Traffic light or Jamaica for Germany?

A few days before Germany goes to the polls, several government scenarios are still in play. Will the country see a traffic light, a Jamaica or a red-red-green coalition? And what could that mean for the country’s energy policy? Listen to a discussion on potential outcomes. 

Could there be a situation where Nord Stream 2 was stopped, along with a speedier coal exit and further green growth?

Guest: 

• Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group

Transcript

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 Energy Matters in an informal setting. In today's pod, we look ahead to Sunday's general election in Germany and what it could mean for the country's energy policy. Would a government that included the Green Party stop North Stream two, could Germany's Coal Exit be speeded up? And who would roll out more renewables. So joining me, Richard Sverrisson, to discuss these issues and much more is Henning Gloystein from Eurasia Group. A warm welcome to you, Henning.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 0:56

Thank you, Richard. It's great to be with you again

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:57

and this time in person. So we're very privileged to have you here.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 1:00

Very exciting.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:01

If I could just start off Henning to say there. Obviously three parties in the running here for the chancellorship and they're all polling around 20% of, is that right?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 1:10

So the latest poll I've seen is actually the SPD is now at around 26%. But it's true. Then you've got the CDO CSU who are polling around 22%, and then you have the greens who are around 17, 18%. Which is an a, a remarkable reversal of polling in a public opinion because just six months ago, the CDU was neck and neck with the Green party and the SPDs of the, so the social Democrats were nowhere near close to being seen as potentially winning these elections. What's the main reason for this turnaround? There's two big reasons that have that we see is within the conservatives, the Christian Democrats. There was a race between lash, the current chancellor candidate and the Prime Minister of North Northern Australia and the C Su Prime Minister Bavaria within Germany and within the polls, Mr. Soto of PVE was much more popular, whereas within the conservative party, the CDU Lash, it was more popular. So they made a party decision rather than a. A poll decision and that backfired. It was a very similar situation within the Green Party on a national level, bare Box co-head of the Green Party, Beck is more popular, whereas internally bareback is more popular and they, so they went with an internal candidate, which again, backfired. Whereas Schultz from the Social Democrats is fairly unpopular within the Social Democrats. But. Superbly popular within Germany and that is basically what pushed him ahead.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:30

Amazing turnaround there. But it looks like there are many constellations that are possible here. Could you talk us through those?'cause maybe the list listeners aren't aware of, for example, the Traffic Lights Coalition or the Jamaica Coalition. Are there others?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 2:42

Yeah, they've got funky names, aren't they? So the Traffic Light Coalition would be a leadership under Schultz, the social Democrats in Coalition with the Green Party. And the liberal Democrats and their party logos yellow. That would be a fairly centrist government. Which would probably see a fair bit of continuation of politics, of current policies. The biggest problem there is that the Green Party and the liberal Democrats really don't get on. They are, I wouldn't say in fundamental opposition to most things, but, they're both centrist parties. But they really don't get on many things. The liberals want to lower taxes, the greens want to raise them. The liberals are very much against market interference, including in energy matters, and the green party, of course, wants to hike its climate ambitions. So that would be an awkward internal coalition, but it, externally they're all pro-European and committed to climate change, for instance. Then if you have a left leaning coalition, you could see the social Democrats. Former coalition with the Green Party and the Lynx Apartheid, which are fairly straightforward to the left. That would be a break with consensus. It would be a break with usual German politics. The Lynx Partai is Europe skeptic. They're antenatal. They have a strong pro-Russia wing and they're an old school leftist party. I wouldn't call them a radical party anymore but that would be a break. With Germany's modest and moderate traditions in politics and would see a fair bit of uncertainty. And so those are the big leadership or the most likely outcomes at the moment. If the conservatives under Lasher turn this around and win the elections, that would be a very continuous. Politics lashed is very much like Merkel in a, I would say, slightly less inspiring version. And, but a continuation of what everything she did. Of course they would probably have to go into a coalition with a green party, which would mean some compromises on climate politics. Definitely.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:27

And she came out, Merkel came out and endorsed him quite recently, which she did first time. She actually did yeah. Yes. She was quite, I think, felt the urge to save the ship from sinking. Absolutely. Which of these outcomes and constellations are more likely Henning?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 4:40

