Germany’s Energy Transition and the European Electricity Market: Mutually Beneficial?

Abstract

Germany's energy system is in transition towards less nuclear, lower carbon emissions and more renewables. Notwithstanding widespread neglect of its European dimension, this Energiewende will further exacerbate current network fluctuations due to the significant increase in wind and solar power. Key data from Denmark show that this transition will soon bring the German national power system to its limits for absorbing the resulting intermittency, and increase the need for more cross-border power transfers. Yet network analysis of import/export data shows that Germany's position in the European power system is contrary to the Danish case. The need for a European solution for Germany's energy transition will therefore soon become evident. In order to establish the necessary infrastructure, the Energiewende needs hence to be guided by an economic approach designed to prevent further fractures in the Internal Electricity Market. Constructive negotiations with neighbouring countries on market designs and price signals will be important preconditions. The article emphasizes the still neglected European paradox of Germany's energy transition and presents working examples and possible solutions to uphold electricity supply in Europe's power house. The neglect of Europe's Internal Electricity Market is one of the most surprising aspects of Germany's Energiewende (energy transition—Substantially increasing the share of renewables in the energy mix, while phasing out nuclear power), as the country's central geographic position, its importance in the European electricity system and the growing pressure on Europe's networks makes a European approach imperative: A dense, cross-border infrastructure which allows flexible import and export of electricity from one region to the other might be the sine qua non of Germany's Energiewende, at least from a technical standpoint. The German government's decision to initialise a complex transition of the country's energy system therefore could be followed by a turn in its policy towards market opening. Germany might be forced to give up its longstanding opposition against deeper integration and become an advocate of an European power system which is large and flexible enough to allow trade and load management at different levels—Local, national, and supranational. Yet this scenario has an economic flipside, which is much less straightforward: As the European Internal Electricity Market is still characterized by a variety of national (and regional) market models, its features, among other things, different electricity tariffs. Given that potential exporters of electricity should favour international markets and better transnational interconnectivity, electricity producers that might sustain losses in their market share, should oppose it. The delicate task of market opening hence depends on mutually beneficial interactions between Germany's energy transition with its environment in a truly finalised Internal Electricity Market. Yet one key element of Germany's energy transition makes the outcomes of the Energiewende highly uncertain: The