Bloomberg: German Electricity Wholesale Prices Tumbled to 12-Year Low on Monday

A recent Bloomberg article points out that German electricity wholesale prices keep falling, reaching a 12-year low on Monday. The article also talks about reasons and names winners and losers.

The Bloomberg chart for year-ahed German power contracts (based on EEX data) shows that prices have halved from about EUR 60/MWh in 2011 to about EUR 30 MWh in August 2015.

1. Reasons for Falling Prices

Bloomberg gives three reasons for the continuously falling prices

  • the German energy transition towards a renewable energy supply (Energiewende)
  • the slide of oil, natural gas and coal costs
  • falling demand for electricity due to milder weather and higher energy efficiency.

With the Energiewende first introduced in 2010 and re-enforced and combined with a nuclear exit by 2022 in 2011 Germany wants to strongly increase the share of renewable power in the electricity consumption. According to the Renewable Energy Sources Act of 2014 (EEG 2014, cf. Section 1 para. 2 EEG 2014), renewable energy shall account for

  • 40% to 45% of the share in the gross electricity consumption by 2025
  • 55% to 60% by 2035 and
  • for 80% by 2050.

To this end renewable energy is promoted by above-market financial support under the EEG 2014 for a 20-year period (primarily market premiums paid in addition to the revenue of self-marketed energy respectively fixed feed-in tariffs for smaller operators). Besides renewable power enjoys feed-in priority in the grids (cf. Section 11 para. 1 sent. 1 EEG 2014). This does of course affect conventional power. Meanwhile operators of 57 mainly conventional power plants have informed the regulator of their intentions to shut down plants.

Increasing energy efficiency is also high on the agenda of the government (for the latest plans, please see here) so that utilities will likely not see higher demand in the future.

2. Winners and Losers

Current losers of the price slump are utilities with a high share of conventional power generation. Bloomberg named RWE AG and E.ON SE, saying they were the worst performers in the DAX this year. Both companies have meanwhile reacted in a somewhat different way. While RWE’s supervisory board recently approved a leaner RWE with more powers at headquarters, competitor E.ON will spin off its conventional business to a new company called Uniper (RWE reserved this option).

As one of the winners of the transition to renewable energy and one of the best performing stocks Bloomberg named Vestas Wind Systems A/S.

3. Impact on Consumers

While wholesale prices have fallen 13 percent in the past year, subsidies to fund Energiewende have pushed German consumer bills to the second-highest in the European Union after Denmark. Household prices rose 2 percent in 2014 from the previous year, Eurostat data show”

Bloomberg said.

This information coincides with the IW/Handelsblatt study we wrote about yesterday, according to which the Energiewende costs consumers EUR 28 billion annually. Industry in particular is fearing further increases that effect their competitiveness, the business daily Handelsblatt said.

4. Outlook

That energy costs are critical is no news to German politicians. Handelsblatt quoted Carsten Linnemann, head of the group that represents business interests (Mittelstands- und Wirtschaftsvereinigung) for the conservative CDU/CSU parties in the grand coalition as saying: “The grand coalition has to do some rework (to the Energiewende). The effects of the Energiewende are becoming a threat to Germany as a business location that is deterring investors and costing jobs.”

And there is work on the Energiewende in progress, inter alia:

  • On 6 July 2015 the Federal Ministry for Economic Affairs and Energy (BMWi) published a White Paper which outlines the ministries plans for a future electricity market (Strommarkt 2.0). The White Paper proposes a capacity reserve system, but not a capacity market to balance the security of supply in Germany in the future.
  • On 31 July 2015 BMWi presented key points for auctioning financial support for onshore and offshore wind power and photovoltaics as of 2017 and launched a consultation.

Which decisions will finally be taken, who will benefit and whether costs can be cut, is yet unclear, but worth following closely.

Source: Bloomberg

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