The Conundrum of the German Electricity Market: How Germany Ended Up With High Retail Electricity Prices And What Can Be Done About It
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2014
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Haverford College. Department of Economics
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eng
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Abstract
The aim of this paper is to analyze the causes of high German retail electricity prices (the highest within the EU region and generally at least double those in the U.S.). The paper finds that the key culprit is the German government's decision to dramatically increase the share of renewable electricity--primarily wind and solar--irrespective of the cost of this policy. With the highest share of renewables in electricity generation in the world--presently at 23 percent and expected to rise to 35 percent by 2020, 50 percent by 2030, and ultimately 80 percent by 2050--Germany has embarked unilaterally on a costly "green energy path." This path has potential extremely adverse consequences for the German economy in terms of cost imposed on consumers and threat to long-term competitiveness of electricity-intensive and export-oriented industrial branches. The upward pressure on German electricity prices has been made much worse by oligopolistic structure of the German electricity sector, dominated by four vertically integrated utilities. While some sectors of the German electricity market are relatively competitive-- particularly the generation and supply sectors--other sectors suffer from lack of competition and few incentives to cut costs. Yet, in spite of the high retail electricity prices, the health of most German utility companies has deteriorated dramatically since the onset of the 2008 global financial crisis. Consequently there are serious doubts that the electricity industry in its current shape will be able to generate sufficient profits to finance the upcoming massive investments necessary to improve the German transmission system, develop smart grid networks, and invest in industrial-scale electricity storage systems when these become economically viable.