Germany’s High-Priced Energy Revolution

March 14, 2017, 10:30 AM UTC

It has made huge but costly strides toward renewables. Can any other nation afford to follow it?

As many generations of Dieter Dürrmeier’s family as he can track have grown vegetables and tended livestock here in Opfingen, a hilly corner of southern Germany near the French and Swiss borders. Over the decades the Dürrmeiers have adapted, ever on the lookout for new ways to make money. In 1963, Dürrmeier’s father exploited cheap government loans to move his 136-acre farm from the crowded village to the outskirts of town. In 1986 the Dürrmeiers stopped raising cows and shifted to the less cyclical business of boarding wealthy city dwellers’ horses. But the family’s current shift has been its most lucrative yet. Though they still grow asparagus and grapes and tend to the equines, the Dürrmeiers today harvest their fattest earnings from sunshine. Thanks to generous checks from the German people, that crop from the sky spins off cash more reliably—and at higher margins—than anything the Dürrmeiers have ever grown in the ground.

On a recent frigid winter night, wearing a red-and-green flannel shirt and mud-caked boots, Dürrmeier takes a break from feeding the horses and chats under the eave of a barn, one of four work buildings on whose roofs he has installed subsidized solar panels. The glass-and-metal sheets, whose production he monitors in real time on a computer in his office, fetch him a steady profit of about 40,000 euros (about $42,000) annually. That equates to about 40% of the earnings from his entire farming operation. As he describes his solar windfall, the balding, barrel-chested 62-year-old is both proud and embarrassed.

“For us it’s a very good business, but for the German people it’s very bad,” Dürrmeier says of the government policy that has turned intermittent sunshine into an all but sure thing for his wallet. Germany’s solar-subsidy scheme pays him a set price for every kilowatt-hour of electricity he produces with his solar panels and sells into the grid. It guarantees him that price, which when he started was several times the prevailing electricity rate, for 20 years.

When he learned of the subsidy more than a decade ago, he says, “I was at first skeptical because it was a bit too good, and I personally objected because I thought that subsidies were generally bad for the economy as a whole. But if it was offered, I had to take it. It was against my beliefs, but as an entrepreneur it was the right thing to do.”

Germany has launched a renewable-energy revolution, and it’s paying a fortune to achieve it. In the past decade its green-minded politicians, backed by green-minded voters, have undertaken an extraordinary energy transition known in German as the Energiewende. At the center of the transformation has been a slate of renewable-energy subsidies that have dramatically scaled up once-niche solar and wind technologies and in the process have slashed their cost, making them competitive in some cases with fossil fuels.

A photovoltaic solar power array in Pasewalk, Germany.Paul Langrock—Zenit/laif/Redux
Paul Langrock—Zenit/laif/Redux

Thanks to Germany’s lavish first-mover spending, a raft of second-mover countries, from the U.S. to China to India, are now installing solar and wind power on a huge scale. If renewable energy ends up significantly helping curb climate change, then history may judge the Energiewende as a remarkable example of global leadership.

The raw ambition of the Energiewende is both mind-boggling and quintessentially German. It reflects the engineering prowess of a country that built the Autobahn, pioneered modernist architecture, and cranks out sleek BMWs and Mercedes. It evokes the environmental ideals of a society that idolizes the Black Forest, led the way in organic farming, and still celebrates Goethe’s nature-loving poems. It bespeaks the moral confidence, both wrong and right, of a culture that created Romanticism in the late 18th century, Nazism in the 1930s, and one of the world’s most generous campaigns to welcome refugees today.

But all that ambition is bleeding Germany. The mounting costs are testing its resolve. Leading politicians, even those with strong environmental credibility, are racing to rein in spending. If they can’t achieve that, then Germany’s near miracle may be remembered as the environmental equivalent of, say, heart-transplant surgery: a worthy endeavor, undoubtedly, but one that remains unattainable for all but the very wealthiest.

From a purely technological perspective, the energy transition has already been a stunning success. It has shown that German engineering can manhandle Mother Nature and power a major chunk of an industrial economy with clean energy from the sky rather than dirty energy from the ground. Enough renewable energy was produced in Germany in 2016 to cover 32% of the country’s electricity consumption, a staggeringly large proportion by global standards.

