Assessing the extent of Germany’s energy dilemma

Will Germany’s seemingly irresistible export engine be undermined by the country’s energy policy?

Maybe not as much as some fear. Or hope.

In the wake of Japan’s 2011 Tsunami and subsequent Fukushima nuclear disaster, German public opinion pushed the government to wind down the country’s nuclear program in double quick time. About half of Germany’s nuclear power plants were switched off soon after while the rest are due to be shut down by 2022.

Germany, which had already shown a strong commitment to (non-nuclear) renewable energy, stepped up the pace. The government’s target is to generate some 40% of all the country’s electricity with wind, solar or wave power by 2025 and 60% a decade later. Ultimately 80% of the country’s electricity needs are to be filled with renewables.

The ambitions are certainly noble, but the transition is proving expensive. In 2006, nuclear power generated around a quarter of the country’s electricity. Renewables made up 12%. Because renewables are expensive, shifting from the former to the latter has been a costly proposition.

Germans pay the highest electricity prices in Europe. Residential electricity prices, including taxes, are 60% higher in Berlin than in London, and are 40% above the euro-zone average. Germany’s energy minister, Sigmar Gabriel, recently estimated that the push to renewables is costing Germans €24 billion euros per year in higher bills. Were this to continue, Germany risked facing a “dramatic deindustrialization,” he said.

High energy costs are squeezing Europe’s steelmakers, who pay double in electricity costs, and four times as much for gas as American producers.

It won’t have passed German policymakers by that Japan’s decision to halt its nuclear program was a significant factor in the country’s shift from large current account surpluses to its smallest since at least 1985 and a run of trade deficits as well.

The German government has started to respond by cutting subsidies to green energy and approving plans to increase coal-fired electricity generation by a third over the coming couple of years.

And undoubtedly, high energy prices will be putting a dent in energy-intensive heavy industry. But overall, German energy consumption is lower than other major economies and exporters. Germany’s per capita energy consumption is relatively low for such an industrialized country–it is only 55% of the U.S.’s and 71% of South Korea’s, though it is 6% above Japan’s.

A recent European Commission report on energy use, however, noted that the difference in energy costs between the U.S. and Europe and Japan had led to American specialization in high-energy industry with Japanese and European firms shifting to lower energy intensity and higher value-added production, and, when they operate in the same industries, European and Japanese firms tend to be more efficient.

Indeed, energy inputs for more than 90% of German industry represent only around 1.6% of revenue.

Although higher energy prices would push Germany further out of, say, steel or aluminum production, it would shift industry into higher value-added segments–which may well have less competition. Firms, meanwhile, could well squeeze labor costs in order to compensate. The pressure would be to offset this hit to domestic demand by boosting German exports even further.

In other words, higher energy prices could, perversely, lead German policymakers to boost the country’s already enormous current account surplus even further–exactly the opposite of what many observers worried about global trade imbalances want. Much as the Japanese government has sought to boost its own exports by devaluing the yen.

Could rising energy prices do to Germany what they’ve done to Japan? Undoubtedly, yes. But it’s not a foregone conclusion.