2014-01-05 03:16:48 - Fast Market Research recommends "Germany Power Report Q1 2014" from Business Monitor International, now available
Our view that Germany's energy policy would be a fundamental tenet of the political discourse in the months preceding the September 2013 general election has proven correct - underscored by the proposed changes to the Renewable Energy Resources Act (EEG) and the country's Energiewende (energy transition) outlined in the preliminary version of the coalition deal between CDU-CSU and SPD. The debate has crystallised around the way in which Germany phases out nuclear capacity and transitions to generating electricity using a greater share of renewable sources - without pushing domestic electricity prices any higher and damaging the economic competitiveness of its major industries. As such, although we caution that a grand coalition deal is yet to be fully endorsed by the
SPD, we maintain our core view that the Germany's Renewable Energy Resources Act is unlikely to survive in its current form and note that some of the proposals made under a grand coalition deal could have some significant implications for the future of German energy policy.
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At the time of writing, Germany appears to be close to forming a coalition government. While Angela Merkel and the Christian Democrats (CSU-CDU) recorded their best result since 1990 in the September 2013 general election, they still fell short of securing an outright majority in the Bundestag and have turned to the Social Democrats (SPD) to form a grand coalition. With the SPD deciding to ballot its entire 470,000- strong membership on the proposed deal, we emphasise that although we maintain our core view that a grand coalition government will take power, there is a risk that SPD members might reject the proposed coalition agreement.
Nevertheless, as the negotiations rumble on, the favourable conditions governing the integration of renewables-based generation into the grid and the sheer volume of electricity generated from green sources continue to create a number of challenges in the German power sector, penalising base-load producers and causing many utilities to consider mothballing uneconomical thermal capacity. As a consequence, although we note that the preliminary coalition agreement lacks detail, it does appear to address issues such as reductions in subsidies for renewables. At the least this shows that both potential coalition partners are cognisant of the need to integrate both green energy and traditional sources of generation into the mix - while also ensuring the costs of Energiewende are sustainable.
The key trends and developments in the German electricity market are:
* On November 27 2013, the CDU-CSU and the SPD released a preliminary grand coalition agreement, which if ratified, could potentially constrain the spiralling costs of Germany's Energiewende. Not only would the proposals introduce new binding targets for renewables but, crucially, they would also lead to reform of the Renewable Energy Act (EEG) by Easter 2014 - with a view to passing the reforms into law by summer 2014. The deal would lead to a revision of the country's feed-in-tariffs (FiTs) and would encourage a more market-oriented approach to producing electricity from renewables sources. The introduction of a capacity mechanism has also been mooted in order to keep unprofitable thermal capacity online, while the controversial issue of exempting industry to the costs of Energiewende also looks set to be addressed.
* We have long argued that, although Germany's Energiewende has registered impressive results with regards to the installation of huge amounts of renewable-based capacity, the EEG would not survive in its current form. This view was predicated on the fact that the cost of the switch from nuclear to green energy has triggered a political backlash - raising fears that spiralling energy prices could ultimately curtail economic growth and damage the competitiveness of German industry.
* Complicating matters for any future government, the European Commission (EC) appears likely to launch an illegal state aid probe into Germany's policy of exempting certain energy-intensive industries and companies from the cost of Energiewende. Indicative of the strength of feeling on the issue, in November 2013, the Verband der Industriellen Energie-und Kraftwirtschaft e.V. (VIK) industry lobby for heavy energy users urged the German government to resist EU action, claiming it could leave its members facing billions of euros in additional costs and destroy the country's 'industrial core'.
* Meanwhile, the vast amount of new renewables capacity coming online continues to drive down wholesale electricity prices. In this environment, cheaper, dirtier coal is still emerging as the most profitable type of traditional thermal generation at the expense of more costly gas-powered capacity. Confirming our view, Bloomberg reported at the beginning of November 2013 that utilities GDF Suez, Trianel and Steag would open three new coal-fired power plants by year-end with a combined capacity of 2,200MW.
* In a move to incorporate spiralling renewables capacity into the German grid, network operator Amprion and its partner TransnetBW are set to push ahead with the development of Germany's 'Ultranet', with plans afoot to develop the first of four high-voltage power lines that will be constructed under the project. The first 340km line will cost an estimated US$1.3bn and would run from the Osterath near Dusseldorf to industry-heavy southern Germany.
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