Bloomberg News

Renewables Make German Power Market Design Defunct, Utility Says

June 26, 2012

Electricity generation from renewable energy in Germany is reducing power prices and has left the country with a market whose design no longer works, according to Stadtwerke Leipzig GmbH.

Renewable generation, such as wind and solar, receives support from the German government in the form of a feed-in- tariff, or FIT. Because there are no costs associated with the wind and sunshine, renewables have a generating margin of zero, as well as legally mandated priority access to the grid. As a result, fossil fuel-fired plants are generating for fewer hours and selling their power at cheaper prices, making them less profitable.

“As long as renewables have zero margin costs, the market design we have doesn’t work,” Jens Teresniak, team manager for business development and market analysis at Stadtwerke Leipzig, said in an interview in Leipzig on June 21. “Capacity markets could be a solution.”

So-called capacity markets allow utilities to fix prices for guaranteed backup power supply in advance, boosting margins for gas and coal electricity plants as renewables output rises. German policy makers are considering how to ensure there are enough round-the-clock plants to keep the lights on when nuclear reactors are phased out and renewables output falls short.

Merit Order

Increasing supply of renewable energy is one of the main reasons electricity prices in Germany have declined, Teresniak said. Average day-ahead electricity prices in Germany fell 18 percent to 43.49 euros ($54.36) a megawatt-hour in the first five months of this year compared to last year, according to data from European Energy Exchange AG compiled by Bloomberg. Germany saw peak solar production in May and this summer will probably see some negative prices during weekends when there is low demand, he added.

“Renewables have shifted the merit order and now it’s like we have two different markets, one for renewables with 20 years’ guaranteed FIT, and one competitive for conventional power plants,” said Thorsten Korner, head of energy trading at Stadtwerke Leipzig. “We have to think about integrating renewables and how we will organize 80 percent renewables on the grid by 2050.”

Swiss bank UBS AG (UBSN) said that the average load factor of hard coal and gas plants will decline by 5 percentage points within the next three years to 33 percent in 2015, including 13.8 gigawatts of expected plant closures.

“Renewables keep growing rapidly in Germany while operating hours and spreads for coal and gas stations decline further,” Patrick Hummel, a senior analyst at UBS in Zurich, said in a research note in April.

Utilities including EON AG (EOAN) and RWE AG (RWE) have held back from building new gas-fired plants, citing concern that the investments won’t be profitable. RWE said on May 10 that capacity markets aren’t needed in Germany in the near-term and more investment in power grids would better ensure security of supply.

Stadtwerke Leipzig buys and sells German power, gas and European Union emissions permits and traded 55 terawatt-hours of German power in 2011.

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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