14.06.21 A scoop of ice cream that costs 42 euros Author: Michael Gneuss • Reading time: 5 min.

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Summary

The majority of Germans support the energy transition, although most people are aware that the conversion process will continue to be expensive. But is it too expensive? Over the past five years, researchers have been attempting to work out the cost of the energy transition and their studies have shown that it could amount to trillions of euros. However, this is counterbalanced by the benefits of protecting the climate.







Work on transforming our energy supply started just over 20 years ago and so the energy transition has been part of the lives of a whole generation of Germans. “Strictly speaking, government support for renewable energy began as early as 1990 when the German Electricity Feed-In Act was introduced under Chancellor Helmut Kohl,” says Professor Claudia Kemfert, Head of the Department of Energy, Transportation, and Environment at the German Institute for Economic Research (DIW Berlin). However, she highlights the year 2000 as being the real starting point for this mammoth project. On April 1 that year, the German Renewable Energy Act came into force and the red-green coalition government began the phase-out of nuclear power.

It was clear even in the early 2000s that the construction of a new supply infrastructure would be costly. However, Germany’s environment minister at the time, Jürgen Trittin from the Green Party, was able to reassure the public: “The subsidies for renewable energies will cost an average household roughly one euro a month – about the same as a scoop of ice cream,” he explained in July 2004 in a ministry press release. And after the change of government a year later, promises were still being made about the cost of the energy transition that could not be kept. In June 2011, Chancellor Angela Merkel said that the renewable energy surcharge imposed to subsidize the generation of green electricity would not exceed 3.5 cents per kilowatt hour. Only three years later, the surcharge amounted to the much higher figure of 6.24 cents.

"The fact remains that the promotion of renewable energy only costs an average household about one Euro per month - as much as a scoop of ice cream."

Jürgen Trittin, Former Minister of the Environment

DICE study: 520 billion euros for the electricity transition

Researchers have been attempting for years to calculate the actual costs of the energy transition. In 2016, the Düsseldorf Institute for Competition Economics (DICE) came up with a total cost for the electricity transition of 520 billion euros in the period up to 2025. The study, which it carried out on behalf of the Initiative Neue Soziale Marktwirtschaft (INSM), a German think tank, identified the renewable energy surcharge as being by far the biggest cost driver, amounting to 408 billion euros. The authors estimated the cost of expanding the electricity and distribution grids at 55.3 billion euros. A further 18 billion euros would be needed for the combined heat and power (CHP) surcharge and 12 billion for research funding from the federal and state governments.

If the figure of half a trillion euros sounds extremely abstract, breaking it down to the amount that will be paid by one person clearly indicates the extent of the burden on German citizens. DICE believes that the costs in the 2000 to 2025 period for each individual amount to 6,300 euros. As a result, according to DICE, a family of four will pay more than 25,000 euros in the first quarter of the century for the electricity transition. The greatest proportion of this cost, a total of 18,000 euros, will be incurred between 2015 and 2025. So how expensive is Jürgen Trittin’s scoop of ice cream per month now? An average household in Germany consisting of two people has to pay additional monthly costs of around 42 euros.

ifo Institute: up to three trillion euros

In 2019, the ifo Institute for Economic Research in Munich calculated the amount of technical and infrastructure components and equipment that would be needed to achieve our climate targets. The researchers worked out the costs of investment, imported fuel, and the machinery and systems required for operation and maintenance, together with the costs of manufacturing fuels on the domestic market, for the various development approaches. The difference between the climate protection scenario and the business-as-usual scenario gave the additional costs caused by the energy transition. According to the institute, by 2050 they will amount to between 500 billion and more than three trillion euros. On an annual basis, that corresponds to between 0.4 and 2.5 percent of Germany’s GDP in 2018.

The institute explains that the largest proportion of the costs will be spent on converting the energy system, which includes investment in equipment and infrastructure. “But once the conversion work has been completed, the annual cumulative systemic costs will amount to a figure that is similar to what is currently needed to operate the energy supply system,” explained the researchers in Munich. They also put the additional costs in relative terms. Although they appear to be “astronomical,” their order of magnitude is comparable with that of other large-scale public sector projects, such as German reunification.

