in the 80s, so around 82% maybe even higher.

Chris Nelder: On like an hourly or daily basis?

Craig Morris: It was just for two hours. But again this is the kind of spiky renewables that I'm talking about. So solar is gone 12 hours a day but then it comes in at a third of total demand or something, 40 percent or something like that, for just two hours. And when we have a combination and they're kind of rare, when we have a combination of a good level of wind, and then a sunny day, then you end up with these really high shares of renewable electricity. Combine that with a Sunday when demand is low anyway, and you end up with a real predicament for the power sector or for conventional plants. And so we actually reached a level of exports on Sunday, August 23rd. It looks like 16 gigawatts, and I saw that number and I thought wait a minute I have to look up the interconnections here because I don't think we have 16 gigawatts of interconnections. And the funny thing was I wasn't able to find any data showing what exactly we have today. I found forecasts for 2024 and the last data I found was from 2011 and I wrote on my Renewables International and said if anybody has the data for 2014 please post it in here and I haven't gotten anything. But we must have been exporting at the max for several hours there. If we didn't have that we would have to curtail renewables a lot more because we don't have the storage yet. So you would just lose renewable electricity. The proponents of renewables would then say that's OK because it's not really losing anything. You're not losing a fossil fuel, you're not creating carbon emissions without getting anything out of it, you're just shutting off wind turbines and shutting down inverters for solar arrays. At the same time there's a financial problem behind it because the people who have invested in these things will still want to be paid. And if you have them curtailed at some point in the future, if it's 10 percent curtailment, are they just supposed to accept 10 percent payment losses. How does that supposed to work? So this is a kind of an issue that hasn't been talked out completely. But we will have this anyway in 10 years.

Chris Nelder: Right. So the notion that for somebody who's casually observing this thing might say, 'well if Germany wants to really cut back on its coal consumption it could just clamp down on the power exports.' But that's obviously not a real solution given all the complexity that you're talking about of the pricing and the construction of the grid and so on.

Craig Morris: I mentioned playing with numbers at the beginning of the podcast in terms of efficiency. You could also play with the numbers here and say we're defining everything in terms of domestic consumption. And by German Law renewables have a priority on the grid. And so I've been waiting for the German government to come out and say we are counting domestic consumption in the CO2. And there have been some kind of indications about a discussion like that instead of generation because generation would of course include all the exports, and by law the exports are the residual load which is fossil and nuclear. So we're not exporting according to German Law we're not exporting renewables. The renewables have the right to be there by the German Law everything else would have to react to the renewables. And so the conventional power sector is lowering their prices when they hit the must run level you know going into the negative, paying the French to take power off of them, or whoever the Dutch or big power buyers in Germany. And so that's what we're going to end up with.

Chris Nelder: Wow. Interesting. Well I'm glad this does ultimately come down to a question of price in a lot of ways. One of the most common criticisms about the transition is that it's been responsible for Germany's high retail power prices and you've actually broken this down and written about it quite a bit. It's a complicated question because as the chart that you've posted on the energy transition site shows, the renewable energy surcharge in Germany actually has six major components. So in addition to the actual cost of renewable energy, there are these unfamiliar concepts like the under draw from prior year, liquidity reserve, market bonus, industry exemptions, lower wholesale prices. All of this stuff is really sort of non-intuitive. So briefly for our listeners can you explain why the cost of renewable energy isn't the main reason for Germany's higher power prices?

Craig Morris: Well if we look at the retail rates, all of the items that you just listed are actually within a surcharge that's called the renewable energy surcharge. So we could start outside of that and we could go back to 1935 when something very interesting happened in Germany and in the States. It so happens that in 1935 each of these countries made a decision in the power sector, the opposite decision. And in retrospect which decision was better? The decision that Germany reached was we're going to add a surcharge to the retail rate for electricity and we're going to use that to pay for community things. So we cross subsidize our public services, the trams we have, the buses, the swimming pools the public swimming pools. We cross subsidise them in Germany by consuming electricity.

Chris Nelder: So this surcharge was originally not about renewable energy at all it was about all sorts of public works?

