Will Germany’s energy policy lead to economic failure? | Hans Werner Sinn

SWhat you will about Vladimir Putin, but his war against Ukraine has opened European eyes to some long-underestimated truths. One is that even after more than 70 years of relative peace on the continent, neglecting military security carries grave dangers. Another is that the “green dream” of modern economies powered solely by renewable energy remains out of reach – and reliable access to cheap energy supplies remains essential.

While the first truth became abundantly clear as soon as Russian troops entered Ukraine on February 24, the second has only gradually entered the public consciousness. Many have even called for an embargo on European imports of Russian gas, arguing that this would not only undermine Moscow’s ability to wage its war, but also accelerate progress towards green Nirvana – all at minimal cost for Europe in terms of lost GDP.

A new study exposes this argument for the fantasy that it is. If the gas supply from Russia is cut off, Germany will simply no longer be able to produce its 300 most gas-intensive products. The study certainly notes that these products can be replaced by imports. But this assessment does not take into account the welfare losses that would result from Germany having to pay much higher prices for these products – losses that would reverberate throughout the economy.

Because of the terms of trade effect, the well-being of consumers of gas and gas-intensive goods would decline as the price of these now-imported items rise. It is only because this price increase is not included in the definition of real GDP that the effects of a gas embargo on European GDP seem minor.

Moreover, not only the direct consumers of the 300 products are affected. For example, if the methanol and ammonia that form the basis for the production of fertilizers and many other chemical products have to be imported from the US instead of sourced locally, downstream and complementary value-added industries in Germany could lose their competitiveness. A large number of jobs can be affected until a new equilibrium is achieved. No wonder BASF, the world’s largest chemical company, has decided to invest up to €10bn (£8.6bn) in a new factory in China.

Replacing fossil fuels with renewable energy sources is not the solution many believe. Weather-dependent fuels such as wind and solar are simply too unpredictable to reliably power modern economies, meaning that “adjustable” energy sources – coal, gas and nuclear – remain essential to buffer volatility by fluctuating inversely with wind and and solar energy. In long-term “dark doldrums”, when the wind is not blowing and the sun is not shining, these sources will even have to cover all energy demand themselves.

The embrace of electric (instead of gas) transport, heating and household appliances will exacerbate this problem by generating an even greater demand for electricity, which will require a proportional increase in the supply of controllable power plants. For Germany, which eschews coal and nuclear power, this means gas-fired power plants. But there is already a shortage of gas, so another solution must be found.

You could argue that this is what batteries are for: collecting energy when it is available and storing it until it is needed. But while batteries in electric cars, for example, could one day accommodate short-term fluctuations in energy access, we’re not there yet – not even close. Even with more advanced battery technologies, a day or two without wind or shine would shut down electric transport. Electric cars exacerbate the seasonal buffering problem. So how long before we have batteries that can handle seasonal fluctuations in the renewable energy supply and store enough electricity – generated by summer sun and autumn storms – to get not just our vehicles, but our entire economy through the winter?

A more realistic – though still distant – future would depend on hydrogen-powered power plants to bridge the gaps left by wind and sun. But to produce hydrogen economically, electrolyzers need a smooth and stable power supply, something they have to supply themselves. How this dilemma can be resolved is still up in the air.

The war in Ukraine has ruthlessly exposed the shortcomings of the green energy transition, forcing countries like Germany into a real-time energy experiment. For now, they have little choice but to purchase extremely expensive supplies of liquefied natural gas, import and extract more natural gas locally, and rely on nuclear power, whether produced locally or imported.

Twenty years ago, Germany was called the sick man of Europe because of high unemployment, weak domestic demand and slow GDP growth. Today, the country seems to have contracted another disease – this time because of its unrealistically ambitious energy policies. Recovery will be painful.

Hans-Werner Sinn is Professor of Economics at the University of Munich. He was chairman of the Ifo Institute for Economic Research and is a member of the advisory board of the German Ministry of Economic Affairs.

© Project Syndicate

Leave a Comment