How did Germany ended up in the Russian energy mess and How to solve it?
Till now everyone in the West has realized that Germany’s energy policy has been a failure. How much of a failure you ask? This much …Wall Street Journal ran a headlines
The World's Dumbest Energy Policy?
So what really went wrong and how did Germany end up in this position.
A changed Nation?
The story starts in the early 2000s with a speech from a young president of a nation in turmoil.
Yes, it’s Putin and Yes, he is talking about stability and peace.
The story starts with the rebuilding of Russia and the EU wanting to accommodate Russia into the Western sphere again. EU thought Russia is a changed nation and willing to work on stability and peace. German had some guilt built up and thought it owed Russia for the destruction and the death of 20 Million soldiers in WW2 and wanted to build business ties to pay back to Russia sort of “reparations” if you will. However, Germans failed to take into account that most of that guilt, if you want to really want to repay, should have been paid mostly to Ukraine as most of the Soviet soldiers that died were Ukrainians. And in the end, a german policy of “Wandel durch Handel” - change through trade was adopted towards Russia.
Move to 2008 and it was working well. Till Russia got into conflict with Georgia and invaded Georgia in Aug 2008. This should have been a red flag to the EU as to has Russia really changed its imperialistic ambitions or not. But it wasn’t. War ended siftly and then things were quiet for a while.
To Nuclear or not?
Then in 2011, Fukushima nuclear disaster happened that shook the world. A lot of countries took a hard look at their Nuclear program and thought is it safe? should we continue to generate electricity with Nuclear?
And the answers to most of these questions for a lot of the countries were Yes. It was worth it. BUT not for Germany, Germany took a hard look and facing strong opposition from public and Green party decided to shut down all nuclear plants in the next 10 years. Now there are a lot of debates around this - most say it was driven by the environmentalist. But to say that drilling gas is safer than generating nuclear engergy is controversial.
The main arguments were
Nuclear is not safe and event like Fukushima can be disastrous for Germany
Nuclear waste is really harmful and disposing of nuclear waste causes environmental damage and Russian gas is relatively environment friendly
HOWEVER and big *****, HOWEVER both arguments are highly controversial
Nuclear is not completely safe - agreed. But have you looked at how many countries in EU decided still to operate Nuclear power plants and how many plants are close to Germany? Just take a look at the map below. So basically German said Nuclear power plants are unsafe so we will shut them but the rest of the EU and especially France will NOT. And most of the French nuclear plants are next to ……Germany. If a nuclear disaster happens in France, Germany will be equally affected.
So you assume that French nuclear plants will not fail and are not a risk to you? If that’s the line of reasoning then why are you shutting down your plants? Unless you say German engineers can’t do their job well enough like French and this is why German nuclear power plants are a bigger risk than French. So we’ll close them.
A flimsy argument in my opinion - if my neighbors are going to continue to generate cheap power from a risky source that can harm me as well I might as well do it and do it better and safer and teach others. And make the whole area overall safer rather than having 10 nuclear power plants on my borders and having no control. And another thing, even Japan after Fukushima decided to continue the nuclear plants as the risks outweighed the rewards.
Nuclear waste - the main argument from environmentalists was that nuclear waste is unsafe to dispose of and causes harm and hence we should not do it. Gas on the other hand is more environmental friendly.
So drilling Earth is more environmentally friendly than disposing highly regulated nuclear waste. Ok, even though it’s controversial - let’s take that argument and agree on it.
What these environmentalists failed to take into account (or knowingly excluded) is that Russia is the biggest importer of Nuclear waste and is notorious for safety protocol breaches.Commenting on the plan in the July 3, 2001, issue of the Christian Science Monitor, the head of the Norwegian environmental group Bellona (which monitors nuclear waste problems in Russia's far north) Thomas Nilsen said, "I don't think you'll find any place else in the world where spent nuclear fuel is stored in such bad conditions. The first priority should be to secure spent nuclear fuel and radioactive waste already existing in Russia. You don't do that by importing more." There is, besides, a fear among opponents that any income generated by the processing, storage, and disposal of international nuclear waste will not be applied in cleanup efforts. Instead, it is feared that profits will finance the construction of nuclear power plants to expand Russia's energy supply.
