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About auctions, diversity of market players and expansion goals

In a nutshell:

Already since 2013, more renewable than conventional energy capacities have been installed every year worldwide. New records in terms of record-low electricity generation costs are reported nearly every month all over the world. Significant changes occurred also in Germany alongside the introduction of EEG 2017 and earlier.

The lowering of the expansion goal, and thus the reduction in the annual market volume, for ground-based wind turbines to 2.8 GW between 2017 and 2019 and to 2.9 GW for 2020 (§§ 4 and 28 (1)) will affect the entire wind power market. The changes on the electricity market will be enormous even if only part of these plans are implemented.

The electricity market and sector coupling

Although the share of renewables in the electricity market is currently about 32% (see the graph below), there is still much to do in the areas of heating and transport. Rescue should come from “sector coupling” which is one of the two pillars of short-term energy policy (the other pillar is energy efficiency).

Figure 1 (Click to enlarge)

But how will decarbonisation affect the total energy requirement in Germany?

It is clear that far-reaching decarbonisation of the power industry

will be successful only if all three sectors contribute to the process. Especially the heating sector, which accounts for 56% of final energy consumption in Germany, is the largest individual segment, while only 13% of final energy consumption is covered by renewables. Because 85% of it is already covered from bioenergy, this segment is expandable only to a limited extent, because, as is common knowledge, the biomass potential has already been extensively exploited, and “desert-like corn fields” and monocultures in Malaysia are frowned upon and thus not

regarded as sources of any further potential.

Due to technical and economic conditions, the expansion of the complementary solar thermal energy and (near-surface)

geothermal energy is limited mainly to new constructions and the restructuring of buildings for energy purposes. Nonetheless, deep geothermal energy will play a huge role in the process, mainly in the south – for example in Munich and the surrounding areas, as e.g. Unterhaching, Grünwald, and Kirchweidach have already shown and Gräfelfing will show in future. However, the significant share of electricity in the heating sector should be covered from wind power and photovoltaics. In the long term, this will gradually lead to a significantly increased need for electricity.

Also the expansion of renewables in the transport sector is currently a huge question mark. In the meantime, the government has admitted that the goal of having a million electric cars on the streets by 2020 will not be achieved, but a transition is sure to come to the mobility market in the foreseeable future. The question here is not if but when the exponential growth will start. Electrical mobility will thus additionally increase the need for electricity from renewable energy sources. (Volvo’s decision to stop designing combustion-engine-only cars by 2019 can be treated as a consequence of the said trend, even if the company clearly made this move in order to meet Brussels’ prescribed CO2 limits

for fleets, and thus to avoid multi-million penalty payments.)

The nuclear power phase-out by 2022 has also been resolved now, and if the government wants to meet the set climate goals, the coal phase-out should better happen today than tomorrow. Also the large power suppliers have recognised the need for a structural change on the market and respond accordingly. For example, RWE commissioned in 2015 in Ibbenbüren one of the most efficient power-to-gas power plants in Germany. From the angle of a timeline, it becomes clear that the erstwhile sluggish energy landscape will undergo a significant transition.

Figure 2 (Click to enlarge)

Even if it is not yet clear at what pace the said change will happen, it is already certain that the need for electricity will dramatically increase in the long term. Prof. Dr. Quaschning has prepared the following simulation and graph:

Figure 3 (Click to enlarge)

According to Prof. Dr. Quaschning (TU Berlin), a climate-neutral

energy supply by 2040 will require electricity at the level of 1320 TWh (assuming that efficient energy saving measures are implemented). This would mean over a two times higher need for electricity than today.

Sector coupling will be advanced also at the pan-European level.

Recently, the Union of the Electricity Industry - EURELECTRIC has signed a joint declaration with associations of the wind and solar

power industry (windeurope and Solarpower Europe), the heat pump industry (EHPA), the copper industry (European Copper Institute), and the electrical mobility industry. These and 49 other proponents, including many utilities such as EnBW, Vattenfall or RWE, have a joint objective of decarbonising Europe by replacing fossil power with electricity.

