At Green Alpha ® Advisors, our whole reason for being is to model the Next Economy and then to build investment portfolios of companies leading the way to that economy, of companies that we can imagine easily inhabiting that future. This Next Economy future is one in which the equations of the earth’s ecology and the global economy have at long last been brought in to balance. And, strange as it may seem to those of us who see clearly much of what this emerging green economy must entail, we do hear the litany of criticism from the fossil-fuel side: “portfolios without oil, coal, nuclear, gas-burning cars or [insert any legacy technology]? Impossible!” And yet, as entrenched as this resistance is, here comes audacious Germany with a grand Next Economy vision of its own. Germany's vision, though, is not merely aimed at modeling stock portfolios, but, awesomely, at building an entire, massive, modern, developed nation-state next economy.
This will make Germany the first, best Next Economy laboratory, meaning it will get all the benefits, but will also face many of the unforeseen problems. For us at Green Alpha, that means our conceptual and portfolio models are going to start being real world tested sooner than later, and we’ll be able to more rapidly and accurately refine and update our theoretical models as Germany progresses.
So, what’s the plan so far? Germany’s roadmap is laid out in their Teutonically thorough, province-by-province "National Renewable Energy Action Plan." Highlights, as summarized by Chancellor Angela Merkel in her new six-point plan (reported here by Der Speigel) include:
- “Expanding renewable energy. Investing in more wind, solar, and biomass energies will try to raise the renewable-energy share of Germany's total energy use -- from a baseline of 17 percent in 2010.”
Note here that 17% renewables in 2010 already made Germany a world leader, with fully half of the world’s total installed solar capacity. So they’re already well positioned to go after higher targets, even with their approach of skipping right over nuclear (to be totally phased out by 2020-2025) and going right to renewables.
- “Expanding grids and storage. Building a much larger storage and delivery network for electricity -- particularly wind energy, which can be generated in the north but must be carried to the south -- will be a main focus.”
Storage is of course key to resolving the intermittency of solar and wind, and has been a cornerstone of Green Alpha portfolios from the beginning. Upgrading the grid to make sense of where power is coming from, where it’s stored and the best times and places to utilize which; and understanding how to efficiently utilize power from a million distributed rooftops is the other key. We love Germany’s attitude to smart grids as stated by Dr. Norbert Rottgen, German Federal Minister for the Environment: “It is economically nonsensical to pursue two strategies at the same time, for both a centralized and a decentralized energy supply system, since both strategies would involve enormous investment requirements. I am convinced that the investment in renewable energies is the economically more promising project.”
- “Efficiency. The government hopes improve the heating efficiency of German buildings -- and reduce consumption -- by 20 percent over the next decade.”
Image: Evaluating a home’s efficiency via infrared photography
- “"Flexible power." The government wants to build more "flexible" power plants that can pick up slack from wind or solar energy when the weather fails to generate enough electricity during peak demand. The obvious source of "flexible power" for now, besides nuclear energy, is natural gas.”
Here’s a major point of disagreement for us. While Germany, facing the practicalities of keeping a nation state running, may be required to use natural gas as a bridge fuel on the way to true renewables, we have the luxury of excluding it from our portfolios and focusing instead on the ultimate long-term winners in renewable energy. Natural gas doesn’t make that list because it unleashes large amounts of CO2 and methane, and its extraction process is proven to contaminate groundwater. These externalities will ultimately make it too expensive to compete with real renewables.
- “Research and development. The government will increase government support for research into better energy storage and more efficient grids to a total of €500 million between now and 2020.”
- “Citizen involvement. The government wants to involve its sometimes-recalcitrant citizenry due to ongoing resistance against wind generators and the installation of an efficient new power line grid in some regions.”
From there, in their document “Energy Concept for an Environmentally Sound, Reliable and Affordable Energy Supply,” Germany presents more specific targets, such as “greenhouse gas emissions are to be cut by 40% by 2020, and…by at least 80% by 2050 vs 1990 levels.” This will be achieved (as summarized here by Grist) “in part by increasing the national share of renewable electricity to more than 35 percent in 2020 and to 80 percent by 2050.” The rest will come via dramatically improving energy efficiency (largely with existing technologies), a piece the “Concept” report calls “the key factor.” Grist concludes: “Within four decades, one of the world's leading economies will be powered almost entirely by wind, solar, biomass, hydro, and geothermal power.” That is, the world’s fourth largest economy will be powered entirely by renewables within a generation. Fantastic.
We’ve also learned a lot from Germany’s associated publications such as their “Cost and benefit effects of renewable energy expansion in the power and heat sectors” report, which calculates downstream grid effects of various renewables (spoiler, they’re beneficial). And Germany’s “Short‐ and long‐term impacts of the expansion of renewable energy on the German labour market: annual report on gross employment” white paper makes it clear that, yes, all this green economy transition stuff creates a ton of jobs.
So, finally, we have one place in the world where policy, closely aligned with business and individual citizens, is leading very meaningful change. We love that Germany is going ahead with no reference to treaties, agreements, G20 obligations or any of the other thus-far-meaningless-hot-air around global climate policy. This is all to their advantage. If Germany can execute as advertized, they’ll remain one of the world’s most competitive economies for decades to come, and will furthermore be to some degree insulated from the shocks of increasingly expensive oil. And sure, so far, much of Germany’s plan is what we and many observers have foreseen as viable components of the future economy to date. But as the real work of Germany’s implementation advances, we’ll be watching. Very closely.
Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.