Cleaning Up Episode 88 Edited Highlights – Patrick Graichen

Michael Liebreich: With the war on Ukraine ongoing as we record this, it seems to me sitting in London, that there's a very substantial rethinking of German energy policy going on as we speak. Is that a fair observation?

Patrick Graichen: Yes and no. It's a no because what is good for the energy transition is also good for making us independent of Russian imports. Yes, there is an additional element that has now come to it, and that is diversification. I mean, we were really dependent on Russian imports, 50% coal, 50% gas, 35% oil, that was our import quota from Russia in the beginning of this year. Since I entered office, we have now a new target that is 80% renewable share in the power mix by 2030. We are also introducing a new heat package that's about switching to renewables in the heating sector. In essence, this will be now the heat pump revolution for Germany, and we have been laggards here. On planning and capacity, we want to hugely increase the whole value chain in solar, in wind, in heat pumps and electric cars; in everything that we know are the key technologies of the energy transition. Part of it is talking to industry and telling them this is real, invest now. And sometimes I'm really astonished that they don't believe that this is what's going to happen. I mean, if you look at the European laws, it's very clear that that's the direction of travel for everyone out there. We've basically relied on there being everything available at the world market. Now we kind of see, well, maybe on coal, oil and gas, we were a bit dependent on Russia, and then we find out also for cables. The German car industry now has a problem, because those were manufactured in Ukraine. And we all know about the chip issue out of China. We want more to be produced in the free world.

ML: If you really wanted to be ‘friendshored’ and resilient in your supply chains, that is a wrenching change. Is this going to be a permanent change, or after Ukraine will we all go back to the fever dream years of being dependent on Russian gas?

PG: You're perfectly right in the sense that we were very much relying on that notion of free trade, free global trade will solve it. And we as an export nation, of course, we're always also counting on that when it comes to our exports. So, we had kind of the same approach when it came to our imports. And I think the question that now comes here is that suddenly, there's geopolitics. And to be honest, Germany was never really good at geopolitics. And we never had resource stocks, because we were all saying, okay, the market will deliver. I do think it will be a permanent change insofar as we now need to talk about stockpiling and less about just-in-time delivery. We are entering a world of high coal, oil and gas prices. And that does have a huge effect, both on the energy transition, but also on the German economic model. Our Polish neighbours, they were heavily investing into LNG, even though it was a lot more expensive than Russian gas. And that was in a way a geopolitical insurance premium that Polish society was willing to pay, and we in Germany never did. So, that's why we don't have an LNG terminal because it was never economic to do that. And I think that's the new element of it. In terms of geopolitics and also insuring yourself in terms of defence policy, we're back in the 80s, in a way.

ML: For all the headlines about what the EU is sending to Ukraine, it's dwarfed by the amount of money that the EU is sending to Russia every day for oil and gas. Is there not a strong argument for an absolutist approach that says come Christmas, no more gas?

PG: Yes, that is, of course, the difficult question. That's a heated debate between German economists, what the effects would really be for the German economy. It goes from that’s doable to that would be an economic disaster for years. And what we're doing is trying to diversify as soon as possible. And that's why we now speed up LNG terminals, floating ones to come to our shore, and the first one should be in place by this winter. So, the idea is - and that's where all my efforts are going into - that within 24 months, we can get off Russian gas. Not within the end of this year, I'm afraid. And if one would want that, one would need to basically buy, I think, a very deep recession and be able to hold that through for two years or so. That said, it’s not going to be painless. But when we think about what can we really do for Ukraine, then I think military assistance and helping them to restore their life within their borders, and helping build a new infrastructure that is hopefully already directed into the clean energy future, I'd say that's what we need to do. And that's where the priority should go alongside with getting out of Russian imports as soon as possible within the next 24 months. Supporting the Ukraine by having a very deep recession to all over Europe over the next two years, I don't think that that is really best.

ML: On the transition, the UK is actually quite far ahead of Germany. Now that you're in power and you're determined to accelerate the transition… why not just copy what the UK is doing?

PG: So, Michael, I mean, the last time I had discussions with UK colleagues some 10 years ago, they were telling me nuclear, CCS and maybe a little bit of renewables, that's the future. I said folks, it's wind and solar, forget the rest. When I look at wind offshore in the UK, I kind of think, wow, we should have been doing that as well. What has happened in the past four or five years is the UK got its act together, and we didn't. What I would have put into the law is a carbon neutral power system by 2035 as a target, which is the same as the UK target, actually. So, I think that's where we're both heading. We are closing up the gap, with the one difference that you still build new nuclear, which I think is the most expensive way to produce electricity. But every country has its peculiarities…

ML: You have gone for 80% renewable electricity by 2030. How do you deal with the famous Dunkelflaute or as I call it, the dark doldrums? And where will your renewable imports come from?

PG: What do we do in those two, three weeks when there's neither wind nor sun? In essence, in an 80% world, that's where the 20% gas is. And that needs to be hydrogen-ready, gas-fired power stations, that we then gradually swift to green hydrogen. We have quite some gas storage sites, which then also need to be transformed into hydrogen storage sites. So, that opens up the import issue, because we won't be producing that green hydrogen in Germany in the amount necessary. That's really where imports will be needed from all over the world. And we would probably also import green electricity, which means North Sea, Baltic Sea, we need to have huge wind offshore projects there that then supply the region. That's where Germany will need to engage and become an importer of green electricity. We’re aware of the scale of the challenge ahead for Germany. When we were calculating the renewables, we basically took into account that power demand will increase by 20% between now and 2030. But the question is, really, is there an alternative? This is about establishing a new global energy economy that is based on green hydrogen, green hydrogen derivatives. And I think that's where I'm pointing at. With gas prices where they are, I don't believe in blue hydrogen at all anymore.