On a recent energy study trip to Berlin, somewhere in between the bratwurst and schnitzels, it became clear that while there are many similarities between Australia and Germany as we move towards net zero, there are also some stark differences.  These are driven as much by history and culture as they are by the differences in the physical power system, market structures and broader economic drivers. Despite this, or indeed because of it, we have much to learn from each other.

How’s this for luck? Three months at Energy Networks Australia and I’m off to Germany with a small group of soon-to-be friends to share and learn about international approaches to the energy transition. Somewhere between bratwurst and schnitzels it became clear there are many similarities but some stark differences between Australia and Germany as both move towards net zero. These are driven as much by history and culture as they are by the differences in the physical power system, market structures and broader economic drivers. Despite this, or indeed because of it, we have much to learn from each other.

This article is the first in a series. It describes some of the big picture take-aways from the trip, such as:

• the electricity market differences
• the energy transition approach
• current security of supply issues, and
• the approach to policy reform.

Subsequent articles will explore the roles of transmission, distribution and gas in more detail.

The ‘copper plate’ electricity market

Germans sometimes described their electricity wholesale market as a ‘copper plate’. Imagine you have a large plate of solid copper with generators connected on one side and load connected on the other. There are no losses and there are no constraints. The German energy market financially settles bulk energy on this basis. There is only one pricing region in which generation and load essentially self-manage the financial trade and physical provision of bulk energy within ‘balancing groups’. The transmission system operator (TSO) must then re-dispatch generators (procured from reserve or ancillary service markets) to address constraints, losses, and system security requirements such as frequency balancing.

The electricity wholesale market in the NEM, on the other hand, accounts for losses and constraints in its design. Australian Energy Market Operator (AEMO’s) NEM dispatch engine dispatches individual generators accounting for losses and constraints and sets the marginal price across multiple regions. In this way, the Australian market design more closely reflects the physical parameters of the system.

The reason for the difference is likely physical. The NEM is the longest interconnected system in the world, but it is quite ‘stringy’ and ‘weak’. It is very important in this context to provide strong incentives to mitigate congestion and losses through the appropriate location of generation and load, as well as provide signals to relieve congestion through investment in transmission. The German system on the other hand is far more interconnected and robust. With about four times the population and one fifth the land, the German system looks much more like a copper plate than the NEM. They still get locational signals through the value of the services procured by the TSOs, and the TSO is more directly responsible for trading off the procurement of those services and the development of new transmission infrastructure.

The German energy transition in context

Germany approaches the energy transition as part of the broader transformation of its economy to net zero by 2045 and becoming a carbon sink by 2050. Within that broader goal, the energy system is targeted to be net zero by 2040.

There are clear targets and policies for emissions reductions for most sectors in the economy, of which energy is only one. There is no discussion about whether or not the targets are right, just a focus on how to get there.

‘Sector coupling’ is a key concept in the German energy discussion. This is the idea that many energy sources are interchangeable and so the whole energy system should be considered. For example, Germans tend to explain their approach to the energy transition in terms of the need to transition the carbon intensity of heating, meeting industry needs, and mobility. This then has implications for the electricity and gas sectors while meeting the fundamental needs of the economy.

The extent of integrated energy system thinking in Germany appears to be greater than in Australia. This may be driven by Germany’s broader cultural approach of discussing and settling on the ‘right’ pathways and technologies, and then building policies and subsidies to support those technologies and paths. In this way the transition is much more planned and centrally orchestrated. This all seems to occur with much more consensus than in Australia.

In Australia the focus has been on developing frameworks that are technology neutral and that are robust to the transition occurring under a range of scenarios. We tend to consider centralised decisions about technologies and pathways would risk consumers bearing the costs of poor decisions. The question arises whether the risks to consumers from such poor decisions outweigh the risks that a market led approach is too unplanned and chaotic, with the transition to net-zero costing more in the long-run. A good example of this is Germany’s coal exit approach, which has been led politically and centrally managed. The phase-out of coal is being implemented through regional plans that empowered coal regions and stakeholders to define the future they want, and the actions needed to get there. This approach is not taken in the NEM, where the market decides which coal generators exit and when they do so.

Security of supply

A focus in Germany is on energy independence and security from shocks, such as the recent war in Ukraine and Russia’s throttling of gas supplies. This time last year Russia supplied more than 60 per cent of Germany’s gas. That has reduced to zero, with the gas largely being replaced by increases in supply from Norway, the Netherlands and France. Europe’s energy security has been placed under severe pressure by these changes, together with reduced output of nuclear plant in France due to low water levels and unplanned outages. Despite this, gas reserves in Germany are now almost full, and across Europe are at just over 80 per cent. This, coupled with assumptions of reduced demand due to high prices and increased supply from nuclear in France, gives some comfort that Germany and Europe can manage the coming winter.

The crisis has enlivened several debates:

• Firstly, there had previously been a relatively settled plan in Germany to build about 20 GW of new gas fired generation that would switch to hydrogen feedstock in the 2030s. This transitional use of natural gas has come into question due to the recent cost pressures driven by gas prices.
• The second major debate sparked is on the need for a capacity market to sit alongside Germany’s ‘energy only’ market. This debate would be familiar to those following developments in the NEM, but it is driven by different anxieties. In Germany it is driven by concerns over energy independence and high gas prices, while in the NEM we are focused on ensuring sufficient capacity as coal exits and managing energy duration needs through the ‘dunkelflaute’ (the low sun and low wind periods) due to our reliance on storage in all future scenarios. In Germany the reliance on flexible gas plant, converting in the future to hydrogen power, means the dunkelflaute has not been a concern since it was first raised as an issue in about 2006.

The reform approach

A striking difference between the German and Australian energy transitions is the approach to reform. In Australia we are used to the public and transparent contest of ideas and influence to guide the reform process. Here, transparency plus time equals good policy. This process occurs throughout the whole life-cycle of reform, from early ideas and options through to the detailed design of approaches.

This is quite alien to the approach in Germany, where government policy has more acceptance and buy-in among stakeholders (note the acceptance of the transition targets above). Furthermore, many of the major industry and stakeholder trade-offs and compromises are worked through early in the reform process and behind closed doors within industry associations. Industry associations in Germany tend to cover more parts of the energy supply chain and multiple energy types. The largest covers electricity transmission, distribution, generation and supply (retail), as well as the gas supply chain, water supply chain and reticulated town heating. This allows compromises to be worked through internally and a united industry approach to be put to government and policy makers.

This approach can also have its draw-backs, with the Australian approach generally pushing harder to reduce costs for consumers and better promoting innovative approaches to the use of markets and technologies. This all takes significant time, and a balance needs to be struck between these benefits and the need to simply get on and deliver the energy transition in a manner that maintains security and reliability consistent with the physical needs of the system.

While there are clearly stark differences between the German energy market and the NEM, there are some valuable lessons for us in some of the approaches. Most notably how consensus about net zero objectives and a lack of politicking over price and technologies is enabling what seems to be a far smoother transition, even when faced with significant shocks such as the Ukraine war and its impact on price and security.