Since mid-April, Germany has been without valuable electricity that was available even during dark periods. Instead, it relies on weather-dependent cheap electricity. This strategy has welfare costs.
The European electricity market is great! It is organized in such a way that Germany imports electricity when importing it is more cost-effective than producing the electricity domestically. In this way, the European electricity market helps to maximize welfare, taking into account political decisions and existing production conditions. In other words, the European electricity market makes it possible to minimize potential welfare losses due to energy policy decisions.
High-priced electricity is imported, cheap electricity is exported
Since April, Germany has been importing more electricity than it exports, which represents a reversal of the previous situation. Germany achieves lower prices for its electricity exports compared to the prices for electricity imports. This results in an impressive net export deficit, which amounted to just over 2.5 billion euros from April to September. To put it bluntly and simply: Germany buys high-priced electricity abroad, exports its own cheap electricity and the amount of high-priced electricity purchased has been greater than the amount of cheap electricity sold since mid-April. This obviously results in a deficit in the electricity trading balance.
Now this new deficit, even if it amounts to several billion euros, cannot be directly equated with a loss of welfare for German citizens. If domestic electricity demand is greater than domestic supply, it may be cheaper to purchase high-price electricity from abroad. Because you don’t want to generate electricity yourself that is even more expensive, often dirtier and more harmful to health, for example through additional coal-fired power generation. It is therefore good if foreign countries supply comparatively cheaper and cleaner high-priced electricity.
“Just” a deficit or a welfare loss?
Welfare losses do not arise because valuable products are expensively imported, such as foreign electricity into Germany. Because European electricity trading works, there are no welfare losses caused by electricity trading. Quite the opposite: The European electricity market serves to maximize welfare at every trading point, as Christoph Maurer recently excellently described on this blog. In this respect, possible welfare losses are usually due to changes in production conditions, which are often brought about by political decisions.
If one were to politically mandate the closure of the functional production facilities for German luxury cars, the associated loss of welfare would be clear to everyone. The production facilities could then no longer be used to produce the luxury cars that consumers highly value, like to use and are therefore valuable.
The situation is similar when power generation systems that can be used even when the wind is not blowing and the sun is not shining are switched off. Electricity itself is in demand and valued by electricity consumers even during periods of darkness. If you deprive the citizens of this electricity because the power plants are shut down, this leads to a loss of welfare. This welfare loss would be partly visible as follows: less electricity would be exported because less domestic electricity is produced. The average import price would rise slightly relative to the export price, as more imports tend to occur during periods of darkness. Thanks to the European electricity market, electricity customers in Germany would use slightly more expensive electricity from abroad than before the shutdown, but still often cheaper than through their own generation from alternative, weather-independent coal-fired power generation. The European electricity market thus reduces the welfare losses of the political decision to switch off. A previously existing net export surplus would be smaller and a net export deficit would possibly arise. This is exactly what we have been observing since the shutdown of the functioning German nuclear power plants. This shutdown has resulted in real welfare losses. Part of the welfare losses became visible through lower electricity exports with low export prices and higher electricity imports with high import prices. The current deficit in the electricity trade balance reflects the welfare losses in a way that is easy for everyone to see. In the event of the shutdown of the German nuclear power plants, the deficit is an indicator of the resulting welfare loss, not its cause. The reason is the political decision to shut down.
The deficit itself is of course also determined by other factors that are not directly related to the resulting welfare loss. If new power generation plants were built abroad that would deliver power even during periods of darkness, there would be a small welfare gain for Germany, even if the trade deficit could become even more negative as a result. Conversely, it is possible that a further subsidized expansion of renewable energies in Germany will soon lead to Germany exporting more electricity than it imports. Since electricity from renewable sources depends on the weather and is not always available, Germany is likely to import expensively and export cheaply in the long term.
German energy strategy: Weather-dependent cheap electricity
Electricity is valuable for households and industries as electricity consumers when they need it. Electricity consumers would prefer electricity to be cheap at exactly that point. Particularly valuable electricity is that which can be produced flexibly and cheaply exactly when it is in demand. So cheap electricity is good, but not really good enough, because it should be as cheap as possible at all times.
Germany relies on weather-dependent cheap electricity. Once installed, wind turbines and photovoltaic systems provide cheap electricity when the weather is good, which is usually great at that time. Photovoltaics fail at night and the wind turbine stops when it is calm. But of course citizens and industry want electricity even when it is dark and calm. And when it is night in Germany, it is not day in the rest of Europe, so photovoltaics from abroad cannot step in if photovoltaics in Germany fail due to darkness. Likewise, calm winds do not end directly at the German border. In addition to wind power and solar systems, massive backup solutions are needed in the form of flexible power plants or electricity storage systems – neither of which is currently cheap and is in any case often more expensive than nuclear power plants that are still running abroad. The German energy strategy of weather-dependent cheap electricity has a decent price tag for electricity consumers and taxpayers now and in the future. And when it comes to the environment and health, you have to be honest: In contrast to Germany’s weather-dependent cheap electricity, the weather willanddependent German electricity tends to be expensive, dirty and harmful to health, including through coal-fired power generation.
Finally, the high subsidies for weather-dependent cheap electricity from renewable energies must also be taken into account as a burden on the German energy strategy for taxpayers and consumers. These burdens are high. However, it is right and important to point out that some other countries heavily subsidize nuclear energy and want to continue to subsidize it. But there is an important difference: Germany subsidizes weather-dependent electricity, while the others subsidize electricity that is also there when the weather doesn’t cooperate. Both subsidies should be viewed very critically! But the German subsidies are more critical because they subsidize electricity that is less valuable because it simply cannot always be there when it is needed. Sticking to the strategy of subsidized, weather-dependent cheap electricity is becoming increasingly expensive, less than exemplary and comparatively harmful to welfare.
Blog posts on “European electricity trading”:
David Stadelmann (2023): Noble foreign electricity, unethical German electricity?
Christoph Maurer (2023): Why Germany benefits from European electricity trading