EnergyFactor By ExxonMobil | Pespectives has a new home

Why are power prices higher in Germany than the U.S.?

A couple of numbers jumped out at me from this recent Reuters report comparing American and European approaches to energy policy.

According to the piece, European Union statistics show that big industrial consumers of energy in German paid 21 cents per kilowatt hour of electricity in 2013.

Germany_LA_Feature_06-2014By contrast, similar industrial consumers in Louisiana paid just five-and-a-half cents per kWh of electricity, according to data from the U.S. Energy Information Administration.

That would mean German companies can pay almost 4 times as much as American companies. But is the difference really so stark?

Not quite, though there is still a substantial disparity.

According to more in-depth research by my colleagues in Europe whom I asked to look into this, the 21 cents per kWh price the article cited reflects the highest possible price industrial consumers could pay in 2013. The reality is that the average price paid for power by large industrial consumers in Germany in 2013 was 13 cents per kWh.

That’s still more than twice as much as industrial consumers in Louisiana.

What explains the difference? It’s not the stretch of water that separates two continents. It’s the approach that policymakers in European countries take compared to their counterparts at both the federal and state levels in the United States.

The German approach

The EU has a carbon emissions trading scheme that impacts price, for example. Moreover, layers of other policies have further distorted markets.

Since the Fukushima nuclear disaster, German officials have moved to shutter the country’s existing fleet of nuclear reactors, which accounted for roughly 25 percent of the country’s electricity. Nuclear power plants are expensive to build, but once in operation they can generate large amounts of baseload electricity at relatively low cost with no emissions. That existing low-cost generation will be lost.

Moreover, the German government has taken steps to mandate the use of expensive renewable energy in the country’s electricity mix at the expense of relatively inexpensive fossil fuels like coal and natural gas.

The consequence of Berlin’s raft of mandates, subsidies for renewables, high energy taxes, and opposition to existing nuclear plants has been to make Germany “among the most expensive places in the world to purchase electricity,” according to Reuters. For German companies trying to compete internationally, these costs can be burdensome.

The Reuters story quotes one prominent international petrochemical manufacturer saying that it is $125 million cheaper per year to run a large, modern plant in the United States than in Germany, thanks in large part to energy costs.

U.S. economic benefits from shale energy development

Contrast that to Louisiana where, as in many U.S. locales, electricity prices have fallen in recent years thanks to abundant new supplies of natural gas brought online by directional drilling and hydraulic fracturing, a.k.a. “fracking.”

This energy development in America’s shale regions has been encouraged by officials in places like Pennsylvania, Ohio, and Texas. As a result, utilities across the country – even in non-producing states – are increasingly turning to low-priced natural gas for power generation. This development has also led to an overall reduction in U.S. greenhouse gas emissions.

Many European governments, meanwhile, are putting up roadblocks to fracking.

The German government has begun to pull back on some of the generous subsidies for renewables that have helped drive up electricity prices, but a lot of damage has been done. In a story about German automaker BMW announcing a $1 billion expansion of its manufacturing plant in South Carolina, the International Energy Agency warned that “Europe’s high energy prices risk driving away a big share of its energy-intensive industries.”

The lesson is that the societies in which we live are shaped considerably by the legal, tax, and regulatory frameworks that our governments establish. With respect to the case study presented by Europe, one could learn a lot from this Reuters’ article about what the costs can be for businesses and consumers.

  • Worth a deeper look...