Eye on the Market | October 22, 2012 J.P Morgan The most important energy developments of 2012: how countries are planning for Independence Day Il: Is Germany making an impetuous mad dash into renewable energy? In the wake of Fukushima, Chancellor Merkel announced a plan to accelerate the closure of coal and nuclear power plants, with the goal of relying more on renewable energy to fill the gap. Germany is by far the largest user of electricity in Europe and its manufacturing to GDP ratio is high, so the consequences may be substantial. To get a sense of the potential impact, start with the first chart on Germany’s current generating capacity and output by source. While wind and solar installations have increased in recent years, their electricity output is less impactful due to wind and solar intermittency. The two largest increases in Germany’s renewable plan are offshore wind and photovoltaic (solar). Offshore wind connections are very expensive; according to Netherlands-based transmission system operator TenneT, they work out to ~1.1 million Euros per MW, and that’s just for the connection (not the wind turbine itself, that’s extra). That offshore wind connection cost is even higher than the 0.8-1.0 million per MW upfront capital cost of building new natural gas plants, using data from RWE AG (Essen) and SWB AG (Bremen). Wind is free and natural gas isn’t, so we should look at all-in levelized costs” by electricity source. As shown in the second chart, all things considered, offshore wind is a very expensive way for Germany to generate electricity, and solar is higher by another order of magnitude. The relative ordering is similar in other countries. Snapshot of current German capacity and generation Levelized cost of electricity production in Germany Percentof total USD/MWh 45% 440 40% ™ Generating Capacity 390 Electricity Generation 35% 340 30% 290 25% 240 20% 190 a 140 LJ 10% 90 _ a 5% 1 _ = 0% Nuclear Coal Natural Onshore Offshore Solar Coal Nuclear Natural