Hello, welcome to visit Shanghai Forum
I am still convincedthat will be a technology of the future, but that will not be applied first inGermany, which might as well be ok, because given the global nature of theproblem I think it is better to have China being a front runner on that.
Reporter: Wu Libo（Professor，School of Economics，Fudan University）
Editor: Silvan Griffith
Reporter：Could you please make a very brief introduction to your positionasthe chairman of theexpert committee of the energy transition of the German government?Could you pleasedescribe the function of this?
Andreas Löschel：The Germangovernment has set long term targets to achieve a transition of its energysystem by 2050, and these targets and this whole transition were described inthe energy concept that was initiated in 2007. In this energy concept, thegovernment not only drew this vision of the energy system, the new Germanenergy system in the middle of the 21st century, but also stated that thiswhole transformation should be followed by a monitoring process, and thismonitoring process should be scientifically based, to see whether Germany is ontrack in achieving these targets, and if they are not on track, to see what hasto be adjusted in order to achieve this long term goal. This monitoring processconsists of two tracks. The one track is that the ministries publish each yeara monitoring report on the advancement in these different areas based on around50 indicators of the energy transition in terms of energy security, the cost ofenergy for the German industry and households, as well as energy securityissues.
Reporter：Are there any newfindings in the upcoming report?
Andreas Löschel：There are alwaysnew ideas that we try to push forward. We go basically through all thedifferent areas that matter, and we try to put in perspective what we haveachieved and what are our problems in the energy transition. For example, welooked at energy efficiency improvement.I think there is still a lot to be done. Welooked at the issues of renewables.We think that we are well on track ofachieving our goals in renewables. We looked at the issue of energy security,we think that we are facing a problem with respect to installed capacities inGermany. And we looked at the issue of costs, where we think that overall thecost of the energy transition at the moment are still in an acceptable level,but we see that some of the cost increases are already laid down in today'sregulation. Lastly, the issue of the European dimension, where we lookedclosely at the EU emissions trading system, and we noted that theemissions trading system is not giving a big push to the German energytransition as the prices are quite low and incentive for low carbon investmentsare therefore not high for the German industry.
Regardingthe energy system transition, one of the most critical challenges is the phaseout of the nuclear system. That is why the renewable sector has to increasemore rapidly compared with previous years, andsome fossil fuels have some competitors. But it is not theonly challenge. There are more things we want to achieve, and it should be aconsistent picture to achieve this transition. Nuclear phase-out is probably themost important and closely watched component of this transition, but I told youthat we have other targets, like improvements in energy efficiency, renewabletargets, and that is exactly to make this phase out of nuclear power possible.I think it is now mainly a problem for the building sector, because in thebuilding sector we want to achieve until 2050 an almost carbon free buildingsector in Germany.
Reporter：That is supportedby the solar system?
Andreas Löschel：This arerenewablesin heating. So we have to think about how we use insulation and other measures toachieve this carbon free building.Italsomeansthatwe cannot only look at new buildings, but in the long run will haveto looknearly all the buildings in Germany. This is very ambitious, and themain point of the energy efficiency, but it is necessary to make thistransition possible.Youalsoask about the role of renewable.Of course, renewables are helping to substitute nuclear power, butthey are only helping to some extent, because as you know we have intermediaterenewables, so we still need conventional power.
Reporter：But according to the 2050 target, around 80percent of the energy will come from renewables. Other countries think this isa very ambitious target!
AndreasLöschel：Ambitious, yes, but wehave already made big progress. This comes at some cost, but we now have 23percent of renewables, which partly make up the loss of nuclear capacity. Wehave switched off eight nuclear reactors right after the Fukushima disaster,but we still need backup capacities. In 2012, for example, we saw that weactually had a plus of 5 percent in coal electrification, which is partlybecause we have to make up for the missing capacity. So renewables are notfully substitutes. As you know, they also have different patterns, wherefore wealso need conventional. This, of course, poses problems to achieve our CO2emission targets, as emissions in Germany actually went up over the last years.
Reporter：Aswe know that recently the success of the shale gas in the US is a really goodexperience for the emerged economies to achieve energy independence,andI think President Obama is also trying to stimulate the deindustrialization byusing such plans.What do you think of these kinds of energy independence strategies?
