An Energy Price Shock: What an Efficient Energy Transition Should Achieve

An article entitled Energiepreis-Schock: Was eine resiliente Energiewende leisten muss, dealing with the challenges of the energy transition amid soaring energy prices, was posted on the Konrad Adenauer Foundation’s website on 13 March.

Its author is Christian Hübner, head of the Global Resources and Sustainability department of the Foundation.

As the energy prices rise, the author raises the issue of keeping the energy transition efficient after the oil and gas prices start falling. The price growth creates only an illusion of an efficient green energy sector.

The price growth affects the economy as a whole. Yet Germany has had some of the world’s highest energy prices for many years. This price growth raises the system costs and State levies, which threatens the economic foundation of the energy transition.

Renewable energy sources reduce the import-related risks. However, it would be an error to believe that they will solve the cost problem. Renewable energies require an infrastructure that now costs Germany a huge amount of money. The electricity price is increasingly determined by public system costs: electricity charges, levies, grid stabilization interventions, and the complexity of the support and regulation system. Not individual price spikes in commodity markets, but rather an inefficient structure keeps energy expensive at all times and threatens Germany’s economic stability.

The energy shock brought out some structural market weaknesses of Germany.

After the war ends, added capacity and normalized trade flows may increase global supply of oil and gas. Iran achieved considerable export volumes in the recent years; easing or actual normalization of the sanctions would relax the market tension even more. Venezuela could also become a major supplier again. The USA is increasingly becoming the world’s dominant energy exporter.

The resilience of the energy transition should be assessed in terms of its ability to weather the fall of fossil fuel. This requires:

- more accurate price signals that encourage rather than limit flexibility;

- the grid working to resolve bottlenecks;

- a more streamlined system of subsidies and regulation.

What is needed in general is lesser dependence on federal funding for maintenance and more market forces.

The energy transition should become a competitive advantage after oil and gas become cheap again. Should it fail, the reverse situation will occur – with emissions falling due to less added value created by the industries and a manufacturing decline, rather than innovation.

To prevent deindustrialization, the energy transition should ensure that the aggregate system costs and pricing components determined by the State do not boost the competitiveness of countries that use fossil fuel.

The idea that electricity will get cheaper automatically on account of greater reliance on renewable energy creates unrealistic expectations. It jeopardizes public recognition of the need for an energy transition and, consequently, the speed of the transformation itself.