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The election is over for Germany, but not for Angela Merkel, the incumbent and victorious chancellor. Smiling and sipping bubbly wine, she gave the impression that the party was beginning when in fact it is her post-election hangover that is about to start – a dirty deal with a coalition partner to tackle a hidden cost. Don't be misled; it's not the euro zone she has to worry about. There are no serious domestic policy disputes remaining on that issue; the big debate in Germany is about energy. It is about the cost of the country's adventurous environmental policies which have hamstrung German industry with the burden of supporting renewables while Asian factories run on cheap coal and America motors on cheap natural gas.
In the wake of the Fukushima disaster, Angela Merkel's conservative government did a policy U-turn and promised to phase out nuclear power by 2022. Nukes contribute about 18 per cent of Germany's electricity but there is no clear road-map about how the shutdown is to happen except through a massive expansion of renewables. Under the Energiewende (energy transformation) strategy, renewables, mainly wind and solar power would expand to generate 35 per cent of power to the grid by 2020 and the incentive by which this is to be achieved is via a massive subsidy, paid for by consumers. Every owner of a wind turbine or solar panel in Germany gets a guaranteed feed-in tariff for every kilowatt-hour it contributes to the grid. Power companies must buy this power at the feed-in tariff which is at a much higher rate and the increased cost is passed directly to consumers. The average German household is paying an extra €200 ($278) per year to support green electricity.
During the final weeks of the election campaign, Peer Steinbruck, leader of the SPD, the German socialist party, identified energy as an election strategy. The roll-out of Angela's Energeiwende was hurting ordinary Germans. He would cut the rate of subsidy and force more of the cost burden on industry, he said. Ms. Merkel has no choice but to negotiate with Mr. Steinbruck – the failure of the Free Democrats to win any seats in parliament means that the only alternative party is the Greens, who will demand not less but more renewable energy. The chancellor is faced with the choice of hitting German industry at a time when their margins are being crimped by rising costs or leaving German consumers with an escalating bill.
Energeiewende creates green haves and have-nots. The wealthy install solar panels on their roofs and profit from feed-in tariffs while the poorer just pay the higher bill. Still, the policy has been a runaway success, with a quarter of Germany's power now generated by renewables. So much renewable electricity is being produced and so rigid is the policy that "green" power is becoming baseload power – and a massive headache for the grid, because renewables are unreliable. Coal and gas-fired power plants are therefore being forced to operate only as back-up facilities, an expensive waste of generator capacity.
Renewables are still hugely popular in Germany but the costs are only just beginning to be felt in people's pockets. So successful has been the subsidy in expanding renewable power that Germany is held up as an example to other countries. Up until now, no one has thought to wonder what the economic impact of very expensive energy might be on a highly sophisticated, industrial economy. We are about to find out.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished