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Meanwhile.. The big German energy revolution

March 8th, 2009 · No Comments

Just look at what’s happening in Germany…Simple and effective measures are revolutionizing energy production with amazing speed, combining free market forces with simple, clear, smart regulation works. In fact, it rocks..

The plan was to have 12.5% of electricity production from renewable sources by 2010. That sounded very ambitious. Price wise, renewable sources can’t compete, yet (although great strides have been made, and are being made).

However, with a few simple measures, the goal has ben achieved early. In fact, this is a huge understatement. Electricity production from renewables is already 18% of all electricity production today.

What’s going on? It’s simply an awsome example how combining market forces and smart regulation can solve what have long seemed intractable problems.

Before we’ll explain how it was done, let’s just list some of the advantages:

  • Needless to say, renewable energy is a lot cleaner, reducing the burden we place on the environment (and our own health)
  • It’s domestically produced, relieving the balance of payments and dependence on Middle-East oil and Russian gas, reducing geo-political tensions
  • A world-class domestic innovative industry has flourished, creating 250,000 new jobs in the process

So it’s environmental, industrial, health, and sensible geo-political policy all in one. In fact, new economic upswings are invariably related to the emergence of broad applicable new technologies (like the steam engine, combustion engine, transistor, etc. previously).

Renewable energy is the most likely candidate to deliver the next upswing, which is so desperately needed. Germany has shown how fast things can move. The interesting question is, how did they do it?

Simply said, it’s letting the market forces do the innovation and the smart regulation setting the incentives. Some noteworthy points:

  1. On the basis of it is the feed-in tariff. This is a guaranteed price that electricity producers get for production with renewable sources (solar, wind, tide, biomass, etc.).
  2. As a result, capital moves to the most promising technologies, as the more efficient the production, the more the producer can keep of the feed-in tariff, leading to vibrant competition and innovation.
  3. The feed-in tariff is gradually reduced for future installations. Not only does this force producers to increase efficiency over time, it also addresses a crucial error of earlier regulation, most notably in Latin America, which tried to create domestic industries by erecting tariff barriers for imports (so-called ‘import substitution’ policies). If tariffs are not reduced over time, producers get lazy and divert efforts to lobbying the government (so called ‘rent-seeking behaviour), instead of trying to figure out how to produce more efficiently.
  4. There is no ceiling in the system, which could lead to a situation in which political arguments could reduce the subsidies arbitrarily, creating much uncertainty for investments that need a long time horizon.
  5. The feed-in tariff is paid for by adding a eurocent to each kilowatt hour of energy consumption, this amounts to roughly 50 euro a year for each consumer.

Instead of abstract theories, we like policies that have demonstrated to work. One can view the world as a big laboratory. This one is one of the best examples showing that it is possible to get rich economies reduce their addiction to fossil fuels (and all their associated disadvantages) with amazing speed.

The German transport sector could be next. A simple idea, much along the lines of the feed-in tariff for electricity production: revoke energy taxes but tax pollution instead. See how that unleashes market forces in search for cleaner transport.

Germany has shown the way, showing that much more is possible today than almost everyone thinks. It seems that these lessons are being avidly studied abroad, most notably in the US, although the lobby of the powers that be (big oil and big cars) is a powerful adversary.

Tags: Alternative energy · Public Policy