London (Platts)--24May2013/1241 pm EDT/1641 GMT

The International Energy Agency said Friday that Germany must shield its consumers from paying too much of the cost of its ambitious switch from nuclear power and fossil fuels toward renewable energy.

The IEA also said Europe's biggest economy should make greater use of natural gas to smooth the transition and reduce the use of coal to meet its carbon reduction targets to combat climate change.

Given the scale of the "Energiewende," or energy shift, the size of the German economy and its location at the heart of Europe, the agency said in a regular review that further steps are needed "to maintain a balance between sustainability, affordability and competitiveness."

"The fact that German electricity prices are among the highest in Europe, despite relatively low wholesale prices, must serve as a warning signal," IEA executive director Maria van der Hoeven said at a presentation of the report to German economy minister Philipp Roesler.

Chancellor Angela Merkel decided after Japan's 2011 Fukushima nuclear accident to phase out nuclear power by 2022, an about-turn that started with the immediate closure of the eight oldest plants.

Since then, Germany has accelerated a boom in wind farms, solar power and biofuels, promoted by subsidies and legal reforms, with the goal of gaining half of its electricity from renewables by 2030.

Legal reform in 2000 "has proven very effective in introducing renewable energies; notably electricity generation from biomass, wind energy and solar photovoltaics," the report said.

However, the Paris-based IEA pointed to a political debate in Germany about discounts given to industry, which have been financed in part by higher power bills for consumers and a tax surcharge.

"The costs and benefits need to be allocated in a fair and transparent way among all market participants, especially households," the report said.

"Household consumers carry a disproportionate share of the burden," it added.

It also pointed to the geographic spread between the renewables' supply and demand. While most wind farms are in Germany's coastal north, the highest demand is in the industrial south and west.

Germany is planning to massively expand its transmission and distribution networks, a costly process complicated by local opposition in many places to the new power infrastructure.

"To date, Germany's record with regard to the construction of new grid infrastructure is patchy and planning and consenting procedures present a major stumbling block," said the IEA.

In the global effort to halt climate change, melting ice caps and rising seas, Germany has pledged to cut its carbon emissions by 40% below 1990 levels by 2020. Ironically, a drop in the price of coal, one of the biggest polluters, along with the rise of cheap renewables, has seen coal make a comeback at the expense of cleaner-burning natural gas.

"As a result of weak carbon prices and high gas prices in Europe, existing gas-fired plants have lost competitiveness, and evidence suggests that some are being taken offline," said the report.

The IEA said gas plants now "struggle to make a return despite the flexibility they offer to the market" in terms of quickly evening out troughs in the fickle supply of weather-dependent renewables.

"The strategic role of natural gas in the Energiewende needs further clarification," said the IEA, adding that "greater thought should be given to its use and place in the electricity supply mix of the future."

The European emissions trading scheme (ETS) will play a central role in meeting Germany's targets but not at present low prices, the report said.

"Germany needs to decide what it wants and in the absence of a European solution in the medium term, find strong partners in Europe with a shared political desire. Look, for example, to the United Kingdom, which recently introduced a carbon price floor," the IEA executive director said, urging Germany to take leadership in the search for an "agreed solution in this matter."

Germany is facing elections in September with energy issues playing an important role in the election campaign and general consensus amongst the parties for the need to reform the EEG renewables energy law and the electricity market design, but little agreement so far about how to integrate renewables into the power market, how to secure security of supply in future decades and how to price carbon emissions.

--Andreas Franke, andreas.franke@platts.com  --Edited by James Leech, james.leech@platts.com

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