Electric Power & Natural Gas Practice

Germany’s energy
transition at a
crossroads
Germany has been a leader in the transition toward a low-carbon-
energy system, but it will still miss most of its energy-transition
targets for 2020. Urgent action is needed to get back on track.

by Fridolin Pflugmann, Ingmar Ritzenhofen, Fabian Stockhausen, and Thomas Vahlenkamp

© Nikada/Getty Images

November 2019
 For a long time, Germany was a pioneer in climate and largely due to weather conditions, does not
protection and perceived as a global role model for change the long-term trend. If the pace of emission
a successful energy transition. As early as in 2000, reduction from the past decade continues, Germany
Germany implemented the Renewable Energy will hit its 2020 targets eight years late, and will only
Sources Act, which supported the large-scale build- meet those for 2030 in 2046.
up of renewables under an expensive feed-in tariff
scheme. As a result, installed solar-photovoltaic (PV) The Energy Transition Index reflects this sluggish
and wind capacities have soared from 6.2 gigawatts progress. At no point since the index’s inception has
to 83.8 gigawatts between 2000 and 2015. During the intermediate CO2e emission target been met
this time, Germany accounted for 33 percent of 100 percent, and currently this indicator stands at 61
the renewable buildup within the European Union. percent. Indicators of primary energy consumption
In addition, the policy has led to the creation of a and electricity consumption also show low levels
considerable “green” industry: German companies of target achievement—57 percent and 39 percent,
used to be global champions in the production of respectively. The likelihood of reaching these
solar-PV cells as well as wind turbines, developing targets by 2020 is therefore classified as “seriously
cutting-edge technologies and creating jobs for off track.” Furthermore, the extent to which
several-hundred-thousand employees. electricity-consumption targets are met has been
falling since 2014 (Exhibit 1).
Based on this impressive trajectory, Germany
set itself ambitious targets to further accelerate The main reason is that to date nearly all CO2e
the energy transition. According to the plans of savings stem from efforts in the electricity sector,
the federal government, significant progress in where emission reductions are primarily due to the
the transition to less carbon-intensive and yet expansion of renewable-energy sources, along
still secure and affordable energy supply should with the decommissioning of older conventional
be achieved by 2020. With this milestone year power plants and the surcharge for CO2 within the
approaching, it is time for a comprehensive progress
review. Today’s necessary message is clear: the
country misses key targets. (For more on the
research underlying this article, see sidebar, “The
German Energy Transition Index.”) Recent course-
correction efforts by the federal government have The German Energy
not yet been far-reaching enough to bring lasting
Transition Index
improvements. Meanwhile, problems are emerging
in all three dimensions of the “energy triangle.”
These recent struggles in Germany illustrate the McKinsey has tracked the development of
potential pitfalls of a fast energy transition, but they the German energy transition since 2012,
can provide important lessons for other countries with an “Energy Transition Index.” The
endeavoring on their energy transition. index is composed of 15 indicators along
the three dimensions of energy supply:
environmental sustainability, security of
Falling behind on supply, and economic development and
environmental sustainability growth—the so-called “energy triangle.”
On the core issue of environmental sustainability, Indicators record the extent to which each
the energy transition is lagging far behind its politically defined energy-transition target
2020 targets. In 2018, 866 million tons of CO2 is achieved, and thus if Germany’s energy
equivalents (CO2e) in emissions were released. transition in each area is well on track, if it
While this amount represents a 4.5 percent drop requires minor adjustment, or if the target
from the previous year, it was still 116 million tons achievement is seriously off track.
above the target of 750 million tons for 2020. The
improvement seen last year, which was temporary

2 Germany’s energy transition at a crossroads

 Germany’s energy transition at crossroads
Exhibit 1 of 3

Exhibit 1

On environmental sustainability, progress lags behind 2020 targets.

