Profit Guarantee

Gabriel Pulls Plug on Utility Bailout

coals bitter end dpa
Cloudy outlook for coal producers.
  • Why it matters

    Why it matters

    The German vice chancellor’s rejection of coal subsidies for energy providers will raise pressure on utilities E.ON and RWE to reduce production overcapacity.

  • Facts

    Facts

    • German utilites had sought state profit guarantees for their coal-fired plants.
    • Coal is Germany’s main source of electricity.
    • The wholesale electricity price has halved amid a glut of wind and solar power.
    •  
  • Audio

    Audio

  • Pdf

Power plants driven by coal and natural gas have a big advantage over solar and wind energy sources: They continue to produce electricity when the wind isn’t blowing or the sun doesn’t shine.

Sigmar Gabriel, Germany’s economics minister and the head of the Social Democratic Party, apparently doesn’t appreciate this advantage.

In any case, he has effectively blocked an industry move to compensate utilities for keeping their conventional plants up and running during the nation’s breakneck move to alternative energy sources.

The power industry, which is struggling to redefine itself amid Germany’s government-led shift to alternative energy, had sought state subsidies for fossil-fuel plants to offset losses as electricity prices hit new lows.

Mr. Gabriel, in an interview with Handelsblatt, ruled out the subsidies, saying the industry was “trying to preserve existing overcapacity at the cost of German taxpayers.”

Opposition from Mr. Gabriel, who leads the junior party in German Chancellor Angela Merkel’s right-left coalition, will make it extremely difficult if not impossible for utilities such as E.ON and RWE to obtain state support during the transition to alternative fuels, which has decimated their profits.

After Japan’s Fukushima disaster, Ms. Merkel authorized an accelerated withdrawal from nuclear power, coupled with liberal subsidies for builders of solar and wind energy sources. The plan, now in its fourth year, has led to a glut of electricity, which has halved wholesale prices.

Utilities have grappled with multi-billion-euro losses as they have taken nuclear and conventional fossil-fuel plants, some relatively new, off line amid the changed economics of Germany’s utility industry. Lawsuits are pending from the industry against the government’s energy transition.

The pursuit of state subsidies for coal and natural gas plants — which will ironically be needed in the transition to a wind- and solar-based energy grid — was one strategy to buffet the financial costs to power plant operators.

Mr. Gabriel, who is a likely SPD candidate for chancellor in 2017 against Ms. Merkel, in effect is telling utility operators that they will have to accept lower prices and profits for conventional energy that now prevail in the market.

In an interview with the Handelsblatt publisher, Gabor Steingart, the co-editor in chief, Sven Afhüppe and a Handelsblatt Berlin editor, Klaus Stratmann, Mr. Gabriel outlined his party’s rejection of utility subsidies and also appealed for further dialogue with Russia over the Ukraine.

Handelsblatt: How are you going to create stable conditions for energy in the long term?

Mr. Gabriel: Our goal in this legislative period is to introduce a system for the Energiewende, Germany’s gradual transition to renewable energy. It’s been anarchy more or less so far, without giving enough reliability in terms of supply. A first step was reforming the Renewable Energy Act last year and liberating energy-intensive industries from additional burdens – for the first time in 14 years, the energy reallocation charge isn’t rising, it’s declining slightly. It’s only a first step but it does send an important psychological message.

But we’re likely to have to keep spending more than €20 billion a year on electricity that’s only worth a fraction of that.

The €20 billion is indeed the cost of the learning curve for renewable energy. But it’s almost a bargain compared to the cost of nuclear energy, because we’ll still be paying for the costs of the consequences of nuclear energy for decades to come. Renewable energy produces almost no marginal costs, but of course it has a market price. Renewable energy even plays an important part in the rapid decline in the market price for electricity in recent years, and in forcing conventional power plants with high marginal costs out of the market.

What’s a second step?

We’ll restructure the energy sector so it sends positive signals for investors and also guarantees security of supply.

Power plant operators have suggested introducing capacity mechanisms and rewarding providers who guarantee capacity. What do you think?

There are huge overcapacities, Germany has too many power stations. Some of those calling for capacity mechanisms are trying to preserve existing overcapacity at the cost of German taxpayers. That’s not sensible energy policy.

But these overcapacities result from the subsidies for renewables.

That isn’t true – there are also overcapacities in states where renewable energies haven’t expanded much. Networks have expanded in line with the development of the European energy market. But in Germany, some older plants stayed in the network because Germany has become an electricity exporter. But there are capacity mechanisms in countries where renewable energies don’t play a major role, in France, the U.S. or the U.K. That’s because those energy markets also don’t provide sufficient price signals for investments in those power plants that are only needed for a few hours or days each year to guarantee security of supply. And if you look at the German load curve, you’ll see that those plants wouldn’t make enough money even without renewable energy. I say let’s take a clear, unbiased look at the energy market and make sure we can see signs of where there are real scarcities.

