Going nuclear

tauringhuang.

Sep 1st 2008
From the Economist Intelligence Unit ViewsWire

If the opposition CDU comes to office in Germany expect an expanded role for nuclear power


Victory for the CDU in the 2009 general election would more than likely herald a turning point in Germany's energy policy in favour of an expansion of nuclear power. Given the high fuel tax burden imposed on German consumers, any impact on electricity prices is likely to be marginal. The benefits to the country's research and development sector could be far more substantial.

Policy shift
Germany's amended Nuclear Act, which came into effect in 2002, prohibits the development and construction of new nuclear power plants. It further stipulates that the country's 17 existing plants will be gradually shut down by 2021. This nuclear phase-out is based on a deal negotiated by the Social Democratic Party (SPD) and their former coalition partner, the Green Party. The SPD held on to this agreement when forming the current "grand coalition" government with the Christian Democrats (CDU/CSU) in late 2005.

A rather swift policy reversal is likely, however, if the CDU—a keen advocate of nuclear energy—ends up as kingpin of a victorious coalition after next year's general election, scheduled for September 2009. Given the CDU's strong standing in opinion polls—the most recent show the SPD trailing a distant second, 18 percentage points behind the CDU—and the continued popularity of the CDU leader and chancellor, Angela Merkel, such an outcome appears increasingly probable. With energy policy likely to figure as an important election issue, given the impact of the sharp rise in global energy prices on inflation and households' disposable incomes, the CDU will welcome evidence of voters' strengthening support for nuclear energy. Whereas opinion polls last December had indicated that only 40% of Germans were in favour of extending the life span of existing nuclear plants beyond 2021, this had risen to 54% in polls conducted last month.

At present, the CDU is concerned primarily with extending the life span of Germany's existing nuclear plants. Nevertheless, Ms Merkel has rejected proposals from SPD politicians whereby the SPD would agree to an extension to the life span of existing plants in exchange for a firm commitment in the German constitution to exit from nuclear energy once these plants are shut down. This shows that the CDU does not want to rule out the possibility of building new nuclear power plants at a later date.

A revised energy policy could easily see the life span of existing plants extended from the current average of 32 years to 40 years, which would still be within the expected asset depreciation range. Indeed, a recent study commissioned by the government bases its energy efficiency models on the assumption that, including proper retrofitting, the life span for nuclear plants could be extended by 20 years, pushing it to 52 years in total.

Marginal benefits?
Calls for nuclear energy to remain part of the electricity mix over the longer term are becoming louder as households struggle with soaring energy bills, which have increased by 55% from 2002. At the same time, the country's electricity-intensive industry, for which affordable electricity prices are key to keeping Germany competitive in a global market, is looking with envy to neighbouring France, where electricity is nearly half as expensive.

According to Eurostat, the EU's statistical office, German electricity prices in the second half of 2007 for both private households and industry users were above the EU average, by 31% and 6% respectively.

An oft-voiced concern among consumers is that in the event of a nuclear phase-out, the 28% share of Germany's electricity generation mix currently covered by nuclear energy will have to be replaced, to some extent at least, with more expensive natural gas, therefore leading to even higher electricity prices.

That said, a closer look at the data for household electricity prices for the second half of 2007 reveals that while Germany's base prices are comparatively high, another important factor to consider is that the government also levies some of the highest taxes on electricity consumption inside the EU. Indeed, while the base price has remained relatively stable since Germany's electricity market was liberalised in 1998, the tax burden, initially around 14%, has steadily increased over the past decade.

Consequently, government-imposed taxes rather than the wholesale cost of electricity seem to be playing more of a role in driving up electricity prices for German households. And with tax levels set high enough to leave the overall price less sensitive to changes in the base price, keeping nuclear energy as part of the electricity generation mix may not lead to any significant decline in electricity prices at the consumer level.

The picture is less clear for industrial users. With a non-recoverable tax burden of only 11.7%, overall electricity prices are more susceptible to price changes at the wholesale level. The loss of nuclear energy as a cost competitive option in the electricity mix could therefore have an impact on prices, depending on which alternative energy sources serve as a replacement. It seems, however, that in the battle to stay competitive, the larger problem for Germany's electricity intensive industry is the fact that a number of other European countries operate under even more favourable tax structures. Eleven mainly east European and Mediterranean governments refrain from charging non-recoverable taxes altogether.

Good news for R&D
A return to a committed future with nuclear energy could have considerable positive implications for the country's research and development sector, leading to a renewed focus in this field. Germany's research minister, Annette Schavan (CDU), has already promised to make available up to