Extent to which targets are achieved, % of target

Electricity generated from CO₂e² emissions Primary energy Electricity

renewable sources consumption consumption

Target: 35% of gross electricity Target: 750 Mt CO₂e Target: 11,454 petajoules Target: 553 TWh
consumption from renewables (40% reduction compared (20% reduction compared (10% reduction compared
(RES) compared with 17% in 2010¹ with 1990 level) with 2008 level) with 2008 level)

200 100 100 100

Target Target Target

150 75 75 75

100 50 50 50
Target

50 25 25 25

0 0 0 0
2012 2019 2012 2019 2012 2019 2012 2019

RES share RES share 931.0 865.6 13,728 12,963 595 595
23.5% 37.8% Mt CO₂e Mt CO₂e petajoules petajoules TWh TWh

No quantitative assessment of sector-coupling indicator has been performed, because no

overarching targets had been clearly formulated

1
Sample calculation, achievement of renewable-share target: 0% 17.0% renewable share; 100% 31.4% renewable share (in 2018); current value is
37.8% (37.8%–17.0%)/(31.4%–17.0%) = 144%.
2
CO₂ equivalent.
Source: Federal Ministry for Economic Affairs and Energy (BMWi); German Environment Agency (UBA); Working Group on Energy Balances (AGEB)

European emission-trading system. In the first renewable sources, a higher price for CO2, and
half of 2019, electricity-sector emissions were mild weather conditions. The amount of electricity
about 15 percent lower than they were during the generated from renewable sources has surpassed
same period in 2018. According to the German the 2020 target (35 percent of total gross electricity
Association of Energy and Water Industries, this consumption) since 2016. Currently target
drop was caused by record generation from achievement for this indicator is 144 percent.

Germany’s energy transition at a crossroads 3

 However, the electricity sector’s progress has not have already announced that they will review the
yet been replicated in the transportation, building, enormous price fluctuations and their causes.
or industry sectors. In the transportation sector,
emissions increased from 153 million tons to 162 The supply situation will become even more
million tons of CO2e (an increase of 6 percent) since challenging in the future. The phaseout of nuclear
2012. The rise in passenger vehicle traffic (increase power until the end of 2022, and the planned
by 5 percent) more than offset the reduction in reduction of coal-fired generation, will gradually
emissions per kilometer driven (decrease by 3 shut down further secured capacity. If new
percent), resulting in a negative balance overall. In generation facilities are not added, the reserve
the industry sector, CO2e emissions increased from margin will tumble, with consequences that vary
180 million tons to 196 million tons (increase by 9 considerably from one region to the next. Industrial
percent). Finally, emissions fell in the building sector, areas in western and southern Germany will be
but only from 130 million tons to 117 million tons of hit especially hard, as large drains on capacity
CO2e—a drop of just 10 percent. exist in these regions and high rates of renewable
expansion are unlikely there. Furthermore, the shift
Substantially lowering CO2e emissions will not only from dispatchable capacity to fluctuating renewable
require further action to increase energy efficiency sources could also lead to problems in situations
but also a higher level of sector coupling—in when demand is high but supply from renewable
other words, comprehensive electrification of the energy is low.
transportation, building, and industrial sectors. In
this way, these sectors can fully benefit from energy The loss of generation capacity has another effect
sources, such as wind- and solar-power systems, as well: Germany will almost certainly go from being
that do not generate CO2e. Despite the importance a net electricity exporter to an importer, especially
of sector coupling, the Energy Transition Index does after 2023. In June 2019, the country imported more
not yet provide a quantitative value for the sector- power than it exported for the first time in five years.
coupling indicator, because no overarching targets However, some neighboring countries are also
had been clearly formulated for this area. decommissioning power plants. The Netherlands
is phasing out coal, for example, and discussions in
Belgium about stopping the use of nuclear power
Security of supply under pressure may also result in plant closures. In the medium
Germany has enjoyed a highly secure electricity term, the European network as a whole could lack
supply for decades, but the tide is beginning to sufficient generation capacity.
turn. The German power grid repeatedly faced
critical situations in June of this year: significant In light of this, expanding Germany’s electricity
shortfalls in available power were detected on three grid becomes increasingly crucial to transmitting
separate days. At its peak, the gap between supply electricity produced by the large wind capacities in
and demand reached six gigawatts—equivalent the north to the demand centers in the south. Faster
to the output of six major power plants. Imports progress is essential to ensure the country’s energy
arranged on short notice from surrounding supply. By the first quarter of 2019, just 1,087
countries were required to stabilize the grid. Also, kilometers of the 3,600-kilometer transmission
the price for balancing energy jumped to €37,856 lines planned for that date were actually completed.
per megawatt-hour in one instance. In 2017, the If grid expansion continues at this pace, the country
price for balancing energy averaged €63.90 per will not reach its 2020 target until 2037. The
megawatt-hour. While this can be interpreted as recently adopted Grid Expansion Acceleration Act
an indicator of shortage, initial investigation has is a step in the right direction, but the backlog will
shown that changes in how balancing-energy not be eliminated anytime soon. Grid expansion will
prices are calculated and that trading behavior also become even more important from 2023 onward,
played a role in this steep increase. Grid operators when a larger transmission system will be crucial to

