Energy Transition

Electricity Prices in Free Fall

Sonnenaufgang im Morgennebel
Energy company managers are scrambling to keep up with plummeting prices.
  • Why it matters

    Why it matters

    Germany’s move to sustainable power sources has been an ecological success, but an economic disaster for the electricity market.

  • Facts

    Facts

    • The price of electricity on the wholesale market has been dropping for five years, reaching a catastrophic level for conventional power plant operators.
    • It has plunged from €60 ($67.37) per megawatt-hour to €20.
    • At current prices, energy companies’ plans to restructure to accommodate the energy transition are now in danger, and they are looking to the government for help.
  • Audio

    Audio

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Germany’s switch to renewable energy sources is a success story. Ever since the country dedicated itself to a transformation of its energy supply following Japan’s Fukushima nuclear disaster five years ago, renewables have been booming. Last year, they accounted for a third of the energy consumed in Germany.

But while this success goes far in protecting the climate and environment, it has an economic downside. The electricity market has come apart at the seams.

While wind and solar electricity are being fed into the grid at set prices on a priority basis, natural gas- and coal-fired power plants, and soon nuclear power plants, are being forced off the market.

The price of electricity on the wholesale market has been in freefall for five years, plunging from €60 ($67.37) per megawatt-hour to the current €20.

The situation poses an existential threat for German operators of conventional plants like E.ON and RWE.

“We can keep the nuclear power plants running at these prices – but it isn’t worth replacing the fuel rods.”

Peter Terium, Chief executive, RWE

According to Trendresearch, a marketing research institute commissioned by Handelsblatt, the use of conventional power plants will continue to decrease. The gas- and coal-fired power plants and the nuclear power plants that remain on the grid will produce around 435,000 gigawatt hours of electricity this year.

Although that’s about two-thirds of the total German electricity production, the power plants were designed for 521,000 gigawatt hours. This means the utilization of their capacity is lagging around 17 percent below what they were designed for. By 2020, the gap between capacity and production is likely to increase to 23 percent.

The plunge in price is putting the heads of E.ON and RWE, Johannes Teyssen and Peter Terium respectively, in a predicament. With prices of €20, restructuring is in danger. When Mr. Teyssen decided to spin off the ailing power plants in 2014, the megawatt-hour of electricity was still at €33.

In a major crisis, even rivals tend to close ranks.

“At these prices, not a single power plant is earning money,” RWE’s Mr. Terium said two weeks ago at the presentation of the company’s financial statement, summing up the situation threatening the very existence of the energy sector.

One day later, E.ON’s Mr. Teyssen could only agree. “Terium is certainly right about that,” he said.

At the moment, the two executives are watching as their business is virtually imploding. First gas-fired power plants were forced off the market, then the black coal plants, and now low-priced lignite and even nuclear energy is struggling against being shut down.

“We can keep the nuclear power plants running at these prices – but it isn’t worth replacing the fuel rods,” Mr. Terium said matter-of-factly.

The price curves for electricity on the European Energy Exchange (EEX) in Leipzig are part of what’s troubling the two CEOs and operators of all large power plants.

While consumers are being forced to pay rising prices for electricity because of constantly higher taxes, fees and levies, the quoted rates on the wholesale market for electricity from coal, gas and nuclear power plants have been heading in the other direction for years. In recent weeks, they reached a dramatic low point that no manager would have thought possible.

At times, the price of electricity broke below the €20 per megawatt-hour mark on the futures market. Five years ago, before Germany’s energy transition was stepped up, the price was sometimes over €60. Since then, the market has been flooded with expensive wind and solar electricity.

The situation was already bad for E.ON, RWE, EnBW, Vattenfall, and hundreds of public utility companies two years ago when the price was at €35. At €20, it is disastrous. The companies can hardly keep up via cutbacks to save on costs. Even drastic survival strategies – like  E.ON and RWE’s decision to split their companies in two – are endangered.

Trendresearch has come to a gloomy forecast in its exclusive analysis for Handelsblatt about the future development of the electricity market: The utilization of conventional power plants – gas, coal, nuclear – will continue to decrease.

 

Electricity Surplus in Germany-01

 

The electricity being produced is consistently being sold off dirt cheap. Measured on current prices, electricity from conventional power plants has a value of just barely €8.7 billion. Five years ago, it would have been well over €25 billion. Already, 57 plant closures have been registered or announced at the Federal Network Agency, the German regulatory office for electricity, gas, telecommunications, post and railway markets. And more power plants closures will likely follow.

But it’s the outlook that’s really making energy executives panic. On the futures market, electricity for 2017 is currently at €22 and for 2018 and 2019 at just €21, with no prospects for improvement. The wholesale price of electricity could also drop even further.

“At the moment, there are some indicators that suggest they still haven’t hit bottom yet,” said Tobias Federico, managing director at energy market analyst Energy Brainpool.

