This Powerful German Industry Is in Desperate Need of Government Assistance. Is America Next?

Germany has invested heavily in renewable energy production, but the investments have increased the volatility of the nation's energy generation. The government is now seeking to subsidize fossil fuels to steady the grid. Yes, you read that right.

Feb 7, 2014 at 8:22PM


Is renewable energy blowing away fossil fuels? Source: Steve Wilson/flickr

The German government has become pretty good at encouraging renewable energy investment. So good, in fact, that fossil fuel sources are finding it difficult to compete. Of course, that's because renewable energy providers get help from subsidies that aren't accessible to power plants utilizing dinosaur sauces. But rather than scale back renewable energy subsidies and risk jeopardizing the nation's ambitious future capacity targets, Germany's energy minister has proposed instituting subsidies for fossil fuels and renewable energy.

You may think that renewable energy replacing fossil fuel generation capacity is a good thing, but there are technological shortcomings that pose tangible risks to Germany's grid and consumers. Is the problem that's brewing in Germany bound to hit American power generators such as Exelon (NYSE:EXC), Southern Company (NYSE:SO), and Duke Energy (NYSE:DUK) as the nation increases its renewable energy infrastructure? Not so fast. 

Traditional renewable energy sources, wind and solar, don't provide steady, reliable energy 'round the clock. While they can produce as much as 61% of Germany's electrical needs, they can also plummet much lower -- leaving major gaps that are difficult to cover on short notice. Wildly volatile energy generation has made it awfully difficult for unsubsidized fossil fuel and nuclear power plants -- the grid's base -- to compete. Thus, many generators have closed power plants.

The rise of renewables is great news, but fossil fuel and nuclear generation will play an integral role in providing base load power until the industry creates better ways to store, and subsequently distribute, energy from peak renewable generation. Not having enough backup capacity could lead to major supply and price fluctuations for German consumers.

Can this happen to the American grid?
The problems with unpredictable generation and unreliable storage of renewable energy sources are inherent to the technologies. In that regard, the electrical grid in the United States -- and any country pursuing wind and solar generation -- is exposed to those risks. However, there are several major distinctions between Germany and the United States that make it difficult to see a similar problem plaguing the American grid and power generators such as Exelon, Southern Company, and Duke Energy.

First, America generates nearly 19% of its electricity from nuclear power, which provides constant, steady base load power. Germany is in the process of closing all of its nuclear power plants by 2022, which formerly contributed 23% of the grid's spark. Relying on unpredictable renewables and imported fossil fuels to replace one-quarter of the nation's total electricity generation capacity, and the majority of its base load power, was probably not the most realistic expectation.

Second, the United States generates a growing amount of its electricity from cheap domestic natural gas, whereas Germany must import expensive natural gas. In fact, Leonhard Birnbaum, an executive at German power company E.ON, went as far to say that "there is no gas-fired power plant on the European continent that generates profits at present." If that doesn't get the message across, take a look at the following energy table detailing the strengths of the American grid:



World Rank

Natural gas production

22,902 billion cu. ft.


Net electricity generation

4,125 billion kWh


Net electricity consumption

3,724 billion kWh


Energy intensity

7,505 BTU per 2005 USD


Source: EIA 

And compare that to market realities facing German energy providers:



World Rank

Natural gas imports

2.4 billion cu. ft.


Net electricity generation

588 billion kWh


Net electricity consumption

515 billion kWh


Energy intensity

5,305 BTU per 2005 USD


Source: EIA 

America may be less efficient at converting energy into GDP (energy intensity), but Germany sports nearly 40% more overcapacity -- an unhealthy metric to lead in. Overcapacity, and an unequal distribution of subsidies, makes production less economical for fossil fuels, leads to plant shutdowns, and further exacerbates the problem of reliably producing enough base load power. Luckily, America has a healthy distribution of such power from the world's leading nuclear industry (by capacity) and the world's cheapest natural gas. Germany isn't so fortunate.

Foolish bottom line
The current subsidy environment in Germany was intended to spur investment in renewable energy infrastructure, which has been a major success. However, the subsidies continue to flow in despite the maturation of the industry. I find it at least a little ironic that the world has gone from laughing at the thought of renewable energy providing the majority of a nation's electricity to crying about how it makes fossil fuels less competitive. Anyone else?

Nonetheless, the risk of over-subsidizing renewable energy must be balanced out with the composition of a nation's grid on a case-by-case basis. Abandoning nuclear power, which sports the cheapest generation costs of any energy source, is a major reason that Germany finds itself in the delicate position at the moment. America, meanwhile, is not in danger of running out of base load power, especially considering that cheap natural gas can compete with even the cheapest renewable energy generation. Therefore, the need for subsidized energy production doesn't exist for Exelon, Southern Company, and Duke Energy nor should it for the foreseeable future. That's good news for American consumers and investors alike.

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Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS pagehis previous writing for The Motley Fool, or his work for the SynBioBeta Blog to keep up with developments in the synthetic biology industry.

The Motley Fool recommends Exelon and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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