Renewable Energy’s Impact on Traditional European Utilities
Europe is the driving force for renewable energy development worldwide; however, other parts of the world are quickly emulating and developing their own renewable energy industries.
According to ThinkProgress.org, Germany is evolving to replace fossil fuels with renewables faster than most European countries. Ever since the Fukushima catastrophe, Germans have intensified their efforts to phase out of nuclear energy and fossil fuels in support of renewable energy called the “Energiewende.”
The preliminary debate surrounding the Energiewende was whether the grid expansion can keep up with renewable energy distribution, to whether the grid liability can be maintained (Thinkprogress.org). Renewables International supported this argument stating that the grid has the capability to sustain grid expansion.
How much has Renewable Energy Grown in Europe Since 1990?
Due to the EU’s Renewable Energy Directive, growth of renewable energy has steadily increased in the EU in the last decade (as seen in Figure 2 below). According to the EEA, in 2010, the share of renewable electricity in gross electricity production in the EU-27 was 21.5% compared to 13% in 1990. Renewable electricity grew at an annual average growth rate of 3.8 % since 1990; however, the growth almost doubled by 2005 (6.9% per year). “In 2010, hydropower accounted for 12.8% in the overall electricity production, followed by wind 4.5%, biomass and wastes 2.6%, 0.7% for other biogas and liquid biofuels and for photovoltaic and 0.2% for geothermal. 2010 was the target year of the renewable electricity directive and overall the EU-27 exceeded the target of 21% of renewable electricity in gross electricity production by 0.5%” (EEA). (To read more about Europe’s 2020 goals, see our blog, The Impact of Europe 2020 on Power and Energy Markets.)
The German Showcase
As a result of Germany’s decision to phase-out its nuclear plants by 2022 and meet its self-imposed CO2 emissions targets, Germany will need to develop its renewables capacity to increase its renewable energy production. Germany’s Renewable Energy Act (EEG) of 2000 assures investors above-market payments for renewable energy for 20 years from the point of installation. According to Theenergycollective.org, “An EEG surcharge, equal to the feed-in tariffs paid by utilities for renewable energy, minus the revenue from that energy fed into the grid, is added to the electric bills of almost ALL households and businesses”. When the German government decided to shut down eight of the country’s 17 nuclear plants within a week in 2011 there were great concerns about whether Germany’s grid would remain reliable. Unexpectedly, Germany’s availability actually increased over the average going back to 2006.
The graph above clearly demonstrates that a very high level of grid reliability is feasible with a high penetration level of intermittent wind and solar power (Renewablesinternational.net).
Erosion of Company Profits
Under the traditional system whereby constant supply of power was guaranteed by coal, nuclear or hydropower plants, electricity prices spiked during peak hours during the middle of the day and fell at night as demand lessened. Power traders made all their money during those peak hours (The Economist). However, the middle of the day is when solar generation is profuse. Thanks to grid priority, solar grabs a large chunk of that peak demand. This has reduced the peak-hour price spike; though, company profits have been abraded.
Contribution to Oversupply
The growth of wind and power is somewhat of a disruption when it comes to power generation supply in general. The capacity, including renewables in Europe, is well above peak demand. Therefore renewables have added tremendously to oversupply. And, to put it simply, surplus supply plus reduced demand equals lower wholesale prices (Europeanenergyreview.eu). (To keep reading on how the market is dealing with surplus energy, see Is Pumped Energy Storage the Future of Renewable Energy?)
Let’s look at Germany’s electricity future prices on Kiodex as an example.
In Figure 3, we get a full picture of Germany’s power prices on Kiodex in the last seven years, as well as futures prices up until 2014. As you can see, prices began to dwindle in late 2008 when the collapse of economic growth combined with the growth of renewable energy led to a situation of oversupply of power generation. Prices dropped from over €80/MWh in 2008.
As wholesale prices fall, so does the profitability of power plants. According to Bloomberg, 30-40% of RWE’s traditional power stations are losing money: “RWE has slumped 32% this year in German trading, the most among companies on Europe’s STOXX 600 Utilities index.”
Retail prices, on the other hand, are a staggering €285/MWh, partially due to inclusive subsidies for renewables. This is the primary reason why the savings from reduced wholesale prices have not being passed onto the customer (The Economist). According to the Energy Collective, “The EEG allowances are estimated to increase monthly electricity bills of households from 26.3 eurocents/kWh, incl. VAT in 2011, to 39.7. incl. VAT in 2021, a total increase of 51% by 2021 compared with 2011. This increase is largely due to the solar and offshore wind build-outs. This is a real increase based on 2011 euros. Bills will likely increase by more than 51%, because other components of the household bill will also increase.”
Germany’s push to have 35% solar and wind power production as opposed to its current 23% has “pushed residential bills to more than twice the amount that utilities pay to deliver the electricity, as taxes and charges that subsidize the plan inflate prices” (Bloomberg).
Renewables have not only put pressure on margins, they have changed the traditionally established corporate model for European utilities.
“A significant part of our business model is now facing new challenges,” RWE Chief Financial Officer Bernhard Guenther said (without being specific about halts or jobs) in a Bloomberg articles. “Whatever we do in terms of cost and capex-cutting won’t fully compensate the profit loss we see in conventional power generation” (Bloomberg).
Renewables have snatched a growing share of the market and pushed wholesale prices down; however, the subsidy cost has also being a large factor resulting in very high residential costs. “The environmental gains are not present so far and the damage done to today’s utilities has been much greater than anticipated” (The Economist).
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