Two Energy Revolutions Vie across the Atlantic

A front-page article in today's Washington Post reported on the trend of energy-related investments in the US by European companies.  This is another aspect of the competing energy revolutions I mentioned a few weeks ago, in my comments on President Obama's State of the Union speech.  Germany's 2000 Renewable Energy Law introduced feed-in tariffs for wind and solar power that have made that country a global leader in green energy implementation, yet it has also become increasingly apparent that this carefully planned transformation paid insufficient attention to the cost of the new energy sources it was embedding at the heart of the German economy.  The Post describes how leading German firms are looking across the Atlantic to invest where energy is cheaper, thanks to the unplanned, largely unanticipated extraction of hydrocarbons from shale. 

The Ludwigshafen, Germany dateline of the article caught my eye immediately.  Having just returned from a family trip to California with a packet of letters I wrote to my parents during a temporary work assignment in Germany in the early 1980s, I had only yesterday re-read the account of my visit to BASF's sprawling petrochemicals complex there.  I recall being greatly impressed by the site, which dwarfed the Los Angeles refinery at which I worked at the time. The BASF facility was part of the post-war boom--the Wirtschaftswunder--that made Germany the economic and industrial center of Europe, where it remains today two decades after reunification and a decade after relinquishing its cherished Deutchmark for the Euro.  Now the company apparently wonders whether Ludwigshafen can remain competitive in a global market dominated by US shale gas.

The divergence of energy prices that worries German industrialists is the result of conscious choices made by that country's government and a set of developments that occurred here largely out of sight of the US government, while its attention was focused elsewhere. In the same decade in which production from shale gas deposits in Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas--output that now sets the price of both gas and electricity in much of the US--was gathering momentum, the German government was negotiating for more imported natural gas from Russia, via a pipeline built by a company led by a former German Chancellor.  It also set up a mechanism for consumers of electricity to fund the payment of up to $0.70 per kilowatt-hour that was necessary to support the initial solar power installations in one of the world's least sunny countries.

German solar tariffs have declined significantly since then, thanks in part to ruinous competition with China-based solar manufacturers.  However, in the aftermath of the nuclear accident at Fukushima, the German government agreed to retire the country's nuclear power plants, which supplied 22% of its electricity in  2010.  New solar might soon be cheaper than new nuclear capacity, but there aren't many energy sources cheaper than an existing, fully-depreciated nuclear reactor, even after allowing for waste disposal and site cleanup.  As a consequence of these policies, German managers such as those at BASF face natural gas prices that are a multiple of those here, along with the prospect of steadily rising electricity rates.  The option to offshore production must seem as obvious for them as it did for US companies in 2005, when US natural gas prices reached $10 per million BTUs.

Of course this comparison is just a snapshot in time; the competition between these two energy revolutions will likely ebb and flow for years.  However, the current energy divergence between Germany and the US should remind us that the cost of energy remains a very important economic parameter, even in highly developed countries.  Measures that inevitably raise it are very likely to bring adverse consequences, no matter how well-intended or carefully justified they might seem.  That's worth considering here, as well, when Congress debates new energy taxes and the administration proposes new rules that could raise energy costs or constrain output.