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Learning from Merkel’s approach to energy politics

CC-BY-NC-ND Number 10This post is by Matthew Lockwood, a senior research fellow in the Energy Policy Group at the University of Exeter.

Angela Merkel’s visit to London yesterday is being widely reported in the context of David Cameron’s efforts to secure EU reform. However, the presence of Europe’s electorally most successful leader is also a reminder of some contrasts between Germany and the UK in the area of energy policy.

Germany’s Energiewende, or path towards renewable energy, has recently been much lambasted in parts of the UK press as disastrously costly. And it is true that support to renewable energy has cost Germany around four times as much as a share of GDP as the UK, while producing only twice as much renewable electricity. A large part of this can be explained by Germany’s huge solar PV programme.

German support for renewables is unlikely to wane
Not surprisingly, there continues to be considerable debate about that cost within Germany. However, it is extremely unlikely that Merkel will actually end or seriously slow down the Energiewende, not least because her partner in coalition government, the SPD, would not support it. In fact, German voters threw out the political party most opposed to renewable energy support in elections last year. The German government (unlike its British counterpart) supports a 2030 target for renewable energy for the EU, and only last week Germany joined France in a statement of joint commitment to expanding renewables further. Contrast this situation with the UK where the prime minister actively opposes renewable energy targets and Ernst & Young concluded this week that the recent energy reforms have made us less attractive to investors.

Why is it that, despite its greater cost, Germany’s renewable energy programme appears to be politically more sustainable than the UK’s? There are all sorts of reasons, including the fact that Germans are generally more environmentally-minded than Brits and, certainly, many are more passionately anti-nuclear. However, I think that the different nature of renewable energy policies in Germany also plays a key role.

How German policy differs from the UK
Germany, under Merkel’s CDU party, adopted a kind of renewable energy subsidy – the feed-in tariff – that is risk free and accessible by small actors very early on, and with the specific agenda of diversifying energy ownership: households, farmers, co-operatives, community groups, municipalities now own the majority of renewable capacity and less than ten per cent of renewable energy capacity is controlled by large energy companies.

Different rates were set for different technologies, which is why solar PV took off, especially in the 2000s. Grid access was guaranteed. By contrast, in the UK, until recently, renewable support came via a more complex and riskier mechanism (the Renewables Obligation), which effectively benefited wind but little else. Almost all investment in wind was made by wind development companies or big energy utilities. The government has very recently launched a new community energy strategy, advertised as “ruthlessly pragmatic”, but it is on a much smaller scale. The UK strategy offers £25 million to help catalyse investment by households and communities. In Germany, as long ago as the early 2000s, there were an estimated 340,000 Germans with investments of around €12 billion in renewable energy projects.

A supportive constituency has been built
German policy has created a huge constituency of support for its maintenance, and a large reservoir of people also hoping to invest. This was further bolstered by an explicitly green industrial policy that helped build a supply chain, with solar PV and wind turbine factories appearing in the economically depressed areas of east and northern Germany, and brought the powerful manufacturing unions on board. By contrast, in the UK, successive governments have found it hard to embrace this approach, and the supply chain benefits of the UK’s renewables deployment have been weaker.

In other words, the nature of policy can have political effects that, in turn, support or undermine the future of that policy, what political theorists call ‘policy feedback’. Renewable energy support policies inevitably produce negative feedback effects. This includes financial costs, but can also involve local concern about wind turbines in the landscape. These are found in both countries. But in Germany, these are balanced by strong positive feedback effects, by widely dispersed investment, by the fact that wind farms were owned by locals, not fat cat outsiders, and by the jobs in the supply chains.

When an earlier proposal to cut feed-in tariff rates was made in 1997, there was a massive demonstration bringing together metalworkers, farmer groups and church groups along with environmental, solar and wind associations. By contrast, in the UK much of the subsidy has been captured by large energy companies, which are currently even more unpopular than banks. This is not to say that renewable energy is disliked in the UK, but rather that not enough people have enough of a material or political stake in it to protect policies against cost criticisms and eventual cuts.

Would it work here?
So does this mean that UK policy makers should copy the Germans? One understandable concern is that if policy makers start doling out subsidy in such a way as to ensure political support, they risk being captured by particular groups and the public purse gets milked. This is similar to an oft-expressed concern about industrial policy. Of course, this is a risk but it can be managed. The greater risk is of not creating positive feedback so that policy is much more politically unstable. There are also good principles for minimising the danger of rent seeking or corporate capture. For example, in Germany, rates of support have come down as technologies get cheaper and economies of scale are realised, a process called ‘degression’. Technology costs are regularly assessed by independent research institutions and rate adjustments overseen by Parliament, all of which helps build accountability and trust.

A final issue is the argument that this works all very well in Germany but it would never work here. There is something in this. Germany has institutions that have proven important for the effectiveness of the policy, and have also amplified its political effects. The state-owned development bank (KfW) has helped provide finance for local small-scale renewable ownership. There is no equivalent institution in the UK. Despite reforms over the last two decades, Germany still has a stronger welfare system, and poverty is not so entrenched, meaning that the implications of the costs of renewables for energy bills for fuel poverty is less of an issue in the UK. Not all of these institutions can easily be replicated in Britain. But we might have a go at building some of them (for example, using the Green Investment Bank to help support community scale energy as well as big offshore wind projects).

All real-world renewable support policy, including the UK’s, can be criticised for not being optimal from a cost perspective. But, in the end, while cost does matter, who benefits also matters. Societies do not always decide to do what economists would see as optimal. The UK has tried to focus on energy policy that is economically optimal in the short term, but it has not created investment stability or strong public support. In contrast Merkel and her coalition colleagues have maintained public support for transformational energy policy for over a decade, even though it may not be the cheapest.

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