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Will Germany’s energy policy lead to economic failure? | Hans-Werner Sinn

sWhat you will about Vladimir Putin, but his war on Ukraine has opened Europeans’ eyes to some long underrated realities. One is that even after more than 70 years of relative peace on the continent, the neglect of military security poses serious risks. Another reason is that the “green dream” of modern economies powered exclusively by renewable energy remains a long way off – and reliable access to cheap energy supplies is still essential.

While the first fact became starkly apparent once Russian forces crossed into Ukraine on February 24, the second fact has only penetrated the public consciousness gradually. Indeed, many have called for a ban on European imports of Russian gas, arguing that this would not only undermine Moscow’s ability to wage its war, but also accelerate progress toward a green nirvana—all at the lowest cost to Europe in terms of lost GDP.

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A new study debunks that argument for its fiction. If gas supplies from Russia were cut off, Germany simply would not be able to produce the 300 most gas-intensive products. The study certainly indicates that these products can be substituted for imports. But that assessment fails to account for the welfare losses that would result from Germany having to pay much higher prices for these products — losses that would reverberate throughout the economy.

Due to the effect of terms of trade, the welfare of consumers of oil and gas-intensive goods will decline as the prices of these imported goods now rise. Just because this price increase is not included in the definition of real GDP, the effects of the gas embargo on European GDP seem small.

Moreover, direct consumers of only 300 products will not be affected. For example, if the methanol and ammonia that underlie the production of fertilizers and many other chemical products must be imported from the United States, rather than produced domestically, Germany’s value-added manufacturing and downstream industries could lose competitiveness. Many functions can be affected until a new balance is found. No wonder BASF, the world’s largest chemical company, has decided to invest up to €10bn (£8.6bn) in a new factory in China.

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Replacing renewables with fossil fuels is not the solution many think. Weather-dependent fuels like wind and solar are simply too unpredictable to reliably power modern economies, which means that “adjustable” energy sources—coal, gas, nuclear—remain necessary to reduce volatility through volatility. Reverse with wind and solar energy. In a prolonged “dark stagnation”, when the wind does not blow and the sun does not shine, these sources must satisfy all the energy demand on their own.

The adoption of electric transmission, heating and home appliances (instead of gas) will exacerbate this problem by generating a greater demand for electricity, which would require the stock of adjustable power plants to grow proportionately. For Germany, which is avoiding coal and nuclear power, that means gas power plants. But the gas supply is already in short supply, so another solution must be found.

One might argue that this is what batteries are for: to accumulate energy when it is available, and store it until it is needed. But while batteries in electric cars, for example, will someday be able to smooth out short-term fluctuations in power access, we’re not there yet — not even close. Even with the most advanced battery technologies, going a day or two without wind or sunlight will bring electric transmission to a halt. Electric cars exacerbate the problem of seasonal buffering. How long, then, before we have batteries that can offset seasonal fluctuations in renewable supplies, and store enough electricity—generated by summer sun and fall storms—to get not only our cars, but our entire economies through the winter?

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A more realistic future—though still a long way off—will depend on hydrogen-fueled power plants to fill the gaps left by wind and solar. But if the hydrogen is to be produced economically, the electrolyzer needs a smooth and stable supply of electricity, something they are supposed to supply themselves. How this dilemma is resolved is still up in the air.

Ukraine’s war mercilessly exposed the shortcomings of the transition to green energy, forcing countries like Germany to experiment with real-time energy. For the time being, they have no choice but to buy expensive supplies of LNG, import and extract more domestic natural gas, and rely on nuclear energy, domestically produced or imported.

Twenty years ago, Germany was called the sick man of Europe, owing to high unemployment, weak domestic demand and sluggish GDP growth. Today, the country appears to have been struck by another disease – this time, due to an ambitious and unrealistic energy policy. The recovery will be painful.

Hans Werner Sen is Professor of Economics at the University of Munich. He was president of the Ifo Institute for Economic Research and a member of the advisory board of the German Ministry of Economics.

© Project Syndicate

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