Mind the Gap

Germany faces an electricity capacity gap of up to 4 GW in 2023 and 2024 due to the country’s exit from both coal-fired and nuclear power generation. 

Listen to a discussion on how supply could be critically endangered and what direction energy policy could take should the Green party join the government following elections later this year.

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel

Guest: 

• Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly Podcast. Bring Your Energy Matters in an informal setting. This week we look at Germany. The country will close its final nuclear plant in 2 22 and as plans to exit coal by 2038. Do both and keep the lights on and without a massive rollout in renewables capacity. And later this year, there's an important election coming up, which could mark a change in direction for Germany's energy policy. To help me answer these questions is Konstantin Lenz, who is Professor of Energy Economics at Erfurt University and also business Development manager at Volue. Constantine has many decades of experience in energy wholesale markets in Germany and beyond, so I'm sure he'll be able to enlighten us about what's happening in his home market and also the outlook for the coming years. So a warm welcome to you, Konstantin.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 1:20

Thank you, Richard. Thank you very much for the invitation and for the opportunity to speak with you today about these hot topics. In a way.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:28

Absolutely. We've known each other for about 20 years, so it's a pleasure to finally have you on our pod. How's life in Berlin at the moment?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 1:35

It's very much Corona driven. We have this kind of lockdown here, so working from home, also doing, for example, my lectures online, so third semester now. Somehow life is going on and the energy market is also topics are there. But if you drive through the streets, it's just the rush hour is not the rush hour anymore. It's not that there are no cars, it's not one year ago, but there are nearly no traffic gems, for example. Meanwhile, I must say we have this situation for a year now. Which is in a way unbelievable. We have this exceptional condition like for one year. And everybody hopes that this ends soon, that we all can go to our summer holidays.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:24

Absolutely. And also maybe start to, to meet people again, in the not too distant future rather than on, on, on these screens, concepting. But what's this, we hear about a bridge lockdown in Germany. Could you tell us a little bit about that before we go onto the en energy markets?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 2:37

Yeah, that's a proposal of arm. Potential chancellor candidate, which is discussed at the moment in Germany, to have some kind of stronger lockdown over, let's say, the next weeks until we have a stronger vaccination, that we are in the third wave now, probably more in the beginning, and that this will not increase further on. We have at the moment numbers, which are. Below them what we have seen in January, but definitely with an increasing tendency.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:14

And do you see much of an impact going forward on, on the German economy and on, on the energy market as a whole?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 3:20

Yeah. If you see the economy at the moment, most companies with offices, people work in home office at least, I don't know, in, in some companies, nobody is in the office. In some companies. 50% are there, but the industry is still producing. So everybody who's not able to do home office is on his workplace. Of course, restaurants are closed. We have this situation with a 16 states in Germany, this federal system. Every state does something different. Of course the supermarkets are open here in Berlin, for example. A lot of shop are open need. Corona test from the actual day in order to go shopping, which at least for me is not a practical solution to go, let's say if I want to go 15 minutes for shopping to have, I don't know, one or two hours effort for test. Even if I heard, for example, that some shopping malls they are offering now the possibility of. Before you are entering the office. So there's a lot of uncertainties in these corona situations and is in Germany a bit difficult with these 16 states? Partially every state is doing something on its own

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:43

sounds very confusing. Let's get more onto sort of energy matters thing. One of the big parts of German policy and one of the drivers for the market is the coal exits or the plans to exit from coal fired power generation by 2038. What's the status there at the moment? How? How do you view current developments?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 5:02

We have seen just last week, the tendering of the Bundes Nets Argan tour of the regulator. For three more coal power plants leaving the market end of this year. So the coal decommissioning law, the legislation work is done. The bunes nets are going to adjust these tendering at fixed dates, and we have a fixed schedule for the Lignite power plants. So there is for every lignite. Block in Germany. There's a dedicated end date as we have it also for the nuclear power plants. However we have, and this is what we wanted to discuss also today. A question, security of supply. We have seen some cold winter weeks, and if you see German press, German newspapers, there are more and more articles about security of supply and questioning this. Is that going to work? One article, for example, was about the hot coal power plant of heden. North R West in western part of Germany, which was supposed to switch off at the end of last year, but due to security of supply, it was in January and February. Six times reactivated. And you remember we had this cold wave in February with a lot of snow and really cold temperatures. These facts like this one coal power plant or another coal power plants are read. Another article was that this reactivated two times. So it seems there is in this sea we situations with. Cold spell. No wind. No sun. We are already now in a situation that cold power plants, which are supposed to be decommissioned, have to be reactivated and we lose until end of next year. Another eight gigawatt of nuclear. Plus also several gigawatt of cold capacity.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:12

So what you're saying is there is a very clear threat of a supply squeeze or a lack of capacity because when it's cold in Germany, it's also cold in in the neighboring countries.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 7:21