The capacity mechanisms you’re criticizing ensure there’s enough capacity all the time. For an industrialized country like Germany, security of supply is critical.

Of course security of supply is of utmost importance. To ensure security of supply at the lowest possible price – that’s the central task of the new energy market.

Many corporate clients disagree. They’re willing to pay a premium to ensure security of supply.

That’s interesting, they tell me the exact opposite. Industries which use a lot of energy fear politicians will agree to extensive capacity mechanisms out of fear, and implement a new redistribution system that will hike prices.

If you trust the market and its mechanisms, you have to accept much higher prices for power in the future. Is that politically acceptable?

I can imagine there being spare capacities, not to avoid price peaks but only to counter real shortfalls in supply. As we get more experienced, we’ll need less extra capacity. A functioning energy market also means having real scarcity prices that send a signal to investors. Politicians will have to live with that.

How you plan to explain prices of €20,000 per megawatt hour if the megawatt hour has a wholesale price of less than €40 today?

There won’t only be spikes, there’ll also be hours when electricity costs almost nothing. But the situation is different. Because of the threat of price spikes, companies will buy long-term power supply contracts again, many are active in the day-ahead market. Long-term contracts in turn mitigate price hikes because they also provide security for investment in power plants. My advice is “trust the market.”

What role do Germany’s neighbors play in guaranteeing security of supply?

We have to stop defining the security of supply issue in just German terms. After all, we don’t know which German power plants are supplying customers in neighboring countries and which plants abroad are delivering electricity to Germany. That shows how the energy market is growing together. It’s a positive development and we should encourage it by building cross-border power lines, for example, and by coordinating on how we structure the market.

That sounds pretty abstract.

Here’s an example. Italy needs all its power plants at full capacity in summer because people are running their air conditioners the whole time. Germany has its peak during wintertime. That means that the peak load of the two countries together is less than the sum of the two national peak loads. But you can only benefit from this if countries are exchanging electricity smoothly. That’s not the case at the moment and we have to change that. In the end, everyone benefits from greater market liquidity, higher reserves during shortages and lower prices.

That sounds good. But it’s little consolation to the municipal utility that will have to shut down a highly efficient gas power station because it is not profitable anymore.

Many of the municipal utilities run cogeneration systems that decouple and market heat as well, and we’ll draft a proposal for those plants. We aren’t interested in causing problems for people who operate these stations, cogeneration systems are very efficient and they’ll continue to play an important role.

So it’s only the operators of older coal-fired plants who lose out.

Every power station has a target date to close. Today, the problem is rather that plants stay on the grid longer than that because it’s profitable to export electricity.

Late last year you announced your plan to make coal-fired plants reduce their CO2 emissions by an additional 22 million tons over five years. That’s pretty hard on operators.

We currently export a lot of electricity and that generates CO2 emissions in Germany. I would also prefer it if Europe’s emissions trading system worked better, but eastern European countries are blocking that. We want to keep to our climate goals and power plants will have to play a role in helping us achieve that too. We’re trying to get a consensus on coal and if we manage, German governments will have to agree to stop investing further. That would guarantee long-term reliability.

That’s too late for E.ON chief Johannes Teyssen who split his company into two parts – was that premature?

None of our current plans would render E.ON’s decision moot or pointless. As I see it, you can’t discredit the company that will contain the conventional power stations and nuclear power plants as a “bad bank.”

The part of the company with conventional and nuclear power plants has to make provisions for dismantling the plants – does that worry you?

We’ll make sure it’s enough.

The two parts of the company will only be connected for five years, after that, the one part of E.ON won’t be liable for the other part any longer. That reduces the firm’s liability for dismantling its nuclear power plants and storing nuclear waste as well. Isn’t that a problem?

There shouldn’t be any legal leeway for plant operators to reduce their liability.

The Energiewende, the transition away from nuclear energy, requires a massive expansion of electricity grids. Bavaria’s premier, Horst Seehofer, has said no to new grids in his state. What do you think of his position?

Bavaria has agreed to all plans for the expansion of the grid. I can understand that’s not necessarily a cause for celebration for the people living nearby – and politicians have to address people’s concerns.

You have big plans and the expectations on you as economics minister are huge. What will you do if you fail in orchestrating the energy transition?

Why would I?

 

interview Gabriel Andreas Labes for HB
Tough stance on coal. Source: Andreas Labes for Handelsblatt

 

Let’s talk about the euro. By abandoning its cap on the franc against the euro, Switzerland has pushed the common currency to an 11-year low. Were you aware of the Swiss central bank’s plans?

