California and Germany may not immediately come to mind as a doppelganger, but they do share several characteristics, particularly when it comes to their attitudes toward energy production and consumption.
Both “States” have large populations which seem to agree that the world will be a better place if renewable sources of energy are given precedence over hydrocarbon based options in powering their economies.
For both, this translates into an emphasis on preferentially using wind and photovoltaic sources. Initiatives include 1) the use of state and federal financial support for building and operating renewable generation and 2) preferential access to the grid for exporting the net power produced.
On the “regulation” side the two “States” differ substantially.
California is relatively tough on coal based generation – long a major source of power to Los Angeles through Utah – while encouraging additional load following natural gas powered generation. Despite the shutdown of the nuclear plant at San Onofre, California is also viewed as being relatively tolerant of nuclear generation which does provide copious quantities of “base load” electric power without measurable amounts of air pollution. Of course California also likes hydropower when – during wet years – they can get it.
Germany also likes wind, solar and hydro generation, but nuclear power units? Not so much. The draconian nuclear shutdown is a reaction Japan’s Fukushima disaster. However, the unrelated shutdown of natural gas plants in favor of coal based generation is a big surprise. By comparison, Japan, which really has a nuclear generation problem, is running their gas plants hard while trying to restart at least some of their existing nuclear units.
The German natural gas plant cutbacks stem from the relatively high price of Russian sourced natural gas under long term contract. Such gas is simply unaffordable given the mandated subsidies charged to utilities. Ironically, Germany’s political and regulatory priorities have had the unintended consequence of encouraging the use of older coal based generation. Germany does have access to affordable coal as well as to existing power infrastructure that can use it. Due to the lack of politically viable alternatives, Germany is relying on their least attractive option.
Power supply and demand is not created equal
Residential power consumption varies significantly over the typical 24 hour day as people wake up, take showers, eat breakfast, go to work, return home, watch TV or play with their computers, and then go to bed. This is overlaid by seasonal needs for electrically powered air conditioning or heating units as well as by demand from industrial consumers. Output needs to vary directly with consumption.
They do this by dispatching power from two different classes of equipment, “base load” and “load following”. (Think fixed and variable output). The time of daily peaks and troughs vary for each utility, but peaks generally occur in the late afternoon with troughs are observed in the late evening or early morning hours. The difference between the peak and trough can vary by a factor of three. Because electric power can’t be stored, utilities need the capability to follow the demand load by using generators capable of changing output quickly, hence “load following generation”. Gas turbines and hydropower are both good examples of load following generators. The other category “base load” is typically provided by nuclear and coal fired units. These power plants run 24/7 and cannot alter their output in the short term. They are capital intensive but can produce power at relatively low unit costs as long as they maintain full output. Because of pollution issues, coal powered generation is least welcome in California.
Industrial power clients tend to be major consumers of base load power as their manufacturing plants run “24/7” and their need for variable power is much lower than that of the residential sector. Adding together industrial, residential, and commercial minimum demand defines the capacity need for base load generation. Adding together the maximum needs for all categories of load following capacity provides the utility’s total capacity requirement. The difference between the maximum and the minimum defines the need for load following capacity.
California Dreaming
There is at least one other category of power generation. We call it “intermittent”. By that, we mean a power source whose output cannot be predicted, such as wind and solar. Adding socially desirable, but intermittent, renewable power generation to a utility’s supply mix requires that the utility also acquire more predictable supplies, as the utility now needs to react to uncertainty of supply as well as to uncertainty of demand. As a state, California has been able to add new renewable sources, albeit with the result of higher residential rates.
Germany has also added significant amounts of intermittent power to the supply mix, with wind turbines in the North and solar panels in the South. However, the economic impact of these additions has been much more severe for residential rate payers. Germany’s “Energiewende” policy has resulted in multiyear, double digit increases in power prices as the residential sector as well as the “non-energy intensive” industrial sector bear the cost of the experiment.
Because Germany is, uber alles an export led economy, with exports representing 24% of GDP, the planners of the renewables initiative initially exempted large, energy intensive industry from paying the higher rates. Logically enough, they concluded that high power prices would compromise Germany’s ability to compete internationally. More recently, a new coalition government has proposed that, in the interest of “political peace in the family”, these previously exempt energy intensive industrial consumers must now bear part of the high costs of the energy transition. The industrial reaction has been to vote with their feet. BASF announced a multiyear investment program that assume the majority of new capital spending will occur outside of Germany, indeed outside of Europe.
Physician, Heal Thyself
Some economists have argued that Germany should simply purchase additional load following power from better-endowed neighbors. In fact, to some extent, that has occurred with Germany purchasing spot power from France and other neighboring countries. However, Germany’s attempts to sell surplus renewable power back to these same neighbors has been less than successful. This is because intermittent renewables are only available when the wind blows or when sunlight is available, not when the neighbors actually need the power. Germany’s neighbors, who have not yet bought in entirely to the new religion, do not have the ability to rapidly reduce their own domestic production in order to accommodate unpredictable foreign (German) surpluses. As a result, the Germans are exporting grid instability to their neighbors.
With no other options, German utilities have resorted to using coal in order to create power to compensate for the variability in renewable output. American hands are not exactly “clean” as we have become a major supplier of steam coal to Germany, coal we no longer need to burn in US based power plants.
Bipolar personalities and orphan power
“Energiewende”, a national policy intended to accelerate the use of renewables and to reduce both CO2 emissions and particulate air pollution, has instead produced the unintended consequence of multiyear increases in pollution levels. It has caused higher prices to be paid for power in order to accomplish this dubious result. At the same time the policy has irritated Germany’s partners on the European Grid by producing intermittent power when it isn’t needed. I have to believe that Germany’s engineering class foretold this result…Too bad the politicians weren’t listening.
Power to the People
Back in California, the state government has been figuratively wringing its hands over the potential for the development of shale gas. Californians like to use natural gas, most of it imported from other western states and Canada. Ordinarily they would love to have a new local source of supply. However, the problem for California is that much of the state is dry during the best of times and, from a water standpoint, this is not the best of times.
Low snow and rain levels are producing a “double whammy” for the state’s economy. While the legislature passed laws that legalize fracking, the implementation of enabling regulations has run afoul of the incremental need for water, either surface or subterranean, to support the fracking process. In a state renowned for its water wars between urban and rural interests, a new incremental need for water, even with the benefit of additional gas supply, is not good news.
For Germany, the solution is a bit more intractable. The energy intensive manufacturers in Germany are now being threatened by a political compromise that has them also paying for the higher costs of renewable penetration of the German power market. The government has now recognized that the residential polity can no longer bare the “unsustainable” higher costs of Energiewende without help from heavy industry.
The result is that their export oriented manufacturing economy is about to export itself to areas with a more welcoming attitude to affordable and sustainable energy supply. Here on the US Gulf Coast the response is “Y’all come on down!”
German companies as diverse as BASF and Volkswagen have announced new and expanded production facilities along the US Gulf Coast (also known as “The American Ruhr”). As long as German political authorities continue to pander to their fantasies, they will have no choice. Of course we will continue to ship them all the coal they can buy. The Germans have a word for political fantasy that grounds on economic reality. They call it “Realpolitik”.
Eric Smith is a Professor of Practice at the A.B. Freeman School of Business at Tulane University. He serves as the Associate Director of the Tulane Energy Institute. He is a Chemical Engineer and has an MBA from the A. B. Freeman School at Tulane University.