Germany's accelerating energy transation

Germany pioneered the vision and concept for an energy transition, and both Germany and the EU were taking steps to accelerate that transition in the last few years, starting before this new energy crisis broke out. Many of Germany’s policies target the power sector, where the largest reductions in carbon emissions are expected to take place. Germany plans to achieve an 80% reduction in power sector carbon emissions by 2030, and carbon neutrality by 2045.

To meet these goals, a number of policy changes have been needed. The first is adjusting targets for renewable energy upward, and defining more clearly what each technology must achieve to send the amount of annual renewable energy tenders. For onshore wind, Germany will have to install 10 GW per year, to reach 115 GW of wind capacity by 2030. For solar energy, Germany should add 22 GW annually, to reach 215 GW by that year. This should enable renewable energy to produce 750 TWh of electricity per year, sufficient to meet the national goal.[2]Germany’s total electricity consumption is expected to rise from 600 TWh annually currently to around 800 TWh by that time, due ain part to electrification of industry and transport.[3]

Centralized renewable wind and solar plants are only part of the story, and Germany has long been a leader in distributed energy – including both rooftop solar and small-scale community wind. The country’s recent policy documents go into detail on how to ensure this remains the case. A new 50-page PV strategy covers several new policies that will remove obstacles or otherwise encourage regular consumers and business to invest in solar. The strategy expands land availability and speeds approval procedures, while increasing support for rooftop PV on commercial buildings. The policy also makes it easier to arrange landlord-to-tenant solar electricity deals, promoting more PV installations on the roofs of multi-family houses, and to facilitate the on-site use of solar power for all the people in the building. (Roughly half of Germany households live in apartment buildings.) The government also aims to encourage PV on balconies by reducing red tape for connection to the building power supply.[4]  Rooftop solar power fed into the grid will also receive higher support levels than previously.

For wind as well, new policies are likely to boost the expansion of both onshore and offshore capacity. In July 2022 the German cabinet voted to amend the onshore and offshore wind acts and to change law on nature conservation to ease obstacles to wind and solar. Going forward, 2% of the country’s land will be allocated to wind energy by 2032, up from 0.8% currently. German states will have to actively identify suitable land, and can trade off quotas to some extent. Over the past decade, wind installations had dwindled due largely to local restrictions placed on new wind sites.

These measures are new, but they build on progress made in past years. In the power sector’s renewable build-out, slow and steady wins the race. Notwithstanding the energy crisis and the nuclear phase-out (see below), Germany in 2022 hit a new record of 45% renewable energy in its electricity mix, up from 41% in 2021.[5] The EU as a whole is also transitioning to renewables more quickly than in the past: In May of this year, the coal and gas share of electricity generation reached the lowest level in many years, gas-fired power plant generation was down 35% and coal power down 24%. Solar generation increased 12% and wind generation rose 15%. The EU recently approved an increase of the EU’s renewable goal for 2030 from 32% to 45% (compared to 22% from renewables currently). The EU will also start to introduce renewable fuel requirements for aviation, including for e-fuels, which should further stimulate demand for renewables.[6]

Aside from new wind and solar, the power sector also needs other adjustments to prepare for the clean energy transition. In terms of reforms to the way energy is priced, one important change in Germany is the abolishment of the renewable energy surcharge, known as the EEG. The EEG served as both a tax on electricity – reducing its competitiveness compared to directly using fossil fuels for heating, transport, or other applications – and as an unfair burden for households. Another important power sector policy is the new Network Development Plan, which must now ensure the grid is capable of supporting Germany’s transition to carbon neutrality and a power sector based on renewables. The new grid plan is based on the country’s new targets for wind and solar, plus 20 new grid connections at sea for offshore wind and exchange with other countries.[7] Germany’s transmission build-out has been lagging prior commitments, so time will tell whether further adjustments are needed in this field.

Energy storage is another bright spot – and critically important, given the rising role of solar in Germany’s energy mix. Storage is expanding both at utility-scale sites and at the household level, and including both batteries and other solutions. For example, a large coal plant in Eastern Germany is being converted into a major energy storage base, including 14 GW of renewable generation, 2-3 GWh of battery energy storage and 2 GW of green hydrogen production. At the household level, at the end of 2022, Germany had over 650,000 energy storage installations, over a third of which were added in 2022 alone. Today, 75% of new home solar PV systems are paired with storage, which increases self-consumption of solar output while reducing the strain on local distribution grids. In fact, the majority of Germany’s energy storage is located at homes and residences.  Germany is the largest player in the European energy storage market, but it is not alone. Europe saw roughly 100% growth in energy storage installations in both 2021 and 2022.