In doing that, Germany has demolished one of the most fundamental reservations about alternative energy: that wind and solar power are too flaky to be relied on. A breezeless day or sudden clouds can interrupt them, making them, critics said, too unreliable to supply more than a token portion of a nation’s energy supply. But even with all that erratic wind and solar energy stuffed into the system, Germany continues to operate one of the most reliable electricity grids in the world. Blackouts remain as rare in the world’s fourth-largest economy as late trains or bad beer.

Nicolas Rapp

To be sure, fossil fuels remain crucial; the economy would grind to a halt without them. But Germany has solidified the start of an epic shift toward renewable energy. And the country has made these huge strides in less than a decade, the blink of an eye in the energy sector, which typically measures its investments in half-­century increments.

The transformation is placing a heavy burden on its citizens. Germany spent 25 billion euros ($26 billion) on renewable energy in 2016, most of which—23 billion euros—consumers paid through a surcharge on their electricity bills. The rise in that surcharge is the single biggest reason that the amount the average German household spent on electricity rose to 1,060 euros in 2016, up 50% from 2007.

The renewable-energy shift is also pummeling the companies and communities that for decades have cranked out the conventional electricity—­fueled by coal, nuclear, and natural gas—that has kept Europe’s largest economy on top. Germany’s big electricity generators have watched in horror over the past few years as solar power has blown up their stability and hefty profits.

Millions of these firms’ wealthiest customers have installed subsidized solar panels on their roofs. This new army of power-producing consumers—“prosumers,” in the lingo—are a force that the country’s established electricity giants simply didn’t believe would materialize.

The prosumers have flooded Germany’s power market with their homegrown solar juice. That has sent prices tumbling on Germany’s “wholesale” energy market, where traders buy and sell power. In turn, that cratering of wholesale electricity prices has rendered many of the country’s gas-fired and nuclear plants uneconomic, unable to sell their electricity at prices high enough to generate the profit margins on which the plant’s construction was based. The upshot: The share prices of Germany’s big energy companies have plummeted too.

Making matters worse for Germany’s traditional energy industry and for the villages and towns that rely on it is that, costs be damned, Germany is upping the ante in its renewable-­energy wager yet again. It is shutting down its fleet of nuclear-power plants, which last year provided 13% of the country’s electricity, because of worries about safety. And it is starting to phase out coal, which last year generated 40% of the nation’s power, because of global-warming concerns.

Nicolas Rapp
Nicolas Rapp

Each of those moves would amount to a historic transition on its own. Together, they put drastically more pressure on Germany’s traditional power producers to reinvent themselves and on the German state to make renewable energy even cheaper.

And yet, for all its progress toward renewable energy, Germany isn’t on track to meet its underlying environmental goal. The objective motivating Germany’s current green push—to slash the country’s emissions of planet-warming greenhouse gases—appears in doubt. Germany, long a cheerleader for more-aggressive international climate targets, has pledged to cut its carbon emissions 40% below 1990 levels by 2020, one of the boldest targets in the world.

Yet Germany’s greenhouse gas emissions, according to estimates, rose in 2015 and probably in 2016 too. With the 2020 goal looming, Germany finds itself in the sticky situation of having cut its carbon emissions only 27% from 1990 levels. That’s because, at the same time that Germany’s domestic subsidies have produced more wind and solar power, the vagaries of the global ­energy market—high prices for Russian gas and low prices for coal, given a glut of exports from the U.S.—have induced the country’s power producers to burn more lignite, a particularly cheap and dirty type of German coal.

The push for renewable energy in Germany dates from the 1980s. It began as a backlash against the country’s campaign to build dozens of nuclear-power plants in the wake of the 1973 Arab oil embargo. At the time, antinuclear fervor assumed existential overtones in a country split in two by the Cold War. East Germany and West Germany were the frontline, laden with nuclear weapons placed there by the Soviet Union and the U.S. Most Germans assumed that, “whenever there was World War III, we would be the first ones to be killed,” recalls Patrick Graichen, then a boy and now the 45-year-old head of Agora Energiewende, a Berlin-based nonprofit funded by foundations with the mandate to help inform Germany’s renewable-energy shift.

In 1983 the fledgling Green Party scored some seats in Parliament on an antinuclear platform. Antinuclear fears in Germany deepened following the 1986 Chernobyl nuclear disaster in Ukraine, to the east. Chernobyl was a news story in the U.S. It was a generationally defining event in Germany, where radiation from the accident was detected over cities and farms.

