Renewable Energy: Bonn, Germany vs. Los Angeles, California By: Caroline Chavos, Julian Cordon, Ashley Leroi, Hannah Newkirk and Ryan Steffens December 17, 2020 Page | 1 Table of Contents Executive Summary 3 The Renewable Energy Industry 4 Market Drivers 5 Growth Rates & Patterns 5 Future Trends 6 Economic Dynamics 6 Cost Structure 7 Energiewende 7 Paris Climate Agreement 8 Germany Steps Down as the International Climate Champions 9 Germany and US Policies in Renewable Energy 10 Environmental Taxes 11 Climates 122 Photovoltaics and Solar Panels 12 Challenges within the Photovoltaic Sector 13 Energy Consumption by Country 14 Case Study: Germany at the Forefront 17 Recommendations 20 Bibliography Error! Bookmark not defined. Page | 2 Executive Summary This paper will discuss the similarities and differences of the renewable energy industry in the cities of Bonn, Germany, and Los Angeles, California. Bonn has been a global leader in the fight against climate change but their high ranking has been compromised. This report discusses the reasons for this negative shift and delves into the positive impacts in the overall renewable energy trend that Germany has made. Bonn is compared to Los Angeles, one of the lower-ranked cities when it comes to the topic of climate change, due to the pollution and nonrenewable energy the city uses. Recommendations are made for each city based on the research conducted. Topics that will be discussed in this paper include: • Analysis of the renewable energy industry • Germany’s Engeriewende policy • The Paris Climate Agreement & criticism of Germany • Differences and similarities in energy policies between the United States and Germany • Climates of each country • Energy consumption by country (Germany vs. USA) • Case study analysis on Germany Page | 3 The Renewable Energy Industry Industry Size The renewable energy industry is a booming industry sector that is projected to grow enormously over the next few years. The industry is currently worth over $920 billion and is expected to reach a staggering $1.5 trillion dollar value by the year 2025 with a compound annual growth rate of 6.1% from 2018 to 2025.1 Leaders in the industry include: ABB Ltd., General Electric, Tata Power, Innergex, Enel Spa, Xcel Energy, EDF Energy, Geronimo Energy, Invernergy and ACCIONA.2 Country leaders in the renewable energy industry include: Sweden, Costa Rica, Nicaragua, Scotland, Germany, Uruguay, Denmark, China, Morocco, the United States and Kenya.3 Exhibit 1: Total renewable energy consumption (TWh) around the world.4 1 (PR Newswire 2020) 2 Ibid. 3 (Climate Council 2019) 4 (Ritchie and Roser 2017) Page | 4 Market Drivers The key market drivers in the industry that compel consumers into switching to renewable energies in newly built multi-family homes include favorable tax benefits, lower interest rates, working from home online, positive and persuasive advertising, demographic factors and a demand for greener household amenities.5 For new buildings being built around the world, the architects, contractors, engineers and local municipality codes drive many new buildings to be built with renewable energy features.6 Existing homes or buildings that are retrofitted with new renewable energy technologies are another major sector that has significant market drivers in the industry with home and building owners, appraisers, capital providers, tenants, contractors, HVAC installers, energy service providers, federal government standards and local codes all favoring renewable energy upgrades for homes and buildings.7 Exhibit 2: Key Market Drivers in the Renewable Energy Industry8 Growth Rates and Patterns The renewable energy sector saw a significant increase in demand from most market segments as overall consumer sentiment remained positive. Additionally, renewable energy consumption by residential and commercial customers increased by six percent.9 Since its decline in 2012-2013, global investment in renewable energy has rebounded to an all-time record of USD 286 billion in 2015 with a shift in geographic focus towards Asia. The 5 (Arent et al. 2006) 6 Ibid. 7 Ibid. 8 Ibid. 9 (Motyka 2020) Page | 5 growth investment flow has been sustained by an evolution in financing models and financial stakeholders for renewable electricity projects coupled with significant policy support for renewable energy.10 Future Trends In 2020, companies in the renewable energy industry should be mindful of a few caveats that could impact renewable energy growth. Under current policy, eligibility for the Production Tax Credit for new wind build expires and the solar Investment Tax Credit step down starts in 2020, both of which have been key drivers for wind and solar growth in the U.S. renewable energy market.11 Economic Dynamics The average capital return period for investment on solar plants is estimated at about 2-5 years.12 Considering that solar panels have an average life of 25 years, investors are guaranteed to make reasonable profits. Moreover, while generating each kWh of solar power costs between 7-12 cents, it