Europe's challenges are in sharp focus. The continent's economy has failed to keep pace with the U.S., energy prices are still higher as it pivots away from imported Russian energy, whilst the geopolitical climate is in a state of flux. And it is Germany, for so long the engine of Europe's growth, which has most notably stuttered under the strain of these pressures.
National security and restoring growth are priorities for Friedrich Merz - the man likely to be the next German Chancellor - and these drivers will in turn impact Germany's ongoing energiewende. The pivot away from cheap, imported energy has hit households and industry but DNV's new Energy Transition Outlook for Germany shows the country is on course to achieving an energy system which is more affordable, more secure and much greener. This is good news, with all three dimensions of the energy trilemma improving in Germany over the coming years.
Germany will electrify 46% of energy demand by 2050, up from 19% today. This will be driven by the massive build out of domestic renewable production although it will fall just short of its 2045 targets for solar and wind installations.
Policies and reducing technology costs will also be an important factor in changing how energy is consumed. For example, a massive shift to more effective electric vehicles and domestic heating will lead to less than 3% of Germany's vehicle fleet using combustion engines by 2050 and one third of household heating will be provided by heat pumps.
The phase out of coal will require new gas and hydrogen-ready power stations to provide continuous and reliable supply, but the utilization of the gas plants will continue to fall and provide power only as back-up in periods of low renewable production, to the extent that 98% of all electricity supply will be from renewable sources.
Merz has strongly backed Kyiv following the invasion of Ukraine. The consequences of the war are being felt both on the battlefield and economically, and it is logical to presume that Merz and his new government will want to continue to prioritize Germany's energy security. The DNV forecast shows that Germany will dramatically reduce its energy imports; with domestic production supplying 73% of its energy needs in 2050 compared with only 30% today. Imported coal and oil, for example, will decline 99% and 79% respectively between 2024 and mid-century.
Germany will, however, remain reliant on international supply chains to build the infrastructure required for its transition.
Affordable for German industry
German industry has been fretting over the high price of energy and the negative impact on its ability to compete on the international stage. This is a broader challenge for Europe and Mario Draghi's report on the competitiveness of the continent's economy dedicated a whole chapter to the role of energy. Historically, Europe pays more for its energy than other major economies, which is maybe unsurprising for a region where Norway is the only country with net energy export.
In the short term, energy prices in Germany will continue to drop from the spike which followed the invasion of Ukraine, and they will settle at a level which is on par with the rest of Europe. Energy bills for German industry will remain higher than their Chinese and American counterparts but within a margin that makes technological innovation and global market dynamics more important factors.
It is worth noting that energy-intensive industries such as chemicals, metals, paper, and cement, account for 71% of manufacturing energy consumption. These energy-intensive industries currently, however, account for only about one fifth of manufacturing value added. And while these industries are at risk, there may be tactical reasons for why Europe wants to maintain domestic production of certain energy intensive commodities such as steel and aluminum.
Germany has long been a front runner in the energy transition and has established a national target to achieve a net zero energy economy by 2045. DNV's Outlook finds that Germany will miss this target -- but by a narrow margin.
Carbon dioxide emissions will fall by 89% by 2045 and by 95% by 2050 compared with 1990. This means that the 2045 climate neutrality target will not be achieved, but compared to most other countries and regions, the likely success of the German decarbonization is notable.
Energy policy is often seen through the lens of the energy trilemma and in recent years energy security has become the main driver of policy for almost every government. The example of Germany shows that satisfying the need for energy security does not come at the expense of a greener and affordable energy system.