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The HRI analysis identifies the major cost drivers of the energy transition, showing where money is already being invested and where further investments are required in the country. This is particularly critical given the current political situation: Currently, government investments in Germany's energy transformation are being scaled back rather than expanded due to budgetary problems. Federal Minister for Economic Affairs Robert Habeck recently said in an interview with Handelsblatt, "We are saving in an economic downturn. We know that, given the structural problems and global competition, more investment is needed."
Here are the key areas where investment is needed:
The Energy Economics Institute at the University of Cologne (EWI) was commissioned by the German Energy Agency (dena) to write a report on the transformation of the energy system by 2045. According to this 2021 report, 440 billion euros in investments in renewable energies will be needed to achieve the goal of climate neutrality by 2045. This sector represents the largest individual expenditure among the necessary total investments.
Most of the investment (190 billion euros) is projected to occur in the 2030s. However, the report also states that investments of 150 billion euros will already be required by 2030. The primary driver for this is the increasing demand for electricity, which is expected to grow by 21 percent between 2019 and 2030.
The funds must be allocated to new wind and solar parks, as well as to the transition to low-emission electricity. This requires controllable power plants and flexibly deployable capacities. According to the EWI report, this will require around 70 billion euros by 2045. Additionally, around eleven billion euros will be needed for electrolyzers that produce green hydrogen.
Critical for future electricity generation is also the construction of numerous new gas power plants that are expected to burn hydrogen instead of natural gas in the long term. Gas power plants have the advantage over wind and photovoltaic power in that they can produce electricity whenever it is needed. Without the necessary investments in new gas power plants, Germany could face a shortage of ten gigawatts of electricity generation capacity by 2030, according to a recent study by energy market consultancy Aurora Energy Research. Germany aims to largely shut down coal-fired power plants by 2030.
Therefore, the industry has been waiting for months for a power plant strategy that the federal government had announced. The currently discussed concept envisages subsidizing both the investment costs and operating costs of hydrogen-capable gas power plants, explains Aurora analyst Hanns Koenig.
Without government subsidies, new gas power plants would likely not be economically viable, as they are intended to serve as backup and therefore would not run enough hours per year to be profitable, especially if operated with expensive hydrogen. "The operating cost subsidies are intended to offset the price difference between natural gas and hydrogen," says Koenig.
A large portion of the investments in new power plants, wind parks, and solar parks will be borne by companies. The energy company RWE plans to invest eleven billion euros in Germany by 2030, with a significant portion likely going towards renewable energies and gas power plants. Uniper, the energy company that was rescued by the state during the energy crisis, also plans to invest eight billion euros by 2030 to make its business areas more sustainable and is considered a major builder of gas power plants.
In addition to new power plants intended to secure Germany's electricity supply after the coal phase-out, energy storage systems are playing an increasingly important role. This was emphasized by the Federal Ministry for Economic Affairs in a mid-December electricity storage strategy. The ministry's document states, "There is currently a strong market-driven upswing in battery storage." The government aims to support this trend. For example, the ministry will examine incentives that can be provided to encourage operators of wind and solar parks to build energy storage systems on-site.
The batteries of electric vehicles also play a crucial role as energy storage. They can charge when there is an abundance of green energy and discharge it when it is needed on the grid, not for driving. According to the Aurora analysis, flexible demand will be mainly met by electric vehicle batteries by 2045. This type of storage is included in the previously mentioned 70 billion euros for flexible capacity. However, additional storage solutions are needed, which will require further investments.
For example, a study commissioned by the KfW Development Bank in 2021 estimates long-term investments of 14.8 billion euros for home storage systems, allowing people to capture excess solar energy from their rooftops.
Hydrogen, which may be used in gas power plants in the future, also needs to be stored. To manage the energy transition, a 2022 study by several storage, gas, and geology associations predicts long-term investments of 12.8 billion euros in hydrogen storage. Other storage technologies exist but are not yet mature enough to make a significant contribution. "Iron-air batteries are very exciting and would allow large amounts of energy to be stored cost-effectively," says Aurora analyst Koenig. This already works on a small scale but not yet on a large scale.
Another major question mark pertains to carbon capture and storage (CCS). In CCS, carbon dioxide emissions are captured and stored underground. A Bloomberg forecast for a climate-neutral scenario in Germany anticipates investments of around five billion euros for CCS.
