Identifying influencing factors for increased coal consumption in Germany despite political directives of the Energy Transition

Troutman, Homework #3 1

REAP Module “Research Methods and Statistics” Winter Term 2014/2015

Homework #3: Final Homework Multi-‐Variable Linear Regression Analysis

Utilizing R-‐Software

“Assessing the impact of U.S. natural gas production and the phasing-‐out of nuclear energy in Germany on the consumption of hard coal in primary energy consumption in Germany from

1990 to 2013”

Submitted: Sunday, April 12th, 2015

Heather Troutman 6028601


Table of Contents

1 -‐ Introduction.......................................................................................................................................................03 2 – Data......................................................................................................................................................................04 2.1 – Discrepancies...........................................................................................................................................04 2.2 – Ambiguity..................................................................................................................................................04

2.2.1 -‐ Hard coal or total coal.................................................................................................................04 2.2.2 -‐ Percentage or quantity...............................................................................................................04 2.2.3 – PEC or GEG......................................................................................................................................05 2.2.4 – 1990, 2007 or 2010.....................................................................................................................05

2.3 – Reasoning for selected data................................................................................................................05 3 – Results.................................................................................................................................................................06 3.1 – Nuclear on hard coal.............................................................................................................................06 3.2 – U.S. natural gas on hard coal...............................................................................................................06 3.3 – Nuclear and U.S. natural gas on hard coal......................................................................................07 4 – Conclusion..........................................................................................................................................................09 5 – References..........................................................................................................................................................09 Appendix 1 – Single Variable Linear Regression Results.........................................................................10 Appendix 2 – Data Discrepancies......................................................................................................................14 Appendix 3 – Preliminary Results....................................................................................................................14

Figures, Graphs and Tables

Figure 1 U.S. NG production and price (2010-‐2013)..................................................................................04 Table 1 Data Discrepancies.................................................................................................................................04 Figure 2 Influence of nuclear on coal as a percentage of PEC (2010-‐2013).......................................06 Figure 3 Influence of U.S natural gas production (billion M3) on coal as a percentage of PEC

(2007 to 2010 and 2010-‐2013)........................................................................................................07 Figure 4 Influence of U.S natural gas production (billion M3) and percentage of nuclear on

German PEC on coal as percentage of PEC (2010-‐2013), (2010-‐2013 U.S. NG inverted), (2009-‐2013 U.S. NG inverted)................................................08


1 – Introduction

Germany is currently in the international hot-‐seat on energy transitions. The global community officially began to discuss the need for a move away from carbon-‐intensive energy sources in 1992 with the adoption of the Koto Protocol by 90 of 196 countries (the author is including Taiwan and Palestine), or nearly 46% of the politically recognized world. Germany surpassed all precedence in 2000 with the adoption of a Climate Action Plan, which has become known as the Eneriewende, that will not only reduce carbon-‐intensive energy consumption and increase non-‐carbon, renewable energy sources, but also phase-‐out nuclear energy generation.1

Ideally, increases in renewable energy would displace, both the reductions in nuclear energy and other carbon-‐intensive energy sources, mainly coal. Critics (Deutsch Bank Research, 2014) site increasing carbon dioxide emissions in 2012 and again in 2013 as a result of increased coal consumption displacing nuclear energy. Other studies (Heinrich Böll Stiftung, 2014) argue that increases in coal consumption reflect the decision to build five new coal plants in 2005 that have now just come on-‐line reflecting energy prices in 2005 and not current circumstances.

Germany was the country with the highest lignite production in 2012, and the seventh largest producer of hard coal (Euracoal, 2013). Still, it should be acknowledge that Germany makes up a relatively2 small percentage (3%) of global coal demand, far behind China (48%) the U.S. (11%) and China (10%) (IEA, 2013). Lignite has a lower energy content than hard coal and higher moisture content, rendering it uneconomical for export but economically viable for domestic use. It seems plausible that this situation could lead to increasing consumption of lignite to offset nuclear, despite its swollen carbon footprint and Germany’s low-‐carbon ambitions.

The Deutsch Bank Research Group (2014) has posited that the German coal market has had little influence on coal consumption. Rather, the U.S. natural gas boom is the reason. “Above all, the US breakthrough of gaining access to cheap, unconventional (shale) gas also impinged on Europe and even Germany with its particularly idiosyncratic energy policy. The latter occurred indirectly, since the US market saw cheap unconventional gas displace hard coal, which in turn found its way to Germany by ship “at a cut price” – and thus influenced (and continues to influence) Germany’s energy mix. In a short space of time the US became one of Germany’s most important suppliers of coal.”