AndreasLöschel：Obviously that is an issue that is alsohotly discussed in the German industry. As you can imagine, many Germancompanies are now facing strong competition.On the other hand, I think we have to takeinto account that most of these problems in terms of competitive disadvantagesare not related to the energy transition. There are other reasons. There is shale gasboomsin the US and other places that puts them at a comparativedisadvantage,so it is not the energy transition as such which is producing thiscost disadvantage. Actually the German government is well aware of the problemsof the energy intensive industries in the international competition, and so itis one of the lessons learned from these developments, because we are not goingto follow this shale gas revolution in Germany. Germany is relatively skepticaland actually wants to wait some time until the technology has improved, and soit is not a short run option for Germany to use shale gas.Therefore the Germangovernment is aware of this problem and is trying to help the industry not tofall into a comparative disadvantage because of these prices. Tosome extent this cannot be compensated, but to the extent possible it is done,for example by exempting very large consumers from the feed in tariff, byhelping them with lower grid fees, so this is just a reaction of this unequalreaction globally.
Reporter：You mentioned the feed in tariff. China now also has thiskind of feed in tariff system for solar and wind, but China is also wonderingwhether it needs more flexible market based mechanisms like a trading systemfor renewable development. What kind of policy is the most effective tostimulate the development of renewables, and what are the costs and benefits?
AndreasLöschel：I think the German renewable policy was veryeffective, because we have seen large increases in renewables in the lastyears. Last year the share of renewables was 23 percent and it increasedrapidly in the last years,so it was very effective.For such effectiveness, it had to be very attractive to invest in renewables,which means that you have to give high incentives for the investors. Theseincentives have led to an increase in wind power, for example, of about 2 GWper year, in PV of 7 GW per year because of these incentives. This led to adecrease in the cost of renewables in the last years, since we could useeconomies of scale and push forward technological development. The cost of PVdecreased from more than 40 cents to 20 cents or even lower, and they arecontinuing to become cheaper. In fact, Germany is buying down the globallearning curve of these technologies. It has now, however, also been shown tobe a very costly policy, because the state costs increased along with thepenetration of renewables: in 2012 we spent about € 20 bn in the promotion ofrenewables.
It is actually the second highestelectricity price for households that we see in Europe, probably in the worldafter Denmark.So the need for reform is now really in the forefront of thepolitical discussion, because we feel that the need for a fixed 20 yeartechnology specific feed in tariff or subsidy for renewables which is forexample totally taken away all the risks from the rewneable investors, and wehave seen that this has to be reformed. It was a good system, starting with theprocess for the infant stage, bringing renewables to 20 percent, but it is nota model we want to use for the next steps towards this 80 percent target. Thisis a discussion that just started, but you know we have elections this year, soit will be up to the new government that will be elected end of september tostart this reform of this renewables system,and I think that has to be a profoundreform which includes market integration of renewable and would also include abetter market oriented support of renewable technologies in the future.
Reporter:As you mentioned elections, how do you thinkabout uncertainties with such kind of long term green strategy.?
AndreasLöschel：Well of course there are politicaluncertainties on the track, and I am sure that over time we will adjust our wayforward. We don't know how we will move to this target and that means we haveto be flexible anyway, to see whether policies are economically viable, whetherthey are environmentally sound, whether they actually contribute to energysecurity, so we have to maneuver.Political uncertainty is something that adds to this problem of beingflexible and achieving our targets because new governments of course as wellhave new views on balancing these different targets..On the other hand we can see that the general idea gets bipartisan support inGermany, so even if there is a fight about the emphasis and the specificmeasures to implement, the general idea is supported by all parties. Sotherefore I do not think that if we get a different constellation at the end ofthis year we would see a totally new energy policy in Germany. There will beadjustments, but this was supported by all parties so that is really carried bythe voters in Germany, by the parties. Butthat is also a reason why, as economists, we want to make sure that thistransition is done in an economically efficient way, not to burden too much thehouseholds and the industries, that would of course cause resistance to thistransition.And we have to show that this is actually a positive vision for theGerman people,we have to make it in an efficient way that does not cause too manywasted resources on the way to this long term goal.
Reporter:To take this in a different direction, coalis a serious environmental and air pollutant, yet Germany is one of the world'slargest coal producers. Why is Germany so far not able to decrease its coaldependence?
AndreasLöschel：Ifyou look at the German electricity system you notice that coal plays animportant role. Around 45 percent of the electricity in Germany is produced bycoal, and that has been like that for a long time. Coal was actually one of thetraditional bases of the German electricity system, and it still is today. Coalis an environmentally dangerous and unfriendly way of producing electricity,especially lignite, but in Europe we have an emissions trading system. The ideawas to cope with the CO2 emissions from coal with the emissions trading system.Yet as we have just discussed, the prices in the emissions trading system arevery low at the moment, around 5 euros per ton of CO2, which means thatshifting away from lignite to gas powered electricity generation is notpossible, or not economic at these prices. Gas prices went up, coal prices wentdown, and CO2 prices are very low, so we are actually continuing with coalproduction.
