Renewable Energy Act Reform: A Difficult Balance To Strike

BMI View: We believe that the reform of Germany's Renewable Energy Act is aimed at controlling the expansion of renewable energy, and not a sign of any retrenchment in policy. Whilst rising electricity prices are likely to remain a contentious issue for the government, industry groups, utilities and public alike, we believe that it is unlikely that the German energy policy - to aggressively pursue renewable energy and phase-out nuclear - will be altered under the Merkel-led government. As such, we expect to see the continued adoption of renewable energy, in line with the government's targets, and do not believe that nuclear will be brought back on the table.

We have been following Germany's ambitious 'Energiewende' (energy U-turn) closely over the last couple of years as the German government has strived to meet its targets of achieving a 35% share of the total power generation mix from renewables by 2020, 50% by 2030 and a staggering 80% by 2050. So far, the country has made incredible progress in its renewables expansion, primarily in the wind and solar sectors, where capacity has increased by roughly 16.1% and 47.6% respectively between 2011 and 2013. We have also witnessed significant progress in the country's offshore wind sector of late; a sector which was once prone to delays stemming from difficulties in connecting wind farms to the power grid, as well as grid outages after the plants started operations. Tangible progress was made in Germany's offshore wind sector during 2013 - in terms of improving regulation, transmission and distribution (T&D) links and bringing projects online ( see 'Offshore Wind Sector Gaining Momentum', November 19 2013).

That said, this rapid adoption of renewable energy technology as an integral part of the country's power mix has not been exempt from problems, and it has had wide-ranging affects on utilities operating within the market, as well as wholesale and retail electricity prices and German competitiveness.

  • Wholesale Electricity Prices Still Sliding
    Germany - First Year Baseload Electricity Forward Price (EUR/MWh)

BMI View: We believe that the reform of Germany's Renewable Energy Act is aimed at controlling the expansion of renewable energy, and not a sign of any retrenchment in policy. Whilst rising electricity prices are likely to remain a contentious issue for the government, industry groups, utilities and public alike, we believe that it is unlikely that the German energy policy - to aggressively pursue renewable energy and phase-out nuclear - will be altered under the Merkel-led government. As such, we expect to see the continued adoption of renewable energy, in line with the government's targets, and do not believe that nuclear will be brought back on the table.

We have been following Germany's ambitious 'Energiewende' (energy U-turn) closely over the last couple of years as the German government has strived to meet its targets of achieving a 35% share of the total power generation mix from renewables by 2020, 50% by 2030 and a staggering 80% by 2050. So far, the country has made incredible progress in its renewables expansion, primarily in the wind and solar sectors, where capacity has increased by roughly 16.1% and 47.6% respectively between 2011 and 2013. We have also witnessed significant progress in the country's offshore wind sector of late; a sector which was once prone to delays stemming from difficulties in connecting wind farms to the power grid, as well as grid outages after the plants started operations. Tangible progress was made in Germany's offshore wind sector during 2013 - in terms of improving regulation, transmission and distribution (T&D) links and bringing projects online ( see 'Offshore Wind Sector Gaining Momentum', November 19 2013).

That said, this rapid adoption of renewable energy technology as an integral part of the country's power mix has not been exempt from problems, and it has had wide-ranging affects on utilities operating within the market, as well as wholesale and retail electricity prices and German competitiveness.

  • One key issue is the rapid fall in Germany's electricity wholesale price, which has dropped by 32% since 2010 - as a result of weak power demand and overcapacity in the market ( see 'Delivering Wholesale Blows To EU Utilities', February 27 2014). Output from heavily subsidised renewable energy projects has been given preferential access to the grid, flooding the network and driving wholesale prices down. This has further encouraged utilities to burn coal, the cheapest way to generate electricity at present thanks to the price and policy dynamics surrounding coal and gas-fired generation in Europe ( see 'EU Energy Policy Continues To Leave Utilities In The Dark', November 1 2013). The resurgence of coal in the German power market has prompted a paradoxical situation whereby carbon dioxide emissions have actually risen over the last couple of years; raising many questions about Germany's low-carbon energy agenda.

Wholesale Electricity Prices Still Sliding
Germany - First Year Baseload Electricity Forward Price (EUR/MWh)
  • German household electricity prices are the third highest in the EU, partly due to the subsidies offered to renewable energy developers (since 2009 the surcharge has risen fivefold). Although large industrial users are mostly exempt from the surcharge, industrial electricity prices are the fifth highest in the EU. The issue of industry exemption has risen up the political agenda since Germany's election in September 2013 and the topic is now at the forefront of the proposals for the Erneuerbare-Energien-Gesetz, or Renewable Energy Act (EEG) reforms. The German government is also under pressure from Brussels to reform the industry exemptions component of the EEG, or face fines and legal action due to a state-aid probe ( see 'EC: More Assertive On Energy Sector State Aid', December 12 2013).

