Net zero – ambitious but doable

Several listed companies, particularly from the energy sector, are likely to benefit from the German government's new climate targets.

Germany’s path to climate neutrality is clear thanks to a ruling in the highest court in April of 2021. According to the German Constitutional Court, the Climate Protection Act of 2019 was not enough and the targets set for reducing emissions from 2031 on were insufficient. The German government has now amended its climate protection laws and moved its "net zero" target up from 2050 to 2045. "Net zero" means that aggregate energy demand, which is currently still mostly covered by fossil fuels, must be generated almost entirely from renewable sources. This includes not only electricity demand, but also the energy previously generated from oil, coal and gas combustion. If greenhouse gas emissions still occur after the target date of 2045, they must be offset in full.

In a comprehensive study, Guido Hoymann, sector analyst at Metzler Capital Markets, has examined how much renewable capacity would be needed in order to achieve this radical transition to green energy by 2045 and has estimated the costs involved. In the study, he has also examined the role that hydrogen will play in this process. His calculations are based on the assumption that energy demand will decline around 30% by 2045 due to savings in all sectors. "But even then, 'net zero' requires Germany’s green energy capacity to quadruple," says Hoymann, whose analysis is partly based on data from the Fraunhofer Institute in Munich, Metzler Capital Markets' scientific cooperation partner.

Expansion will focus primarily on photovoltaics and wind energy. Their capacities will have to increase about six-fold by 2045. This means Germany will have to build around 630 gigawatts (GW) of photovoltaic and wind power capacity over the next 24 years, or around 26 GW per year. By comparison, the figure for 2020 stood at just 6.5 GW. According to Hoymann, the new target corresponds to a total investment of around EUR 630 bn at today's price of around EUR 1 bn per GW.

Power-to-gas technologies, which convert electricity generated from renewable energies into hydrogen and its derivatives, can help solve the problem of storing and supplying green energy at any location. It also allows combustion engines, e.g. in aviation and shipping, to continue to be used in a CO2-neutral manner. Hoymann expects that by 2045, about one-third of the energy supply could be stored and made available as "green hydrogen", e.g. for transportation. The remaining supply will be consumed directly as green electricity or stored – either electrochemically via batteries, thermally via hot water storage, or mechanically, e.g. via pumped-storage power plants, compressed air storage or flywheel storage.

Electrolysis capacity for hydrogen production will have to be increased to approx. 140 GW by the target date, i.e. by around 6 GW per year. At Hoymann’s estimated cost of about EUR 750 m per GW, this corresponds to an annual investment of about EUR 4 bn or a total of about EUR 100 bn for electrolysis plants. The cost of building and expanding hydrogen distribution infrastructure is likely to add up to about EUR 10 bn for additional pipelines or for repurposing existing pipelines. Hoymann believes repurposing should cover about 75% of pipeline needs.

However, the investments for hydrogen demand will probably not be made directly in Germany. The Fraunhofer Institute in Munich assumes that more than 70% of hydrogen demand in Germany will be covered by importing.

"We estimate the direct costs of building a completely green energy supply for Germany over the next 24 years will be around EUR 750 bn or about EUR 31 bn per year," says the Metzler analyst. More than 80% of this will be accounted for by expanding renewable energies. To put the figures in perspective, EUR 31 bn corresponds to around 0.9% of Germany's annual gross domestic product (GDP). Over the past ten years, German companies have invested an average of around EUR 200 bn per year in equipment. German utilities have invested a total of around EUR 11 bn p.a. on average over the same period.

Hoymann has also extrapolated the costs for the net zero target to a global level. Assuming that Germany accounts for about 2.5% of the annual energy consumed worldwide, about 40 times the amounts mentioned will have to be invested in renewables and hydrogen worldwide. This corresponds to about 1% of the world's GDP.

Contact for press-related question