It wasn’t until 2000 that Germany’s modern renewable-energy push really gained steam. That year, after years of fighting about the issue, the German government, run by a coalition of Social Democrats and Greens, passed a law declaring the country would phase out nuclear power. In a bid to ensure that what picked up the slack from nuclear would be renewable energy and not coal, the government that year also passed a renewable-energy support policy known as a “feed-in tariff.”

Germany's Operational Nuclear Power Plants Ahead Of 2022 National Shut Down
An RWE nuclear operation in Emsland, Germany. The country plans to shut its nuclear plants in the coming years.Krisztian Bocsi — Bloomberg via Getty Images
Krisztian Bocsi — Bloomberg via Getty Images

Germany is hardly a natural solar hotspot. Berlin sits at roughly the same latitude as Calgary; Germany’s sunniest areas get about as much sunshine each year as Seattle. Yet by 2010, encouraged by subsidy payments, millions of citizens had mounted solar panels on their property, and Germany had become the world’s largest solar market by far.

The subsidy rules contained a mechanism under which they got a bit less juicy every year. But technological progress is hard to predict, and solar-panel prices ended up falling far faster than the writers of the tariff had expected. As a result, profit margins for those who installed solar installations in Germany ballooned. That spurred more projects, which drove up the subsidy bill facing German consumers still more.

Worried German politicians ordered a cut in the subsidy at the end of 2010. But the announcement induced solar developers to push through even more projects before the regulatory window closed. That year, fully 44% of the solar panels installed globally were installed in Germany, a country with a land mass roughly equivalent to Montana’s. Solar installations in Germany kept rising in 2011 and in 2012. Politicians enacted reforms in 2012 that dialed back the fervor. But because of their 20-year guarantees, the subsidies agreed to in the go-go years will dissipate only in the 2030s. Until then, they will linger in the German economy, like a gobbled mouse moves slowly through a snake.

Few places better illustrate ­Germany’s technical success in handling the particular challenges of wind and solar power—namely, their perpetually fluctuating natures—than the region served by 50Hertz, a regulated monopoly that operates one of the country’s largest electric grids. Its territory spans the northeast quadrant of Germany, from the Baltic coast down to the Czech border. As is typical for Germany, even the company’s name is optimized for engineers: It refers to the electrical frequency at which the European grid hums.

Enough renewable energy was produced in 50Hertz’s territory in 2015 to cover 49% of consumption; the biggest portion, 38%, came from wind and solar. “There is no other region in the world that has this concentration of intermittent renewables,” Boris Schucht, 50Hertz’s silver-haired CEO, boasts to me one evening over coffee. “We are the proof that a high share of renewable supply can exist with a high degree of system security.”

Dressed in a tailored gray suit, he is sitting in a conference room on a high floor of the company’s new glass-sheathed headquarters tower, across the street from Berlin’s main railway station. Schucht was trained as a nuclear engineer; these days he often receives foreign delegations hungry to know how a power system can accommodate so much renewable energy. His answer: a combination of hot technology and cool engineering tricks. “When I started in the energy business, the grid was the least sexy business,” he says, flashing a smile. “I’m sexy now. The company is totally sexy.”

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The centerfold of the 50Hertz operation is its grid-control room, which sits in a squat gray building on a dirt field down the street from a discount grocery store in Neuenhagen, a nondescript suburb east of Berlin. Gaining entry requires pressing a palm against a blue, wall-mounted sensor that detects the pattern of blood flow in the entrant’s hands. (That’s a surer security measure than a fingerprint sensor. A terrorist could cut a finger off an authorized company official, touch it to a fingerprint reader, gain admittance, and then wreak havoc with the grid.) Inside the control room, an electronic screen that can display the 50Hertz electric grid at various magnifications and orientations covers a wall. On the left side of the screen is a column of digital counters that report the amount of wind and solar electricity being produced on the grid at any given moment.

Gunter Scheibner runs the grid-control center and has worked at 50Hertz and its predecessor companies for 40 years. He spent his early career overseeing a reassuringly boring process: Electricity was produced by flicking a switch on a centralized power plant, and then it was transported to customers in steady, easy-to-manage flows.

Not any more. Today 50Hertz needs to forecast precisely how and when the wind will blow and the sun will shine. It buys forecasts of wind production from seven companies and forecasts of solar production from five. Today the wind data is between 96% and 98% accurate. The solar data is less accurate: between 93% and 95%. Solar is harder to forecast for several reasons: Solar power scaled up after wind power, so the forecasting science is younger; there are more, and smaller, solar installations than there are wind farms; and solar production is affected by many variables that don’t affect wind production, such as fog and snow.