However, CCS is not currently permitted in Germany. The Federal Ministry for Economic Affairs is working on a carbon management strategy that could change this for some use cases.
Transporting CO2 to storage sites outside Germany is already feasible. The Bloomberg forecast estimates additional investment costs of five billion euros for this purpose. CO2 transport is becoming increasingly important for energy-intensive industries. According to the Federal Environment Agency, nearly 43 million tons of CO2 are considered "unavoidable emissions" every year.
For example, such emissions occur at the cement manufacturer Schwenk in Baden-Württemberg. "We are urgently dependent on the CO2 is captured for partial underground storage and to produce aviation kerosene. When CO2 is used after separation, it is referred to as Carbon Capture and Usage (CCU).
Thormann claims that there has been little political attention paid to this issue so far. It is unclear how carbon capture and storage or related infrastructure will be regulated in the Carbon Management Strategy. However, time is running out for companies like Schwenk. Tobias Sprenger from EWI says, "We need CO2 capture in industry and other applications no later than 2030."
Because this issue is so important, projects are already being initiated in Germany even without political support, often in cooperation between German and foreign companies. Countries like Norway, the UK, Denmark, Switzerland, and the Netherlands already have regulations and concrete projects in place for CCS and CCU.
Another major expense is the investment in the power transmission network. The Network Development Plan published by the Federal Network Agency in June 2023 estimates these costs at 313.6 billion euros by 2045. This includes the connection of offshore wind farms in the North and Baltic Seas to the grid.
The expansion and modernization are necessary because the electricity supply system is undergoing a fundamental transformation. Electricity generation is increasingly shifting to the northern and northeastern regions of the country, where conditions for wind turbines are optimal. However, consumption centers are located further to the south and west. This necessitates the construction of "electricity highways," known as high-voltage direct current transmission lines (HVDC), from north to south Germany. Additionally, existing lines need to be reinforced and technically optimized.
This endeavor is particularly costly because Germany decided years ago to lay the HVDC lines as underground cables. Above-ground installation would be significantly cheaper, but the cables have faced acceptance issues. However, there are now calls to implement at least some projects as overhead lines.
Investment needs are also high at the distribution network level. Distribution network operators deliver electricity to the household level. EWI calculates the necessary investments in distribution networks by 2045 to be 183 billion euros.
The structure of distribution networks is changing rapidly: more and more decentralized electricity generators, such as photovoltaic systems, feed into the distribution network, and the number of electric heat pumps and electric cars on the consumption side is increasing. This necessitates the expansion and intelligent management of distribution networks.
Operators of long-distance gas pipelines in Germany, grouped in the FNB Gas association, have designed a "Hydrogen Core Network" in coordination with the Federal Ministry for Economic Affairs, the Federal Network Agency, federal states, potential consumers, and importers. It has a length of 9,700 kilometers and aims to connect future consumption centers and hydrogen import terminals.
German steel manufacturers are likely to be the first users. The network will expand gradually and is expected to be completed by 2032. FNB Gas estimates the investments at 19.8 billion euros. The network is considered essential for the desired hydrogen upswing in politics.
The Hydrogen Core Network is expected to consist mostly of repurposed natural gas pipelines. The money for the network comes from the network fees paid by users. However, initial network fees for early customers would be very high; they would have to cover the entire network construction cost.
But there is a solution: to prevent potentially high initial network fees from inhibiting the hydrogen upswing, they will initially be capped. The difference between the high initial costs of network construction and the low income from a few network users will be covered by interim financing from the federal government.
However, to transport hydrogen to rural areas, such as the Sauerland or the Swabian Alb, parts of the gas distribution network also need to be converted. The German Association of Gas and Water Professionals (DVGW) estimates investments of 15 billion euros by 2045 for this purpose.
Heating systems must also be completely climate-friendly by 2045. In this regard, district heating is expected to play a significant role. In the summer of 2023, Minister for Economic Affairs Robert Habeck announced that 100,000 buildings would be connected annually to existing or new district heating networks. Currently, six out of 43 million households in Germany are supplied with district heating, representing a market share of 14 percent.
The Heat Planning Act, which forms the basis for this expansion, was passed by the Federal Council in the second week of December and will come into effect in 2024. It stipulates that major cities must develop heat plans by the end of June 2026, while smaller communities must do so by the end of June 2028. The German Energy Agency (dena) estimated necessary investments in this area at 20 billion euros in a 2023 impulse paper on district heating decarbonization.