While running for president in 2008, then-Sen. Obama delivered a speech in Germany in which he urged the world to “look at Berlin” for inspiration to “save this planet” by curbing carbon dioxide emissions. Five years later, President Obama is returning to the country he once heralded as a model for the world, yet history has not played out as President Obama hoped.
Since 2008, Germany has seen dramatically higher electricity prices because of its massive subsidies for renewable energy. And despite Germany’s “green” rhetoric, the country is actually building a large amount of coal-fired electricity generation.
When candidate and later President Obama said that we should look at Berlin for energy policy advice, we listened. In 2009, the Institute for Energy Researched commissioned a study which found that Germany’s approach “failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies.” The study also discovered that German energy policies had driven up the price of electricity by nearly 20 percent.
But Germany did not heed our warnings. In 2010, German Chancellor Angela Merkel unveiled an even more aggressive campaign to expand green energy, dubbed energiewende, or “energy transformation.” Goals include producing 35 percent of Germany’s electricity from renewables by 2020, 50 percent by 2030, and 80 percent by 2050.
By economist Bjorn Lomborg’s calculations, Germany has spent $110 billion on solar subsidies in the name of reducing global warming. But as Lomborg explains, “The net effect of all those investments will be to postpone global warming by 37 hours by the end of the century.”
Indeed, the only transformation under Berlin’s energiewende has come in the form of skyrocketing electricity rates and crippling taxes. Household electricity prices in Germany have risen by 61 percent since 2000, with a full quarter of all household costs stemming directly from renewable energy. Prices have risen so fast that some Germans are resorting to stealing wood for heat.
As a result, residential electricity rates are more than three times as expensive for Germans compared to Americans—35 cents (U.S. cents) per kilowatt hour in Germany compared to an average of 11.6 cents in the United States.
Berlin’s energiewende is squarely to blame. Since 1998, power companies have increased production and distribution costs by 11 percent, but government taxes and fees exploded by 243 percent over the same period. Taxes now constitute more than 50 percent of Germany’s total electricity costs.
As bad as things have been, this year is shaping up to be the worst year on record for German ratepayers. In 2013, energy taxes will increase by about 25 percent to an historic €31.6 billion, or $42 billion. By far the biggest cost is the Renewable Energy Levy (EEG), the funds of which subsidize renewable energy production. In just one year the EEG rose from €14.1 billion ($18.9 billion) to €20.4 billion ($27.3 billion).
Families are bearing the brunt of Berlin’s tax-and-spend binge. For the EEG alone, German households will fork over €7.2 billion ($9.6 billion) in 2013. To make matters worse, higher energy prices tend to hit the poorest families the hardest. In fact, the International Energy Agency warns that Germany risks a consumer backlash if the government fails to curtail runaway energy costs.
“The fact that German electricity prices are among the highest in Europe, despite relatively low wholesale prices, must serve as a warning signal,” said IEA Executive Director Maria van der Hoeven.
Even as Berlin levies record-breaking taxes, Germany’s energy transformation goals are slipping out of reach. Last year, two German ministers cast doubt on whether the country could achieve its quixotic targets. The ministers argued the government should instead focus on curbing consumer electric bills.
Meanwhile, European energy partners are pulling the plug on Germany’s ill-fated foray into green energy. Poland and the Czech Republic are building switches on their borders to block Germany from using their power grids, as unreliable wind and solar destabilize the grid. As one German paper put it, the country is becoming an “electric island in the European energy network” due to its reliance on renewable energy.
While Obama looks to Berlin for guidance, German companies are looking to America for salvation. Ulrich Grillo, president of the Federation of German Industries, warned the government last week that rising energy costs would force German firms to flee to other countries, including the United States. Grillo credited the shale boom with making America a more attractive investment option.
Amazingly, despite the talk of energiewende, Germany is building a large amount of coal-fired electricity generation. New coal-fired plants with a capacity of 5.3 gigawatts of electricity will come on line this year. In total, there are 10 new coal and lignite power plants currently under construction in Germany. While Germany talks about reducing carbon dioxide emissions, and provides large subsidies for renewables, the country is in fact expanding new coal resources, unlike the United States.
Although the U.S. is indeed blessed with abundant energy supplies, including the world’s largest coal resources, Washington has embarked on a green energy spending binge that rivals Berlin’s energiewende. Since 2009, the U.S. government has doled out more than $27 billion in tax subsidies for renewables and nearly $14 billion for energy conservation, according to IER’s Federal Energy Spending Tracker. These figures do not even account for the billions funneled through the Department of Energy’s (DOE) loan guarantee program to green energy chimeras like Solyndra.
Fortunately for Germans and Americans alike, the tide may finally be turning. As a result of soaring electricity rates, Germany is beginning to reverse course, cutting renewable subsidies by 30 percent and placing a cap on renewable surcharges. And Merkel, who is up for re-election in September, has pledged to “reform” subsidies for renewables. In America, some in Congress are considering putting an end to massive subsidies for wind and ethanol.
Germany’s reversal comes not a moment too soon, as President Obama returns to Deutschland this week for another speech. Germany’s energy transformation serves as a reminder of the limitations of central planning. Obama would do well to not only look to, but also learn from, Berlin’s failed energy experiment.
(IER Policy Associate Alex Fitzsimmons authored this post.)