The importance of accurate predictions was underscored on the morning of March 20, 2015. Just after 8:30 a.m. local time, a solar eclipse occurred. The eclipse covered Europe, blocking some 85% of the sun. For 90 minutes or so solar production cratered by about 6 gigawatts, then surged back by 13 gigawatts. That’s roughly equivalent to six large nuclear-power plants going dark—then twice as many switching back on.

Yet the lights didn’t go out. Why not? Planning. Six months earlier, forecasts had predicted the eclipse, and since then Scheibner and his colleagues had been working feverishly on a strategy to counteract the expected fall and rise of solar production. Along with other major German grid operators, 50Hertz held several workshops with the various players in Germany’s electricity ­market—notably generators and traders—to ensure that enough other sources of power would be bought and sold around the time of the eclipse to compensate for the sudden solar variation.

When the eclipse came, they executed the plan. “We were able to balance the system without any incident,” Scheibner tells me. But things wouldn’t have been so easy for 50Hertz had the solar eclipse been accompanied by, say, a sudden change in the wind too. “We were lucky,” he acknowledges.

It’s the sort of challenge that Scheibner expects Germany will face more frequently as renewable energy expands. And none of this balletic engineering to manage Mother Nature’s vicissitudes is easy or cheap. When the wind is blowing particularly hard or the sun is shining especially brightly, Scheibner and his colleagues have to compensate to ensure the frequency in the system never wavers much from the namesake 50 hertz.

Because Germany’s rules compel grid operators to pay prosumers for all the wind and solar power they produce, 50Hertz has only a few options to mitigate a surge from all those installations. It can order conventional-power producers to reduce their production—something that hurts the profitability of those coal, gas, or nuclear plants. But sometimes that’s not enough. In those cases, 50Hertz tells wind and solar operators to stop feeding their electricity into the grid—even though the law forces 50Hertz to pay those renewable producers anyway for the juice they produced.

In engineering-speak, this is called congestion management. In plain terms, it’s a waste of money. In 2015, 50Hertz spent 351 million euros on such measures. And because the German government assures grid operators a minimum return on their outlays, it is German consumers who ultimately bankroll the millions that 50Hertz and other grid operators spend adapting to renewable energy’s rise and fall.

Now Germany is racing to upgrade its transmission system to catch up with the massive increase in wind- and solar-energy production. For its part, 50Hertz is adding new lines and beefing up existing ones. It’s installing, on Germany’s borders with Poland and the Czech Republic, devices called phase shifters, fancy valves that can be opened or closed to send excess power more easily across the borders. And it’s encouraging the installation of big batteries to store renewable power.

“It’s difficult,” says Schucht, the 50Hertz CEO. As the city lights twinkle below his offices, he isn’t talking just about his company’s slog to bulk up power lines. “We need to be clear. It will be the same all over the world,” he says. “There will be winners and losers. It’s a huge transformation.”

The biggest losers in Germany’s energy makeover are the companies and communities rooted in the conventional-energy past. In January 2012, Jürgen Grossmann, then the CEO of RWE AG (RWEOY), a giant German power producer, told a conference that solar power in Germany “makes as much sense as growing pineapples in Alaska.” By that time his replacement as CEO had already been announced; Grossmann left his post that summer. Since then, Germany’s metaphorical pineapples have been thriving. RWE? Not so much.

Last year the company underwent a radical restructuring. It spun off its renewable-energy operations—in which it had begun to invest even under Grossmann—into a separately traded company called Innogy SE. The goal was to give the markets a pure-play renewable-energy stock to invest in. RWE still owns a 77% stake in Innogy and has retained its longtime portfolio of coal, gas, and nuclear plants. The market has made its preference clear: As of early March, new-energy Innogy’s market capitalization was 18.9 billion euros ($20 billion), more than twice that of its old-energy parent.

The shift to renewables in Germany is “an irreversible process now,” Thomas Birr, an RWE veteran who helped the company’s board engineer the restructuring, tells me when I meet him on a gusty, rainy morning in the former RWE headquarters tower in Essen, the traditional capital of Germany’s western coal region. Purely on profitability, he says, solar projects “are completely outcompeting fossil” ones. “You cannot build a coal plant any more for this price. And we don’t talk about nuclear; nuclear is totally outpriced.”

