Germany's Overhaul of Its Power System May Put It at the Vanguard of a Nascent Global Transformation

BERLIN--(Marketwire - Mar 14, 2013) - Global electricity markets are in the early stages of a secular transformation -- and Germany's bold reshaping of its power system could serve as a paradigm, according to a new report by The Boston Consulting Group (BCG). The report, titled Toward a New Balance of Power: Is Germany Pioneering a Global Transformation of the Energy Sector?, is being released today.

Driven by a confluence of forces -- chief among them being environmental concerns, worries over energy security, and advances in technology -- countries around the world have begun to shift away from conventional centralized, fossil-fuel-based power generation in favor of renewable-energy sources and distributed generation. Germany, whose ambitious plan for its energy future places heavy emphasis on renewable-energy sources, distributed generation, and increased energy efficiency, is at the forefront of this transformation. Its progress will be monitored closely by many countries, BCG believes, and could ultimately influence the decisions that other countries make about their own energy programs. 

A Transformed German Energy Landscape

The report notes that Germany's efforts may deliver sizable benefits to the country, especially over the longer term. Germany's dependence on foreign fuel, for example, will fall sharply -- gas consumption for supplying power, for instance, will fall to 50 terawatt-hours in 2030 from 200 terawatt-hours in 2010. Germany's carbon footprint will also improve significantly as it pursues its emissions goals, which include a 55 percent reduction in greenhouse gas emissions from 1990 levels by 2030. In addition, the business case for Germany's plan could turn positive in the long term. And the growing prevalence of distributed generation -- by 2030, roughly half of Germany's power will likely come from distributed sources, such as rooftop solar panels and wind farms, compared with roughly 15 percent in 2011 -- will make the self-supply of electricity an increasingly viable option for individual German homeowners, industry, and possibly entire communities.

But Germany's path promises to be a rocky one, accompanied by large challenges for multiple groups of stakeholders, says BCG. Retail power prices, for example, will climb significantly: assuming today's pricing mechanisms, retail prices for German residential customers in 2020 under a renewable-energy-based system will be 35 percent higher than retail prices in 2010. Germany will also need to increase its total power-generation capacity substantially: capacity could reach more than 250 gigawatts in 2030, BCG calculates, compared with 158 gigawatts in 2010, driven primarily by increases in wind and solar photovoltaic (PV) energy. The investment required to ensure this buildup and the necessary upgrades in supporting infrastructure will exceed EUR 370 billion from 2010 to 2030.

The German power industry's incumbents, especially the Big Four utilities, face particularly steep challenges, says BCG. These players will see their business model challenged by a combination of factors, including the government's mandated phaseout of nuclear energy, the priority given to renewable-energy sources, the falling number of full-load hours of operation for conventional power plants, and the emergence of new competitors with new business models. As a result of these forces, incumbents' revenues and returns will decline materially in their home market, forcing them to rethink their sources of competitive advantage.

The Potential for Other Countries to Follow Germany's Lead

The report notes that few countries, to date, have indicated an intention to closely follow Germany's path. Currently, Japan seems to be the only one whose emerging policy is comparable to that of Germany, although its choice is largely driven by necessity, including lingering effects from the crisis at the country's Fukushima Daiichi nuclear plant in 2011.

Other countries are pursuing elements of German's policy and face comparable challenges, particularly with regard to nuclear energy, says BCG. In Europe, Italy, which closed the last of its nuclear reactors in 1990, has had to aggressively pursue other sources of energy to make up for the shortfall. It has turned, among other sources, to solar PV: Italy's installed solar PV capacity is now the world's second largest, trailing only Germany's.

Most countries continue to embrace nuclear energy and largely conventional, centralized generation. But the report explains that there are forces that could ultimately steer more countries down Germany's path. One is the economic argument for renewable generation in specific countries, especially those that are rich in sun and wind or that are in remote locations where the costs of imported fossil fuels are high. BCG says that there is an equally strong business case in many countries -- especially developing ones with a need for greenfield electrification of rural areas -- for decentralized generation for residential consumers. Instead of investing in expensive grid infrastructure and centralized power plants, governments in Africa, India, and Indonesia, for example, could provide power to remote locations via small rooftop solar PV installations, batteries, and rarely used backup diesel generators. Finally, an increasing number of countries and regions have set ambitious targets for energy efficiency, renewables, and distributed generation. 

The report is part of BCG's Game-Changing Program to help leaders and their companies capitalize on the opportunities created by the seismic shifts in the global economy.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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