If the matter wasn’t yet sufficiently convoluted, it has also been argued that there hasn’t actually been

an increase in coal consumption (Heinrich Böll Stiftung, 2014). This confusion begs investigation. Has the 2000 decision to phase-‐out nuclear energy in Germany lead to an increase in coal consumption? Was this effect enhanced following the 2007 U.S. natural gas boom leading to increased hard coal exports and decreased international hard coal prices? Or, has German coal consumption actually decreased rather than increased?

1The author would like to note that Germany imports electricity from neighboring countries and has not currently adopted policies to quantify or limit if that electricity was produced from nuclear reaction. It is foreseeable that increasing international electricity trade as directed by the EC (2014) could result in an increase in nuclear-‐generated electricity, namely from France. 2 Germany’s coal demand is small relative to GDP, but not in comparison to population size.


2 – Data 2.1 – Discrepancies

There exists a surprising inconsistency in data on U.S. natural gas production as presented by the U.S. Energy Information Agency (USEIA) (2014), the German Federal Ministry for Economic Affairs and Energy (Bundesministerium fur Wirtschaft und Energie – BMWi)(2014), and British Petroleum (BP)(2014), as expressed in Table 1. Similar discrepancies were found with German coal consumption. These inconsistencies likely arise from the adoption of different energy efficiency conversion factors by the various reporting agencies. It is worth noting that the German Working Group on Energy Balances (AGEB) made considerable changes in the valuation of energy efficiency from various sources in 1995 away from conventional conversion rates adopted by the EIA and World Bank to “more accurately reflect German and European operational performance (BMWi, 2014).

2.2 – Ambiguity 2.2.1 -‐ Hard coal or total coal

Which to consider, total coal consumption or hard coal consumption? First, the U.S. is exporting hard coal (USEIA, 2014). Second, Germany still has an economically viable supply of lignite reserves that out perform hard coal and often natural gas, also increasing coal demand. Resultantly, there has been a sharper rise in both the quantity and percentage of lignite consumption in Germany in the past decade. 2.2.2 -‐ Percentage or quantity Total primary energy consumption (PEC) has been in decline since 2005 but so too has the distribution of energy sources changed quite drastically in Germany since the early ‘90s. The decrease in PEC is partially due to increased efforts in energy efficiency, but also reflects the economic crisis of 2008 and a slow recovery in German industry. The changing energy mix is a result of the Energiewende and the rapid deployment of renewable energy sources.

Figure 1 U.S. NG production and price (2010-‐2013). Source: Deutsch Bank Research (2014)

Table 1 Data discrepancies. Source: Author


2.2.3 -‐ Primary energy consumption or gross electricity generation Changes in quantity and distribution of energy sources has manifested differently between primary energy consumption (PEC) and gross electricity generation (GEG). It is not immediately clear which category most appropriately represent the phenomenon this study seeks to address, refer to Annex 1. Calculations by the author have verified that percentage of both hard coal and nuclear, in terms of power content in TWh, have maintained a consistent proportion between PEC and GEG. Consistently, since 1990, 33% of all nuclear energy has been used in GEG. Hard coal has ranged from 22% to 27% from 1990 to 2013, with a closer range of 24% to 26% since 2009 – our area of observation, see Annex 2. Further, it should be acknowledge that the rapid increase in renewable energy generation has only affected GEG. 2.2.4 – 1990, 2007 or 2010

In 1990 Germany committed to phasing-‐out nuclear energy by 2022. Thus, it can be expected that if this decision lead to an increase in coal consumption that this would become evident in the years directly following the first nuclear plant closures. If increased U.S. natural gas has influenced German coal consumption then one can expect to see this effect following the U.S. natural gas boom in 2007. Additionally, the economic crisis of 2008 resulted in a sharp decrease in PEC and a temporary increase in nuclear energy consumption, but a decrease in both total coal and hard coal consumption. However, visual analysis of coal consumption in PEC and GEG both as a quantity and as a percentage show a transition from declining coal consumption relative to the year before to an increase from 2010 to 2013, refer to Annex 1. Is this a result of the compounded effect of decrease in nuclear energy production in Germany and an increase in U.S. natural gas production? 2.3 – Reasoning for selected data

