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Photo Gallery: The High Price of Clean Energy

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Germany's Pricy Gambit Will 'Cleantech' Be Next Economic Miracle?

Climate change is forcing the world's economies to embark on a new industrial revolution. The environmental industry creates growth and jobs, with German companies leading the way worldwide. But how much longer can it last? And what is the cost of the boom?

On the outskirts of Güstrow, a town in northeastern Germany, 20 tent-like structures rise from the Mecklenburg plain. From a distance, the scene looks like a circus convention. But if anyone were to enter the circular structures, he would not encounter a joyful menagerie of people, animals and circus sensations, but immediate death by suffocation.

The giant, airtight tanks are filled with corn silage, tons of chopped up stems, grains and leaves, which is fermented at 36 degrees Celsius (96.8 degrees Fahrenheit) for 10 weeks. The process, which yields biogas that contains methane, mirrors what happens in a cow's intestines, says businessman Felix Hess, but with one difference: "We capture the gas."

Hess, 49, picks up a handful of the corn substrate, crumbling it between his fingers. It smells fresh and slightly sour, "which is exactly the way it should be," he says.

An engineer by trade, Hess has fulfilled his dream. After working for years as a strategic consultant, he wrote a business plan and, together with three partners, founded the bio-energy company Nawaro, an abbreviation, in German, for the words "Renewable Natural Resources." The plant the four partners designed in Güstrow is something the world has never seen before. In a few weeks, the world's largest biogas production plant will begin operating at full capacity for the first time.

Gas for 50,000 Households

Once the Güstrow plant is up and running, farmers from the surrounding 50-kilometer (31-mile) radius will supply it with organic matter. Roughly 1,250 tons a day will be processed at the plant, producing methane that is pumped into a pipeline running directly beneath the plant grounds.

If all goes well, the company will produce 46 million cubic meters of gas a year, "enough for 50,000 households," as Hess estimates. Biogas, which is produced on an industrial scale from arable crops, now plays only a small role in the energy mix, but the market is still in its infancy. Nevertheless, the developers of German plants, which control 90 percent of the global market, have already gained an enormous edge over the future competition. With its advanced environmental technologies, the German economy is not only capturing global markets but is also seen as a trendsetter in the industry.

Green industries are developing into an engine for growth and employment, particularly in Germany's eastern states. Many see "cleantech" as a new major industry that could even surpass the auto industry one day. There is talk of a new economic miracle not unlike what happened in post-World War II Germany, except that this time the emphasis is quite different and unmistakably green.

This time it is not the unfettered play of market forces that is driving the economy to churn out mass-produced goods for a throwaway society. In fact, almost the opposite holds true today: The government, with the help of laws and regulations -- from emissions control to packaging regulations --- is developing investment incentives to encourage companies to come up with technologies that protect resources. It is essentially forcing the economy to embark on a second industrial revolution, except that this time belching smokestacks and sparks are not part of the mix.

Germany's Green Wave

This new environmental movement is not spearheaded by concerned environmentalists, but by coolly calculating entrepreneurs. They are armed with a good deal of specialized knowledge in the development of highly efficient equipment, including condensing boiler heating systems, heat pumps and steam turbines, and they expect their efforts to yield a handsome profit.

At the same time, a number of young companies have sprung up that specialize in the exploitation of renewable energy sources. With massive support from the government and from electricity customers, they have catapulted themselves to the top of the industry worldwide. Their founders, people like Frank Asbeck, CEO of the solar panel producer Solarworld, and Aloys Wobben, the chairman of wind turbine manufacturer Enercon, have become rich in the process.

According to studies commissioned by the German environment ministry, a veritable green wave is taking shape in Germany. Experts with Roland Berger, a strategic consulting firm, predict that by 2020 sales in environmental industries will have more than doubled, reaching €3.1 trillion ($4.55 trillion).

German industry, according to Roland Berger, is benefiting enormously from this green revolution. The Berger consultants predict that the share of the gross domestic product stemming from cleantech will increase from 8 to 14 percent, and that the sector could provide many new jobs.

In the midst of the deepest economic crisis since the Great Depression, climate protection offers a way out of the current plight -- and a path to a low-carbon future. "In the next 20 years, we will experience more changes than in the last 100 years," predicts the legendary US scientist Dennis Meadows, a coauthor of the 1972 book "The Limits to Growth." The German economy appears to be extremely well equipped for these developments. But exactly how great are the opportunities? Will the green revolution automatically create prosperity and jobs?