4 Germany’s energy transition at a crossroads

 counteract the regional bottlenecks expected after remains in the “minor adjustment required” category.
the last nuclear plants are shut down and the first The target for the cost of grid interventions, an
steps to phase out coal generation take place. indicator of transmission-system stability, has
been met to 42 percent, so hitting this target is
Current indicators of the security of supply considered “seriously off track” as well. What’s
reflect these problems. As just 36 percent of the more, intervention for redispatching and feed-in
Insights 2019 transmission-grid-expansion target has been management has increased significantly since 2016.
Germany’s energyreached, the likelihood
transition of hitting this target remains
at crossroads In contrast, hitting the targets for power outages
Exhibit 2 of 3 classified as “seriously off track.” No updated values and secured reserve margin is considered “on track,”
are available for interconnector capacity; based on as indicators for both have been over 100 percent
the last value calculated—89 percent—this indicator for several years (Exhibit 2).

Exhibit 2

Security of supply could become more challenging.

Extent to which targets are achieved, % of target

Power Secured reserve Interconnector Cost of grid Transmission-

outages margin capacity interventions grid expansion

Target: Maximum outage Target: Secured reserve Target: Expansion Target: Maximum cost of Target: Expansion
time of 17 minutes a year margin of at least 1.3%¹ to 10% of installed €1.0/MWh (2008 level)² to 3,582 km EnLAG³
(based on 2008 level) generation capacity and BBPlG⁴

120 400 120 120 120

NCP⁵ NCP⁵ NCP⁵
Target Target Target
100 100 100 100
Target 300
80 80 80 80

60 200 60 60 60

40 40 40 40
100 Previous
Target expansion
20 20 20 20
target⁶

0 0 0 0 0
2012 2019 2012 2019 2012 2019 2012 2019 2012 2019

15.9 15.1 3.8% 4.7% 7% 8.9% €9.48 €9.12 679 km 1,087

min/year min/year (2015) (2016) per MWh per MWh (2015) km
(2015)

1
Based on new calculation logic used by transmission-grid operators as of 2015. 2 Sample calculation, achievement of target for grid-intervention costs
(redispatching, feed-in management, reserve plants): 0% €15.07/MWh, 100% €1/MWh, currently €9.1/MWh (9.12–15.07)/(1.0–15.07) = 42.3%. 3 Power Grid
Expansion Act. 4 Federal Requirement Plan. 5 No comparison possible due to definition changes and data-availability issues. 6 EnLAG; BBPIG targets added in 2016.
Source: European Commission; Federal Ministry for Economic Affairs and Energy (BMWi); Federal Network Agency; system balance report of German transmission-
system operators

