Politics

RENEWABLES COSTS

Vattenfall Explodes Offshore Wind Power Pricing

Germany's position as leader in wind-power generation could be under threat. Source: Julian Stratenschulte / DPA

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German business groups are increasingly vocal in opposing the country’s renewable energy structure, which heavily subsidizes suppliers, substantially pushing up the price of electricity for business and private consumers.

The latest focus of criticism of the country’s Renewable Energy Law, or EEG, is Kriegers Flak, a massive offshore wind field stretching across the Baltic Sea from Germany to Denmark and into Sweden. Projects in the area allows for direct comparison between prices in Germany and elsewhere. This week Vattenfall won a tender for the Danish part of the scheme, bidding just €0.0499 per kilowatt-hour (around $0.054), an all-time low price. But on the German side of the project — where prices are guaranteed and tendering still very limited — the government is locked into long-term contracts paying suppliers up to €0.194.

The German government has recognized this problem, and announced a new bidding system early this year. But the planned phase-in of market-based tendering will be slow. Industry bodies complain that this saddles German business with high energy prices for the foreseeable future.

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Earlier this year, even limited market reform prompted opposition from the wind industry and environmental groups, seeking to protect guaranteed high prices. Strikes, demonstrations, and symbolic lockouts drove home the message. Federal economics minister, Sigmar Gabriel, was described as the “gravedigger of energy reform.” However, events in Denmark suggest that the party is over for wind power suppliers, as the gap becomes visible between wind energy’s market price and the inflated prices commanded by renewable firms.

Kriegers Flak windpark will be the largest ever Danish windpower project, in a country already famous for its modern windmills. When completed, it will push some 600 megawatts onto the national grid, as much as a medium-sized conventional power plant. Vattenfall are investing some €1.3 billion ($1.4 billion).

The winning offer of €0.049 per kilowatt-hour stunned the industry: it’s the lowest ever bid for a major wind contract anywhere in the world. This marks another ratchet downward in a rapid fall in the costs of wind-generated power. The record had been broken earlier this summer when Dutch company Dong made a successful bid — 7.27 cents per kWh — for the massive Dutch offshore project “Borssele I und II.” It was then broken again when Vattenfall won a project called “Danish Near Shore,” with a bid of just €0.064 per kWh.

 

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But this spectacular improvement threatens to pass Germany by, even after Mr. Gabriel’s market reforms. Despite these reforms, companies delivering electricity to the German grid by 2019 will be grandfathered in on the old system, in effect meaning they will receive nearly four times the current market price for the following twelve years. This prospect has driven industry managers to complain about current policy: “We are lining the pockets of project developers and wind industry, while German business suffers from high electricity prices,” commented one.

Around 2,000 large industrial consumers of electricity have exemptions to the EEG, the German subsidy law. All other consumers contribute to subsidies, which now total some €23 billion per year. For Barbara Minderjahn, managing director of the Association of the Energy and Power Industry, or VIK, representing many industrial energy consumers, this is simply unacceptable: “Kriegers Flak shows that renewable technology subject to market forces is far more efficient,” she said. “The German renewables sector has to measure itself by this,” she added. Franziska Erdle, chief executive of WVM, a body representing the metal industry, agreed, telling Handelsblatt that: “The path to tendering is an important step, the right one. Only more market forces can reduce costs.”

In other countries, including Denmark, the United Kingdom, and the Netherlands, tendering has already been the norm for years. Subsidies are lower in those countries, and last for a significantly shorter length of time, typically 12 years compared to Germany’s 20.

While there are some variations in the payment system in different countries, the prices charged are comparable, said Dirk Briese of the energy research firm Windresearch. “Vattenfall’s low Danish bid and the €0.194 per kWh charged on the German side of the border are worlds apart,” he says. “Any company that starts supplying wind power to the German national grid by the end of 2019 will get the high price, and can do very well wigth that,” he adds. The introduction of tendering processes in Germany begins next year, but will not be complete until well into the next decade.

The experimental phase is over ... Offshore wind power is set to become the most cost-effective renewable energy.

E.On spokesman

Vattenfall’s Danish bid has won attention across the industry. “They have entered a new dimension with that,” said Bernhard Günther, chief financial officer of Innogy, the renewable energy subsidiary of RWE. A spokesman for rival green electricity giant E.on agreed: “Below five cents a kilowatt-hour proves the offshore sector is evolving faster than expected,” he said. “The experimental phase is over, the technology is mature and that pushes costs down,” he added, saying that E.on’s next project would also see substantial cost savings, as the sector progressed quickly. The development showed that “offshore wind power is set to become the most cost-effective renewable energy,” Klaus Meier, chairman of the wind park developer WPD, told Handelsblatt, adding that he thought German bids on offshore power generation would soon fall well below €0.09 per kWh.

Before Vattenfall’s Danish bid, the Dutch project Borssele, from the Dutch company Dong Energy, had been seen as setting a new standard in daring wind-power projects. Until recently, industry consensus still felt offshore wind generation would never be truly competitive, thanks to technical and logistical challenges. But opinion is rapidly shifting. Market research company Make forecasts that the offshore market will grow annually by an average 16 percent to 2025. While 80 percent of all offshore windmills are currently in Europe, the biggest future growth is thought likely to come in Asia, off the coasts of China, Japan, and Indonesia.

A recent study by consultancy firm Roland Berger called the Dutch acceptance of the Dong bid a “turning point” in the offshore wind industry. But the new success of offshore is largely founded on downward pressure on prices exerted by competition. Commenting on the report, Manfred Hader, a partner at Berger, advised governments to coordinate their subsidies with “competition-oriented systems.” Tendering could push down prices at every part of the value chain, he added.

In Germany, however, there is little evidence of this pressure as yet.

 

Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the author: stratmann@handelsblatt.com.

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