That is a tough call at the moment. We talked, I just this morning talked to our regional analysts. So we currently officially still have A-A-C-D-U as winning the election, although they're slightly behind the polls, but that is, is the sort of 5% turnaround that polls to see in Germany that the leading or the governing party at the last day still gains a few percentage points. My gut feeling actually says, though, I think Schultz will win it. So the social Democrats, so the current vice chancellor will become chancellor. And the conservators have to go into opposition for the first time in decades. So I think the most likely outcome is the ample coalition. So the social Democrats leading a coalition with the greens and the liberal Democrats, the traffic light one. Yeah, exactly. Yeah. And slightly behind that, the left wing coalition. So red, green. But that would cause quite a strong public backlash because they, why they might have the figures, the numbers to form a government. It is not a very. Popular choice in the German public.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:31

So do you think the SBD would prefer to go in with the FBD and the greens or with the left and the greens? What do you think? What's the feeling within the social Democrats there?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 5:41

That's the tricky part. So Schultz definitely prefers a moderate coalition with the greens and the liberal Democrats. He's of the centrist liberal wing within the SPD. But a significant number and a share of the SPD is left-leaning. And would certainly prefer a swing to the more traditional leftist form of politics. So that's a debate, an internal debate that would probably break out into the open if Schultz actually wins the election. And very hard to say who will win that, but my gut feeling is it would be coalition with the Greens and the Liberals.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:11

But it's certainly gonna be many weeks after the election. And this is gonna roll, and roll really, until you find, actually the horse trading, the bargaining, the negotiations sitting around the table ironing out. These differences and what's gonna happen. So we can we, when do you expect the government to be in place?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 6:26

Could be months. Yeah. Last time it took months. Yeah. So it could be Christmas, could be in 2022. Which is awkward because of course you've got cop coming that in November, the global climate talks. And if the EU doesn't have Germany on the table, that, becomes a bit awkward. Yeah. Although some people say that France is actually hoping that exactly that happens because it would put the leadership firmly to Paris rather than to Berlin. So that's who knows? But it could take months. The liberals want to play a strong role. The green party don't want to back down, back off and they have very opposing ideas. And then of course, the links parti the left party might also have a word to say,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:56

throw a spanner in the works there. Yeah. But Hein, before we go on to what this could mean for energy policy in Germany, which is of course, Europe's biggest energy market and what happens in Germany has a, is of vital importance to not only its neighbors, but also countries beyond Europe, but there's the early support for the non-major parties. Do you think that will fade as the election comes close as we come close to, as people go to the polls on the Sunday morning and they maybe. Go back to the CSBD or to the CDU at CSU.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 7:23

That, that is what regional analysts currently expect is that there will be a very late jump for the conservatives. Because they're in power. People are used to them. People know that Lash, it is very much like Merkel. He is had a decent run governing Germany's biggest state North Northland's failure. He might receive a job, but that's, that is why our regional analyst actually still favor him over soda. Schultz. Sorry. Then again, of course Schultz is. Vice Chancellor, everyone knows him. He's very well respected, so I think he could gain even more as well. There's a significant chance that the Green party still lose a couple of percentage points. And then of course, if you look to the smaller parties, the links, Partai has a slight risk of falling below 5%. There currently it's six or seven, so that's not outside the impossible. And then the, whereas the liberals, they look fairly. Stable around 11, 12%. I'd be quite surprised if they jumped to 15 suddenly that they've never done that. There's just not a vote of bait for that many liberal Democrats in Germany.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:16

But in terms of energy policy, and you said if, if there was a continuation with the CD, with lash aid and power that would see current policies a continuation of that. But what if you had. More of a left wing consolation, would that result in a bigger shakeup for energy policy and in which direction do you think that would go?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 8:33

Yeah. I actually think in energy and climate policies, that's one of the biggest potentials for change happening soon. Because if it let's, if we start on the left, if it was red, green, that would almost certainly result in a much more ambitious. Climate policy action from Berlin. You mentioned earlier, maybe they would pull forward the 2038 coal phase out, which is, 2038. It's a bit silly, especially if you look at carbon prices. The coal exit in Germany will be much earlier, whatever the law is because of the carbon price. But the, the greens will push aggressively for a much earlier exit. The links part is very much in favor of North Stream two.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:09