Craig Morris: No no sorry. I'm saying those items that you listed are in the renewable energy surcharge. But before we even get there we can talk about other things. OK so there are other other elements in there. And this is a surcharge that's basically just for sort of community services and it's not much, I think it's like 7 percent of the retail rate. So it's a couple of cents, but it's an indication of the kind of different philosophy over here. In 1935 in the States we were going in the same direction or at least talking about it. And then I forget who, I was going to say the government came in but maybe it was an anti-trust authority. But someone came in and said OK this is illegal. You can't cross subsidize like that. And in a way you can look at it and say well we have really good public services in Germany so maybe that was a good idea. At the same time, we're going to reduce maybe if we reduce electricity consumption we're going to hurt our swimming pools and public transportation. So it's not safe to do it the way Germany did, it's not worse to do it the way we did in America. It's just we have these two experiments out there. So that renewable energy surcharge to come back to that one which makes up I'd say about a quarter of the retail rate, we're at something like six point one cents right now, and it will probably rise to about seven, seven and a half cents and then it will decrease. We can talk about why in a minute, but out of that roughly 6 cents, about two and a half are the actual feed- in-tarrif payments. The feed-in-tariff is the policy name. So about two and a half cents goes to cover the roughly 23 billion euros that we spend on renewable electricity. OK. So you would think 2.5 cents, that's not really that much more than we're spending on the swimming pools and everything else. About half of that OK is just photovoltaics because Germany built, writing this book I saw some of the old data. Germany had something like 45 percent of global PV installations in around 2006 when PV was so expensive. But we really built it in 2009 2010, 2011, and 2012. In 2012 we came out with what was it something like 25 gigawatts of really expensive PV in the ground, and now the costs have gone from 50 cents to 10 cents per kilowatt hour of solar power, and now we're slowing down. That's a different discussion. But just to give you an idea we built tens of gigawatts of PV when it cost between 50 and 30 cents.

Chris Nelder: And that's kind of one of the common criticisms that I hear is that Germany just simply overpaid for its solar capacity and should have waited or something like that.

Craig Morris: It's maybe a bit more complicated than that. We know now that we did overpay, and I was actually working within the PV sector and I saw the infighting during that discussion. I suspected very strongly actually that we were overpaying because some of the experts over here presented some really strong evidence. You know they did the math, and the other companies just said well that's not our numbers right. And it was essentially a number of companies and planners just trying to keep the high revenue flows going. So yes we did overpay for a while. But the reason we overpaid was that we did not realize how fast we would bring the costs down. So we had a mechanism in place that said Every year the price for electricity from New systems will go down by 5 percent. So we had this 5 percent reduction built in, what we didn't know was that we were going to be doing a 20 percent reduction every year for a couple of years there. And so the government had to keep running after the sector and adjusting things. And while the politicians did that there was just a lot of fighting and it got very nasty. And that's probably why feed-in-tariffs in Germany right now, the government's kind of keen on moving beyond them, and I think they got their fingers burned because every year or two they had to be out in the spotlight saying we have to reduce rates. But it was unpopular with so many people. And they probably didn't know themselves how to reduce them.

Chris Nelder: Right, right. And I think you've actually explained that for some new solar systems it doesn't even pay for them to go after the feed-in-tarrif, it's better for them to just operate on the spot market.

Craig Morris: In the meantime we have gotten feed-in-tariffs to a point where the return seems to be zero percent which is not necessarily a real problem at least not for people who can offset consumption in some way. If you're going to build something out in the field and you don't have any kind of power meter to offset that's a different story. But if you have a home or a business or a bigger company even, you've got some power consumption that you could offset and with the retail rates at something like 25 to 28 cents, and solar from a roof now, a new solar array can produce below 12 cents in Germany, 12 cents maybe 10 cents. There's obviously a huge space there for a gigantic profit margin. But Germany has a policy that's not net metering. Net metering just means your meter goes back and forth. If you produce more than you consume you ship it out to the grid and your meter runs backwards. In Germany it's called direct consumption or own consumption in German. If you want this own consumption policy then your electricity cannot touch the grid. So you have to either consume it immediately or you store it before it touches the grid, you don't export it. So if you export it and you get this feed-in-tariff that really doesn't give you much of a return if any at all. But if you can consume it directly then you're consuming at 12 cents instead of maybe 25. Which is fantastic right. And you have some space there for storage. You have like 12 cents to spend on storage. And so this is a huge market that may crop up any year now. And I keep investigating this and writing about why it's not getting going. In the last sort of stab that I took at it was somebody saying probably it's because everybody thinks that Tesla is going to bring down the cost of batteries so much that we might as well wait another year.

Chris Nelder: So I was incorrect earlier in saying that instead of the FIT solar producer the home or business could participate in the spot market it's not that it's that they're actually going more toward the so-called grid defection model.

Craig Morris: Exactly. It's grid defection and it's something that we should be very just for the record I had been against this policy of own consumption since it was rolled out and I opened up Renewables International with a six part series basically saying this is terrible don't do it. And it's become known as grid defection now. And I'm happy with the term because the grid has been the great enabler of everything over here in Germany. And I do not see the case for everybody leaving it just because it pays for itself for a particular household doesn't mean that the grid is bad or that we don't need it in the future.

Chris Nelder: Right exactly. If you're going to undermine it you're actually ultimately undermining the entire case for the transition.

