Germany's new government to speed up transition via 'Fit for 65' decarbonization plan

Germany's new coalition government under Chancellor Olaf Scholz plans to speed up Germany's energy transition to achieve a 65% cut in CO2 emissions by 2030 on 1990 levels.

S&P Global Platts reporters provide context for a country that is Europe's biggest importer of oil, gas and coal and biggest producer of electricity.

Power

Germany is Europe's largest wind and solar market with 120 GW capacity already installed, putting a strain on north-south power flows. Further additions may again result in negative hourly prices during offpeak days another reason for Germany's strong appetite for hydrogen.

• German power demand is forecast to increase to 680 TWh-750 TWh/year in 2030, up 16%-23% from pre-COVID levels in 2019.
• Germany is to exit nuclear generation by end-2022 while a first wave of coal closures has begun under an existing 2038 phaseout deadline.
• The coalition plans to boost the share of renewables in the generation mix from 65% to 80% by 2030.

Phasing out coal "ideally by 2030" under the coalition agreement accelerates the need for flexible supply including new gas-fired plants that are hydrogen-ready for longer-term decarbonization conversions.

• German coal and lignite generation of 131 TWh for Jan.-Nov, 2021 is up 26% on year, while 2021 nuclear generation around 65 TWh is still covering 12% of power demand.
• Platts Analytics projects German year-ahead power prices to average around Eur70/MWh for 2023-2023, double the average price for 2016-2020.
• Platts assessed Platts assessed the cost of producing renewable hydrogen via PEM electrolysis in Europe at Eur16.01/kg Dec. 6 (Netherlands, including capex), based on front-month power, up fourfold since the start of the year.

Natural gas

Germany is the biggest gas consuming country in Europe by some distance, with demand of 87 Bcm/year. It is a modest gas producer with output in 2020 of 5 Bcm.

• Germany is Russian Gazprom's biggest export market with sales in 2020 of 45.8 Bcm -- a little over half of Germany's total gas demand.
• German gas is traded at the THE hub, which began operation in October following the merger of the Gaspool and NCG hubs.
• Since launch, the day-ahead THE price has averaged Eur85.08/MWh, a premium of more than Eur3/MWh over the benchmark Dutch TTF day-ahead price.

Germany has one of the best connected gas markets in Europe, with direct links to imports from the Netherlands, Norway and Russia, as well as connections with other regional markets.

• The 55 Bcm/yr Nord Stream 2 pipeline from Russia was completed in September but awaits regulatory clearance before operation can start.
• The new coalition excluded any mention of the project in its coalition treaty. Based on previous declarations, the SPD is largely in favor of the pipeline, but the Green Party and FDP have previously called for the project to be halted.
• Germany has no LNG import infrastructure. Two terminals are under development: the 12 Bcm/year Stade and the 8 Bcm/year Brunsbuttel facilities.

Related podcast: Nord Stream 2: No end in sight to long-running saga over controversial gas pipeline

Oil

Although oil consumption peaked in the late 1970s, Germany remains Europe's biggest oil consumer.

• Germany burned 2.12 million b/d of oil products last year, or 19% of the total demand in Western Europe, according to Platts Analytics. With almost no domestic production, almost all the country's oil needs are imported.
• In 2022, the country is expected to return to 2019 oil demand levels of 2.32 million b/d.

Germany is also Europe's largest fuel market and refining hub.

• Germany consumed 1.1 million b/d of diesel and gasoil in 2020 and 450,000 b/d of gasoline, putting it ahead of both the UK and France.
• Europe's biggest refiner Rosneft is also set to become Germany's biggest refiner in 2025 after Shell shuts some units at its Rhineland refining complex.
• Platts assessed cracking margins for refining Russian Urals crude in the ARA hub at $2.375/b Dec. 6, down from $3.3/b at the start of the year.
• Like most of its European peers, Germany has seen sales of diesel and gasoline cars fall sharply since 2020 helped by incentives to promote electric cars.
• During the third quarter of 2021, registrations of new gasoline and diesel cars fell to 55% of total sales, with hybrid, plug-in and fully electric cars making up 44% of sales, according to sector association ACEA.
• For key biofuels, Platts assessed the spread between renewable diesel, or HVO, and ultra-low sulfur diesel in Europe at $1588.45/mt.
• The spread between biojet (SAF) and jet fuel was assessed at $1,776.43/mt on Dec. 6, Platts data show.

Battery metals

Germany aims to have at least 15 million electric vehicles by 2030, a goal the new coalition lifted from previous targets.

• German EV sales are expected to nearly double to 755,000 in 2021, according to Platts Analytics. This is expected to rise to 1.13 million in 2025 and 1.7 million in 2030.
• To meet increasing demand, seven EV battery gigafactories with a combined 246 GWh capacity are planned in Germany including Tesla's 100 GWh Gruenheide factory outside Berlin.
• Battery metal prices have been skyrocketing in 2021. Seaborne lithium carbonate and hydroxide prices reached almost daily record highs with Platts' assessments at $31,000/mt and $30.5000/mt CIF North Asia respectively.
• Similarly, European cobalt metal prices reached a three-year high of $31.25/lb IW Europe.

Steel

Germany's steel industry accounts for 30% of all CO2 emissions from industries and 6% of Germany's overall emissions.

• Steelmakers aim to cut emissions by a third by 2030 through changes in the manufacturing process estimated to cost Eur100 billion.
• Steel association WV Stahl welcomed plans by the coalition to support energy costs as the carbon-intensive blast furnace mills, among them Europe's biggest steelmaker Thyssenkrupp, are under pressure to stem the price of switching from coal- to hydrogen-based production while undergoing the transition from blast to electric arc furnace production.
• Platts daily HRC assessment has come down to Eur955/mt Dec. 6 since a record Eur1190/mt EXW Ruhr in June, but margins remain healthy at mills.
• Expected decarbonization costs for the European steel industry already changed pricing policies at mills and led steelmakers to introduce or plan carbon surcharges as extra costs on base prices.

Petrochemicals

Germany hosts some of the largest petrochemical companies in Europe. The sector will be seeking a level playing field with global counterparts on carbon emissions to prevent the risk of investment leakage.

• Germany is at the forefront of EU plans to reduce plastic waste pollution and increase the use of recycled plastic.
• Germany is well positioned with PET plastic bottle collection rates above 90%, but strong demand and exports means Germany is facing an uphill battle to ensure that 2025 mandates are met.
• Post-consumer PET bottle bales, the feedstock for recycled PET, have more than doubled in 2021 to Eur850/mt FD NWE Dec. 6, Platts data show.

Hydrogen

The new government plans to double Germany's electrolyzer capacity target to 10 GW by 2030. The outgoing government had already pledged Eur9 billion in support for electrolyzer and related projects at home and abroad.

• German hydrogen demand accounts for approximately 2% of current global consumption, or 1.6 million mt/year, almost all from unabated fossil fuel production, with demand concentrated in the refining and fertilizer sectors, according Platts Analytics.
• Demand could reach 2.2 million mt/year by 2030, Platts Analytics said in its European Hydrogen Long-Term Forecast in October.
• Platts Analytics Hydrogen Production Asset Database tracks a total of 640,000 mt/year of production capacity in Germany by 2030.

GERMAN PRIMARY ENERGY MIX (%)

Source: AGEB (Nov. 8, 2021)