It was a stunning message from a senior executive of one of the world’s largest conventional utilities. A fit runner and horseman, Birr came to RWE 18 years ago from the oil industry. Today, at 51, he finds that decentralized renewable energy has ­utterly rocked his world. He now spends his time flying around the globe assembling what ­Innogy calls its “innovation hub,” an operation that includes a clean-energy venture capital fund. He even looks the part of a Silicon Valley entrepreneur: His head is shaved, he sports fashionably thick black glasses, and his idiomatic English is peppered with phrases such as “machine economy” and “disruptive digital.” The office tower in which we are sitting, the tallest building in Essen, was recently rebranded as the headquarters not of RWE, the parent, but of Innogy, the child. Beside the front entrance on the day I visit hangs a massive blue banner that promises, “We will be pioneers.”

Like RWE, E.ON (EONGY)—the two traditionally have been Germany’s biggest electricity producers—restructured over the past year by cleaving its renewable-energy and conventional-energy sides into two. Klaus Schäfer, formerly E.ON’s CFO, now is the CEO of Uniper SE, which owns and runs the former E.ON coal and gas assets. Schäfer says he “happily subscribes” to Germany’s long-term carbon-reduction targets but takes issue with the “very aggressive” way Germany has gone about trying to push renewable energy to meet them. “You do it first,” he says, “and you spend even more.”

But reality is reality. Given the government’s intent to continue accentuating renewables, E.ON decided it had to break into two. “How do you push for a new coal plant and argue for solar? Can you credibly do that as one company?” Schäfer asks me rhetorically, reprising the question that preoccupied the former E.ON’s management. “We felt no.” As with Innogy and RWE, the market value of new-energy E.ON in mid-March was 15 billion ­euros ($16 billion), more than three times the value of old-energy Uniper.

One person shedding no tears for the utilities is Rainer Baake, a state secretary in the German Ministry of Economic Affairs and Energy. If there is a political godfather of the Energiewende, it is Baake, who for the past two decades has alternated between senior jobs in the German government and top posts at environmental organizations. He has the heart of an ecological activist and the spine of a tough negotiator. Tall and thin, with blue eyes, close-cropped hair, and a careful gray stubble, he looks vaguely like Sting, if slightly more rumpled.

Rainer Baake, a state secretary in the Germany Ministry of Energy and the Economy, is the political godfather of the Energiewende.Goetz Schleser — laif/Redux
Goetz Schleser — laif/Redux

“I wish them all the luck in the world that they will be successful,” Baake tells me, referring to the utilities, when we meet one afternoon in his elegant office at the ministry. Gummy Bears, the ubiquitous German-made candy, fill a bowl on the table. Two massive photos shot in Africa by Baake’s wife—one of a lion and one of a jaguar—hang on a wall.

It was Baake who, in a similarly senior post in the German Ministry of the Environment in 2000, steered the political negotiations that led to the country’s national feed-in tariff. Today, nearly two decades on, he is trying to make the Energiewende leaner and meaner.

Baake has angered many green activists by pushing through reforms to cut the cost of the renewable-energy subsidies. Rather than continue to pay a uniform tariff for big new wind and solar projects, Germany is beginning to set their subsidies at auction, a system that has been used in other countries and that Germany hopes will exploit competition to drive down costs.

Baake is also rankling the utility industry by leading the government push to finally shut down the country’s nuclear-power plants and phase out coal. That move would require Germany to pay big sums to the utilities to close the plants early, yet another cost of the country’s climate push.

He is acutely aware of the symbolic importance of what he’s doing. If Germany succeeds, the leadership effect will far outweigh the actual impact on the planet. “We could bring down our emissions to zero and it would not have any effect on the global climate,” Baake notes. Germany coughs out just 2% of global carbon emissions, slightly more than Iran. China emits 24%; the U.S., 13%. Germany’s real objective, Baake says, is to set an example: “We have to do this economically efficiently. Then others will follow.”

Down on his farm, Dieter Dürrmeier smiles. The earliest of the solar projects he installed on his barns won’t lose their ratepayer support until 2024. If a business owner ran a company the way the German government has structured its solar subsidies, “he would be bankrupt,” Dürr­meier says. Still, he would happily install more solar panels if he could. But the electric line from his farm to the grid is maxed out, and he has run out of space on his rooftop.

A version of this article appears in the March 15, 2017 issue of Fortune with the headline “The Best Energy Revolution Money Can Buy.”