Craig Morris: The entire project, yeah. Let me say one more thing about the spot markets because that's kind of interesting as well. Another term that everyone's talking about now is the cannibalization effect. So in fact solar and wind will not work on the spot market because when large amounts or produced it automatically brings down the spot market price and so wind and solar always undercut themselves. And so when you have large amounts to sell you will by definition have low prices and you have no business model in that case.

Chris Nelder: Right. That's actually something that we've talked about in a previous episode here at least in the US context. And you know points towards certain sorts of market reforms that might be necessary in the future. As you have higher and higher percentages of renewable energy, you want to avoid having renewables ultimately cannibalize their own market. So given all these price effects of these higher amounts of renewables What is the long term outlook for Germany's power prices. You know I think sometimes it might be helpful even to think about relative to other countries that aren't transitioning to renewables. I mean ultimately is it going to be cheaper to have this renewable capacity on the grid because essentially the fuel is free, or after you pay a lot upfront for it as Germany has done or how would you look at the long term outlook for power prices?

Craig Morris: Well any one, as I said, half of the power prices over here, half of the renewable energy surcharge that's related to the cost of feed-in-tariffs is just PV. And so any country that decides now to start developing renewables faces a completely different world of prices. In Germany because we have this legacy of the expensive PV mostly, these feed-in-tariffs are guaranteed for 20 years. And so the systems from about 2012 will fall out of the system at the end of 2031. And so you could just say as a ballpark figure that we have these surging costs now, they will flatten out and by about 2030 we will have our golden years where these systems will no longer be eligible for feed-in-tariffs at all and they will begin to drop out of that. There will be huge chunks of their renewable surcharge disappear. Yet these arrays will still be installed and it's very likely that the average homeowner is not going to go up on their roof and take it down and put something new up, if anything they might say OK let's maybe build some more storage or something get another battery back. But this electricity will still be generated. It will either be sold to the grid at extremely low prices because it cannibalizes itself or homeowners and roof owners will say you know what, that 1 cent per kilowatt hour is not worth it. I'm going to invest in battery storage or whatever we have by then, and then this will disappear and it will look like efficiency. So the demand will go back, and the effect is going to be very significant. As I said, we had something like 22.5 gigawatts installed. I think I said 25 a minute ago, we had something around there at the end of 2012 just for PV. So we're going to have something like 22 gigawatts of PV in 2032. It's going to still be connected and it will disappear from this payment scheme, but be connected to the grid generating electricity at a slightly lower level. Right. The performance warranties are for something like 80 or 85 percent after 25 years. So you're going to have this, just as a ballpark figure, this solar electricity will be coming in every day, every sunny day at about 12 gigawatts. We had about 60 to 70 on a normal day and we're going to get 12 for free in 20 years.

Chris Nelder: So. The renewable energy cost portion of the renewable energy surcharge will fall out. But what about all those other little elements of the surcharge?

Craig Morris: Well we have various surcharges and there are going to be various movements as well. I think what's going to happen in the long term is you're going to see the wholesale market become relatively irrelevant. I think that the writing is already on the wall if you look at the futures trading, we've got the lowest prices ever, we're touching three cents and looking at the end of the decade. There's no money to be made in power generation. The money will be made in, and we need to create these markets, and again I'm working on a, there's project over here right now. I can't tell you who it is because I've signed a confidentiality form but this is looking into creating a kind of regional price market for ancillary services.

Chris Nelder: That's the perfect answer. Yeah absolutely.

Craig Morris: Yeah. Well and in this project they write the Americans already have this. Not everywhere but like California has it.

Chris Nelder: Well we're getting there.

Craig Morris: You're getting there. Well and again we over here in Germany they're looking at some of the more progressive ideas in the states and saying we're going to need to do what the Americans are doing. And so I think the wholesale market is going to be there in some way shape or form but it will be, it will be as a price signal, but it will not be as a revenue generator. And I think the real revenue is going to come from an ancillary service market, one that probably needs to be regional. You know again going back to the beginning of the podcast, the power shortfall is the concern more in the south and that's just a good sign that amid all this talk about the EU saying we need interconnectors we need to have an energy union and making this one huge power market. All right this is where the experts want to go. And below that we've got this discussion about regional. And so we're going to have maybe an energy union and one power market but it has to consist of these little modules of regional ancillary markets with their own price signals.

Chris Nelder: Really interesting, interesting. Well a point that I've often made is the destination here is far from clear and nobody knows how this is all going to work out. It's an evolutionary process. These questions are hard, market reforms will be necessary and we just kind of have to move in that direction and see what can work both in terms of the long term goal, as you were saying you know start with 2050 and work back. But also in terms of, what's the next step that we need to take tomorrow while still maintaining reliability. Really interesting. So on one final point, moving beyond sort of grid power. A big part of the transition plan as you pointed out was improving the efficiency in the building sector. And Germany has implemented some really interesting incentives that allow residents to obtain low interest financing for efficiency improvements and that kind of thing. And I don't think most U.S. listeners certainly have even heard of this stuff. Can you briefly describe those programs and how they work?

