TUESDAY, MAY 31, 2011 STRATFOR.

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Russian Gas and Germany's Nuclear Gamble

German Economy Minister Philipp Roesler arrived in Russia on Tuesday to discuss
energy with Russian officials, one day after Germany decided that it will phase out
nuclear energy by 2022. The planned phase-out means that Berlin needs to find an
alternative source for a little less than a quarter of its electricity generation — the amount
nuclear power currently contributes. Berlin is aiming for greater efficiency and reliance
on renewable energy, but it is clear that in the short term — by which we mean within
this decade — it will turn to Russian natural gas.

Germany relies on Russian exports for around 40 percent of its consumption of natural
gas. How much more it needs will depend on how fast Germany can increase its output of
renewable energy and achieve greater overall electricity efficiency. If any one country
can accomplish those two tasks quickly, it is Germany. Furthermore, the nuclear phase-
out will not take all reactors offline at once, meaning Berlin has time to adapt to the
situation. Roesler and Chancellor Angela Merkel stressed immediately after announcing
the phase-out that Germany will not look to substantially increase natural gas imports
from Russia.

“Berlin is consciously placing a domestic political issue (opposition to nuclear

power) over a considerable geopolitical strategic concern (increased
dependency on Russian natural gas.)”

Germany may not, however, have any other choice, at least for the next five years. There
are no plans for large-scale energy infrastructure projects, such as major non-Russian-
sourced trunk line pipelines or facilities importing liquefied natural gas. Efficiency,
renewable energy and domestic production of shale natural gas will not develop
overnight or without a massive capital injection. Meanwhile, the 55 billion cubic meter
Nord Stream underwater pipeline, shipping Russian natural gas directly to Germany via
the Baltic Sea, will come online by the end of 2011, with full capacity in place by 2012.

The logic behind Nord Stream for Germany was never about increasing imports of
Russian natural gas. Berlin is not looking to become more dependent on Russia for
natural gas. In fact, Nord Stream can be considered a coup for Germany and somewhat of
a liability for Russia, which can no longer hide behind Ukraine and Belarus as causes of
energy disruptions to Germany. Playing energy politics was a useful strategy for Moscow
because it allowed the Kremlin to starkly illustrate to Berlin and other EU countries the
negative consequences of a pro-Western Ukraine, for instance during a series of energy
cutoffs following the 2005 Orange Revolution. A direct line between Russia and
Germany, Berlin reasons, means that Moscow no longer has plausible deniability when it
plays energy politics.

The problem is that Merkel and her government did not expect to have to replace 24
percent of electricity generation within the next 10 years. As such, Nord Stream is no
longer a strategic investment that decouples Russian power politics from energy exports
to Germany. It now becomes the only option available in the next five years as Germany
moves away from nuclear power. It also could potentially become a dangerous gateway
toward an addiction to Russian natural gas, especially if the Kremlin plays its cards
correctly and makes its natural gas too tempting — that is, cheap — to pass up, which
remains to be seen.

The most interesting aspect of the current situation, however, is that Berlin is well aware
of these strategic considerations. Simple arithmetic dictates that Germany will have to
increase natural gas imports from Russia once 24 percent of Germany’s electricity
generation is offline. It’s a calculation that German decision-makers are capable of
executing. This means Berlin is consciously placing a domestic political issue (opposition
to nuclear power) over a considerable geopolitical strategic concern (increased
dependency on Russian natural gas).

This is going to be a problem for Berlin’s neighbors in Central Europe. It shows that
Germany takes its domestic political logic more seriously than regional geopolitics, at
least right now. If Berlin is so easily swayed by popular discontent with nuclear power
that it will embrace an increase in Russian energy imports, how long, as an example, will
it continue to support bailouts of peripheral eurozone states in the face of mounting
domestic political anger? Credibility and trust between allies are built when decisions
favoring one’s ally are costly. For Germany’s Central European neighbors, a Berlin that
is increasing its natural gas dependency on Russia is not an ally they can count on to
counter Moscow.

In the long run, Berlin understands the dangers of dependency on Russian energy exports.
It is unlikely that Germany will fail to develop renewable alternatives given time,
technological know-how and capital. However, Germany’s neighbors may find it hard to
think of the long term in this case. Central Europe may very well become a geopolitical
hot zone within the next five years. U.S. ballistic missile defense installations are
expected to be in place in Romania by 2015 and Poland by 2018. The United States is
attempting to extricate itself from Afghanistan and Iraq, and by the middle of the decade
may be ready to assert itself in Central Europe. If this occurs, and Berlin’s dependency on
Russian natural gas is at that point still increasing, its response to these strategic moves in
its neighborhood could put Germany at odds with NATO allies.
Germany Opts Out of Nuclear Power
May 31, 2011 | 2201 GMT
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INGO WAGNER/AFP/Getty Images

Protesters use a boat during demonstrations against the use of nuclear power at
Unterweser nuclear power plant in Kleinensiel on April 25
Summary

German Economy Minister Philipp Roesler visited Russia on May 31 to discuss

increasing its imports of Russian natural gas. Roesler’s visit comes on the heels of
Berlin’s announcement that it will phase out nuclear power by 2022, an optimistic goal
given that nearly 25 percent of its electricity is nuclear generated and that it must more
than double its renewable energy production. In the meantime, Germany will have to rely
on Russia for its energy needs by buying more natural gas.
Analysis

German Economy Minister Philipp Roesler, also the German vice chancellor and leader
of the junior coalition government member the Free Democratic Party, went to Russia on
May 31 for a one-day visit. During his trip, Roesler was scheduled to meet with Russian
Economic Development Minister Elvira Nabiullina and Minister of Trade and Industry
Viktor Khristenko. Roesler’s visit, his first international trip since becoming vice
chancellor in early May, concentrated on talks over increasing Russian supplies of natural
gas to Germany due to the German government’s May 30 announcement that it would
phase out nuclear power by 2022.

