SOURCE: The Boston Consulting Group

The Boston Consulting Group

September 25, 2014 00:01 ET

Germany's Power-Sector Transformation Could Trigger the End of Market Liberalization, Both in Germany and Beyond

High Electricity Costs, Rising Emissions, and Growing Financial Pressure on the Country's Power Producers Pose Large Challenges; German Policy Makers Face Difficult Decisions and Will Likely Increase Intervention, Says BCG

MUNICH, GERMANY--(Marketwired - Sep 25, 2014) -  Germany's ongoing transformation of its power sector has delivered noteworthy successes so far but also met major hurdles -- hurdles that could ultimately derail power market liberalization both in Germany and elsewhere in Europe, according to a new report by The Boston Consulting Group (BCG). The report, titled Germany's Energiewende: The End of Power Market Liberalization?, is being released today.

Germany is in the early stages of a secular overhaul of its power sector, one centered on the phasing out of nuclear energy and, simultaneously, growing emphasis on renewable generation. The Energiewende (German for energy transformation) has already yielded impressive results, says BCG. Germany's goal of expanding the role of renewables in its power scheme, for example, is very much on track, with the country on a trajectory to meet or exceed its 2025 target of having renewables account for 40 to 45 percent of electricity consumption. And Germany's power-supply system continues to rank among the world's most reliable.

But the effort has also run into significant challenges, says BCG. Power prices for German residents and many industrial consumers have risen significantly (though the rate of increase in residential prices should slow materially in the coming years). Germany is likely to miss its emissions-reduction targets, despite the country's growing emphasis on renewables, as a confluence of forces -- including the country's ongoing phaseout of nuclear energy, its continued heavy export of power to other European countries, and low prices for carbon-dioxide-emissions allowances -- have kept the country wedded to carbon-intensive coal-fired generation. Financial pressures on the country's major power producers, whose business model has been disrupted by the Energiewende, continue to mount and could trigger a fundamental restructuring of the industry, says BCG, replete with significant state intervention, shakeouts, and consolidation.

Moreover, the German government is progressively reinserting itself in the management of the power market, belying policy makers' longstanding pursuit of deregulation. Ultimately, Germany's struggles could bring the de facto end of power market liberalization both in Germany and, potentially, beyond, says BCG, given the country's central role in Europe's power-generation landscape. 

"German policy makers have some critical decisions to make," says Philipp Gerbert, a BCG senior partner and coauthor of the report. "The Energiewende is a highly ambitious scheme, given the power market's realities and Germany's proposed timetable, and arguably overdetermined. Policy makers will have to decide which of the plan's various objectives are most important and where compromises and trade-offs need to be made."

The issues facing Germany are indeed thorny, says BCG. Policy makers will have to decide, for example, how to apportion the Energiewende's substantial ongoing costs among German consumers and industry. They will have to decide whether the country's current emissions targets are realistic or should be relaxed. They will have to determine how best to drive forward the necessary grid extension in the face of "not in my backyard"-type resistance from residents and local politicians. "These are complex, multifaceted challenges, and there are no easy answers, unfortunately," says Harald Rubner, a fellow BCG senior partner and report coauthor.

The choices made by German policy makers could have substantial ripple effects beyond the country's borders, says BCG, given Germany's critical place in Europe's interconnected power system. Countries around the world will also be monitoring Germany's course closely, as the country stands at the vanguard of a nascent global shift toward renewable power sources. 

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group
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    Eric Gregoire
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    Tel +1 617 850 3783
    Fax +1 617 850 3701
    gregoire.eric@bcg.com