Okay.'cause of the Russian wing in the party. Indeed. The pro Russian. Yeah, indeed.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 9:11

And of course, north Stream two is a bit of an SPD project as a Schroeder thing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:15

The former Chancellor Gerhard Schroeder.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 9:17

Yeah, exactly. Yeah. So a left leaning coalition would almost certainly see North Stream two be put in place quite fast. The Traffic Light Coalition would. I suspect also see North Stream two happening. The greens would try and bulldoze over the liberals who want to phase out subsidies in renewables. They would probably try and keep them, but that would be the coalition writing of that. Like I said of that government would be complicated. Whereas if it was conservatives and the Green Party, so under lashed and with the Green Party and maybe the liberal Democrats, I think you would see pretty much. A continuation of now, again, maybe with an acceleration because the green party in government must do something on climate. It's a deal breaker if they don't. So speed limit I suspect, will happen in any way, which is irrelevant for the world. But for Germany it's very relevant. And yeah, I do expect the coal phase out to be accelerated.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:03

And how about the rollout of renewables? Is there much space in Germany for more wind farms and solar farms? And who would take on that? Policy

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 10:11

and they all have to do something. Germany's last six nuclear reactors are going off next year. That's part of the reason why the power prices are so high in Germany now. It's, it's literally not tomorrow, but it's next year. It's a few months from now. And that is also why North Stream two is has a certain role to play. But in the long term, we. Published a note on this recently. If you look at the fossil fuel prices and the carbon price, the signal is very clear. You need to invest into renewables and storage solutions in Germany, like now. There is space for it. Yes. And there's a need for it. The positive news is there, there is a lot of, especially offshore wind capacity being built right now. The. Global Wind Energy Council put out their report yesterday. There's a big development pipeline there and crucially, although this is never mentioned in the election campaigns, but it's because there's consensus is the hydrogen strategy, the left party, the social Democrats, the green party, the conservatives and the liberals all agree that clean hydrogen, especially green hydrogen, must form part of the industrial. Policy of Germany in the next 20 years. So that's unshakeable I think.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:07

So we're recording this a little bit ahead of the election. So when you say the Global Wind Council, they put this out in, in early September? Indeed, yes. Yeah. I'm just wondering here about the Greens. Like in the summer there was a lot of talk about, alarm bells ringing about Nord Stream two. If you got Bear Book in as Chancellor, she would put a stop to it. She would cut that. Do you think. Is there a chance of that happening?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 11:27

It's a low chance because you see all the headlines at the moment that the pipeline's finished or about to be literally the last screw being tied to it. So it would be a real political, almost scandal if that never gets put into operations. It's a massive, wide elephant under the ocean. If that happens and like I say, it is. Whether one likes it or not, and whether it was a mistake or not, to even build it in the first place and not build something different, but the gas in the short term is needed. I don't think it'll be totally stalled, but you can do naughty little things like put a, an environmental review on it. If the green government comes in and they want to cause some problems and see that they're doing something against gas they could say that we need to do a last environmental review of gas pipelines and methane emissions and, and they take it. Terribly long time in Germany. Those reviews. Exactly. So if they really want to try and do that, I think they could delay it by several years. Yeah. These things don't happen

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:17

overnight. These, no. Especially not in Germany. You have a lot of T's to cross and I over the dots over the I, but what do you think, do you expect a more ambitious climate policy under coalition with the C-C-D-U-C-S-U and the FDP? Would they even have more ambitious policies?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 12:33

I think if Lasher wins and the Green Party is a strong coalition member with them, that would be a ca in acceleration of climate policies because the Green Party would insist that the coal phase out be pulled forward. Probably a internal combustion engine ban be announced. Germany has an informal one in place and all the car makers have announced that they'll stop making these, but the greens would want that in. I mentioned the speed limit and probably an extension in some form of renewable subsidies, whereas the liberals, they want to get rid of them as fast as possible because they say we don't need them anymore. The SPD has turned very pro climate as well, and the SPD and the green party together, that would also form a strong climate push in Germany. So actually that means that the outcome is probably, we'll see an acceleration of climate policies in Germany because the conservatives would have to do that. As a concession to the Green party and the SPD wants to do it together with the Green Party and the FTP would have to just swallow that pill and say if we get the finance ministry in return, we'll be silent and tolerate this.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:32

