Germany’s Energy Crisis Deepens: Power Market Paralysed By Subsidised Renewables
Germany’s wholesale power market is teetering as long-term prices trade near eight-year lows and September elections dim hopes for any speedy reform of renewable subsidies blamed for overcapacity and weak utilities’ margins.
Successive German governments have paid out generous subsidies to develop wind, solar and biomass power generation capacity. This has guaranteed producers fixed prices and given green power priority access on transmission grids.
As a result, German renewable power generation capacity from wind, solar, biomass and small-scale hydro plants has more than doubled in the past four years.
It has risen to more than 80 gigawatts (GW) from less than 40 GW in 2008, in theory enough to cover Germany’s maximum demand of 82 GW.
But renewables typically only generate around a third of their installed capacity, so effectively this boom has resulted in some 25 percent of Germany’s total power generation being generated from renewables.
Spurred by subsidies, the problem is that Germany now suffers from overcapacity which is pulling down wholesale prices while gas and coal needed for electricity production in thermal power stations have remained expensive.
“The current prices have dire consequences for utilities. As such, we believe the outlook for European utilities remains gloomy,” said Michael Bret, head of thematic research at AXA Investment Managers.
Wholesale forward power prices have fallen about 30 percent on the back of the renewables build-up, and currently languish close to 8-year lows, Reuters data shows.
“Conventional capacity is under pressure,” said Tuomo Hatakka, country head in Germany for Vattenfall Europe . “I’ve seen the generation margins of our plants. It’s not a pretty sight.”
For consumers, the surge of renewables has driven up costs, as their energy bills include fees used to help cover the green energy subsidies.
The rise of renewable power capacity – now more than 60 GW for wind and solar – also means a high degree of volatility as both depend not on demand, but weather conditions.
That has hurt forward contract trading in Europe’s biggest power market, according to Steffen Koehler, chief operating officer of the European Energy Exchange (EEX).
“Market participants have to deal with great change and uncertainty at the moment, and traders deal with uncertainty by shifting positions from long-term to short-term products,” Koehler said.
“The more renewables you add to the grid, the more the market will shift towards short-term trading.”
Future trading volumes in 2012 fell 13 percent to under 1,000 terawatt hours (TWh) as participants turned to short-term maturities.
“What we’re hearing is there was quite a big fall in German volumes in Q2 and Q3 2012,” said Laura Tait, director of Prospex energy consultancy.
Tait said that sluggish economic growth, regulatory uncertainty in Europe, and a partial withdrawal of banks from energy trading also hurt turnover.
MARKET ON THE BRINK
Analysts say that the changes have been so big that the market is essentially broken, and that any reform would take a long time to take effect.
“Without radical overhaul, we conclude the German power system is structurally broken,” Macquarie analysts said in a research note last month.