I think people are not so worried about local air pollution.That is an issue which is not so much in the forefront of discussion, as thereare environmental regulations to deal with local air pollution problems. Forexample, we have a big coal plant right in Mannheim, yet there was very littleresistance to building a new power plant in Mannheim because people areconvinced that this local air pollution problem is taken into account byvarious measures. We also, however, have the global pollution problem, andthere we see that the last year actually showed an increase in the use of coal.Our main instrument is the emissions trading system, and we don't want to take reallyconcrete measures apart from regulations in phasing out coal power. We want todo that with market based instruments, and the market based instruments do nothave sufficiently high prices. We would probably need prices over 20 euros perton of CO2 to induce this shift away from coal power. Lignite is a domesticresource, actually the only domestic resource Germany has; it is in fact thefifth largest reservoir of lignite in the world, so this is very competitive inthe moment. I think as long as we show that we are on track with our CO2targets, there will be no other measures. If it becomes obvious that the ETS isnot delivering on this track, I think that people will think again about theuse of coal in Germany.
Reporter:Maybeby then CCS will have become more cost effective.
Andreas Löschel：Thatis, of course, another issue. We have already talked about fracking and shalegas. We have seen that there is quite some skepticism of the German peopleconcerning these kinds of technologies, so they actually oppose shale gas use,and they oppose CCS. We therefore stopped most of the demonstration projects inGermany, which is a pity because it might be a technology for the future. I amstill convinced that will be a technology of the future, but that it will notbe applied first in Germany. Actually, given the global nature of the problem Ithink it is better to have China being a front runner on that. Obviously youhave other problems of coal use in China such as problems of air pollution dueto inefficient coal plants. I guess the situation in Germany is just different:the coal plants in Germany are much better than the average coal plant in termsof efficiency, in terms of environmental impact. In our case it is mainlydiscussed through the lens of the ETS, and so I think we will not see any concreteinterventions with respect to coal power because the problem is poseddifferently in our context.
Reporter: About the German energy’sstrategyin north Africa,There are 20 present ofsolar energy in 2009,Germany startedDesertecto catch up this energy from the desert toEurope. Can you talk about it?
Andreas Löschel:Desertec was a visionary project of theGerman industry. The idea was that we will get part of our energy from regionsin the north of Africa that are more abundant in terms of solar and wind energythan Germany. This was initiated in 2009, but I think the enthusiasm has cooleddown a little, though the project is still continuing. I think it will continueunder a different perspective. It will be less about delivering energy toGermany, which is a difficult project anyways, with the high voltagetransmission lines that would have to go through Spain and France to Germany.Nowadays we see it more as a possibility to develop the North African region ina sustainable way. So it is not so much about delivering energy to Germany, butmore about delivering renewable energy to the North African countries in theprocess of their development. Many of the companies have withdrawn from theproject, so it is not as strong as it was some time ago, but I am sure that theywill not drop it completely. This initiative will be shifting focus; in theregion we had the Arab spring, this new movement which we should support interms of its energy development. That could be the contribution of the Germanindustry, providing technology for a more sustainable development in theregion.
Reporter:Sincethe regional distribution of renewable energy production in Europe is quite uneven,will this necessitate gas and clean technology as a balance?
Andreas Löschel：Atthe moment in Europe we have individual systems of support in each of themember states. Of course we know that the potentials are distributed unevenlyin Europe, especially if you think about solar power in the south, hydropowerin the north, wind power in the north west of Europe. At the moment we are notreally exploiting these potentials because we have individual systems ofsupport in the different member states. One of the proposals which I think wasa good proposal was to build a European wide system of renewable support, whichwould mean that we make better use of this difference in resources, and havefor example more wind development in the north west or more use of hydropowerin the Scandinavian countries. That is something we don't have at the moment, whichmeans that Germany, for example, is regretfully not the sunniest country inEurope, but the biggest PV user in Europe. That is not efficient, and we thinkwe can develop a more efficient system in Europe. Since we want to work towardsa unified European energy and security market anyways, this would not poseproblems in the long run in terms of energy security issues, because we willhave one market for electricity with a much improved grid between the differentmember states. Then you can think about having a better distribution of therenewable sources over Europe. At the moment we don't do that, and we don'thave the infrastructure ready in order to transport renewables over longdistances, but that will be something that will be absolutely necessary in thisenergy transition. We already have this vision for Germany, because in Germanywe have the same uneven distribution: we have most of the load, the consumers,sitting in the south, while we have most of the production of wind in thenorth. If we want to increase the production of wind in the north we will havethe problem of transporting electricity over long distances, wherefore we wantto develop new HV TC networks that will transport the renewables over longdistances without a big loss of energy. This technology will hopefully be usedfor taking better advantage of the possibilities of the resources available inEurope.