A Profound Challenge for Traditional Businesses

"That's nonsense," says Joachim Weimann. "The net effect is more likely to be negative." For Weimann, an environmental economist in the eastern German city of Magdeburg, some of the studies currently being touted are nothing but "pipe dreams." He argues that green expenditures represent costs more than anything else, particularly for energy-intensive industries. They increase the costs of production and hamper competition, effects that are sometimes glossed over, says Weimann. "Environmental protection isn't available for free."

Does this mean that the green revolution won't trigger another economic miracle, after all? One thing is certain, and that is that the demands stemming from climate change are wreaking havoc with the traditional business models of entire industries, particularly in Germany, with its pronounced industrial sector.

The real question is this: Will the economy succeed in going green, and can it revitalize itself so that it ultimately generates more added value than it loses? The answer to this question is critical to the future of traditional companies like Bosch.

The world's largest auto parts supplier is in the midst of a profound shift in strategy. Bosch wants to make itself less dependent on its classic clientele, the auto industry, which is struggling with rising gasoline prices, tougher environmental requirements and the financial crisis. For several years now, CEO Franz Fehrenbach has been investing heavily in new, future-oriented markets, particularly the solar and wind industry.

Now that its traditional business has declined sharply, Bosch will likely be in the red for the first time since World War II. But its new growth businesses are still far too underdeveloped to offset these losses. Bosch has embarked on a bold balancing act, but, as Fehrenbach says, it has a history of particularly strong development in difficult times. He emphasizes the "regenerative energy of the crisis," even in Bosch's traditional businesses.

Memo to Companies: Change or Die

A visit to the company's plant in Elchingen near the southern German city of Ulm illustrates what Fehrenbach is talking about. For the past three years, a team there headed by project manager Christine Ehret has been developing a new type of braking system. Scheduled to go into production at the beginning of 2010, the system is designed to reduce fuel consumption in trucks by up to 25 percent.

In one of the assembly buildings, Ehret is running the final tests on a 20-ton truck, an orange garbage truck based on the Mercedes Econic. She climbs into the driver's cab. Steel tubes that look like scuba tanks, the heart of the system, are installed behind the cab. Hydraulic oil is compressed in the bottles using the energy that normally escapes as heat during braking.

The oil is compressed at pressures of more than 100 bar. When the vehicle starts accelerating again, the pressure is released and the energy is fed into the powertrain, boosting the engine. The system works very smoothly, says Ehret. "Drivers enjoy it."

This process of returning energy to the engine is called recuperation. It is particularly effective in vehicles that make frequent stops, like garbage trucks, which consume up to 120 liters of diesel fuel per 100 kilometers (for a fuel efficiency of only 2 miles per gallon). According to Bosch estimates, the investment could pay for itself within four years.

The example of the hybrid brake shows how climate protection encourages companies to innovate. The biggest transformation will be faced by those companies that have been the most heavily dependent on the fossil fuels and are now forced to adjust to increasingly strict environmental standards. Change is their only option.

Revamping Product Lines for the 21st Century

Carmakers like BMW are putting all of their efforts into developing fuel-efficient hybrid engines. Chemical giants like Germany's BASF are producing energy-saving insulation materials. Electricity producers like E.on already operate enormous wind farms, including one in Texas that is the world's largest. Steel producers like ThyssenKrupp are making oversized rolling mills to produce the giant rotors used on wind turbines. All told, some of the biggest names in German industrial history are revamping their product lines for the 21st century. Nevertheless, no one really knows whether these companies will end up earning more or less money by making such major adjustments.

At engineering giant Siemens, the environmental segment is already large enough to offset declines in the company's other divisions. The Munich-based group earns about €23 billion a year with its environmental businesses, which include products like gas turbines and smart power grids. Siemens' environmental business has grown by 11 percent this year and is expected to continue growing at about the same rate.

The frugal use of resources has always been seen as a hallmark of the German economy. From major corporations to virtually unknown smaller operations, German companies are always at the forefront when it comes to making products designed for precision control, regulation and measurement.

"The German machine tool industry identified the field of energy efficiency as a megatrend early on," say the analysts at Deutsche Bank Research, who believe that the industry is "one of the great white hopes for the end of the age of oil." There is no doubt that increasing energy efficiency is one of the most important tools to avert the squandering of fossil fuels.

Take, for example, the building sector, which generates more than a third of all carbon dioxide emissions. By installing the latest in heating and insulation technology, property owners can easily cut their energy use in half.

Energy Harvesting

Electricity providers are another case in point. Equipping all of the world's power plants with the latest technology would save four times as much CO2 as is currently emitted in Germany. However, it is not always necessary to realize potential savings at the gigawatt level. Sometimes even tiny amounts can be relevant, as evidenced by the high-tech sensors engineers have developed at Enocean, a pioneering company in Oberhaching outside Munich.