Exactly. And we had this panel discussion last year in Dusseldorf on your, on the German Energy Day, where I said, we see security of supply as endangered. And today I would say I see it severely endangered and very interesting is there was a report from the Federal Audit Office, I think it was on 31st of March, and it had an interesting sentence and I translated that sentence into English and I would just would it German? Federal Ministry of economics and energy for the assessment of the dimension of security of supply on electricity markets are partly unrealistic or due to current political and economic developments. Outdated. Monitoring of the dimensions of supply, reliability, and system security is cheaty. The Federal Audit Office expects the federal ministry to have a consistent system of indicators and thresholds that fully encompass all dimensions. Only in this way, it can identify dangers to security of supply early on and take appropriate countermeasures in order to understand. The Federal Audit Office. This is federal office. Which usually complaints about waste of tax money, so usually they're more on money and tax expenses and that it is really remarkable. That this federal audit office is taking care of security of supply. I have never seen something like that before. Also, for other sectors,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:11

so this is unprecedented that the audit office is basically telling the ministry that their assumptions are wrong about the market conditions and the outlook. It's a veiled threat that there could be a capacity crunch then you're saying?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 9:23

Yeah, absolutely.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:24

Is it likely that the lights will go out or is it just likely that, prices will spike to very high levels over a sustained period of time?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 9:32

We do these fundamental simulations and we see really challenges of what our simulation program calls unserved energy. Of course our fundamental model is embedded in the European system, but in let's say cold winter situations. We used the year 2005 and six, for example, which had a really cold winter, also cold winter in the neighboring countries. And there we see for, yeah, let's say the winter 2023 and winter 2024, for example. With a cold spell as we had it. In these years, we see situations where the last power plant in Germany is running and there is still unserved. Consumption. So what would mean some kind of, I don't know, switch off of some electric consumers? Of course this has some factors, but if we see, we had this type of winter in the last 20 years, we had this four times. So what would mean a probability of 20%? In addition to avoid that, we see a need of 18 gigawatt new gas power plants to be built until 2030. Plus some also capacity to be built in other countries. Doesn't really matter in which countries. Partially you, you build these as long as there's enough cross-border connection,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:06

this gap. But would you have a number of the amount of consumption that isn't server? Are we talking two gigawatt, five gigawatt? How big is that gap?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 11:14

You mean in 2023? 20 24,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:16

24. Yeah.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 11:17

Up to four gigawatt. Okay. In Germany,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:19

that's substantial. 18 gigawatts of gas fired plants. Who's gonna build these at the moment? The economics just aren't there. Building gas fired capacity is pretty, pretty much off the table in many countries without some form of subsidy or remuneration scheme as we're seeing, Belgium struggling to get it through, so is this something that maybe that Germany needs to reconsider? Do you think

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 11:40

Germany has to reconsider it and, these power plants, they have to start to be built soon. If you see such a project, this could be simple open cycle gas turbines, which run only in these. Specific, some hours where these challenges could occur. This could be, of course also some ccgt. Somehow these capacities have to be replaced, which disappear with a nuclear and cool decommissioning. But you're right, nobody is. Willing to build that, and in my opinion, it will be necessary to establish some kind of capacity mechanism. In Germany we have already these different types of strategic reserves already with a grid reserve and capacity reserve and lignite reserve. But I see there must be some incentives too. Build these new capacities

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:41

isn't an alternative way of looking at it. You'd say, okay, with this prospect of very high prices of a sustained period, wouldn't that be an incentive maybe for batteries, for other types of storage or for demand side response? Wouldn't there be other, some other mechanisms that could come in and hope alleviates that supply deficit?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 13:01

I have this discussion often, and this was already. The intention of this energy market 2.0, which was I think even published by the last government in this white book, that price spikes should incentivize new capacities. The challenge, which I always see is. You are an investor and I tell you as analyst, we will have some significant price spikes in the next years so that your investment will be profitable. Okay, would you make a multimillion investment based on that? And even if I'm very convincing and convince you and all the other stud worker or utilities, then these price incentives will not occur because there is enough capacity in the market. The same with batteries. Batteries at the moment, they are only profitable within the primary control reserve, and that will probably also stay a while. But a lot of batteries are the debt of the batteries because the more storages you are building, the lower will be. The spreads between day and night and so on, for example,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:18

the cannibalization effect, then

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 14:19

Absolutely. Yeah. There is a cannibalization effect, and that's why I see this really from the psychological point of view, this incentive with price spikes as really critical. Because in my opinion, the uncertainty for an investor is too high.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:37

I think you've made very clear some of the flaws or the challenges in current policy or current policy thinking Constantine. But if we get onto to current conditions in Germany, there's an election looming. Do you think, is there much of a discussion around this supply security in the election, or do you expect it to become a topic in the months to come? In the Runup to September.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 14:59

Hard to say at the moment. Also, due to all this Corona, also the political parties are behind. If you see at the moment. The Social Democrats and the Greens. They have published a draft for a election program. The Christian Democrats didn't yet. Also, the liberals didn't yet publish a program and I looked yesterday into the green draft'cause it has still to go through the party assembly, but. They right there. They want to establish a capacity market. The program is not very concrete in many aspects it's not that there are concrete steps described. In the program, you find more general declarations what we would like to intend to do, but not what are the steps to get there.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:53