Ultimately, it was decided to examine hard coal as opposed to total coal consumption in Germany because the U.S. is exporting hard coal, and not lignite (USEIA, 2013). Percentage has been examined instead of quantity because of the rapid drop in PEC following the 2008 economic crisis. While it is reasonable to consider the economic effects this had on viable energy sources, such an analysis is beyond the scope of this study. The author believes that changes due to increased U.S. natural gas exploration and German nuclear decommissioning is best represented by the percentage of PEC and not total quantity. PEC has been reviewed rather than GEG because there has been no change in distribution of total energy supply for nuclear between the two categories since 1990, and a reasonably small variance in hard coal. As PEC represents 77% of total nuclear energy by power content and 74% to 76% of hard coal (in the defined timeframe), PEC should best reflect changes in distribution of PEC energy sources following the rule of magnitude. Examination of trends from 1990 to 2013 shows clear and strong downward trends in both nuclear and hard coal energy production. Relative to the year before, hard coal first begins an upward trend in 2010. This timeframe, however, was too transient for the R software and insufficient for computation, so the timeframe has been modified to 2009 to 2013. This decision is further described in the following section.


3 – Results 3.1 – Nuclear on hard coal

0.080 0.085 0.090 0.095 0.100 0.105

0.122

0.124

0.126

0.128

Influence of nuclear on coal as percentage of PEC (2010-2013)

Nuclear

Coal

In the observed time frame there is a strong and very significant negative linear correlation between

the percentage of nuclear energy in PEC and hard coal, i.e. the more the portion of nuclear energy decreases in PEC the more the portion of hard coal increases. The R-‐squared value of 0.9704 represents that 97% of the increases in percentage of hard coal in PEC is related to decreases in percentage of nuclear in PEC. A change of one standard deviation in the percentage of nuclear, σX1, relates to a 15% change, increase in a temporal perspective, in hard coal. 3.2 – U.S. natural gas on hard coal The relationship between U.S. natural gas production, measured in billion M3, and German hard coal consumption as a percentage of PEC exemplifies the temporal sensitivity of this analysis. Analysis of data from 1990 to 2013 shows a negative linear trend, as does an analysis of data from 2007 to 2013. Refining the data by another three years to limit the influence of the 2008 economic crises flips the linear relationship to positive. It is also possible that there would be a delay between the start of the U.S. natural gas boom and the time that increased U.S. hard coal exports negatively affected global hard coal prices, and therefore a delay before Germany began consuming higher volumes of cheap hard coal. This anticipated delay would have been further prolonged by the 2008 economic crises that had the deepest negative impact on German PEC in 2009. While these outcomes seem reasonable, this analysis has found no statistical relationship between U.S. natural gas production and German hard coal as a percentage of PEC. The analysis shows that 0.08 of the change in hard coal in German PEC is related to U.S. natural gas production.

ΔY = beta1hat *ΔX1 ΔX1=σX1 ΔY1 = 0.1475478

Figure 2 Influence of nuclear on coal as a percentage of PEC (2010-‐2013) Source: Author using data from BMWi (2014)


560 580 600 620 640 660 680

0.110

0.115

0.120

0.125

0.130

0.135

0.140

Influence of U.S. NG production on coal as percentage of PEC (2007-2013)

NG

Coal

620 640 660 6800.122

0.124

0.126

0.128

Influence of NG on coal as percentage of PEC (2010-2013)

NG

Coal

ΔY = beta1hat *ΔX1 ΔX1=σX1 ΔY1 = 0.1531064 ΔY2 = 0.05998204 3.3 – Nuclear and U.S. natural gas on hard coal Percentage of nuclear energy in PEC has a strong negative correlation with percentage hard coal in PEC. U.S. natural gas production has no statistically significant relationship to the percentage of hard coal in German PEC. Still, the regression of both regressors against the independent variable, percentage of hard coal in German PEC, has a strong correlation with 97% of the change in hard coal resulting from decreases in nuclear and simultaneous increases in U.S. natural gas production. The change in one standard deviation in both the percentage of nuclear energy in German PEC and U.S. natural gas production in billion M3 is reflected by a 12% change in the portion of hard coal in German PEC. Although there is no statistically significant linear relationship between U.S. natural gas production (billion M3) and the percentage of hard coal in German PEC there is a positive linear trend. This result confounds with the negative linear relationship between nuclear and hard coal impeding analysis. The data for U.S. natural gas production was inverted to also move in a negative linear trend. The two regressors together have a slightly weaker correlation to the independent variable, the percentage of German hard coal in PEC, than the percentage of nuclear in German PEC alone.