Ingo Becker, an analyst at Kepler Cheuvreux, agrees: “I think it is more likely in the mid-term that we will be seeing wholesale electricity prices at below €20 for the megawatt hour than above €20.”

Energy companies are themselves largely to blame for their misery.

In 2006, when Germany had already long since started its energy transition, RWE launched the largest investment program of its history and put almost €15 billion into its fleet of power plants. While the Germans were installing solar panels on their roofs, RWE was setting the cornerstone for gigantic coal-fired power stations.

E.ON was also busy building coal-fired power plants. But natural-gas installations were also being built on a major scale at the time – as lawmakers demanded. Such plants were considered the perfect supplement to renewable energies dependent on weather conditions, because the power plants were flexible and could be fired up and shut down quickly.

It isn’t an equal battle.

The renewable energy law (EEG) that was passed in 2000 guaranteed investors in wind and solar plants that they could feed every kilowatt-hour produced into the energy grid – and at an agreed-up fixed price. The EEG was a huge success for climate protection.

By 2015, renewable energies accounted for a third of electricity consumption.

For the free play of market forces, it was a catastrophe for reasons that are obvious. The more priority green electricity has in the grid, the less demand there will be for energy that conventional power plants can provide.

The electricity market is the collateral damage of the ecological boom. A megawatt-hour of electricity from a new wind farm on land is currently remunerated with €85 – that’s a good four times the market price. Solar energy producers receive €110 per megawatt-hour – a good five times. And offshore wind turbines are paid €150 the megawatt-hour – about seven times the price of electricity.

And the price of electricity for the end consumer is completely detached from the drop in price on the electricity market. On average, households are currently paying about 28 cents per kilowatt-hour – that is more than 10 times the price the utility company is currently paying on the exchange for purchasing the electricity. The grid operators receive a fourth of the electricity price, and more than half goes for taxes, fees and levies.

At the same time, electricity customers are also having to help pay for these distortions. The grid operators are allowed to pass the difference on to the customer between the high remuneration costs of feeding green electricity into the grid and the market price. The lower the market price, the higher this sum, which is known as the EEG levy. This year, it already amounts to 6.4 cents per kilowatt-hour. Electricity customers are paying more than a fifth of the price of electricity to finance Germany’s energy transition.

Altogether, the EEG levies in 2016 add up to almost €23 billion. Gauged on the current EEX quotation, the green energy produced this year has a value of less than €4 billion.

At the same time, for E.ON and RWE, it has become a question of survival. At first, the energy groups tried to counter the changes with austerity programs, then Mr. Terium and Mr. Teyssen took more far-reaching steps.

First, at the close of 2014, Mr. Teyssen decided to split up his company. E.ON spun off the large ailing power works into a new company, Uniper.

E.ON itself plans to totally commit to the energy transition and concentrate on renewable energies, grids and marketing.

Mr. Terium followed suit a year later – with a slightly modified plan: RWE split off the future-orientated green-energy business into a new company, and RWE is now to be the company’s equivalent of a bad bank.

The problem is the price of electricity has dropped so dramatically that even these rescue plans are in danger.

At the end of 2014, when E.ON decided on the break-up, the price was already alarmingly low at €33 – and now at €20, Uniper has few prospects left.

Mr. Teyssen recently conceded at the financial report news conference that the “economic environment in general” and “the situation in the industry” has significantly worsened since he communicated his strategy. “The path is becoming more difficult and longer than expected,” he said.

At RWE, it isn’t the new, green subsidiary – to which Mr. Terium plans to escape – that is facing the problems, it’s RWE, which will continue to operate the coal-fired, gas-fired and nuclear power plants.

The designated head of RWE, Rolf Martin Schmitz, up to this point Mr. Terium’s deputy, is taking over a company in need of major restructuring – which will be almost impossible to accomplish. “That’ll be really tight; the situation is really serious,” said one high-ranking manager.

Vattenfall’s plans to sell its German lignite division at a profit are also being spoiled. The management of the Swedish energy giant launched the sale in the fall of 2014 when prices were being quoted at €34. By the time the binding offers were to be submitted, the price had plunged to €20. Any buyer must reckon with losses for the coming years. A number of interested parties were frightened off. The Czech energy group CEZ specifically made reference to the fall in electricity prices when withdrawing.

What does the future hold for the utilities?

In their time of need, energy producers are seeking help from the entity they hold responsible for the whole distorted situation: the German government.

The EEG for wind and solar energy is supposed to be counteracted with help for the power plants. The talk is of designing an electricity market, which might sound like a contradiction in terms. The government decided a year ago that a reserve of power plants should stand ready to back up renewable energies.

“But the federal government’s new law on the future design of the electricity market isn’t at all enough to send out adequate price signals,” Mr. Terium said recently.

The energy giants want more.

 

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. Franz Hubik covers renewable energy for Handelsblatt in Düsseldorf. To contact the authors: hubik@handelsblatt.com and flauger@handelsblatt.com