Annual Economic Report 2014/2015 Calls for International Climate Protection Strategy and More Efficient Energy Transition

German Council of Economic Experts (GCEE) has presented its Annual Economic Report 2014/15. GCEE expects GDP to increase by 1.2% in 2014 and 1.0% in 2015. In the section on energy policy entitled “Low Expectations Confirmed” GCEE critises the German support for renewables and calls for an international strategy for climate protection and more efficiency in managing the energy transition (Energiewende).

1. General Comments and GDP Projection

Council sums up the political and economical situation as follows

The German government has used the budgetary leeway allowed by the positive economic performance in recent years in order to introduce the full pension for some 63 year-olds and the increased “mother pension” (Mütterrente) for those with children born before 1992. However, reality has caught up with politics faster than expected. Thus, economic policy should be redirected to address the main long-term challenges, in particular those due to demographic change. It should place greater confidence in market processes instead of increasingly seeking to fix market outcomes in order to achieve distributional objectives.”

The GDP projection for 2014 of a 1.2% increase is down 0.4% from the prediction in last years’s report (Annual Economic Report 2013/2014).

2. Energy Policy: Low Expectations Confirmed

Under the heading “Energy Policy: Low Expectations Confirmed” GCEE points out that the German Energiewende (energy transition) shall lead to a renewable energy supply of 80% by 2050. Yet renewable power production in Germany was not competitive and this was not likely to change in the near future, GCEE says. Instead of supporting an increasing number of renewable power plants in Germany, GCEE demands again (see last year’s report) to strengthen the European Emissions Trading System (EU ETS). A functioning EU ETS that was in the long-run expanded into a global system would lead to renewable capacity being build in the most cost-effective way, GCEE says (regarding reform proposal for the EU ETS, please see here).

With regard to the reform of the Renewable Energy Source Act (EEG) that took effect in August 2014, GCEE criticises that renewable support was still not happening in the most cost-effective way (i.e. with a quota model as favored by GCEE) despite new elements of quantitative control as support still differed for the various renewable energy sources. An opportunity for correction was the start of auctions for determining EEG support in 2017 (for more information, please see here), GCEE says, yet currently individual auctions for each renewable energy source were planned (see report, pages 25 and 27, points 36 and 38). Citing the Institute of Applied Ecology (Öko-Institut), GCEE says that financial obligations incurred under the EEG so far amounted to EUR 300 billion (at 2014 prices), EUR 192 billion of which were state aid.

GCEE positively remarked that the government has so far not given in to demands to create a capacity market that remunerates non-volatile capacity (often conventional power) provided to balance fluctuating renewable power input. Government efforts to create an electricity market design for a market with a growing share of renewables did however have to ensure sufficient (conventional) reserve power as well as renewable power that was no longer state-sponsored (see report, page 27, no. 38), GCEE says.

The German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) is an academic body consisting of five economists who advise the German government on economic matters. Each year in mid-November the Council publishes its Annual Economic Report.

Source: German Council of Economic Experts

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