Figure 3 Influence of U.S natural gas production (billion M3) on coal as a percentage of PEC (2007 to 2010 and 2010-‐2013) Source: Produced by author using R-‐ software and data from BMWi (2014)


0.080 0.085 0.090 0.095 0.100 0.105

0.122

0.124

0.126

0.128

Influence of nuclear and U.S. NG production on coal as percentage of PEC (2010-2013)

Nuclear

Coal

620 640 660 680

0.122

0.124

0.126

0.128

NG

Coal

0.080 0.085 0.090 0.095 0.100 0.105

0.122

0.124

0.126

0.128

Influence of nuclear and U.S. NG production (inverted) on coal as percentage of PEC (2010-2013)

Nuclear

Coal

620 640 660 680

0.122

0.124

0.126

0.128

NG

Coal

0.080 0.085 0.090 0.095 0.100 0.105 0.110

0.110

0.115

0.120

0.125

Influence of nuclear and U.S. NG production (inverted) on coal as percentage of PEC (2009-2013)

Nuclear

Coal

600 620 640 660 680

0.110

0.115

0.120

0.125

InvertedNG

Coal

ΔY = beta1hat *ΔX1 ΔX1=σX1 ΔY1 = NA ΔY2 = NA ΔY3 = 0.119381

Figure 4 Influence of U.S natural gas production (billion M3) and percentage of nuclear on German PEC on coal as a percentage of PEC (2010-‐2013) , (2010-‐2013 U.S. NG inverted), (2009-‐2013 U.S. NG inverted) Source: Produced by author using R-‐ software and data from BMWi (2014)


4 – Conclusion The results of this analysis suggest that decreases in the percentage of nuclear in German PEC has a strong negative correlation, 97%, with increases in the percentage of hard coal in German PEC, increasingly so over the past four years. Increasing the observational period to 1990 to 2013, i.e. n=33, results in a diminished significance. This analysis has an R-‐squared of 0.01162 meaning that less than 1% of changes in hard coal as a percentage of PEC from the period 1990 to 2013 could be attributed to changes in nuclear energy as a percentage of German PEC. This drastic change is predictable as nuclear energy as a percent of German PEC experience a rapid increase from 1990 to 2000 and then rapidly declined with the adoption of the Energiewende in 2000 and the decision to phase-‐out nuclear energy in Germany. While this analysis showed no statistical relevance between the U.S. natural gas boom in the past six years and an increase in hard coal percentages in German PEC, the authors speculates that this influence may have been masked by the 2008 economic crises, which not only resulted in a dramatic cut in German PEC, but also increased economic viability for domestic lignite consumption in Germany. It will be interesting to reevaluate the significance of this phenomenon as current estimates suggest continued increased in U.S. natural gas production over the coming two decades, resulting in an increase in hard coal exportation over the same period. How this increase in global hard coal supply effects global hard coal prices will be, in the author’s opinion, dependent upon the continuation of the global trend away from carbon-‐intensive energy sources, continued deployment of renewable energy sources and increasing state-‐level carbon dioxide emissions regulations. The last may have a surprising development in the coming years depending on the outcome of the Conference of the Parties in Paris this December (2015). 5 – References British Petroleum (BP) (2014), “Statistical Review of World Energy: June 2014,” pages 20-‐29 Bundesministerium fur Wirtschaft und Energie (BMWi) (2014), “ Facts and Figures Energy Data: National and

international development. Web. [Accessed 01.30.2015] http://www.bmwi.de/DE/Themen/Energie/energiedaten.html

Deutsch Bank Research (2014) The changing Energy Mix in Germany: The drivers are the Energiewende and

international trends. Deutsch Bank AG. Frankfurt am Main. European Association for Coal and Lignite (EURACOAL) (2013), “Coal Industry Across Europe”, 5th Edition,

pp.5-‐15, 29-‐33. European Commission (EC) C(2014) 8786: Commission Decision of 25.11.2014 On the Aid Scheme SA.33995

(2013/C) (ex 2014/NM) Heinrich Böll Stiftung (2014) The German Coal Conundrum: The status of coal power in Germany’s energy

transition. Washington, DC. International Energy Agency (IEA) (2014), “Key World Energy Statistics”, Paris, page 14-‐15. International Energy Agency (IEA) (2013), “Coal Information 2013”, Paris, page 11-‐17.


Annex 1 – Single Variable Linear Regressions





Annex 2 – Data Discrepancies

Annex 3 – Preliminary Results

Science

Identifying influencing factors for increased coal consumption in Germany despite political directives of the Energy Transition