To reach its strict climate targets and fulfill Chancellor Angela Merkel's nuclear exit plans, Germany needs to avoid coal and build a stack of gas power plants to secure clean energy supplies beyond 2020.
Yet the challenge facing Merkel's new environment minister Peter Altmaier, his predecessor fired last week following a disastrous state election defeat, is finding a way to make gas an attractive option while coal remains the more profitable way to produce electricity for Europe's biggest economy.
"At current prices, you create a future that is comprised of renewables and lignite (coal) power generation," Klaus Schaefer, CEO of German gas company E.ON Ruhrgas, said at the Reuters Energy Summit in London last week. "Is that something we want," he asked.
Germany's energy mix is undergoing sweeping changes, with massive growth in solar and wind, and a law on phasing out nuclear set to erase 12,696 megawatts of atomic power over the next decade.
Germany needs to make up for that loss, some 15 to 20 per cent of the country's electricity needs, by importing more or building new power plants using gas or coal.
Environmental considerations would make gas the clearcut choice over coal, as it pollutes far less.
Germany aims to cut its greenhouse gas emissions by 40 per cent from 1990 levels by 2020.
But then there is the need to create power while making a profit, and on that front coal wins.
Electricity from coal for sale in 2013 is more than 16 euros per megawatt-hour more profitable than generating it from gas, according to Reuters data.
Gas-fired power plants, in fact, lose money during baseload hours (24-hour supply), only turning a profit at the higher-priced hours of peak demand (0800-2000 local time).
Energy efficiency gains
Steps to help gas close ground on coal include boosting the efficiency of gas plants, tax breaks, as well as putting a price on carbon to help steer utilities and manufacturers toward greener energy use.
Yet to date, these steps combined have shown little promise.
The core problem for gas-fired power is that even the newest plants, which offer 60 per cent energy efficiency, cannot compete against standard coal-fired plants currently operating at 35 per cent.
According to Reuters research, an ageing coal plant would still be more than four times more profitable than a new gas power plant.
An exemption from a fuel tax of 5.50 euros per MWh is offered for gas plants with an efficiency over 57.5 per cent, yet even this does not tip the scales in favor of gas.
Siemens, a leading gas turbine maker, says it now guarantees an efficiency rate of 60 per cent for new gas power plants in Germany and can achieve up to 61 per cent.
That's up from an industry norm of about 50 per cent.
"Any additional percentage point increase (above 60 per cent) in gas-fired power generation would be a dramatic milestone," E.ON's Schaefer said.
Siemens sees the physical limit at around 70 per cent.
Including the tax break, gas power plants would have to reach an efficiency rate of 65 per cent to compete with existing coal plants, according to Reuters research.
While Siemens says it plans to reach this rate in the long-term, the problem is that new coal-fired power plants (which are still dirtier than gas) can reach an efficiency of 45 per cent, maintaining coal's competitive advantage.
Carbon market blues
Another stumbling block for gas has been the failure of the carbon market to spur a move to greener energy and away from sources such as coal.
Under the European emissions trading scheme, large polluters must buy carbon emissions certificates for each ton of CO2 equivalent they emit, a system that favours clean gas over coal.
But carbon prices are currently below 7 euros a metric ton, while Reuters research shows that prices would have to top 35 euros in order to make German gas-fired power generation more attractive than coal.
"We need more long-term investment (in power plants), but at 6 to 8 euros for a metric ton of CO2 there is no price signal (to invest in cleaner technology)," the European Commission's Energy Commissioner Guenther Oettinger told the Reuters summit.
A solar challenge
Generous renewable energy subsidies have led to a boost in wind and solar power generation in Germany, but this only means even more competition for the gas sector.
German solar capacity will exceed 25 gigawatt (GW) in 2012, the equivalent of 25 nuclear power plants at full capacity.
Although solar generation rarely reaches maximum output, the capacity is enough to shave several euros per MWh off peak demand prices, eroding profits that gas power plants rely on.
One solution would be to raise wholesale power prices to increase power plant profit margins.
But Germany's power demand outlook for the next few years is flat as efficiency gains offset economic growth.
Germany's price outlook is pegged at around 0.5 per cent growth a year, according to analysts at Point Carbon.
One potential game changer between now and 2020 would be if gas prices tumble, helping the case for building new plants.
The US gas market in recent years, powered by a jump in shale output, demonstrates how quickly prices can fall, a factor which has made gas plants there highly attractive.
And there is potential for price falls in Europe, too, as some analysts expect a flood of convention gas to come to European markets in the next decade, including from Azerbaijan, Iraq, Cyprus, Israel, and perhaps even Iran.
In the meantime, if new gas power plants can't be built to compete with coal in Germany, then the country must fill its looming capacity gap by other means.
In addition to more offshore wind power along its North and Baltic Sea coasts, Germany could increase its interconnector capacity with neighbours Austria, Belgium, Czech Republic, Denmark, France, Luxembourg, Netherlands, Poland and Switzerland.
This would give Germany access to vast hydro capacity, but also mean importing more electricity from the one energy source it is trying to escape – nuclear power.
This article was originally poublished by Reuters. Republished with permission