Lessons From the Energy Crisis – How to Prepare for the Next Shock
How can we build a future resilient energy system? Tom Krebs presented insights from an upcoming study at our XII New Paradigm Workshop.
PUBLISHED15. MAY 2023
READING TIME5 MIN
In light of the fossil fuel-based energy crisis, the question of how to build a future resilient energy system is one of the most important debates of the moment. At our recent XII New Paradigm Workshop we invited Tom Krebs to present insights from an upcoming Forum New Economy study that outlines the cornerstones of a resilient German energy system. The results were discussed with ZEW president Achim Wambach and head of the think tank Agora Energiewende Frauke Thies. Cecile Boutelet from Le Monde moderated the panel.
While the crisis itself is uncontroversial, there is still no complete consensus on the extent of the impact and the implications for policy following the energy crisis in Germany. Some economists believe that the impact of the crisis on the overall economy remained small. Despite a tenfold increase in gas prices during the height of the crisis, German GDP did not fall as dramatically as feared. Tom Krebs pointed out that this view is simplistic, as it ignores the difference between the actual development of GDP and the development that GDP would have taken without the energy crisis (based on model forecasts). Moreover, for most people it is not GDP that matters, but labor income, since it is their main source of income. In this crisis, there was a large divergence between GDP and real wages, with the latter declining much more sharply.
The GDP loss during 2022 was similar to the losses during the Covid-19 pandemic in 2020 and a bit smaller than during the financial crisis. However, at the beginning of the year 2022 the economy was expected to grow very fast, and that didn’t materialize. At the same time, the loss to real labor income in the energy crisis was much worse than both during the Covid-19 crisis and financial crisis in Germany. In numbers, the 4 percent GDP loss during the energy crisis still amounts to a staggering 150 billion euros. A lot of resources (and long-run effects not even factored in).
Clearly, any future energy system should be more resilient to avoid such losses. According to Tom Krebs, two pillars are essential to achieve this: Firstly, given that the future energy system will primarily be based on electricity from renewable resources, a lot of storage capacities will be needed to account for times with little wind and sun. Otherwise, more price shocks after supply shocks loom. Krebs made the case that from a macroeconomic perspective, the investment costs barely compare to the losses of the current energy crisis. Even departing from a cautious scenario of necessary storage capacity, as e.g., calculated by Hans-Werner Sinn (2017), costs would come up at 20-40 billion euros – much less than the 150 billion in losses incurred during the crisis. One way of designing this storage could be in form of hydrogen power plants.
“From a macroeconomic and social perspective, we need this capacity, but the market will not automatically provide it. There is a big role for the government.”
According to Krebs, the second pillar should therefore be a public insurance against future price risks for renewable energy producers in order to speed up the process of building a resilient renewable energy system.
The other panelists agreed that the impact of the crisis was substantive and that a future renewable energy system can only work with sufficient storage and hydrogen power plants. Achim Wambach cautioned that within the market economy, currently, there is no way of financing the creation of these storage capacities. He also emphasized that the German system needs more flexibility from the demand side.
“There are a lot of market failures in the energy system. Building hydrogen power plants is only one step. We should incentivize investors and industry to become more flexible. We also lack smart metering and regional energy prices.”
Frauke Thies pointed to the need of massively speeding up the transition: to meet climate targets, the expansion speed for offshore wind in Europe would have to triple, and for solar and onshore wind even quadruple. At the same time, inflation has widened the payment gap. And above all, what are currently often regressive climate policies will have to be transformed into progressive policies in order to be socially compatible, especially with regards to the building sector. In the future, production in Germany will likely be more expensive than in renewable rich countries. Supply chain and labor market implications of the end of the era of cheap gas should also be considered, according to Thies.
Given the climate targets and ruling by the Supreme Court, we will have to have less fossil fueled production in Germany and Europe. What will be left in terms of manufacturing? Will we have climate neutral manufacturing here and do we need industrial policies that will help companies and people to get there, or do we think the market will take care of it? These will remain decisive questions to be addressed in the future.