The sensors require no outside power sources to operate. The mechanical pressure generated by pushing a button is sufficient to transmit a radio signal, which can activate a light or switch on a heating system. Cable connections and batteries are no longer needed.

The principle is called energy harvesting. A small vibration, a weak light, a puff of air or the push of a button is sufficient to generate voltage of no more than 10 milliwatts. The company's miniature power plants are still "quite unique," says Markus Brehler, the engineer who founded the company eight years ago. Enocean -- the name signifies an ocean of unused energy -- employs 50 people.

Germans Pay Dearly for Green Economic Miracle

Enocean, which has not taken advantage of government subsidies, derives its funding from about €22 million in private venture capital. The political world doesn't have a very good record when it comes to promoting energy-efficient technologies, says Brehler, at least when compared with the vast amounts of money the government spends -- or wastes? -- on the production of renewable energy, particularly photovoltaic systems.

In fact, German citizens have paid dearly for this part of the green economic miracle. Electricity customers have paid €6 billion for solar modules that were installed between 2000 and 2008. But the bulk of costs related to solar power are yet to be incurred. German economic research institute RWI-Essen estimates that the government will spend an additional €29 billion to promote solar power in the next 20 years, the remaining duration of the county's solar energy subsidy program.

The benefits are relatively modest, compared with the cost. Solar-generated electricity covers only 0.6 percent of demand in Germany. Subsidizing solar is neither good for the climate nor does it help employment in Germany, says economic sage and RWI President Christoph Schmidt. The Renewable Energy Act (EEG), says Schmidt, has merely artificially stimulated demand for solar energy. "The EEG may be well-intentioned, but it's highly inefficient from an economic standpoint."

The law -- enacted in 2000 under the center-left government coalition of then Chancellor Gerhard Schröder of the Social Democrats and the Green Party -- allows operators of solar systems to collect a fixed payment of up to 43 cents per kilowatt hour that they feed into the grid, at prices guaranteed for 20 years. By comparison, the producer price of electricity is approximately 5 cents per kilowatt hour. The rate paid to solar power producers, in the system known as net metering, will be reduced to 39 cents at the beginning of next year, prompting a rush among homeowners to have solar panels installed on their roofs. Many installers are now booked solid until the end of the year.

China Competes in Solar Panel Market

But the investment will still be worthwhile after that. Even more significant than the government subsidy is the substantial decline in the cost of solar panels. Chinese manufacturers like Yingli and Suntech are now offering comparable systems at discounts of up to a third off current prices. German solar panel producers, accustomed to success, can hardly compete. Major players like Solarworld are reporting sharp declines in profits, while some manufacturers are already in the red and cutting jobs.

The German photovoltaic industry is in danger of losing its dominant position in the world market, and even Germany's technological leadership is now in jeopardy. Chinese companies, lured by German subsidies, are the beneficiaries -- an object lesson in misguided industrial policy.

Nevertheless, the new administration in Berlin is standing by the existing subsidy system. The coalition government of the conservative Christian Democratic Union (CDU) and the pro-business Free Democratic Party (FDP) is determined to take "the path into the renewable age," as the coalition agreement states, and it has already guaranteed the continued existence of the EEG and net metering rates. The government wants to do everything within its power to defend "Germany's pioneering role in climate protection," now that other countries have also discovered the green markets of the future and are upgrading their industries accordingly -- no matter what the cost.

The International Green Energy Race

An international race is underway to provide the most comprehensive support for green energy. There is hardly an economic stimulus program that doesn't contain a green component. The United States plans to invest more than $100 billion in environmental protection, and President Barack Obama wants to spend $11 billion alone to modernize the country's ailing power grid. Even more remarkable than America's green "New Deal," however, is the seriousness with which the rising world power in the Far East is pursuing the issue.

"The Chinese have recognized the problem," British environmental economist Lord Nicholas Stern says approvingly. China is pursuing a special solution. Instead of wasting time in developing technologies where they already lag behind the West, the Chinese are concentrating on new high-tech industries with the goal of becoming world leaders in those fields.

From Ox Carts to Electric Cars

The People's Republic has fared well with this strategy once before. Instead of copying existing video recorders, China went straight to DVD technology. Today, a company called BYD ("Build Your Dreams") is about the make a similar leap -- from the ox cart to the electric car, as it were.

Although it has few car models on display in its showrooms in Shenzen, BYD does pride itself on the many types, shapes and sizes of batteries it manufactures. Batteries are the company's original business, and it now controls close to a third of the world market for mobile phone batteries. Company founder Wang Chuanfu is now using BYD's cumulative expertise in battery production to enter the automobile business. A year ago, he unveiled the F3DM, the world's first mass-market, plug-in hybrid vehicle, to fanfares and showers of confetti. At the time, the company announced plans to sell 10,000 of the new vehicles by the end of the year.

