Reflect on Germany’s Energy Transition for Future US Strategies

This brief is part of “Election 2024: Policy Playbook,” a series by the Baker Institute and Rice University that offers nonpartisan, expert analysis and recommendations to equip policy leaders governing the United States and Texas in 2025.

The Big Picture

• Germany’s recent efforts to implement bold renewable energy policies risk undermining its long-standing position as a European economic powerhouse and global leader in manufacturing. 
• By prioritizing energy transition speed over economic stability, Germany’s new energy policy includes many missteps, such as relying heavily on Russia to supply natural gas, shutting down all nuclear plants, among others. 
• As a result, its economy has experienced persistent economic underperformance coupled with the fear of growing industrial weakness and potential political instability.
• Germany’s current status as one of the world’s worst economic performers offers lessons for the United States’ and other countries’ approaches to renewable energy adoption. 

Summarizing the Issue

Germany is pursuing one of the most ambitious plans for renewable energy adoption in the world. However, the energy transition, or “Energiewende,” has not been the panacea anticipated by its proponents. As energy is central to any country’s prosperity, misguided energy policies can have far-reaching implications. When technological and market constraints are ignored in favor of unrealistic aspirations, reality has a way of kicking back.

In fact, Germany has become one of the world’s worst economic performers among major developed economies, jeopardizing its status as an economic powerhouse of Europe and a world leader in manufacturing, a position its held for the past 75 years. Its missteps in energy policy offer valuable lessons to the United States and other countries for their approaches to transitioning to renewable energy.

Expert Analysis

The decision to rely almost exclusively on Russia to supply Germany with natural gas through the Nord Stream pipelines is likely to go down in history as one of former Chancellor Angela Merkel’s biggest policy mishaps, although it can be argued that shutting down Germany’s nuclear plants was another major error. Despite the country’s strong focus on decarbonization, the disruption of Russian supplies after the onset of the Russia-Ukraine war point to the fact that short-term energy reliability is as important a factor as reducing emissions in the longer term.

Economic principles imply that when demand exceeds supply, prices rise. The German economy is heavily dependent on the manufacturing sector, and high energy prices are damaging to industry. The popular view in Germany that a faster switch to renewable power would make electricity cheaper appears to have been unfounded. Given the intermittent nature of wind and solar power, maintaining a reliable energy system requires a mix of energy sources, such as natural gas and batteries as well as infrastructure, that can transmit new power sources efficiently. As a result, renewable generation expenses are only a fraction of the costs associated with the overall transition to renewable energy. Failing to consider these additional factors can lead to a serious underestimation of higher total system costs and affect a country’s entire economy. 

Other Perspectives

Given its ability to make or break governing coalitions in Germany, the Green Party has had a remarkable influence on the country’s energy policy in recent years. The forceful antinuclear and anti-fossil fuel stance of the Green Party — and some of the Social Democrat Party — appears to boil down to one or more of the following arguments:

• A full and speedy transition to renewables is essential to tackle climate change and is the fastest route to German energy independence.
• Nuclear energy is fundamentally unsafe.
• A first-mover advantage will make Germany a technology leader in renewable technology manufacturing.

Policy Outlook

There are several issues with these arguments, all of which are relevant to U.S. energy policy.

To begin with, Germany is already quite energy efficient and creates a relatively low yearly flow of carbon emissions, meaning the lowest-cost emissions reductions have largely already occurred. Hence, any actions Germany takes now will have little impact on global emissions — while potentially imposing a significant cost to many of its economy’s major sectors. This means that speed alone in transitioning to renewables may exact a far higher cost from a country’s economy than expected.

In addition, viewing nuclear energy as fundamentally unsafe ignores an important tool in mitigating climate change because of the following: 

• Nuclear energy produces no carbon emissions. 
• Its safety record in Germany is excellent. 
• Some of Germany’s closest neighbors are considering plans to pursue nuclear energy production.

For similar reasons, adopting a more nuanced view of nuclear energy would likely benefit the transition to renewable energy in the U.S. and elsewhere.

It is also important to note that the idea that a rapid scale-up of renewable energy sources alone can lead to energy independence is problematic. The inherently intermittent nature of wind and solar power requires that other resources be available to balance the grid. Realistically, the dependence of Germany on foreign-sourced fossil fuel is likely to remain for a while — meaning that a country’s portfolio of power supplies also matters and that the emergence of the U.S. as a major gas supplier has significant energy security benefits.

Lastly, due to labor costs, a rigid regulatory regime, and expensive input prices, it is unlikely that Germany will be able to compete with China in renewable technology manufacturing in the future. These same high energy and labor costs threaten the country’s auto industry aspirations to expand production and export of electric vehicles (EVs). The lack of key minerals, processing capability, and supply chains needed for EV batteries also means high dependence on China-dominated supply chains. 

Lessons Learned

Altogether, Germany’s missteps with their approach to transiting to renewable energy include: 

• Depending almost exclusively on Russia’s supply of natural gas. 
• Shutting down all nuclear plants. 
• Relying too heavily on intermittent wind and solar power.
• Failing to bolster delivery infrastructure. 
• Prioritizing transition speed over economic stability.

All of these contributing factors should be considered carefully by any country, including the U.S., seeking to maintain the strength of their economy while implementing energy transition policies.

Other Implications

The resulting dissatisfaction with Germany’s economy in recent years has boosted support for its far-right Alternative for Germany (AfD) party, which is now poised to be a powerful contender to lead Germany into the future — something that was unthinkable a few years back. 

In addition, several German businesses have announced plans to close and/or relocate at least part of their operations. Volkswagen, an iconic German company, has taken steps to address rising costs and lack of competitiveness by shutting down some plants in Germany, while both Volkswagen and Mercedes are making significant new investments in the U.S. Finally, major industrial player Badische Anilin- und Sodafabrik (BASF) announced layoffs and plant closures in 2023 due to high energy costs. This trend is expected to continue.

The Bottom Line

By prioritizing energy transition speed over economic stability, Germany’s recent energy policies have resulted in persistent economic underperformance, the fear of growing industrial weakness, and potential political instability. Given that Germany is at the core of Europe, especially following Brexit, the consequences for the European Union and the entire continent are far-reaching and offer valuable lessons to the U.S. and other countries in their transition to renewable energy sources. 

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.