Yeah. We'll return to that in a minute, but what does that mean in concrete terms on the ground? Does it mean you tighten the emissions targets for 2030, for example, that you actually, like you say, high carbon prices maybe mean the end for these coal plants anyway, but maybe you accelerate that or review that target. Those are more concrete terms. Do you expect those to happen?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 13:51

Yes. So the EU et s is under review in Brussels anyway on how to go forward. So I'd suspect the new German government will support a tightening of the carbon scheme. In particular, reducing the amount of remaining free allowances, taking those outta the system much faster. And that would of course, increase the carbon price pretty much immediately. In fact, I talked to a couple of utilities in industrials in Germany in early September. And they were all saying that they. Have an internal carbon price now of around 90 to a hundred Euros, perton for 2025 and 150 plus for 2030, and that is what they measure their investments against. Okay. And that is why I meant coal will be outta the system before 2038. Natural gas looks really challenged in that environment as well. You can probably be. Keep a few of them as peakers to, expensive peak hours like now probably. But you don't build a natural gas fired power station that operates a couple of days a year. That's not a good investment case. It's, and this is the case for the Clean Energy and storage investment. That means invest into green hydrogen. You'll get subsidies for it and do it fast and offshore wind probably has a good chance. And yeah, the concrete measures tightening the carbon trading scheme is probably the most immediate one, and it has support the French. Support the idea that Benelux do. I think Spain does. I think the only ones who really oppose it is Poland, but they, I don't think stand a good chance because of the majority. Exactly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:10

Then of Scuppering, this kind of tightening of the et. S Germany's establishment is a big fan of the Schwa Nu which balanced federal budget of Black Zero, if you like. So an FDB, we talked about if they get the finance ministry so they could. Expected to advocate this, and even the sbd Schultz has enjoyed being identified with that. But is that incompatible with what you're talking here about the rollout of renewables the investments needed in storage in green hydrogen infrastructure or this is that, can they coexist if you like?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 15:40

Tricky. It's a good point to raise because, so the SPD would probably not be married to that schol for much longer. Schultz might be, but that's what I meant. He's not very popular within his own party. The left-leaning segments of the SPD has doesn't want anything to do with it. Neither do the green party, the links patai, the left party. No desire in that di direction. So as you say, it's only the liberals. So if they get into government, they might try and get a concession from the Green party and the social Democrats to make an effort towards it. But I am quite certain the ambition to keep that. Black zero in place would go out the window under an SPD chancellery only with Lasher and the CDU in government. What does it stand any chance? And even then, it looks a little bit shaky because of the Green Party that'll be in government. So the only chance of having that anywhere near in place is if the liberal Democrats are in the government and they look like they'd be the they'd almost certainly be the weakest link in a coalition. So they could try and enforce some discipline but not on major scale. And interestingly, of course, that would also mean that Germany ex exits less pressure on other EU state countries to, to keep their budgets under control. I actually suspect in many corridors of power in the rest of the eu people are hoping for social Democrat government. Machor seems to be much in favor of of Schultz actually.'cause then they can sort unleash their spending plans. Yes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:00

And which is needed in this. And, in the recovery post COVID and also the green transition.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 17:04

Yeah. It costs a lot of money and the economy's broken and the green transition costs money. Like you say, it's, there's, we're not gonna get around spending and that probably means to re taxes up somewhere in some areas. Again, liberals won't like that at all, but it probably will happen.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:19

You mentioned gas and gas fire plants. What's the role of. Even if as happens, Nord Stream two comes online. We can talk a little bit more about that later. But what's the role of gas within Germany now, from the perspective of the next German government?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 17:31