Wang has toned down his rhetoric since then, after having sold only about 100 of the plug-in hybrids. BYD still earns most of its revenue with conventional gas-guzzlers, because China lacks the necessary infrastructure to allow users of plug-in hybrids to fill up their batteries. Besides, the vehicle's reliability has been called into question.

Wang, whose personal fortune of $5.8 billion makes him China's richest man, expects more assistance from Beijing, but the government has been hesitant. It currently provides a subsidy of at least €4,900 for each purchase of a so-called new energy vehicle. But Beijing is concerned that by offering even higher subsidies, it would be involuntarily supporting foreign competitors like Toyota, with its Prius hybrid model. The Chinese know that market leadership cannot be bought in the long term.

This is the crux of green industrial policy, in Asia and Europe alike: Expensive, dramatic projects are often given preference over alternatives that may not be as flashy, but are far more effective in avoiding greenhouse gas emissions.

At any rate, photovoltaics is by far the most expensive method. It costs more than €600 to reduce CO2 emissions by one ton. For wind energy, that cost is reduced to about €100 per ton. It would be more worthwhile to improve the efficiency of brown coal power plants, for example. According to a study by the McKinsey consulting firm, that would cost less than €20 per ton. In other words, the money that is spent to save one ton of CO2 with solar power could be used to save up to 30 tons in coal-fired power plants.

'Economic Horseplay'

Another inexpensive way to avoid emissions is for the owners of single-family homes to insulate their roofs and replace windows. Under very favorable circumstances, the investment can even pay for itself. According to a study by the Stuttgart Institute of Energy Economics and the Rational Use of Energy, this approach could save up to €150 for each ton of CO2 not emitted into the atmosphere. However, such efficient but unglamorous methods encounter relatively little political support.

"The more inefficient the generation of renewable energy is, the higher the subsidy," says the Kronberg Circle, a group of liberal economists, commenting on what it views as the government's faulty incentive policies. "This is economic horseplay."

Particularly paradoxical is the fact that the amounts of carbon dioxide saved with solar power contribute to reducing the price of CO2 pollution rights. The going rate for emissions certificates on the European Energy Exchange, based in Leipzig, Germany, is €13.40 per ton. Ironically, solar subsidies reduce the incentive for operators of conventional coal-fired power plants to invest in clean coal technology, because it's cheaper for the plants to buy certificates.

In light of these gross defects in the system, economists advocate a fundamental reversal. Instead of the government investing billions in relatively uncompetitive technologies, they want to see it stipulate a uniform price for CO2 emissions, with the help of a carbon tax or the auctioning of pollution certificates. This would allow every business and every household to find the best approach to reducing its greenhouse gas emissions, and the most efficient emissions avoidance method would automatically be applied.

'No Better than East Germany's Central Planning System'

Instead, politicians are dabbling in micro-management. As an example of the painstaking detail found in the EEG law, offshore wind farms that are installed more than 12 miles off the coast receive six months of additional subsides per nautical mile after 12 years, and additional subsidies are paid for 1.7 months for each meter of water depth, but only to a depth of 20 meters. Companies whose wind farms go into operation before 2016 also receive a bonus for fast action.

The upshot of this interventionist policy is "no better than what East Germany achieved with its central planning system," says economist Hans-Werner Sinn, head of the Munich-based Ifo Institute for Economic Research.

In the end, the fight against climate change sends mixes messages to German businesses. On the one hand, it offers industry, particularly the machine tool and plant engineering industry, the opportunity to achieve past export successes with innovative products, and the economy is rejuvenated in the process. On the other hand, the subsidization of renewable sources of energy threatens to become an enormously costly experiment.

Felix Hess, the Güstrow biogas entrepreneur, is trying to eliminate his dependence on government support as quickly as possible. However, he is still a few cents from his goal. Natural gas from Russian wells currently costs less than 3 cents per kilowatt hour, while his biogas from the fields of Mecklenburg is only profitable at prices of 8.5 cents or higher.

However, it is also important to consider the benefits, says Hess. Take, for example, the effects of his business providing 60 jobs in a structurally weak region. Another benefit of his business, he says, is that it reduces dependency on Russian suppliers. "I'd rather be dealing with Mecklenburg farmers," says Hess.

For that reason, according to Hess, the government cannot avoid addressing the cardinal question in its climate policy: "What is the effort worth to us?"

Translated from the German by Christopher Sultan.
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