Cleantech Market Intelligence
German Utilities Struggle in Renewables World
Germany’s energy policies have promoted strong growth for the country’s renewables industry and have served as guidelines for countries like the United States, Australia, and Canada in adopting similar laws. They have not, however, benefited German utilities.
Power generators in Germany are struggling as the combination of renewables and other Energiewende policies continue to shift the economics of the country’s power market. The result has been frightening drops in per-unit wholesale electricity prices, the proliferation of low-cost/high CO2-emitting generation resources, and desperate calls from utilities for policy reform to preserve capacity markets that will provide revenue stability.
Germany allows renewables to take priority on the grid. Because its energy market is deregulated, compensation for energy resources is set by supply and demand dynamics and marginal costs per unit. As a result, renewables flood the grid when they are available, which is mostly during daytime peak periods (when prices used to be the highest). But because the marginal cost per unit of renewable electricity is essentially zero, even when fossil fuel-powered resources are utilized, they are compensated at a much lower price than they have been in the past. That’s bad news for German utilities (which are surprisingly underinvested in renewables), as they have traditionally made most of their income by generating electricity. E.ON reported revenue losses of 14% compared to 2012, while RWE reported a loss for the first time in 50 years.
The Brown Stuff
One of the most noticeable consequences of this is the growth in coal consumption. Due to the intermittency of renewables, utilities are required to ensure sufficient backup power at all times. Since they are not guaranteed the ability to actually sell these reserves – and face low marginal profits when they do – they choose the most inexpensive generating option – usually coal. Currently, lignite (brown coal) provides about 25% of Germany’s energy supply, a figure that, according to the U.S. Energy Information Administration, is growing steadily year-over-year. This is unfortunate because it is the dirtiest fuel source in terms of CO2 emissions. Furthermore, plants take upwards of 6 to 8 hours to ramp up, which means that it is more cost-effective to keep them running at all times. But utilities claim that they must increase their use of lignite in order to maintain financial stability.
So what’s the answer? After so much push for renewables and dedication to reforming the energy industry in Germany, it doesn’t make sense for Chancellor Angela Merkel and German regulators to return to the status quo ante. Grasping the futility of seeking to reverse the Energiewende, utilities have proposed a number of market reforms. In particular, following France, there has been an increase in lobbying for the establishment of capacity markets that would guarantee utilities a source of income regardless of whether they actually sold their resources.
Proponents argue that capacity markets would enable utilities to not only use cleaner fossil fuel sources, but also increase their investments in efficiency-related grid projects. And this makes sense; the Energiewende has proposed grid investments to decrease overall transmission and distribution losses and extend the reach of renewable resources (also promoting energy efficiency). In addition, the extension of demand response technologies (something that could also proliferate if curtailment is allowed to be sold as capacity) could ease some of the problems surrounding intermittency and high CO2 emissions from spinning reserves.
With anxiety rising among both utilities and regulators as the energy business in Germany becomes more and more disparate, it seems important to take a close look at establishing market mechanisms that simultaneously promote renewables and allow utilities and grid operators to maintain financial and operating stability while developing new revenue streams based on energy efficiency.