is sold at 15 cents. This allows for a profit margin of 25% - 110% percent. In the United States, the solar industry has experienced an average annual growth rate of 49% alone, generating USD18.7 billion of investment in the American economy.13 In Germany, solar power has become the cheapest mode of power generation in the country according to research institute Fraunhofer ISE.14 Depending on the type of installation and the sun's intensity, generating one kilowatt hour (kWh) with solar panels can cost no more than 3.7 euro cents.15 Costs for equipment and installation, the biggest factor for investors, fell by 75% between 2006 and 2017.16 An analysis by Sandbag, a British climate non-governmental organization, found that costs fell so much that new solar (and wind power) installations in German auctions are not only cheaper than new hard coal and gas plants but also undercut the operation costs of existing fossil power plants.17 In future projections, the German government forecasts that green power will make up about 80% of the electricity mix by 2038 compared with just over 40% in 2019.18 10 (OECD Business and Finance Outlook 2016) 11 (Motyka 2020) 12 (Böhringer, Landis, and Tovar Reaños 2017) 13 Ibid. 14 (Wirth 2020) 15 (Wehrmann 2020) 16 Ibid. 17 Ibid. 18 Ibid. Page | 6 Cost Structure The levelized cost of energy (LCOE) in Germany for a photovoltaic power plant is the ratio between the total costs of the plant (€) and its total electricity production (kWh) over its economic lifetime. The LCOE for photovoltaic power plants is primarily based on these factors19: 1. Purchasing investments to construct and install the plant 2. Financing conditions (such as the return on investment, interest and plant lifetime) 3. Operating costs over the lifetime of the plant (such as insurance, maintenance and repairs) 4. Irradiance availability (the flux of radiant energy per unit area) 5. Lifetime and the annual degradation of the power plants These costs have fallen by an average of 13% each year and have fallen 75% overall since 2006. Additionally, module costs are responsible for almost half of the total investment costs of a photovoltaic power plant of this size. Energiewende Back in 2019, Germany was the largest energy consumer in Europe. Due to the fact that Germany is a large consumer when it comes to energy, they have begun a long-term initiative to transition into low-carbon and a more effective energy mix. This is called Energiewende. This can be translated into English as “energy transition” and refers to “Germany’s policy of increasing the share of renewables and phasing out nuclear power.”20 This concept is based off “energiekonzept” policy, which was published in 2010, in addition to the Renewable Energy Source Act (Erneuerbare Energien Gestez, EEG) which was passed in 2000 and it takes into consideration all the energy, but the main focus is on electricity. “The Energiewende policy includes: greenhouse gas reductions of 40% by 2020 and 80- 95% by 2050 relative to 1990; a fall in primary energy consumption by 20% to 2020 and 50% to 2050, a renewable energy target (including biomass) of 60% by 2050; and the shutdown of the country’s nuclear reactors, even though they are the main source of carbon-free electricity. Electricity is to be 40-45% renewables by 2025, 55-60% by 2035 and at least 80% from renewables by 2050, “which requires new solutions to provide ancillary services” according to German Energy Agency (Deutsche Energie-Agentur, DENA). It also requires a major increase in energy efficiency: compared with 2008, 19 (Wirth 2020, 7-8) 20 (World Nuclear Association 2020) Page | 7 electricity consumption is intended to be 10% lower by 2020 and 25% lower by 2050. However by 2015 it was only 3% lower.”21 At this point in time, Energiewende is currently in phase two and includes ambitious targets for phasing out coal and nuclear and developing renewable energy. Concurrently, Germany has some of the lowest wholesale electricity prices in Europe, but on the contrary has some of the highest retail prices due to the policies put in place by Energiewende. With that being said, taxes and surcharges account for more than half of the domestic electricity price. Another aspect to consider is the fact that because Germany was the first mover in this industry it has been incredibly expensive. However it has transformed the German energy system in just a decade and a half, “ensuring that it is a rising industry, taking over from coal and residual fossil fuels as well as nuclear.”22 A criticism that Energiewende has received is the fact that there is still a large amount of coal that continues to burn. What would cause a change is a carbon tax. It would force “the pace of a switch to electric vehicles in transport and away from coal in energy-intensive industry… if a carbon tax could be made politically acceptable in Germany.”23 With all this in mind, even though Germany still uses a large amount of coal, Germany produces more wind, solar and renewable resources than any other major country in the world.