LONDON: Germany’s strong support for renewable energy has broken its electricity market, where incentives are lacking to build back-up power plants and cheap coal prices discourage the use of cleaner gas plants, investment bank Macquarie said.
Retail prices in Germany will continue to rise to cover the costs of building and connecting solar and wind projects to the grid, Macquarie analysts said in a research note.
This contrasts with the wholesale market, where prices have been weighed down by excessive electricity production from those renewable energy facilities.
“Without radical overhaul, we conclude the German power system is structurally broken,” analysts said, arguing that a steep decline in the price of solar installations and costs passed on to consumers means theGerman government should stop subsidising solar power.
Germany has seen an explosive growth in solar power installations since subsidies were introduced, with around 32 gigawatts (GW) of solar plants now installed.
Macquarie analysts said another 5 GW could be added through the subsidies regime which continues despite the fact that the cost of installing rooftop solar panels is near the price of grid electricity, meaning they can compete in the market without support.
“Ultimately, this would threaten the role of coal-fired generation as the price setter in wholesale power price formation,” they said.
Instead, lignite would take up the role as a marginal fuel in Germany’s power market which will further depress power prices as the fuel is around 8-9 euros per megawatt-hour (MWh) cheaper than coal.
The main problem arising from large amounts of solar capacity is that peakload prices, the hours when demand is highest in the day, are cut by sun-fuelled power production.
Midday power prices used to typically increase due to higher demand at lunchtime, but over the past three years those prices have flattened on the back of solar power influx into the market.
On Dec. 25 last year, the German spot price was negative for a full day due to high generation of renewable electricity, which under German law must be used when produced.
Macquarie research also showed that around half of the country’s coal and lignite-fired capacity is at risk of being shut down due to its age.
Around 93 per cent of Germany’s installed hard coal plants have been in operation for over 21 years and 56 per cent are at risk of being shut down, Macquarie said.
“The gas-fired generation fleet is significantly younger than the coal and lignite fleet, but even the most state-of-the-art (gas) plants are being priced out of the market,” the analysts said.
German gas-fired power plants have been losing money when generating for the past three years as the fuel is more expensive than competing coal.
Macquarie analysts expect this situation to remain unchanged over the next four years.
Clean spark spreads, which refer to the margins on burning gas in power plants including the price for carbon emissions, are forecast to produce an average loss of 6 euros per MWh in 2014-17 for plants running at 58 per cent efficiency.
In contrast, clean dark spreads, the margins from burning coal, are expected to produce profits averaging 17-18 euros over the same period for plants running at 46 per cent efficiency.
Source: Economic Times