Background: electricity price reduction is feasible – with gas and nuclear power: bitter pill

Background: electricity price reduction is feasible – with gas and nuclear power: bitter pill

Background: Electricity price reduction is feasible – with gas and nuclear power
Bitter pill

Alexander Weiss, head of global energy consulting at McKinsey

Alexander Weiss, head of global energy consulting at McKinsey

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Although renewable energies have increased in Germany, the price of electricity has exploded in the past year. A study shows that in order to significantly reduce costs by 2025, you need gas and nuclear power plants.

All experts agree on one thing. Electromobility will pick up speed in the next few years. These optimistic predictions are followed almost automatically by the same questions: where will the electricity come from and how much will it cost? The skepticism is not unfounded, after all, many electric vehicle drivers already have to dig much deeper into their pockets than before when charging up with electricity. For example, the energy provider EnBW will noticeably increase its prices at the charging stations from January 17th. Competitors such as Allego and Ionity are now also holding out when it comes to charging car batteries. Even Tesla drivers have to dig deeper into their pockets.

So if the number of electric cars increases, then the price screw should continue to turn. Because one thing is clear even to the greatest optimists about renewable energies. When it comes to energy supply, Germany will never become self-sufficient. There is a lack of constant wind and water power as well as solar energy. If complete self-sufficiency is not feasible, one should use regenerative energy sources as best as possible. Germany is obviously on the right track. According to studies by the Fraunhofer Institute for Solar Energy Systems (ISE), wind and photovoltaics have increased significantly in net electricity generation in Germany in 2022.

According to the ISE, German photovoltaic systems generated around 58 terawatt hours (TWh) of electricity in 2022, of which around 53 TWh were fed into the public grid. The Renewable Energy Sources Act (EEG) is having an effect and is doing its bit, as the expansion of the EEG systems with 6.1 gigawatts increases the nominal capacity of these systems for electricity generation (installed capacity) to around 66 gigawatts (as of November). This corresponds to the highest photovoltaic expansion since 2013. In combination with the sunny weather of the past year, solar power generation has increased by 19 percent compared to 2021. Remarkable: From April to August and in October, the monthly power generation of the photovoltaic systems was higher than that of coal-fired power plants and from March to September the power of the sun even exceeded the output of gas-fired power plants.

2022 was an average year for wind farms: In total, the wind turbines on the coast and inland produced around 123 TWh, nine TWh more than in the previous year. This puts wind power at the top of German electricity producers, followed by lignite, solar, hard coal, natural gas, biomass, nuclear power and hydropower. Electricity production from hydropower fell by three TWh compared to 2021 to just 16 TWh due to the hot summer. All in all, renewable energy sources generated around 244 TWh of electricity in 2022, around 7.4 percent more than in the previous year (227 TWh). This also has an effect on the share of regenerative energies in public net electricity generation: it rose by four percent to 49.6 percent (share of the load 50.3 percent).

Despite all the progress, these power generators are still a long way from being self-sufficient. As the number of electric cars increases, the price structure at the German charging stations will remain dynamic. Especially since the battle for electricity will become even tougher. The analysts at the management consultancy McKinsey, who came to the conclusion in their study “Future path power supply” that electricity prices can be reduced to a competitive level by 2025, raise hope. A central requirement to achieve this goal is a massively accelerated expansion of renewable energies.

The accompanying circumstances show that it will not be that easy. Currently 95 percent of the photovoltaic modules come from China. In view of the increasingly complicated geopolitical situation, it is therefore important to locate the largest possible production capacities in order to ensure a supply of these power sources. This dilemma is all the more remarkable because Germany was the leader in the production of photovoltaic cells for a good ten years. But the staying power was lacking, China seized the opportunity and jumped into the breach. Now you have to make up for a carelessly given up advantage with a large and costly effort. The positive thing is that, according to the McKinsey consultants, 180,000 additional workers are needed to implement the expansion of renewable energies.

Nevertheless, it is not to be expected that regenerative energies will be able to shoulder the burden of supply to such an extent that they will depress electricity prices by the middle of the decade. According to the McKinsey experts, the consequence is obvious and is likely to cause some disillusionment: “Gas, as a stable and comparatively low-emission supplement, will continue to be an essential part of the German energy system for more than ten years, because energy demand is increasing and expansion of renewable and conventional generation capacities and grids is not running fast enough,” says the study.

Gas plays a crucial role in reducing the price of electricity. “Declining natural gas costs are the key to reducing CO2 emissions from power generation as well. If natural gas costs remain high, too much coal could be used,” explains Alexander Weiss, director of global energy consulting at McKinsey. According to the authors of the study, a reduction in the price of gas is only possible through long-term contracts with gas producers. A bitter pill for everyone who longs for the end of fossil fuels. The implications are clear. “If the gas price drops significantly to the forecast LNG price of 28 euros/MWh in 2025, the electricity price could fall to as much as 75 euros/MWh,” the McKinsey analysts note. If the federal government decides to extend the operating times of the nuclear power plants beyond April 2023, the wholesale electricity price could be reduced by an additional five to 15 euros/MWh in 2025. “Individual measures will probably not be enough to reconcile profitability, sustainability and security of supply – an overall package and concerted action by all stakeholders is necessary,” says Alexander Weiss, obliging those responsible to do so

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