Berlin’s decision to phase out nuclear power is a boon for natural gas-exporting Russia,
especially with the first phase of the 55 billion cubic meter (bcm) Nord Stream pipeline
coming online by the end of 2011 and second by the end of 2012. Germany’s easiest and
cheapest alternative to nuclear energy will be increasing its dependency on Russian
natural gas. However, there are several mitigating factors that will keep the German
reliance on Russia a short- to medium-term scenario.

Germany relied on nuclear power for 24 percent of its total electricity generation in 2010;
coal accounted for 40 percent; renewable (wind power, solar power and hydropower)
generated between 14 and 17 percent; natural gas generated 13 percent; oil 4 percent and
other resources 6 percent. With nuclear power to be taken offline completely by 2022 and
coal considered environmentally unpalatable — at least in terms of replacing the lost
nuclear power production in the long term — the obvious alternatives are natural gas and
renewable energy sources.

To accomplish the phase out from nuclear power, Berlin has a two-part plan: reduce
electricity use by 10 percent and more than double its reliance on renewable energy
sources to 35 percent, all by 2020. This would more than make up for the loss of the 17
nuclear reactors to be taken offline. It is also a highly optimistic, expensive and long-term
plan.

(click here to enlarge)

Germany’s aging demographics should help with the first part of the plan to reduce
electricity use. Currently, the largest population group in Germany is the most productive,
the 35-55 year old range, a group that contributes greatly to overall economic
productivity and output. However, part of this cohort will begin to retire within a decade,
forcing Germany to choose between allowing skilled migrants into the country for the
manufacturing sector or outsourcing production to facilities in Eastern Europe. It is
highly likely that Berlin will opt primarily for the latter, which would decrease the
industrial electricity demand in the country.

The second part of its electricity reduction plan to increase its reliance on renewable
sources of energy from 17 percent to about 35 percent by 2020 is highly optimistic. Of
the different fuel types, renewable energy sources for electricity generation are by far the
costliest per kilowatt-hour. In fact, electricity generated by nuclear power is by far the
cheapest of the alternatives, with wind power being more than three times and solar more
than 20 times more expensive.

The costs associated with renewable energy sources could be mitigated over time as
technology advances, electricity transmission infrastructure is improved and as
economies of scale develop. Furthermore, Germany has managed to bring up the share of
renewable energy as a percent of total electricity generation relatively fast over the past
decade but sustaining the same rate will be difficult. The biggest problem for renewable
energy remains storing power and finding alternatives to it during days when it is cloudy
or wind fails to blow, or both. The greater Germany’s reliance on renewable power, the
more complex this problem becomes specifically because of the lack of options for
electricity storage.

(click here to enlarge)

As Germany deals with these issues, it will find it both essential and convenient to turn to
Russia for more natural gas. Roesler and German Chancellor Angela Merkel have both
stressed since the May 30 decision to phase out nuclear power that Berlin does not want
to see a considerable increase in Russian natural gas imports. Over the next five to 10
years, however, it seems that Berlin has very few alternatives. Germany has no current
plans to build liquefied natural gas facilities and shale natural gas production is not
expected to come online in Europe for the next 10-15 years.

Meanwhile, the Nord Stream natural gas pipeline has already begin pumping test
quantities of natural gas and will be operational by the end of 2011, with the full 55 bcm
capacity coming online by the end of 2012, which represents higher than 60 percent of
current levels of German natural gas consumption. Natural gas currently only accounts
for 13 percent of electricity generation, which is less than renewable sources combined.
With such a low base, and with a significant source of supply coming online because of
Nord Stream, natural gas is one source of electricity generation with considerable room to
grow within the current decade, although that will also necessitate building more natural
gas-burning power plants, something that the German government has shown it is keen
on doing.

If any country can set a complex industrial goal (increasing renewable energy resource
reliance by about 20 percent in 10 years to replace the electricity generated by 17 nuclear
reactors) and reach it in a short amount of time, it is Germany. German companies are
already global leaders in both wind and solar power, and the country’s industry is known
for being by far the best at capital intensive, high-quality manufacturing. While Germany
is becoming more efficient and is steadily increasing the percentage of electricity
generated by renewable sources, it will have to rely on some fuel to replace nuclear
reactors coming offline. That fuel will most likely come from Russia. The question is
what will be the geopolitical implications of this trade relationship in the next 10 years.

Read more: Germany Opts Out of Nuclear Power | STRATFOR