Germany’s energy transition at a crossroads 5

 At the same time, the planned decommissioning household electricity in Germany—far higher than
of nuclear and coal-fired plants could soon the European average of 37 percent. Costs for grid
dramatically change the reserve margin. In their expansion and interventions also add to the German
current system-balance report, the transmission- electricity price; fees for grid usage have reached
system operators predict that the reserve margin 7.4 eurocents per kilowatt-hour, up 20 percent
will be negative—indicating a lack of secured since 2012.
power—as early as 2021. This gap will amount to 5.5
gigawatts even before accounting for the shutdown The Energy Transition Index does point to positive
of coal-fired plants in the course of the German developments in the labor market. Thanks to the
coal exit. A slightly positive reserve margin of 1.1 overall good employment situation in Germany, the
gigawatts is achieved only under the assumption target for jobs in energy-intensive industries has
that the 6.6 gigawatts of grid reserve are extended been exceeded (reaching 141 percent). The most
beyond 2020. From that point until 2023, at least recent figure for the indicator for jobs in renewable
17.7 gigawatts of the remaining secured output will energies is 105 percent. In both cases, the targets
disappear as the last nuclear plants go offline and have been surpassed for years. However, the current
coal-fired plants follow. If peak load remains the struggles of the German wind-energy industry, as
same, the balance gap will grow to 16.6 gigawatts one example, suggest a negative outlook.
unless new generation capacity is added.

Federal government announces

Electricity costs remain high climate-action concept
Economic development and growth have long In Germany, frustration is now growing among the
constituted a problematic area for energy general population over the lack of progress in
transition—especially when it comes to electricity- addressing climate change. The “Fridays for Future”
price development. For years, German consumers school strikes and the good results of the Green
have paid more for their electricity than their Party in the European election are signs of broad
European neighbors do. Today the electricity price public interest in climate protection. Pressure on
for households is still about 45 percent above the the federal government is rising. It has become clear
European average. As a result, target achievement that small adjustments are not enough to get the
for this indicator is just 25 percent, so the likelihood energy transition back on track.
of hitting this target remains classified as “seriously
off track.” Conversely, the electricity price for In September 2019, therefore, the German
industry continues to follow the positive trend that government agreed on a concept to reach the
began in 2014, and target achievement for this goal of reducing greenhouse-gas emissions by 55
indicator is 127 percent. However, the electricity percent until 2030 with annual reduction targets
price used in this analysis only applies to companies per sector. Several ministries had worked for months
that are partially exempt from the Renewable on proposals for this “climate package.” In order
Energy Act levy (Exhibit 3). to ensure compliance, the reduction efforts shall
be objectively monitored by an external board of
The high price of household electricity is mostly due experts. More than 50 measures are planned now to
to taxes and fees, which rose by 17 percent since help accelerate the cut in emissions and keep costs
2012, even as costs for procurement and sales fell under control: starting in 2021, a national CO2 price
by 16 percent. The Renewable Energy Act levy— will be implemented on emissions from the building
which increased from 3.6 eurocents per kilowatt- and transport sector, complementing the existing
hour to 6.4 cents per kilowatt-hour—is a particular European Emission Trading System. Furthermore,
challenge for Germany. As a result, the level of citizens will be financially compensated by lowered
target achievement is just 17 percent, relegating electricity prices, increased support payments for
this indicator to the “seriously off track” category. commuters, higher housing allowances, and tax
Overall, levies account for 54 percent of the price of reductions for using public transport—that’s the plan.

6 Germany’s energy transition at a crossroads

 Germany’s energy transition at crossroads
Exhibit 3 of 3

Exhibit 3

While household electricity prices remain high, there are positive developments in the
labor market.
Extent to which targets are achieved, % of target

Jobs in renewable Jobs in electricity- Electricity price Electricity price Renewable Energy
energies intensive industries for industry for households Act levy

Target: At least 322,100 Target: At least 1,593,808 Target: Deviation Target: Deviation Target: Maximum of
jobs (2008 level)¹ jobs (2008 level) of no more than 8.5% of no more than 25.5% 3.5 eurocents/kWh
from European average² from European average²

