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Germany: Reducing Russian energy dependence in a hurry

Juhi Dhawan, PhD, Macro Strategist
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With consumers and governments across Europe facing stiff energy price increases in the near term, I recently spent some time in Berlin seeking to understand the energy and climate policies likely to be pursued by Germany over the coming decade. I found that the government has maintained its resolve to move away from fossil fuels and even nuclear power in the medium term, and to embrace renewables. My conversations revealed a stoic calmness in the face of the crisis brought on by the Russian invasion of Ukraine, as officials work to create and systematically execute their plans — and perhaps even accelerate the move toward greater electrification of the economy.

Highlighting a few findings and observations

  • On natural gas, a key area of worry in the current crisis, there has been an 8% reduction in demand without any legislative effort. The “ideal goal,” according to policymakers, is a 20% reduction in demand (with the thought of creating a list of companies whose operations may be impacted should the winter prove to be severe — i.e., a “priority list” should rationing be needed). In the meantime, Germany’s stated goal is to raise supply to 95% of storage capacity by November 1. Recent reports suggest that the country is already at 82% capacity.
  • Germany is trying to find alternative sources for natural gas given its stated intention of moving to zero percent Russian dependence in two years. The starting point for Russia’s share of German supply was 55% precrisis and the goal was 30% for this year, though reports suggest that the number is already lower than that.
  • Four liquified natural gas (LNG) terminals are opening soon, with some floating terminals having been leased and others being built more permanently. Diversification of sources for LNG is a focus, with Qatar and possibly Canada being tapped for medium-term contracts.
  • On nuclear, the plants that were scheduled to be phased out will likely stay open through 2023 as the gravity of the current situation requires all possible options to be utilized. However, Germany (at least the current Green Party) remains against nuclear as a long-term option for the country.
  • Renewable energy made up 45% of electricity generation in Germany in 2020, and the target over the remainder of the decade is 80% — effectively doubling the country’s renewables footprint.
  • Germany’s installed wind capacity ranks behind only the UK and China. Plans call for adding 10 gigawatts (GW) annually to onshore wind capacity (currently at an aggregate 56 GW) each year from 2025 on. Under legislation passed earlier this year, 2% of federal landmass will be dedicated to wind farms. For offshore wind (current capacity of 7.7 GW), the goal is to reach 30 GW by 2030 and 40 GW by 2035.
  • Hydropower is being considered as another option to explore via North Africa, as Germany continues to concentrate on energy security and diversification of its partners.
  • Germany is focusing on increasing energy efficiency by providing renewables incentives to companies and households. It’s also looking to accelerate the renewables approval procedure, which has been identified as a constraint on a more rapid move toward renewable energy. Conservation measures are also likely to gain traction.
  • In addition to addressing the overreliance on Russia, German policymakers are thinking about the possible overreliance on China and a desire to continue to diversify supply chains and markets for German products. Batteries are an area of focus in this regard. Germany is exploring opportunities to source rare-earth metals from Chile, South Africa, and Canada, in order to diversify away from China.

The bottom line

While Germany’s move from fossil fuels to renewables has been made more challenging by recent events, with natural gas prices up substantially more than most would ever have imagined, I came away from my trip convinced that the country’s commitment to this transition remains strong.

Read more from Wellington on economic developments and issues related to climate and sustainability.

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