So basically, the place you dump your nuclear waste is the same place where you get your gas. How convenient and environment friendly.
In my personal view, this decision was a disaster and Russian lobbyists played a big hand in influencing public opinion with distorted facts that led to this mistake.
Another aggression
Coming back to our timeline, in 2014 Russian annexed Crimea and still, the EU and particularly Germany ignored the imperialistic move besides putting some standard but strict sanctions. Kind of sanction that hurt you but don’t hurt enough. Meanwhile Germany continued to increase the supply of gas from Russia. And assumed that this will be the last act of aggression from Russia.
And this ignorance is the real policy failure
this assumption that Russia will behave rationally
this assumption that Russia has given up its imperialistic ambitions
this assumption that Russia doesn’t want to be a bully superpower
this assumption that tying Russia with trade will deter Russia to take offensive actions
this assumption that tying Russia with trade will not backfire
this assumption that security and energy can be decoupled politically and economically.
All these assumptions are the real failure of the German energy policy.
The German market
Now that we have established what caused it. Let’s look at how German can correct its mistake.
Germany’s reliance on Russian gas is nothing new, it was always there. The only thing that is new is the increasing reliance of Germany on gas and volumes of gas imports from Russia. The graph from 2017 only goes higher up.
And to come up with a solution first we need to understand the problem in detail first.
German economy is powered by predominantly fossil fuel. And its one of the strongest and biggest economies in the world that don’t have its own natural resources to generate energy. US is the most fortunate in this regard a economy that has high level of natural resources and industrial output. Countries like Russia and Saudi Arabia are predominantly natural resource export oriented.
This chart is energy consumption of the whole economy that is cars, industries and homes. And in that Gas and Oil plays a big part.
Some might say, wait Renewable is only 16%, I heard Germany produces up to 40% of energy from Renewable. Yes, that is correct as well but its 41% of the all electricity consumption.
Renewable is ramping up fast but still (don’t get me wrong, its quite impressive) only produces
41% of all electricity
16.5% of all heating and cooling
and 6.8% in transport
Now we come to the real problem
Electricity generation is going quite well and with German putting more resources into Renewables, Germany will be (if they manage to pull it off) one of the first big economies to complete transportation to 100% Renewable energy. Germany has moved its plan 15 years (!) ahead of schedule to 2035. Impressive but still a long way to go. And Germans want to bring the production of solar cells back to EU.
Erfurt wants to bring solar manufacturing back to Europe. And he has ambitious plans. "We could theoretically create the first 5,000 megawatts in the next 12 to 18 months," he says. That is, if approval procedures are accelerated and he receives the necessary capital. Solar Energy Association head Körnig considers autonomous solar production in Germany to be realistic in 2040 at the earliest.
Transport - Electrcity cars are taking off but the problem here is not the adoption but the production. Electric cars production is strained with supply chain problems and even if all supply chain problems were to disappear if it take a few years to increase this number from 6.8% to lets say 50%. So the dependcies will remain for short to mid term. The options to replace Russia oil we covered in my last newsletter.
Now we come to the real problem - Heating and Cooling.
Above you can see the usage of gas - 32% for heating homes, 27% for industry, 19% for generating electricity, 12% trade and services, 7% district heating production.
Germany is addicted to natural gas. Of the 40.6 million homes in the country, nearly half are heated using natural gas. For many industries, it is also the most important source of energy.
Half of German household use gas to heat the their houses. Pulling off transition from gas to electric heating systems in houses is not easy. It requires the refitting of systems and complete overhaul aka can’t be done at short notice.
However, the bigger problem is industry
The other, arguably bigger concern, are the manufacturing giants, dependent on gas to operate, such as Thyssenkrupp, BASF and Bayer. And the hundreds of thousands of small and medium sized businesses with which they are interlinked.
Turning off gas would mean tripping off German economy. Factories and industries will have to be closed down that will cause a lot of damages and second degree unforeseen consequences.
So the real question is not how to get Germany away from Gas BUT how to get Germany away from Russian gas?
Gas is demoninated by Russia but there are options.
