Bloomberg News

Merkel Faces Achilles Heel in Grid to Unplug German Nuclear

June 01, 2011

(Updates with closing share prices in 12th paragraph.)

June 1 (Bloomberg) -- Chancellor Angela Merkel must carry out a 10 billion-euro ($14.4 billion) expansion of Germany’s electricity-delivery network or her decision to exit nuclear power can stunt growth in Europe’s largest economy.

Cables are needed to connect new offshore wind farms in the north to the factory-rich south and high-volume lines to France are necessary for imports to cover a shortfall as Germany phases out reactors that provide 23 percent of demand. A grid upgrade is essential, and Germans must end their opposition to new power lines overhead, energy economics professor Christoph Weber said.

“The grids are the Achilles heel and greatest challenge of the energy policy,” University of Duisburg Essen’s Weber said in an interview. “The government will have to overcome significant problems on the ground to get the lines built.”

Germany became the biggest economy to plan an atomic-power exit after a meltdown in Japan stoked safety concerns, costing Merkel’s Christian Democrats votes in state elections. Europe’s largest power market will be a test case for whether an industrialized nation can rely far more on clean energy without eroding corporate profit, according to Environment Minister Norbert Roettgen.

An improved power network to avoid potential blackouts would be paid for largely by business and residential power consumers and benefit carmakers in the south including Daimler AG and Bayerische Motoren Werke AG, as well as equipment suppliers including Siemens AG and Switzerland’s ABB Ltd.

Legal Challenges

Infrastructure projects often face resistance from local residents concerned that home prices and quality of life will decline. EON AG, the country’s largest utility, is fighting legal challenges to finish building a coal-fired power plant in the town of Datteln while Elia System Operator SA’s German unit is trying to convince local authorities to proceed with a plan to build power lines through a forest in the state of Thuringia.

To kick-start the work, the Economy Ministry plans to use fast-track powers last exercised in 1990, when united Germany replaced crumbling roads in the east to improve connections in the country. Control over approving power grids would be taken by Merkel’s government from states and local councils. Her cabinet is set to discuss the energy policy overhaul on June 6.

Build Cables

The country’s top priority is to construct as many as 3,600 kilometers (2,235 miles) of cables by 2020 to link renewable energy projects with consumers, the German Energy Agency said today in an e-mailed statement. That would cost 9.7 billion euros and include connecting offshore wind farms, according to the agency, a think tank owned by Allianz SE, Deutsche Bank AG, DZ Bank AG, KfW Group and the government.

“The grid cannot become the bottleneck of the energy shift,” Stephan Kohler, the president of the agency known as Dena, said in the statement. “Wind and solar power won’t do any good if we can’t transmit it to where it will be used or stored.”

Utilities will need to “strengthen the power grid, boosting north-south capacity and allowing for a growing percentage of intermittent renewable energy being fed in,” James Stettler, a London-based UniCredit SpA analyst, and colleague Alasdair Leslie wrote in a May 31 note to clients.

Siemens, Schneider Electric SA, ABB and Alstom SA may benefit from demand for transmission products, according to UniCredit. Siemens, a stock the analysts rate “buy,” is “particularly well-placed” given that it sells wind turbines, transmission and distribution equipment, gas-fired power plants and other energy products, according to the note.

Grid Ownership

Germany’s four high-voltage grids are owned by RWE AG, EnBW Energie Baden-Wuerttemberg AG, TenneT Holding BV and Elia. RWE, which also generates power, fell 1 percent to close at 40.11 euros in Frankfurt trading while Elia slumped 3 percent to 31.37 euros in Brussels. EnBW is more than 93 percent held by a southwestern German state and local authorities, while TenneT is owned by the Netherlands.

Gas-fired power plants are used to shadow renewable energy output because they can increase and reduce generation quicker than other reactors or coal-fired stations.

While Germany will add gas-fired plants, the country could have to source as much as 10 percent of its annual power use from abroad during the phase-out, said Weber.

Renewables Goal

Merkel said May 30 that Germany will raise renewable power output to 35 percent of the country’s supply in 2020 from 17 percent last year. The government already had a target of more than 30 percent and has said 35 percent would be achievable.

Germany is considering reducing the guaranteed, above- market rate paid for solar power by 6 percent on March 1, Environment Minister Roettgen said at a May 30 press conference in Berlin. That would come on top of cuts of as much as 24 percent between July and next January to adapt the subsidy to falling panel prices.

“There is no room” for the planned cut, which is “decoupled from market growth,” the German Solar Industry Association said today in an open letter to Merkel published on the lobby group’s website.

The government has cut subsidies further than it originally planned over the last two years after panel prices slumped with an increase in Chinese imports.

“It’s clearly possible to boost solar use in Germany: they have not yet managed to stop their market growing explosively despite increasing tariff cuts,” said Jenny Chase, Bloomberg New Energy Finance’s lead solar analyst. “The challenge will be handling intermittency. Expect Germany to become very, very interested in a Europe-wide grid and power storage.”

--With assistance from Lars Paulsson and Marc Roca in London. Editors: Todd White, Stephen Cunningham.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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