It's also about the details, isn't it? Yeah. How you get the specifics done, so Exactly. It's fine to have sort of general objectives and that's interesting that they, they're touting the capacity market of course, but what would you, currently what The Greens are the second biggest party in Germany. There's quite a development over the last sort of 10, 15 years from being a marginal to now the second biggest as far as I see from the polling numbers. Yeah. So they seem to be challenging the Christian Democrats, the CDU at the moment. Before I go on to maybe what kind of coalition one can expect or how the future government would look like, or even a green chancellor, we're seeing the greens are, they have, majority in the government in Barden Denberg, don't they? Yes. And that hasn't led to the lights going out or a massive expansion of renewables. The car industry in the region is still going very strong as far as I can see. So they haven't been, they haven't made energy policy or threatened supply security As far as I can see.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 16:43

Yes. That's right. Also in a federal government, the Greens would have. Somehow the reality and the practic, there are certain assumptions what could happen. If you see on the current policy, you are right, the CDO lost significantly in the last weeks due to the Corona crisis management. However, most probable is at the moment a coalition of Christian Democrats and greens. And then it's with the question, okay, what will be the compromises? Let's assume we will get this kind of government maybe with a, I would assume a Christian Democratic Chancellor, Marco Suda. Let's take the scenarios. There are, of course, other scenarios also possible, but it's maybe a bit too much just for the time we have.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:33

Of course,

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 17:33

the greens, of course, they want to bring the cool decommissioning forward, so they want to get out of. The coal electricity production by 2030, which of course would mean we need even more gas power plants. They even also see that in their election program, and they state, okay, if we take natural gas production, it has to be hydrogen ready. Which I think is not a problem because I think the new generation of gas turbines is anyway able to use hydrogen. So you see, they see that necessity also there. What the greens will try is. That the national CO2 price will get higher in a shorter time horizon as it's in the legislation at the moment, and will try to reduce that renewable energy. DY. Which is on the electricity price. So in order to, yeah, bring sector coupling forward in order to make electricity cheaper, in order to make it more attractive for electric vehicles, heat pumps and so on. I think this is something what probably the Christian Democrats will go with. So they say, okay, we increase the CO2 price. We reduce. The electricity costs cross some kind of cross subsidizing. I think this will probably happen. Then however, they would like also to make PPAs, for example, more popular for the financiation of renewables. There will probably. Some money subsidies spent for hydrogen, but still, if they want really the cool decommissioning until 2030, we don't need only 18 gigawatt of new gas power plants. We, I haven't calculated the numbers, but I would expect we need something like 30 gigawatts at least. Maybe even more, probably even more. This is a major challenge.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:41

As we mentioned, no one's really building gas fire plants and without, certainly without subsidies. So the question is how would that be financed? Even, building 18 gigawatts is probably challenging enough and, but up to 30 and beyond it's. It's incredibly expensive. And would you then just put a levy on customer's bills instead of the renewables levy? You'd have a gas fired levy, which seems to be turning things on, on their head slightly.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 20:01

Yeah, they would call it the security of supply, Levi. No, but you are right. I dunno. It is really, you need incentives for investors. So it could be with. Some kind of, again, a subsidy system as we have it for the renewables, but then we are really in a state economy, or we need a capacity market. Again, a real capacity market where you have to secure your electricity deliveries as a electricity supplier with certificates off. Security of supply. That was proposed by the BDV, I don't know, 5, 4, 5 years ago already. So the models are there.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:44

Yeah. The association for Energy. But do you think then the greens, what kind of ministerial role would they get in a government? Could they have the economic ministry of economics and energy, for example? Is that likely?

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 20:55

Yeah. Or could be Maybe that there is an eCom tree of environmental and energy. And the economics is separated from that. Again, it depends also a little bit on the relation in percentage wise between these two parties. If you're sitting on current polls, the CDU is at around 27% and the greens are around 23%. Same size. If this changes and the CDO goes again up to 35%, let's say, and to 18%, they're able. A large number of ministries. Usually it is if you have a two party coalition in Germany, one party gets the finance and the other party gets the economy. Hard to say. It is not that greens have really a dedicated finance expert. Maybe they go for the economy because I think from their. From the targets, they want to realize they could make more in the economics ministry than in the finance ministry. And then the CDU says, okay, you want to let spend a lot of money, but we have the financial minister who gives you the money or not. Maybe that could be some kind of compromise.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:10

They hold the purse strings, but there's a long way to go and, before we can see what kind of bargaining position, either parties could have. But I think Constantine, we'd very much like to invite you back later this year. Hopefully when we get a little bit more back to normality. Maybe when you, you'll be calling from a traffic jam. But I think, because there's a lot of leeway here for forger policy and obviously, a lot of changes that could occur. So yeah, so once we get more clarity, I think it'd be very good to invite you back and discuss this a bit more further. But in the meantime, thank you very much for being a guest on the Monte Weekly podcast, Constantine.

Konstantin Lenz, Professor for Energy Economics, University of applied sciences Erfurt and Business Development Manager, Volue: 22:44

Thank you very much, Richard, and all my regards to the whole Montel team.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:48

Thank. Thank you and goodbye. Goodbye. Listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.