Germany’s energy transition includes the phase-out of nuclear energy, which has been ongoing since the early 2000s and has generated widespread debate and criticism outside Germany, as well as in Germany. The German nuclear phase-out is the result of a long and difficult process to achieve social consensus within the country. After the Chernobyl disaster, it was recognized that nuclear plants would have a limited life and no new plants would be built, and nuclear energy would therefore phase out at some point. Plants were already closing in the early 2000s but after Fukushima  this accelerated, and meanwhile a timetable for the final closure of the last nuclear plant was agreed. The nuclear share of German electricity production fell from 30% in 2000 to 11% in 2020, before the Ukraine war. Wind and solar now account for a larger share than nuclear ever did. Meanwhile coal’s share has fallen from 41% in 2011 when 11 nuclear stations closed to 33% in 2022.

Since the phase-out schedule was decided at a policy level, there is a perception that the absence of such a policy would enable nuclear to continue operating, perhaps for a long time. However, as we have seen recently in France and California and in prior decades in the U.S. and Japan, old nuclear plants become unreliable and require serious long-term investment and planning to remain in safe and reliable operation. Even in mothballs, such facilities would require major ongoing costs – and even decommissioning them is a costly process requiring years of advanced planning as well. Hence, we should not think of nuclear as an old item of clothing we can keep in the closet and wear when the occasion strikes us. For the climate, the most important thing is for renewable energy to scale up more rapidly, and that is indeed happening.

Even though most energy crises tend to draw public attention to energy supply, demand-side policies are equally crucial and often more economically sustainable in the long run. Germany considers energy efficiency as one of the pillars for achieving carbon neutrality, and energy efficiency policies could contribute about 45% to its emissions goals.  To achieve carbon neutrality by 2045, the German government has raised the energy-saving targets of reducing primary energy consumption by 40% by 2030 compared to 2008, and aims to achieve a 50% reduction by 2045. Recognizing the importance of demand-side energy efficiency measures, the European Union and Germany set the "Energy Efficiency First” principle and enshrined it into law. This principle not only applies to the energy system but also extends to multiple aspects of national development. In Germany, the Energy Efficiency First principle is not only reflected in macro-level strategies, such as strategies addressing climate change or energy development plans, but also in the formulation of mid-level policies for industry, investment, finance, and other sectors.

Since the energy crisis, Germany has actively advanced measures on the demand-side to increase energy efficiency and reduce reliance on natural gas. The guiding principle is that every kilowatt-hour of electricity saved translates to one less kilowatt-hour that needs to be generated. In 2022, the German federal government adopted a series of measures to increase energy efficiency, and provided support and funding for residents and businesses to adopt energy-saving measures in the building and industrial sectors. It further actively participated in EU-level energy efficiency policy-making.

Regarding energy conservation in buildings, the German federal government has introduced the new Buildings Energy Act (GEG) as well as amendments to the Federal Funding for Efficient Buildings (BEG). These reforms aim to replace outdated windows and gas heating systems, promote energy efficiency retrofits in buildings, and advance the application of low-carbon heating technologies such as renewable energy-based centralized heating and heat pumps.

Additionally, other measures, such as lowering the indoor maximum temperature to 19 degrees Celsius in public institutional buildings, have been taken under the Energy Security of Supply Act (EnSiG) to advance energy conservation efforts. Moreover, natural gas suppliers and landlords are required since last autumn to inform their customers and tenants in advance about potential natural gas consumption and costs, as well as to provide information on potential energy-saving opportunities.

Regarding energy conservation in the industrial sector, Germany continues to drive enterprises to improve energy efficiency and reduce costs through measures such as carbon emission trading, mandatory energy audits for businesses, and incentives for energy-saving upgrades in general technology and production processes. In terms of capacity building, Germany has established a system of energy auditors and energy management experts to strengthen the foundation of energy-saving talents. The German government also conducts annual monitoring and evaluation of the progress in transforming the energy system.

In most countries, including Germany and China, the power sector has been the initial focus of the clean energy transition. It is widely recognized that the next phase will entail bringing down emissions in the transport and heating sectors. These are both areas in which Germany is seeing significant progress, partly but not exclusively driven by policy.