Survival instincts
Since the breakout of the war, Germany has been desperately exploring options to replace Russia gas and have made significant progress and talked about tradeoffs to sustain.
Filling up gas reserves - sounds really simple but German gas reserves were below 20%. This was another blunder on the German part.
Which is why Economy Minister Habeck is quickly preparing a new law requiring that all gas storage facilities must always be 80 percent full by Oct. 1 of each year. By Feb. 1, when the winter heating season slowly starts winding down, 40 percent should still be available. It is just one of the many about-faces that have been made in recent days. From this point on, the construction of the liquified natural gas terminals has top priority.
Building not one but three LNG terminals - Finally!
LNG is a short to mid term bet
LNG is a good alternative but a bit expensive though. You need to import LNG at -160C and then convert it into gas. Currently, German has no LNG terminal as of today but has started actively building two permanent terminals and one floating terminal. The floating one can help replace 20% of all Russian gas imports by as early as 2023 while the other will take 2-3 years and can cut another 30-40% of Russian gas. This can be devastating blow to Russia. Gas unlike oil can’t be cheaply transported to other customers. And Russia spend a good two three decades building Gas connections to EU. All these is currently being undone and hill hurt the Russian economy in 2-3 years heavily. Germany is planning to buy LNG from Qatar and US mainly and rest from the open market.
And Germans want to build these terminals fast, Tesla fast
“The construction of electricity networks, LNG terminals and renewable energy must be done at ‘Tesla speed’,” said Germany’s Economy Minister Robert Habeck in a recent press conference.
Replacing Gas with Hydoregn
Green hydrogen a mid to long term bet for Germany.
Germany is a leader and a true believe in this and has invested a lot in the past decade on it. Germany wants to produce and import Green hydrogen - hydrogen which is produced by renewable sources rather than Blue hydrogen produced by fossil fuels. Green hydrogen also has the possibility to solve the storage problem of renewable sources - currently grids can’t store energy and renewable sources have to be turned off if production exceeds capacity.
Also importantly, these LNG terminals can support green hydrogen. Germany is about to sign a deal with Norway and has signed a deal Australia to import green hydrogen.
And surprisingly with UAE as well
Habeck's trip now moves on to the United Arab Emirates (UAE), which is repositioning itself as a hub for green hydrogen.
The UAE could also help Germany meet its longer-term goal to switch to cleaner energy sources.
Another option Africa!
worth a try but a low volume alternative
Algeria can supply in mid term but its requires them to develop capacity.
Egpty can but is quite happy with partnership with China. EU will have to convince Egypt to send some gas its way.
Libyan infrastructure is insufficient to boost exports, let alone receive the payments.
Nigeria already plays an important role in the European gas market, there are bottlenecks there, too, he said. In 2021, the country was unable to meet its target. The infrastructure hardly allows for further production, and there is always the question of efficiency and reliability.
North Sea - new drilling for gas and oil in the North Sea, though the potential resources are rather small and local opposition is strong. German also has (not much) gas but can be only extracted through fracking which Germany has banned.
Bottom line
Finally some pragmatism from Germany. Germany is moving toward a strong clean, renewable and self sustainable approach. If they managed to execute it - it will be a big win for Germany and its economy.
Bad news for Russia - Germany and EU will cut dependcies on Russia oil and gas heavily in the next 1-2 years. Russia will need to find new customers outside of EU. For oil, China and India can be but its difficult. China and India would not like to increase their depency on a unstable and outcast nation too much. They can increase buying by 4-5 percentage points but not further. The main problem is gas, once cut off from EU. Russia will struggle to find new buyers for its gas. This would be a huge blow to the economy.
Necessity is the mother of innovation
In the end I would share a short anectode from history.
In May 1940, Franklin D. Roosevelt called for the production of 185,000 aeroplanes, 120,000 tanks, 55,000 anti-aircraft guns and 18 million tons of merchant shipping in two years. Adolf Hitler was told by his advisors that this was American propaganda; in 1939, annual aircraft production for the US military was less than 3,000 planes. And there was no way America could scale that fast.
By the end of the war US factories had produced 300,000 planes
That’s all folks.