Germany's decision last week to close down its nuclear fleet over the next 10 years represents both a gamble on the ability of renewable energy to power Europe's largest economy, as well as how volatile the politics of nuclear energy have become in the wake of the Japanese earthquake. Despite the German claims to the contrary, the decision will benefit gas and coal producers and could backfire if renewables do not fulfill their promise. In this Energy and Climate Brief, Garten Rothkopf examines the realities behind the policy shift as well as the impact it will have on energy choices, both in Germany and internationally.

Last week's decision by the German government to permanently shutter all its nuclear power capacity by 2022 and more than double renewable energy generation to 35% of their power mix by 2020 was largely met with skepticism globally, and energetic opposition from the nuclear industry and German utilities. Monday, we got our first indication of what is at least the early thinking by the government on how it will move forward and it did little to generate confidence that the goals are achievable. The proposals, still general in nature, are limited thus far to building efficiency, subsidies for renewable energy, and breaks for energy intensive industries to stem the impact of the higher power prices expected from this move. In this GR Energy and Climate Brief we will take a look at what the German decision could mean and their chances of closing the energy gap left in the absence of nuclear, while meeting other economic and environmental goals.

Theory Versus Reality. Perhaps the most glaring question left unanswered by the proposed policies is that of how nuclear capacity will be replaced with clean, efficient alternatives that meet set emissions targets and avoid producing a major drag on growth.  In 2007, the IEA undertook an analysis of how Germany could achieve this ambitious goal. They found that the results achieved in models did not correspond to how businesses are likely to act in reality. While they were able to produce a theoretical means of closing the gap created by shutting down nuclear through a combination of renewable energy and efficiency, “in reality it is likely that the shut-down will result in increases of lignite-, hard coal- and gas- fired power plants, particularly as companies’ current slate of proposed and planned power plants lean heavily on these fuels.” This continued reliance on coal and expansion of natural gas in the absence of nuclear is, in our opinion, the most likely scenario, as utilities, investors and energy companies have already demonstrably ramped up investments in both.

The Many Risks of Gas Dependence. Increasing dependence on natural gas implies an increased dependence on Russia—as Russia holds the largest supply of natural gas in Europe. While the geopolitical security risk of becoming increasingly dependent on Russia was widely acknowledged in reactions to last week's announcement, the risk of limitations in supply remained unaddressed. Assumptions of unlimited Russian supplies fail to consider endemic Russian gas supply constraints. Russia follows a model common in fuel rich states of relying on state energy companies as cash cows to sustain public sector budgets, but traditionally, the gas sector has borne a much lighter burden than oil producers.

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