150 150 150 100 100

Target Target

100 80 80
Target
100 100
Target Target 50 60 60

0 40 40
50 50

-50 20 20

0 0 -100 0 0
2012 2019 2012 2019 2012 2019 2012 2019 2012 2019

395,600 338,600 1,593,331 1,724,479 Deviation Deviation Deviation Deviation 3.6 ct/ 6.4 ct/
jobs jobs jobs jobs 14.2% 6.2% 33.8% of 44.7% kWh kWh

1
Sample calculation, achievement of renewable-energy-job target: 0% 0 jobs; 100% 322,100 jobs; current value is 338,600 jobs 100%.
2
Deviation in 2009–10.
Source: E-Control; Eurostat; Federal Ministry for Economic Affairs and Energy (BMWi); German Federal Employment Agency; information platform of German
transmission-system operators

Although there is broad agreement that this climate- already in the Energy Transition Index. For example,
action concept is a step in the right direction, most while on sector coupling the concept defines
observers consider the proposed measures as specific targets in the mobility sector (7 million–
not efficient enough to reach the reconfirmed 10 million electric vehicles until 2030), other sector
emission-reduction target of –55 percent by targets remain vague, for instance, with regard to
2030. The biggest criticism: the CO2 price levels buildings and heat.
are not strong enough to induce sufficient shifts in
customer behavior and investments. Furthermore, Regarding energy efficiency, critics complain
the concept does not address all challenges of the about a lack of a holistic perspective on the target
decarbonization pathway until 2030 as identified contribution of energy-efficiency measures—and

Germany’s energy transition at a crossroads 7

 so the government has announced the development capacity, such agreements can only serve as a
of an energy-efficiency strategy 2050 by the end of temporary solution with limited scope. Fourth,
the year. One challenge in developing this strategy demand management should be expanded to
is that while financial support for energy-efficiency further mitigate supply bottlenecks; this tool will
measures shall increase, it is unclear to what extent become more relevant in the coming years as
the measures will contribute to reducing energy nuclear and coal power is phased out.
consumption. At least electricity consumption can
be expected to increase further, despite efficiency The necessary move away from coal-fired power
initiatives, due to further advances in electrification. generation to renewable energy poses major
challenges for all countries worldwide. Germany
Objectively, too, it can be stated that these was one of the first countries to formulate ambitious
measures do not sufficiently address the security national goals for its energy transition. Today, it can
of supply concerns in Germany, as it relies on be said that Germany will miss most of its energy-
overcapacities in the European electricity system. transition targets for 2020. However, energy
However, as dispatchable capacity decreases transition remains a process. To get back on track
across European countries, it is certain that now, the federal government needs to put the
further action is needed to secure Germany’s recently announced climate program into action,
energy supply in the medium to long term and to in an effective and timely manner, and it needs to
prevent the high macroeconomic costs of potential consider further measures. There is still a chance for
bottlenecks. In particular, four additional types Germany to remain a pioneer in climate protection.
of action at the federal-government level should And, there is an external “motivation” for the country
be considered: first, grid extensions need to be to succeed: based on current EU regulation, the
accelerated to enable the integration of more country could be obliged to make compensation
renewable power. Second, capacity for peak loads payments if EU targets are breached continuously.
should be expanded to compensate for the secured Already, in the federal budget for 2020 to 2022,
capacity that will be eliminated, or existing backup €300 million has been reserved for the purchase
capacity should be maintained until compensation of missing CO2 pollution rights from other EU
is online. Third, to secure supply in the short term, states. The energy think tank Agora estimates that
Germany could enter into contractual agreements penalties could add up to €30 billion to €60 billion
with foreign power plants to provide power when over the next decade. That’s money taxpayers would
domestic supply bottlenecks occur. However, as have to spend if no countermeasures are taken.
other countries also plan to shut down secured

Fridolin Pflugmann is a consultant in McKinsey’s Frankfurt office, Ingmar Ritzenhofen is an associate partner in the Cologne
office, and Fabian Stockhausen is a research analyst in the Düsseldorf office, where Thomas Vahlenkamp is a senior partner.

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8 Germany’s energy transition at a crossroads