No. I was and remain just as surprised as everyone else. But it was clear to me, of course, that pegging its currency to the euro was a double-edged sword for Switzerland. On the one hand, the Swiss were trying to relieve pressure on their export economy with a stable exchange rate. At the same time, the constant market interventions cost billions. That sort of exchange rate policy can’t be kept up for long.

It’s probably no coincidence that the Swiss National Bank acted before the European Central Bank could announce a major sovereign debt-purchasing program, thereby weakening the euro even more.

We shouldn’t kid ourselves. Europe is still in an economic crisis, as evidenced by high government debt in most countries and 26 million unemployed. It’s a bitter pill to swallow, that the ECB – as in the past – is holding the euro zone together as the last body capable of taking action. It would be better if lawmakers would finally muster the strength to tackle reforms.

That was the gist of the appeal ECB President Mario Draghi made to politicians in a recent interview with our newspaper. Why don’t European leaders take advantage of the time Mr. Draghi is buying them to introduce real reforms?

We Germans, with our way of walking around Europe wagging our fingers, should remember that we also tied our reform program, Agenda 2010, to investments in growth. Agenda 2010 consisted of more than just cuts to social benefits. It also included investments in research, education and renewable energy. It is precisely this combination of reforms and investment that has made us so successful and, in the end, has even made a balanced national budget possible. Nevertheless, the last European Commission and the heads of state and government, in their ideological fixation on quickly reducing government deficits, have prohibited precisely this combination. The policy has been a total failure. The new president of the European Commission is now changing course, and it’s about time. And we Germans should support him instead of trying to thwart him.

Thrift Comes at a Cost-01

 

The theory that you can save yourself to death may apply to the first Greek bailout package, but not to France or Italy. These countries don’t lack funds, but they do lack flexible labor markets, innovative products and efforts to shrink bureaucracy.

That’s been true for a long time. But just look at what (Italian Prime Minister Matteo) Renzi and (French President François) Hollande have presented: Programs for a drastic downsizing of the bureaucracy and major administrative reforms, liberalization of the labor market, tax cuts for businesses and much more. But it will take years until these reforms take hold. Last year I proposed exchanging reforms for time. The conservatives in Germany immediately called it a “betrayal,” because it supposedly violates the Stability and Growth Pact. And what’s happening now? Without amending the Stability and Growth Pact, the new European Commission is providing more time to reduce government deficits where urgently needed structural reforms are being addressed. This is a 180-degree reversal of European economic policy. And I’m as pleased about it as Mr. Draghi, because Europe was well on its way to failure.

Few people have such a positive memory of the violation of the Stability Pact by then German Chancellor Gerhard Schröder. It was a dangerous assault on the young monetary union and its principles.

Two E.U. countries violated the Maastricht criteria at the time: France and Germany. But there was a big difference between the two. France, under its conservative president, merely incurred more debt. That was all. Germany, under Social Democratic Chancellor Gerhard Schröder, launched the social reforms of Agenda 2010 in the same year. If we had had to comply with the Maastricht criteria, an additional €20 billion ($23.2 billion) in budget cuts would have been necessary, and Agenda 2010 would have failed.

European Commission President, Mr. Juncker isn’t interested in social reforms. His main objective is to push a gigantic investment program.

The European Commission asked all crisis-ridden countries, including Italy and France, to tackle social reforms, as well, especially in labor markets. In addition, it wants to see tax cuts, less bureaucracy and stronger competition in individual markets. That is precisely the purpose of the European semester that each member state must complete.

But the problem is that the pace of reform is anything but fast.

I’m not satisfied with the pace of reform either. But let me say this again: People also need prospects. And if we make no headway with our unemployed population of 26 million, if we allow an entire generation of young people to become unemployed, we will see so much resistance to even the most reasonable reforms that governments will be swept out of power. What do you think is more costly in the end: a little more time to reduce deficits or Madame Le Pen as the next French president?

Do we need new investments in Europe to improve economic coordination? Possibly even the economic government advocated by France?

I find the idea of an economic Schengen zone convincing. Schengen means that you can drive across the border on the highway without noticing it, because all member states in the Schengen zone have committed themselves to a high level of securing their external borders. What would it be like if the countries within the E.U. that want to develop a shared digital infrastructure formed a stronger union? Or if countries would voluntarily agree to invest an additional 0.5 percent of their gross domestic product each year? We won’t make any progress without further development of a Europe that is now moving at different speeds.

After 45 years of continually exceeding its budget, the federal government once again managed to make do with its tax revenues last year. What does this historic event mean?

First of all, it’s a consequence of precisely the development I previously described in the example of Agenda 2010: social reforms plus investments in competitiveness. Incidentally, Peer Steinbrück, the SPD finance minister in the last grand coalition, would have achieved a balanced budget if the global financial crisis hadn’t set us back by years. It’s all the more gratifying that we have achieved this splendid success in the current grand coalition.

