IEA Commends Germanys Greenhouse Gas Emission Reductions but Recommends Continuous Assessment of the Impacts of the Nuclear Phase-Out and Further Action in Regulatory Reform

"Germany has managed substantially to reduce greenhouse gas emissions and it has implemented a reform of its electricity and gas markets" said William Ramsay, Deputy Executive Director of the International Energy Agency at the launch today of "Energy Policies of IEA Countries - Germany 2002 Review". While recognising the domestic political impetus behind the decision to phase out nuclear power, Mr. Ramsay said that maintaining the greenhouse gas emission levels beyond the Kyoto target years would be a challenge as a result. He also noted that the effectiveness of regulatory reform should be reviewed.

Climate Change Mitigation
Germany ratified the Kyoto Protocol in April 2002 and is well on track to meet its Kyoto target. In 2000, Germany was only about 2 percentage points from its target under the EU "burden-sharing" agreement and provided the bulk of European Union reductions in emissions between 1990 and 2000. These reductions made it possible for the EU as a whole to meet the stabilisation goals of the UNFCCC, set in Rio in 1992. The government is pursuing an additional target: to reduce CO₂ emissions from 1990 levels by 25% by 2005. This is a tough goal, since emissions in 2000 were almost 10 percentage points above this target.

These achievements reflect investment in energy efficiency improvements and management efforts, but also the industrial restructuring process in the New Laender during the last decade. That opportunity was unique, however, and it is unlikely that Germany can continue to reduce emissions at the same pace and at the same cost as in the 1990s.

Germany introduced a package of measures in its National Climate Protection Programme in 2000. These include voluntary reduction agreements, minimum feed-in tariffs for electricity from co-generation and renewables, the "eco-tax" and legislation to encourage energy efficiency. As a result of these and earlier policies, Germany has become the world leader in wind power installations and the European leader in photovoltaic installed capacity. The benefits are counterbalanced, however, by the burden on taxpayers and consumers. Despite the government's preference for domestic measures, use of the Kyoto "flexible mechanisms" would reduce the cost. The Report recommends that the "eco-tax" should better reflect the carbon contents of fuels and the externalities, and that it should apply to energy users in a more equitable manner.

Regulatory Reform and Competition
Germany was one of the first IEA countries to liberalise fully its electricity and gas retail markets. While prices for industrial and domestic consumers have fallen, problems of access remain, notably expensive electricity network access tariffs, and slow and costly dispute settlement, implying abuse of dominant market position by incumbents. Germany is the only EU country that has chosen negotiated third-party network access, without a sectoral regulator. Instead, it relies on Association Agreements to establish access conditions and on ex-post abuse control by antitrust authorities. Despite considerable progress under these arrangements, problems remain, especially for small consumers. In addition, the negotiation processes have been time consuming and burdensome. One option for improvement would be to have a regulator to set the access rules. Another option would be to involve the government in the negotiation of Association Agreements and make them legally binding. If more competition does not develop, further unbundling might be necessary.

The consolidations and mergers that have occurred as a result of increased competition, notably at the supra-regional level, need to be closely monitored. The Federal Cartel Office performs this task conscientiously. The mergers of RWE and VEW, Veba and Viag and the on-going merger case of E.On and Ruhrgas are good illustrations.

The Report welcomes the government's decision to phase out the protection of lignite power plants in the New Laender. German hard coal still receives a significant, though declining, level of subsidy. The IEA does not consider this subsidy to be warranted on energy policy grounds, since the international market offers secure coal supply at lower prices.

Phase-Out of Nuclear Power
Germany has decided to phase out nuclear power, which currently accounts for 30% of electricity generation and 13% of total primary energy supply.

The energy policy implications of the decision are significant. 170 TWh of base-load electricity will have to be replaced, without prejudice to climate change mitigation after the Kyoto commitment period. The phase-out entails no direct cost to the government, but any economic benefits of extending the operational lives of fully depreciated units will be lost. The decision will increase Germany's reliance on energy imports.

The government relies on the market to find solutions to replace nuclear power. It will need to monitor the situation closely, since the impacts will only gradually emerge. While the nuclear programme is still operative, Government and industry must share responsibilities for maintaining safety in the nuclear sector, disposing of radioactive materials and safe decommissioning of the nuclear power plants.