The Fraunhofer Institute for Solar Energy Systems ISE in Freiburg also calculated the net additional costs caused by the energy transition in several different scenarios and came to a figure of between 440 billion and 2,300 billion euros for the period from 2020 to 2050. These annual additional costs amount to between 0.4 percent and around 2.0 percent of German GDP in 2019. Depending on the scenario, the cost of avoiding one tonne of CO2 emissions ranges from 50 to 233 euros.

Significant rise in electricity prices

Both households and businesses are already noticing the financial impact of the energy transition. Electricity prices have risen considerably in recent decades. According to figures published by the German Association of Energy and Water Industries (BDEW), the average electricity price for a household with an annual consumption of 3,500 kilowatt hours rose from 13.94 to 31.89 cents between 2000 and 2021 (as of January 2021). That amounts to an increase of 129 percent. Industry was even harder hit. Businesses with an average annual consumption of between 160,000 and 20 million kilowatt hours saw their average electricity price rise from 5.70 to 16.71 cents per kilowatt hour, an increase of 189 percent.

Cost-benefit analysis

But according to Kemfert, alongside the costs, we also need to consider the benefits of the energy transition: “Conventional power stations not only reliably supply a specific amount of energy, but also unfortunately cause huge damage to the environment and the climate.” The bottom line is that the net benefits of the energy transition are far greater than the net costs. “If I were to sum the situation up honestly and realistically, I would say that the energy transition will saves money,” says Kemfert.

"The fossil-fuel phase-out could have been more efficient and cheaper."

Prof. Claudia Kemfert, Head of the Energy, Transport and Environment Department at the German Institute for Economic Research

In addition, speeding up the development of renewable energies could cut costs by allowing us to avoid other spending. “The faster we implement the energy transition, the cheaper it will be. It’s like saving for a house. The earlier you start, the smaller your monthly mortgage payments will be and the bigger the returns,” explains Kemfert. Germany could learn from Denmark, for example, which has been using renewable energy for a long time and has a high proportion of renewable combined heat and power generation. Kemfert is also calling for a faster changeover because of the security of supply. “The current expansion targets for renewable energy are not ambitious enough. We are walking into an electricity supply gap with our eyes open.”

The cost of phasing out coal


According to Kemfert, over the last 20 years, time and money has been spent unnecessarily on what she calls the “bridge technology drama.” “The phase-out of coal could have been managed more efficiently and cheaply,” she says. Christoph Kost, Head of Group Energy Systems and Energy Economics at the Fraunhofer ISE, also believes that the exit from coal-fired power generation is a significant factor in the costs of the energy transition. He believes that if greater attention had been paid to the phase-out of brown coal, it could have been achieved more cheaply.

Kost does not believe that international comparisons of energy transition costs are useful, because the various countries often start from very different positions. For example, Austria and Switzerland, with their high mountains, have been able to generate much more electricity from hydropower and this has reduced the pressure on them to construct solar and wind farms.

Criticism from the Federal Audit Office

The Federal Audit Office (BRH) has criticized the management of the energy transition by the Federal Ministry for Economic Affairs and Energy (BMWi). “The federal government’s management of the transformation process is still inadequate. It is jeopardizing the reliability and affordability of our future supply of electricity. And the energy transition is also threatening to put too great a financial burden on private households and businesses,” says BRH President Kay Scheller.

"The energy transition threatens to overburden private households and businesses financially."

Kay Scheller, President Federal Audit Office

He fears that electricity prices could rise even further, because the hydrogen strategy and the integration of transport and heating into the energy transition will create additional demand for electricity. And the costs of the further expansion of the grid and the development of renewable energy also have to be taken into account. The BMWi needs to investigate the possibility of a comprehensive reform of prices so that the financial burden on consumers remains within reasonable bounds. The ministry must also finally come up with a definition of what it understands by an affordable and efficient electricity supply. The Federal Audit Office recommends a fundamental reform of the state-regulated components of the electricity price, for example the renewable energy surcharge and the network charges, because electricity prices for households, businesses and industry in Germany are currently the highest in Europe.

The EU sets ambitious targets

The European Commission’s Green Deal, which aims to make the EU climate-neutral by 2050, will also have an impact on energy costs. According to the Fraunhofer ISE, it will increase the CO2 avoidance costs by 50 euros per tonne of CO2 to 200 euros. The Fraunhofer researchers explain that one way of preventing this rise in costs is to considerably reduce consumption. This would result in a fall of around 100 euros per tonne of CO2 and the scoop of ice cream would not then become even more expensive.

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