Reporter:Isn’t the energy transition a show of romanticism?
Andreas Löschel：Iwouldn't call it romanticism, because in the end we are facing serious and veryreal long term challenges. The question is how we address these long termchallenges. Long term benefits are coupled with short term losses - that is theproblem that everybody is facing. All governments have to make the decision ofwhether they are willing to incur these short term costs in order to improvethe long term situation. The German government sees its responsibility inaddressing these long term targets, and it is trying to act on thisresponsibility. It should not act in a foolish way, so of course we have tomake sure that our living standards are not endangered by environmentalpolicies. On the other hand we have a responsibility as one of the leadingindustrialized countries, and we want to step up to that responsibility. We dothis not in a romantic manner, but in a manner that takes an advantage ofopportunities in the long run. We know that we have scarce resources, we knowthat we have a climate problem which is going to accelerate in the future. Sowe follow a long term realism, by trying to be front runners in energyefficiency, in resource efficiency. We think that in the long run this will bethe real challenge, and we want to be on the fore front, instead of laggingbehind. But as I said, we always have to tread carefully, in order to make surethat these policies do not impose short run costs and short run problems toindustry or households - that is something you have to balance all the time.
Reporter:Ok. The theme of this year's Forum isHarmony in Diversity. Are cap and trade systems like the European ETS aharmonious solution to climate change utilizing the diversity of marketparticipants?
Andreas Löschel：The EU ETS is trying to do exactly this, it is trying to find thecheapest solution to reduce CO2 emissions, independent of emissions in theEuropean Union. This is the most efficient way to reduce emissions, but you maybe burdening member states differently by this policy. Therefore there is asystem in place which tries to harmonize the benefits and costs of thesepolicies, meaning that the different member states get different shares of thereceipts of the CO2 ETS.
We are now moving mainly to an auctionsystem of emission quotas, whereby the income from the auctioning isdistributed to the different member states. This distribution tries to takeinto account the burden that the different member states have to carry, theireconomic prosperity and situation as well as the environmental soundness of thepolicy. We therefore look to places where there are the least costly solutions,but we also try to balance the burden that comes with this least cost solutionby redistributing the income from the auctioning to the member states in a waythat was agreed upon by all participants. In the construction of the ETS andnow also in the continuation - we are in phase 3 that started in 2013 - weenacted new rules for these distributions of the benefits from theenvironmental ETS. Therefore as you said, this is something that combines aneconomic approach with a burden sharing between different member states.
Reporter:Andyet you said that the price of CO2, for example, are too low at the moment toeffectuate a change from coal to gas.
Andreas Löschel：Theprice is low, but I think we have to take into account why it is low, andunderstand that this is to some extent a reflection of the economic crisis wehad after 2009. The demand for certificates dropped strongly, so we have anexcess demand of certificates on the market - so we have to learn that thesystem has to be better sheltered against economic fluctuations. Another reasonfor the low price is the extensive use of cheap permits outside of the EUthrough the flexible mechanisms. This is another lesson: we have to be verycautious about how many certificates we want to have in our system. We have alot, which added to the surplus in emissions. The third reason is that we gavea lot of certificates to the industry for free, and given the economicsituation at the time we were very generous with free allocations. In somecases companies got more certificates than they had actually needed for theiremissions, so they could even sell certificates and profit from them. These arewell known, big companies!
All three developments added to this overallocation in thesystem. When we discuss reforms of the ETS we have to address all threecomponents. This, however, will be something that will not be fixed quickly,because the third stage of the EU ETS has just started, and I think many of theEU member states are unwilling to change the rules of the game just five monthsafter starting the new phase. We are now discussing the targets for 2030, thetargets for CO2, for renewables, for energy efficiency. We are also discussingwhether there should free targets again as we have them at the moment for theeuro, and we are also discussing how stringent these targets are. I think wehave to take into account this situation, especially when we move from 2020 to2030. We have to set ambitious targets to show investors that while the pricesmight be low now, we have a long term dedication to achieve our targets, so itwill pay off if you invest in carbon technologies today. You have to take intoaccount that most of these investments are there for 20+ years, so these arelong term investments. Investors must see that the current situation might continuefor the next years, but not in the long run. If we factor this in, we can againinduce more investment in carbon technology. I think that is something that wehave to start very quickly, setting this ambitious target, taking into accountthe three problems that we face with the ETS today.
Andreas Löschel Introduction:
Chairman,Commission of Experts for Monitoring Energy Transformation, German Professorand Head of Department, Centre for European Economic Research (ZEW) Professorof Economics, University of Heidelberg
