Germany’s green energy transformation
By Jeevan Vasagar
June 23, 2014
On a bright but windy weekend in Germany last month, renewables set a new record. For an hour at lunchtime on Sunday May 11, wind and solar energy accounted for 70 per cent of the national electricity supply, illustrating the transformation brought about in Germany’s energy system.
The record reached that day also highlighted the challenge facing conventional power generators, as the glut of clean energy in the system pushed electricity prices into negative territory. On the intraday energy spot market, prices ranged as low as minus €48.19/MWh. For a brief period, utilities were paying grid operators to take their energy.
The renewable energy law which came into force in 2000 set guaranteed prices for 20 years and provided clean energy with favourable access to the grid, sparking a scramble to install solar power, wind and other renewable energy sources.
The consequences of the Energiewende, as Germany’s ambitious transition to green energy is known, are now visible across the country. Photovoltaic panels speckle the roofs of Bavarian farmers and community wind farms dot the windswept plains of northern Germany.
While established utilities were slow to respond, new businesses seized the opportunity. Renewables have gone from being the province of idealistic “Grüne Spinner” – crazy greens – to being firmly anchored in the mainstream, says Tim Loppe, a spokesman for one such business, Naturstrom.
The company, founded in 1998, has 240,000 customers across Germany and has signed a partnership deal with BMW to offer clean energy to buyers of the carmaker’s electric vehicles.
In March, Audi offered a similar deal to buyers of its electric A3. The Volkswagen-owned brand teamed up with Hamburg clean power provider LichtBlick, which has 600,000 private and business customers across Germany, to recharge its electric model with hydroelectric power.
For investors, the news from Germany’s traditional power providers has been bleak. Last year, RWE reported an annual loss for the first time since the Federal Republic of Germany was established. Germany’s second biggest utility is crossing a “vale of tears”, its chief executive Peter Terium told the Financial Times recently.
Eon, Germany’s biggest utility by market value, suffered a 46 per cent drop in underlying net income in 2013. Income fell from €4.2bn in 2012 to €2.2bn last year. The hit to the utilities’ profits had made it tougher to adapt their business models.
“The government forced significant losses on the utilities’ businesses and on their market values, which limits their ability to invest,” says Ralph Trapp, managing director of Accenture’s German utilities practice.
It was an indication that the pace of the Energiewende was too fast, Mr Trapp says. “It was not a coherent solution.”
But the tide may be turning in favour of the big power providers. Reforms to Germany’s renewable energy law, due to come into force in August, pose a challenge to the prospects of smaller players. “Politicians are giving the big energy concerns space to breathe,” says Mr Loppe, of Naturstrom.
He suggests three reasons why the reforms to Germany’s Energiewende will cramp smaller developers. First, a tendering model for new clean energy projects that is due to be introduced by 2017 will raise the risks for smaller businesses. Such companies are less likely to be able to afford early investment in a project that does not win a tender.
Second, annual caps on new installations of renewable energy mean there is a possibility that by the time a project comes to fruition, the annual limit will have been reached. Again, bigger companies are more able to bear such a risk, he says.
Third, the higher feed-in tariffs for offshore wind projects, compared with other forms of clean energy, favour a market from which smaller players are excluded because of its scale and technical difficulty.
The traditional model of power generation in vast plants outside big cities has been squeezed hard by the Energiewende. Eon plans to shut more than a quarter of its conventional generating fleet in Europe.
Both Eon and RWE are seeking to expand instead in areas that require greater interaction with customers. These include helping customers to optimise their energy consumption, or working with customers who also generate their own power using sources such as rooftop solar panels or combined heating and power plants.
“Utilities need to develop agility,” says Mr Trapp of Accenture. “That is not the way they have been used to working.”
The utilities are waking up to a world in which selling electricity is no longer enough. In the UK, RWE’s Npower has teamed up with Google’s recent acquisition Nest to sell a thermostat that tracks household energy usage and uses the data to set temperatures automatically, saving energy.
“What helps [the utilities] is they have so much experience,” Mr Trapp says. “If you combine that with new technology, they are certainly in an advantageous position.”
It remains to be seen whether gains in new technology will make up for declines in utilities’ core competence. The extent to which customers are willing to pay for the extra convenience and bespoke solutions offered by digital technology is open to question.
However, once they have discovered and tested the right technology, the ability to roll it out on a big scale is an advantage, says Mr Trapp.
With wholesale power prices predicted to fall further in the next few years, the outlook remains tough for utilities. But there are a few glimmers of hope.