And what happens next?

With our budget surpluses, we are providing ourselves with financial latitude for unfavorable economic times. We cannot assume that today’s favorable economic climate will last forever. The time will come when we’ll have to adopt measures that will lead to government deficits once again. It’s critical that we don’t also accumulate deficits in good times. The fact that we’ve balanced the budget today is a great success.

So “moderation” is the order of the day?

The term “moderation” is easily misunderstood, and it hasn’t been a successful concept in German economic history.

What do you mean? A policy of moderation made Ludwig Erhard Germany’s most successful economy minister.

As chancellor, Erhard called for “moderation” in the first German economic crisis, and in doing so he only exacerbated the crisis. He was forced to resign as a result. I would call that failure. The upshot was the first grand coalition, which got the Stability and Growth Law off the ground. It requires us to maintain a balance between price stability, growth, foreign trade and employment. An appeal for moderation is usually misinterpreted as a call to reduce wages and salaries. Even the president of the German Bundesbank made precisely the opposite argument.

Finding the right wage level is a delicate art. The ÖTV [public services trade union] fought for an 11-percent wage increase in the 1970s and jeopardized jobs in the process. It also severely damaged the authority of then Chancellor Willy Brandt.

That was the only instance in German postwar history. I can certainly remember a number of wage negotiations in which the outcome wasn’t even enough to offset inflation. That’s why we have massive real wage losses in some cases. Exaggeration in any direction just happens to be the wrong approach. It makes sense for collective agreements to be based on increases in productivity. We can’t lose sight of that relationship.

But increases in productivity don’t just drop out of the sky. They require hard work.

Absolutely. At the moment, high energy prices are making it difficult to increase productivity. In the past, labor costs were the biggest challenge for companies, but today it’s raw materials and energy costs. The United States has an enormous competitive advantage in that respect. And it isn’t just that the Americans enjoy an advantage because of their massive production of shale gas through fracking. Their energy providers also pay significantly lower taxes and fees. To secure the competitiveness of the German economy in the long term, we also have to address the fact that our public and private investments are much too low – and we also lag behind when it comes to digitization of the economy.

The price of oil has fallen by more than 50 percent in recent months. That’s certainly a big help.

The collapse of the oil price is especially beneficial to countries with a strong export economy, like Germany. It also keeps consumer prices low. There can hardly be a better economic stimulus for Germany. But we can’t rely on that.

OPEC isn’t doing anything to stop the decline in prices by curbing production. What’s behind this development?

It’s pointless to speculate on that. But the oil-producing countries can’t be interested in such a low oil price in the long term. And once large oil-consuming countries have overcome their weak economic phases, the thirst for energy in those countries will also drive up the price of oil once again.

Some experts claim that the U.S. government pushed for a low oil price to force Russia to its knees. In fact, a 50-percent drop in the price of oil is much harder on Russia and President Vladimir Putin than all the West’s sanctions combined. Is that conceivable?

I don’t know. But I can certainly warn against such a strategy. It cannot be in our interest for force Russia to its knees economically. The purpose of the sanctions is to bring Russia back to the negotiating table, not to plunge the country into chaos. I know that there are those in the United States who advocate such a destabilization strategy, and unfortunately some in Europe are also taking the same position. I think it’s immensely dangerous. Europe has an interest in a peaceful and strong Russia.

Given the new, dramatic situation, doesn’t it make more sense to help Russia rather than continuing to push it down?

We must continue to seek dialogue with Mr. Putin, as [Foreign Minister] Frank-Walter Steinmeier and the chancellor keep doing. Beside, we cannot come to grips with the many crises around the world, be it in Syria or Iran, unless Russia is part of the solution. And that only works with a stable and self-confident Russia.

That brings you back to the idea of a modernization partnership with Russia, doesn’t it?

Yes. Europe needs good economic relations with Russia – and so does Ukraine. This United States is relatively unaffected by this situation, because Europe alone bears the economic and political consequence of the Russian crisis. That’s why we must find a way to approach Russia once again.

How can rapprochement with Russia succeed unless the Ukraine crisis is resolved?

Of course, resolving the Ukraine is a top priority. To begin with, achieving a solution requires a real ceasefire and the withdrawal of Russian troops, so that a negotiation process can begin over how the country can achieve peace once again.

 

Sigmar Gabriel, the German economics minister, discussed the ongoing crisis in Europe, Western sanctions against Russia and his energy policy plans with Handelsblatt Group Publisher Gabor Steingart, Co-Editor in Chief Sven Afhüppe and Berlin-based editor Klaus Stratmann. To reach the authors: steingart@handelsblatt.com, afhueppe@handelsblatt.com and stratmann@handelsblatt.com.

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