Fossil fuels are finite. Investment in sustainable and renewable energy sources is essential to meet the ambitious social and political objectives associated with the transition to a greener future
How energy transition got onto the agenda
The idea of switching to renewables has its origins in the 1970s. Against the backdrop of the oil crisis and growing evidence of the negative impact of fossil fuels on the environment, scientists and the public alike discussed possible solutions to these problems. The recognition that fossil resources would eventually run out, combined with concerns about the immediate and long-term risks of nuclear power, triggered a move towards renewable energy that quickly found political expression..
Massive expansion of renewable energy sources
The renewable energy sector has experienced a major boom worldwide over the past decade. In research and in politics, the transition to renewable energy has gone from niche to mainstream. Germany was the first country in Europe to commit to renewables and has positioned itself as a leader in this field. Since adopting this policy, it has been a global pioneer in tackling the technological, regulatory and political challenges. The facts and figures speak for themselves. According to a report published by the German federal government for 20151, “switching to the future” has created work for more than 371,000 people in Germany to date. 261,500 jobs alone are attributable to implementation of the Renewable Energy Act (Erneuerbare-Energien-Gesetz – EEG). The economy benefits in other ways too, with a total of EUR 14.9 billion invested in renewable energy plants in 2015. Of this amount, almost 79% had been invested in wind energy. Around a quarter of Germany’s electricity is now generated from wind, sun, water or biomass. The country has cut its greenhouse gas emissions by 148 million tons, of which 90 million tons are thanks to power produced under the Renewable Energy Act.
Renewable energy is not over-subsidized and is just as economically viable as conventional generation methods
The course for a successful transition to renewable energy was set in Germany with the introduction of the Electricity Feed-in Act (Stromeinspeisegesetz) in 1990. The Renewable Energy Act was passed in 2000, and then gradually amended over time to reflect new insights and the growth of renewable energy. While this flow of changes caused regulatory uncertainty at times, it nevertheless proved possible to create a largely stable framework for investors. The 2016 reform of the Renewable Energy Act marks a further step towards making renewable energy more competitive and establishing an appropriate market mechanism.
Like in most other markets around the world, subsidies for renewable energy in Germany are reflected in a surcharge on consumers’ electricity bills. The surcharge has its critics, but supporters point out that conventional energy sources also cost much more than what can be seen on the consumer’s electricity bill. Nuclear and coal power plants, for example, benefit from significant tax breaks and other financial aid. Costs arising from past and future environmental damages also need to be taken into account. There is no associated surcharge, but these costs are ultimately still borne by consumers through taxes and levies. From an economic viewpoint, the surcharge under the Renewable Energy Act produces a better net outcome over the short, medium and long term, once all the ancillary and follow-on costs are taken into account.
Investment in “real assets” is driving the transition – and is essential for the switchover to renewable energy
Expanding alternative energy sources involves a corresponding reduction in the use of conventional energy. The energy sector is thus undergoing a transformation that is supported politically, underpinned by legislation and rapidly gaining momentum. Thus the shares of renewable energies in gross electricity consumption are increasing from year to year, reaching the threshold of 30% for the first time in 2015. Utility companies need to embrace this trend if they wish to remain profitable and survive. The transformation requires substantial investment, thereby opening up many exciting opportunities for investors in “green energy”. Germany’s Renewable Energy Act and comparable legislation in other parts of Europe provide a stable long-term framework and largely uncorrelated investment opportunities. The trend appears unstoppable, and the environment for investors in alternative energy sources will probably continue to improve as “niche goes mainstream”. Not just in Germany, but worldwide.
1 Bilanz zur Energiewende 2015. Die Bundesregierung. Entwicklung der erneuerbaren Energien in Deutschland im Jahr 2015. BMWE.