Craig Morris: Well they've been of moderate success. I wouldn't necessarily praise what we have over here too much, what we're trying to do is get what's called the building renovation rate up from 1 percent to 3 percent ideally. And right now we're shooting for 2 percent. That means that at 2 percent you would have 2 percent of your buildings sort of completely renovated, completely weatherized every year. If you do 2 percent every 50 years you've got a new building stock. That's not fast enough and we're at 1 percent. In the States you might build an A-frame house and you're thinking it'll be there for 30 years. That's not quite the way it works over here. They put up buildings that are supposed to just sort of stand there forever.

Chris Nelder: Well you have a lot of buildings that have been standing there for 400 years.

Craig Morris: Some buildings yes, but even the ones that we're putting up now they're solid construction. And these things are built to be there for certainly generations, potentially even longer. And so it's very important to get those done right. The incentives that we've had, to come back to your question, they have basically, it's focused on low interest loans. So we've provided certain incentives for people to do certain things. We have energy audits that are subsidized, and so someone can come by and tell you whether the next step should be new windows or whether it should be insulation or whether actually both at the same time would really pay for itself quickly and just the information is very important because you know homeowners don't necessarily know when they look around the house they might look at their bills and say you know I'm really paying a lot for heat but they might not know whether the next step should be windows or insulating the roof or something else. And then again what their options are. Right. So what kind of insulation and and how much. And so just the information in the low interest loans together they've been good steps. But really we have the problem that people, they'll buy a house over here probably much later than we do in the States so maybe when you're 40 you get your first house, 45 even. And so it needs to be renovated near retirement age, and that might be a time when everybody just wants to ride it out. And so we've got a social issue that we need to overcome, we need to find some way of encouraging people to have a major project right when really what they want to do is just relax. And if you tell these people who are 65 this investment will pay for itself over the next 20 years. That's not a good selling point.

Chris Nelder: Yeah exactly. But that aside just in terms of the mechanics of the program I mean who's ultimately paying for these incentives?

Chris Nelder: Well we have a bank over here called the KfW Bank. It was founded after World War II to funnel Marshall Fund money and it has stayed there as a kind of infrastructure building bank and a sort of good ideas bank. Right. So anything that maybe the market might not do on its own will give low interest loans for that. And so having a central KfW bank has been a blessing in so many ways. I mean they are criticized sometimes they invest in a coal plant or something somewhere in a developing country for instance. And so you'll see some bad news items if you Google KfW bank but they have been so helpful in sort of rolling out renewables and efficiency in Germany. I can see how countries that don't have that kind of central bank that gives you low interest loans for good ideas and good projects can really hamper everything.

Chris Nelder: So it's ultimately federal funding that's public funding through this KfW bank?

Craig Morris: It's tax money.

Chris Nelder: Tax money, yeah.

Craig Morris: It's governmental money. In the meantime it's a development aid to foreign countries is also funneled partly through the KfW. But when it's used domestically it's essentially just tax money and so it's the government giving low interest loans. But there have also been studies and I believe we mentioned this. I don't have the number by heart but if you look on the Energy Transition website you may be able to find it. I think they have calculated that for every dollar that they give in a low interest loan for an efficiency project they generate several dollars in tax revenue coming back. And so you can't even argue against it and say we're wasting tax money, no we're generating. It's got great macroeconomic effects.

Chris Nelder: So how low interest are these loans we're talking about?

Craig Morris: I don't know. I know that we're looking at something like below 1 percent, possibly but certainly below 2 percent.

Chris Nelder: Wow interesting.

Craig Morris: Is that good? We have very low interest rates here now anyway because the financial crisis but 10 years ago that was impressive when you would have had 5 percent.

Chris Nelder: I don't know of any sort of loan that a home owner could get in the United States for less than two percent interest. So yeah I think that's pretty good.

Craig Morris: OK well I actually am looking to build right now and I can tell you that the normal rate over here is 1.8.

Chris Nelder: Well that certainly helps.

Craig Morris: So I made your day.

Chris Nelder: Well Craig look I'm going to let you go. It's been just fascinating. I always enjoy talking to you about this stuff and I'm sure that our listeners learned a lot of things today. There's so much more to discuss because the Energiewende is just such an amazing example both of what works and what might not work and what sort of challenges the future holds so I really appreciate you being on the program today.

Craig Morris: It was a pleasure.

Chris Nelder: All right. We'll have you back. Thank you Craig.

Craig Morris: OK. Thanks.

Chris Nelder: All right.