I think it's involuntarily important. Nobody really wants to because the, the European Development Bank, European Commission says natural gas plays no long term role in Europe. But because. Germany's in a given its Enogen transition has been so lopsided in favor of renewables and coal that they need to do something. Now that and the nuclear exit, there is a need in the next couple of years for natural gas in Germany. Whether one likes it or not doesn't really matter. It's the need is there. Britain interestingly has had a much more success in this area. 10 years ago, Britain's and Germany's coal fired generation was the same. And now Britain has almost zero left and Germany's is still quite significant. I know Germans, a lot of Germans are very proud of the German energy transition, but it's gone wrong in some areas and gas has a role to play there. It also, of course, because of the pipeline system has some role to play in the transition towards clean hydrogen. And even Nord Stream two, if you talk to gas prom, they'll very politely tell you that Nord Stream two could carry quite a lot of hydrogen if you want to. But then that of course turns to blue hydrogen, which is much less popular, and there's some serious doubts that the Russians have the capacity to actually create clean hydrogen from their natural gas fields.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:37

If I can. Pin you down on Nord Stream two, Henning. Do you expect it to be online this year?

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 18:42

So I think they'll put gas into it this year, but where they'll be delivered to customers, I doubt it because the regulatory approval process is so sticky and this year is not that long anymore. It's only talking a couple of months. So no, I doubt it. I think it won't come become commercially operational operational this year. I think it'll be 2022. That said, if there's a serious. Energy crisis this winter. And there's some people look at it, look at the gas storage it looks terrible. And if it gets very cold and then there's some outage somewhere else and the Russians play the game and say, sorry, Ukraine, you can't do that, then north Stream two might need to be fast tracked. Of course. It's prob probably easier than, I don't know, delaying a nuclear exit. That, that is very unpopular in Germany. And if you need the gas over outages, you'll take the gas, even if it's from Russia

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:23

and you think that's a possibility that there is, there's an opening that it could be fast track if you hit that crisis point, if it's very cold in December, January. Lack of LNG and outages on the power side. No wind for example.

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 19:36

It's dark and it's not windy and it's bloody cold. And the Chinese are buying LNG like there's no tomorrow because their gasification is ongoing and Asian spot energy price suddenly is $40 per MBTU then. Yeah, I think there is a chance. I don't think it's a high one because nobody wants it that early. No one wants to fast track it. The Americans would go berserk over it. But if it's that or outages, it's gonna be North Stream two and it's ready. I mean it's So the Russians say we could put the gas in next week. Maybe not next week, but I mean by October I think they're saying so there is a chance. Yes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:07

It's more likely that it'll be fast tracked to that Nord Stream two, be fast tracked than you'll switch on the nuclear plants again,

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 20:12

much more likely. Yeah. I actually think switching on old nuclear power plants is an impossibility because you need to safety and inspections and the regulation is tight around it and it's unpopular. North Stream too fast track would be unpopular as well, but it's it's an interesting point to raise because it's, nobody wants to discuss it, but it is the option to solve a problem in a really cold winter supply crunch. And Russia knows that, and we suspect that's what they're playing at. Okay. Interesting.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:37

Another issue, and which is related to, to these regulatory factors, Henning is the slow. Process of the permitting processes for big high voltage transmission lines, which to transport all the renewable energy to the area where they need it in Germany, which is gen generally from north to south. Do you see that could be accelerated or that the government can put in fast track processes there? Tricky, because

Henning Gloystein, Director, Global Energy & Natural Resources, Eurasia Group: 21:00

You need to work with local governments and local populations who don't not. This is the German NIMBY problem. Nobody wants power lines in their backyard the big ones. And putting them underground is even more challenging. So I think that would be almost impossible to fast track that really fast. One thing that doesn't get discussed a lot is Germany's geographical advantage of having nine land borderers and having two hydro. Reserves accessible from the north and from the south. Germany could just suck in from all their neighbors and export their problem. Not very popular, but that is, that's what the European market was designed for. And so they've got a lot of interconnectors. So in, they could start importing electricity from France, from the Alps, from Nordics, from everywhere, and then price there goes up.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:42

Yeah, exactly. Price goes up everywhere. So I think we're in for some quite interesting times going forward in, in the months until a new German government is formed. And I think, as you've highlighted here, very well handing the ramifications for energy policy, not just within Germany, but Europe are huge. So thank you very much for joining Montel podcast today, Henning, and we look forward to having you on again. So 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.