Why we cannot delay the energy transition

Following protracted negotiations, Germany finally has a budget for 2024. Hardly a day goes by without a jubilant, headline-grabbing announcement that funds have been secured for certain projects – such as the recent funding of real-world laboratories, for example. This microcosm of ‘good’ news is diverting our attention from the bigger picture of the energy transition. This is fatal: important funds have been cut from the ‘Climate and Transformation Fund’ (KTF), which already had limited resources for the energy transition.

Funding the energy transition

The funding requirements of the energy transition are essentially split into three areas:

1.       the funding of renewable technologies that are struggling to prevail against fossil technologies under current market conditions,

2.       investments in energy infrastructure and

3.       research funding for testing and developing new technologies.

From a target perspective, the future energy system will be much more cost-effective, efficient and resilient. Until then, we need to overcome numerous inefficiencies due to infrastructure that does not yet exist and which requires investment, the lack of economic viability of new technologies and outdated regulation.

Given this state of affairs, the energy transition is in danger of taking much longer than necessary due to fiscal policy. Failure to invest is having an impact elsewhere, namely in energy prices for all consumers. This is evident in the electricity grid, as the costs of redispatch (EUR 1.6 billion in the first half of 2023) and power management have been factored into network charges for years.

Necessary investment in the heating transition

Another clear example is the heating transition, where a contentious social issue has been temporarily diffused by promoting district heating as a suitable solution for numerous households. However, the construction of new district heating pipelines and larger renewable heat generation plants can rarely be achieved without government funding. The existing political funding pot, the ‘Federal funding for efficient heating networks’ amounting to EUR 3 billion by 2026, will not be anywhere near enough and there is little prospect of a significant increase given the current political priorities. Who will pay for rising natural gas costs due to carbon pricing or geopolitical impacts in the medium term if the district heating ‘alternative’ is built much later or not at all?

Essential infrastructure measures

There is also a lack of infrastructure in the electricity sector and the expansion of renewable energies. By 2030, the installed onshore wind turbine capacity is expected to double to 115 GW and to almost quadruple to 30 GW for offshore wind turbines. However, industry stakeholders point out that this planned increase will require a massive expansion of port and construction infrastructure, among other things. Major wind turbine components, such as towers, rotor blades and foundations for offshore projects, are almost exclusively imported by boat. The German Offshore Wind Energy Foundation estimates that Germany will need at least 50 hectares for the necessary port infrastructure by 2027, and 60 to 120 hectares during the expansion peak in 2029/30. These calculations do not include storage capacity for onshore projects. One possible option for covering the costs without the help of government funding could be the pro-rata use of the proceeds from offshore wind tenders. Last year, income from offshore tenders amounted to EUR 12.7 billion.

Emerging hydrogen economy

Without public funding, the hydrogen economy also faces major problems. The construction of pipeline infrastructure is a necessary investment that will not be made by the market. Consequently, the German government is making advance payments for the development of a core network and absorbing the risks of insufficient infrastructure utilisation, thereby ensuring that network charges for ‘first movers’ are not prohibitively high. Funding programmes are also necessary to broaden applications such as long-distance hydrogen trucks, for example. More of these could be required if Deutsche Bahn halts its new freight projects as announced. Potential operators are hesitant to invest due to the lack of economic viability and often refer to scaling effects that would result in a corresponding cost reduction. But how would these scaling effects be achieved without funding? The entire carbon capture technology for residual emissions would face the same problems, by the way.

Far-sighted fiscal policy is required

Many other problems could be mentioned at this point, such as the condition of motorway bridges that makes it difficult to deliver wind turbines, and many more. Anyone who wants the energy transition to succeed has to question the current fiscal policy. Stakeholders may have extremely detailed arguments about priorities within the budget, but what is ultimately certain is that Germany cannot ‘park’ a successful transformation. Public investment and guarantees are also required for private investors to invest in the energy transition on a much larger scale. Persisting with the current situation will only burden consumers and result in distributional conflict that will take its toll on social consensus in favour of the energy transition. In short, a discussion about the re-introduction of the EEG levy is imminent.