Cost Burden High
Domestic Electricity Prices for Selected Countries in 2012, GBp/kWh

The adoption of renewables into the electricity mix is clearly a huge financial and technical burden for the country, considering the aforementioned problems, and we have highlighted in our previous analysis of the market that the EEG would need to be reformed in order to rein in costs and improve economic sustainability. Indeed, reform is underway, following the signing of a grand coalition agreement between Angela Merkel's Christian Democratic Union (CDU-CSU) and the Social Democratic Party (SPD) in December 2013. SPD Chairman Sigmar Gabriel has been installed at the head of a new 'super' ministry that will enable him to oversee both economic affairs and energy policy and the revision of the EEG is reported to be a priority during Germany's current legislative term.

We have already undertaken an initial analysis of the blueprint reforms, released in late January 2014, which give an indication of how Gabriel plans to reduce the financial burden of the energy transformation, whilst maintaining growth in the renewables industry, and ensuring that it complies with EU law ( see 'EEG 2.0: Balancing The Politics And Economics Of Reform', March 10 2014). The reform of the EEG is expected to be finalised by Easter 2014 - with a review to passing the reforms into law by summer 2014. As such, greater detail with regards to the plans will be announced in due course.

However, included in the proposals are plans to award statutory feed-in-tariffs (FiTs) only in exceptional circumstances and instead focus on marketing electricity generated from renewable sources directly - with market-based approaches to the integration of renewable energy suggested in an effort to drive down costs. As previously mentioned, with regard to industry exemptions, the blueprints suggest that energy generated from new industry facilities will have to pay 90% of the EUR6.24 renewable subsidy, while those that generate power using renewables will pay 70%. The expansion of wind and solar will be more controlled, with support for projects capped so that roughly 2.5GW of capacity for both technologies is brought online annually. The support for wind power projects will reportedly be more flexible, and will now vary according to location and output feasibility, using a 'reference yield model' approach.

Consumers vs. Industry

Of course, we will need to wait until the final EEG reform is outlined before we can make a full assessment, but overall we believe that the approach Gabriel has taken is aimed at controlling the expansion of renewable energy, and not a sign of any retrenchment in policy. Instead, the government has become all too aware of the spiralling costs of the Energiewende and recognised the need to curb them, whilst maintaining strong investor interest and continued renewable energy growth. In terms of the costs, particularly retail electricity prices, we do not expect these to notably decrease as the contracts offered to renewable energy developers, in the form of subsidies, are long-term guarantees and will therefore need to be maintained.

At best, we believe the reform will help stabilise consumer electricity prices. Although recent surveys suggest that Germans are broadly in favour of the expansion of renewable energy, uncontrollable consumer power price rises, or the unequal sharing of the costs between consumers and industry, could prompt a consumer backlash against Energiewende.

In terms of industry power costs, if exemptions are scaled back then power prices for big industrial companies will consequently rise - decreasing Germany's competitiveness and threatening the country's longer term economic outlook. Germany has a significant current account surplus, highlighting that German industry could potentially afford to take on more of the burden of the Energiewende, as at present German industry is relatively competitive. However, transferring greater costs onto the industry will not be an easy task, and we expect industry leaders to condemn such proposals. For example, German chemical company Bayer has already voiced concerns over the reforms, stating that self-owned power plants would no longer be economical under the new decision. The issue of consumers-versus-industry is likely to be key area of focus for the EEG 2.0 and will remain a contentious issue for the government, industry groups, utilities and public.

Expansion Underway
Germany Non-Hydro Renewables Capacity By Type (MW), 2013-2020 and Total Capacity and Non-Hydro Renewables Capacity (MW), 2020

We believe it is unlikely that the German energy policy - to aggressively pursue renewable energy and phase-out nuclear - will be altered under the Merkel-led government. As such, we expect to see the continued adoption of renewable energy, in line with the government's targets, and do not believe that nuclear will be brought back on the table. With so much of the country's total electricity capacity comprising renewables and substantial amounts of money having already been invested in the industry, we believe that a U-turn away from renewables or back to nuclear is unlikely.

As such, we have forecast strong growth in renewables capacity across our ten-year forecast period, with the industry posting annual average growth rates of 4.2% between 2014 and 2023. Additionally, we expect the wind and solar segments to grow roughly at the rate targeted by the government - 2.5GW a year, with solar capacity reaching 51.8GW by 2020 (in line with solar capacity targets). After a slight downward revision to offshore wind targets, the government now hopes to have 45GW of onshore wind and 6.5GW of offshore wind (as opposed to the original 10GW) installed by 2020; and although we are confident that the wind sector will grow significantly over the coming decade, we expect Germany to fall just short of these targets (48.2GW by 2020).

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Sector: Power, Renewables
Geography: Germany
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