Market-Making

In North Sea Turbine Deal, Siemens, Vattenfall Target Subsidies

  • Why it matters

    Why it matters

    The development of Germany’s alternative energy industry is still supported largely by government subsidies.

  • Facts

    Facts

    • Siemens, Vattenfall and a Munich operator agreed to build a €1.3 billion North Sea windpark.
    • The investors agreed to approve the project after Germany adopted more generous subsidies.
    • The German subsidies have created a glut of electricity, causing wholesale prices to fall by half.
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    Audio

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A wind park off the German coast in the North Sea. Source: DPA
A wind park off the German coast in the North Sea. Source: DPA

 

A €1.2 billion ($1.6 billion) project to build 72 wind turbines off the coast of North Sea resort island Sylt by Siemens, Munich City Utilities and Swedish energy producer Vattenfall showed again this week how Berlin’s government policymakers, not market demand, are driving the alternative energy industry in northern Europe.

Germany’s so-called “Energiewende’’ or transformation aims to phase out nuclear power by 2022 and generate 80 percent of energy from renewables by 2050. The transition began in the early 2000s and got a big boost after the March 2011 meltdown of a nuclear plant in Fukushima, Japan. The accident prompted the German chancellor, Angela Merkel, a trained physicist, to phase out Germany’s stable of nuclear power plants.

Since then, every change in Germany’s subsidy rules to build wind and solar energy production has directly affected investment behavior.

On August 1, a change in Germany’s renewable energy law, which stipulates energy production targets, efficiency goals and financing rules, took effect, a decisive factor for Vattenfall to start building the wind park.

Investment in renewable energy  in Germany amounted to €169 billion through 2013, and is dependent on tax levies on consumers and companies. Under the updated energy law, offshore wind parks will get a higher subsidy in their first years of operation.

A wind park owner will now receive €0.15 to €0.19 per kilowatt-hour of electricty produced from €0.13 and 0.15 previously.

A change of Germany’s renewable energy law, which stipulates energy production targets, efficiency goals and financing rules, came into force on August 1, a decisive factor for Vattenfall to start building the wind park.

The updated law, which plans to increase offshore wind energy production to 6.5 gigawatts in 2020 from 0.6 gigawatts currently, will also change how licenses to build solar and wind park are granted, shifting to an auction system later this decade.

“Right now, there is good profitability for those who have the possibility to build,” Vattenfall Chief Executive Oeystein Loeseth told news agency Bloomberg.

“From 2017, the system will be partly redesigned with auctions in the areas where wind power is to be built, which will increase competition and lower profitability,” Mr. Loeseth said.

Thies Clausen, an associate of German energy think tank Agora Energiewende said:”The claims for these off-shore areas in the North Sea were made in 2004. Areas and projects were therefore secured in 2004. It is only now with the new offshore subsidies that companies like Vattenfall were financially able to build these offshore wind parks. Otherwise it would have been a brutal waste of money.”

windpark nordsee
blah Source: Getty

 

The end-user pays for energy shift in the form of a higher energy bill. An average German household with an annual energy consumption of 3,500 Kilowattstunden is currently paying €218 in levies to help build renewable energy parks and update Germany’s power grid to accommodate, for instance, energy transport from offshore wind parks to land.

„With the new German energy law I do expect investments in the wind park sector to go up. The law wasn’t just made up for fun – it was a serious consideration by the German government. Given the law, there are subsidies for such investments, so an investor will take that into consideration upon making his investment,” said Thies Clausen an associate of German energy think tank Agora Energiewende.

He, as well as Eva Hauser of energy research institute IZES, did not regard the money received by wind park operators as subsidies because the payments were made by end-users.

Nevertheless, both agreed that renewable energy investments were to a large part determined by the conditions set by Germany’s politicians.

“Offshore wind parks involve huge investments. The legal frameworks must be in place to entice parties to pay for it and build them,” said Hauser of research institute IZES.

For the offshore windpark owned by Vattenfall and Munich City Utilities, Siemens will supply 72 wind turbines, which can jointly produce 1.4 terawatt hours of electricity, equivalent to the consumption of about 400,000 households.

Vattenfall, which means water fall in Swedish and is owned by the Swedish government, said it was the second-largest operator of offshore wind power. It also produces part of its energy with water-powered energy plants, or hydro plants.

 

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