On heating, the critical next step is to expand the market for heat pumps, which are vastly more energy efficient than traditional electric resistance heating or heating with individual gas boilers at the level of a single residence. Germany’s heat pump market grew by 53% in 2022, and this trend seems to have accelerated in 2023 so far, with 1Q heat pump sales up 110% from the same period the prior year. Overall, Germany’s heat pump sales have tripled on an annual basis from before the Russian invasion of Ukraine. If manufacturers had not encountered various supply chain issues arising from the pandemic, sales would likely have been even stronger. More work is needed, however, since the majority of new heating systems are still fuelled by gas, with heat pumps reaching a market share of around one-third.

On the policy front, several important changes have been introduced that are already affecting the demand for heat pumps compared to gas heating. Lower electricity prices for heating, under a policy established by the federal government to encourage switching from fossil fuels, have helped establish the case for cleaner heating. Also, the amendment of Germany’s building energy policy (‘Building Energy Act’) (passed in the Bundestag on 8 September 2023) requires all new heating systems after 2024 to derive 65% of their energy from renewable sources. While this could include green hydrogen, this is unlikely to be cost-effective in most cases, meaning that heat pumps or district heating will be the primary solutions. The government will also offer significant subsidies to households that replace fossil fuel heating systems in advance of what the law requires.

Although heat pump sales have risen, Germany also faces challenges. The long-lasting debate around building energy policy has led to a temporary rise in new fossil-fuelled heating systems. Because homeowners won’t be allowed to install these systems once the policy is in effect, the delay of the policy has caused a push in sales of oil and gas heating systems. In addition, since heat pumps are vastly more efficient than traditional heating systems, they will play a central role in the energy transition of Germany’s heating sector, yet German heat pump manufacturers and associations face a shortage of skilled labour paired with a lengthy vocational training. These issues will still need to be addressed.

On transport, Germany is obviously a leading car manufacturing country. The transportation sector accounts for roughly one quarter of Germany’s annual CO2-equivalent emissions, most of which is from road transportation. The electrification of transport has passed a major inflection point. In 2022, electric vehicles and plug-in hybrids achieved a 31% market share, up from 26% the prior year and just 13% in 2020. In December last year, plug-in vehicles (EVs and PHEVs) achieved a market share over 50% as buyers rushed to lock in subsidies for PHEVs before they were discontinued. Now that subsidies target mainly pure EVs, the EV market continues to grow as the PHEV share shrinks.

Much of the transition to EVs is being powered by German marques, with the domestic sales share at 60%. VW is targeting an 80% electric sales share by 2030, and the company has increased its investment plans to almost Euro 200 billion to make that transition possible – including investments in batteries, upstream minerals, and charging networks.

Policies are focused on removing the biggest obstacles to EV adoption, especially in the field of charging. Charging infrastructure has expanded, not only in the number of charging points, but also in terms of the average power, as Germany’s infrastructure providers focus on building out the essential fast-charging points needed on highways. In 2022, the number of chargers grew by 35% and the total charging capacity grew by 40%. But slow charging is also expanding: the government will require employers to offer charging at as many as a quarter of employee parking spots.     

The energy transition is a complex challenge involving all sectors of the economy and all areas of energy and environmental policy. This article has summarized the areas where Germany is seeing the greatest progress, and mentioned a few of the fields where there is debate or criticism. If space allowed, there are many other relevant topics that bear mentioning, particularly in sectors with carbon emissions that are most difficult to reduce, such as heavy industry, marine transport and aviation. Technology innovation and just transition are also important topics where Germany has introduced important policies and yet also faces major challenges. Germany is also a contributor to international efforts to address climate change, both via climate finance and development assistance, and by its participation in international organizations and cooperation projects – including GIZ, where I formerly worked.

This article could hardly summarize every one of these aspects of the energy transition, but the topics covered here concern the most important fields of energy consumption and carbon emissions. To summarize briefly, in the power sector Germany is poised to enter into a period of rapid growth, building on the already impressive 45% share of renewables in the national energy mix. In other sectors, especially electric vehicles and clean heating, Germany is making major progress, though there is more to do. Germany as a country and the EU face many challenges in the energy transition, and the energy crisis resulting from the Russian invasion of the Ukraine and the need to shift away from Russian gas has certainly not made matters any easier – for policy makers or for citizens. But in some ways this external shock has clearly accelerated the energy transition for both, increasing the policy ambition to build out alternatives while also encouraging consumers to make a new choice for clean energy.