Nevertheless, every KWh generated by a brown coal-fired power

station is still a source of income for the operators, who of course will make every effort to continue to operate for as long as possible. And they seem to be quite successful as of now. If you look at the grid expansion plan, you will see that the same level of utilisation of coal-fired power stations as today is assumed for 2030¹. The federal government‘s Climate Action Plan (of 14 November 2016) seems to be similarly tentative. A working group is said to be established in 2018 (!) whose work will include “assessing and politically evaluating economic, social and ecological impacts of suggested measures”.²

The situation becomes graver also in the area of grids and networks: If the generation of energy from renewable sources increases and the conventional energy generation is not reduced, this will lead to grid overloads, switch-offs or shutdowns of RE power plants, re-despatching, and the necessity to export the excess electricity abroad at lower or even negative prices. The cost of this policy will be shouldered mainly by private households and the SMEs sector, which, as a result, will have to bear the financial burden of the EEG surcharge. If, in consequence, the market price quoted on the energy exchange is low because there is surplus electricity, the surcharge will increase, which will be reflected in

higher utility bills of private households. Instead of phasing out coal-fired power plants successively, consistently and without any

compensatory payments (keyword: hidden reserves) and more quickly advancing the expansion of renewables and promoting energy storage technologies, the government is currently doing the exact opposite.

Wind should put it back on the right track – but where?

Also at the level of the federal state policy (and Bavaria’s H10 rule is a good example for that), wind energy receives a harsh rebuff, as in North-Rhine Westphalia recently. According to the CDU/FDP Coalition Agreement for North-Rhine Westphalia, a rule should be introduced where wind turbines should be built 1,500 metres away from residential housing. The potential area where wind turbines could be installed would thus shrink by 80%. Restrictions on building new wind farms also became tougher in Rheinland-Pfalz. The federal state government under

the leadership of SPD, FDP and the Green Party has resolved to

include in the Rheinland-Pfalz federal state development plan a

requirement where the minimum distance between new wind turbines and residential housing must be 1,000 metres.

How should especially the smaller project developers position themselves on the market now in order to stay afloat also in the future and will the diversity of the market players continue to decrease? After the first auction, a certain tendency can be clearly seen.

In the first auction round held on 1 May 2017 where 800MW were auctioned among ground-based wind farms, citizen-owned wind power cooperatives were the big winners. Out of 70 awards, 65 contracts were awarded to small regional citizen investors. In this process, the mean feed-in price was 5.71 ct/kWh. Because the EEG 2016’s definition of citizens’ wind farms leaves much room for interpretation, it is yet to be specifically examined whether indeed there are no large companies behind the citizens’ projects. The relatively quick reaction of the German

Federal Network Agency in form of abolishing the privilege for cooperatives in 2018³ should be certainly interpreted to the effect that the criticism voiced earlier by many associations saying that the criteria for the cooperatives were too lax was indeed justified. To be classed as a citizen cooperative, only the minimum number of members (10 real individuals) must be met, whereas none of these members may hold more than 10% in the cooperative. In addition, holders representing 51% of the voting right must have had their principal place of residence in the administrative district where the planned project is to be

situated for at least one year.

According to enervis energy advisors GmbH, out of the 214 citizen cooperatives which placed a bid in the auction, 148 should be directly allocable to a project developer. This means a ratio of 70% (!). In addition, about 61% of the winning power cooperatives were founded and registered only between March and April. The functions of their managing directors are often performed by employees of large wind

power companies…⁴

Furthermore, only within the coming four and a half years will it be possible to see whether the winning projects will be actually

implementable. This is because citizens’ wind farms will be able

to enjoy more privileges than other investors. For example, citizens’

wind farms do not have to hold the building permit under the Federal Immission Control Act at the date they submit a bid in the auction (§ 36g (1) EEG 2017). In addition, citizens’ wind farms always receive the highest price achieved in the auction per fed-in kWh, irrespective of their own bid. (§ 36g (5) EEG 2017). Furthermore, citizen-owned power cooperatives have 24 months more to complete the project and bring it to the final, grid-connected state (§ 36e (1) EEG 2017). Therefore, it will be possible to effectively assess the first auction round only in at least four and a half years. Here, it should be also noted that the financial guarantee required for citizens’ wind farms in case of failure to implement the project is half as high as that for other project forms (§ 36g (2) no. 1, §§ 31, 36a EEG 2017). It is also doubtful whether the winning “citizens’ wind farms” will be actually connected to the grid. If they aren‘t, the non-installed capacity will not be considered in the next auctions any more and thus all of it will be squandered.

In sum, it should be stated that the situation of citizens’ cooperatives

will become difficult starting from 2018 at the latest, and the diversity of the market players will significantly decrease to an extent noticeable also to an outside world, if no changes to the legislative framework are made to prevent this situation. To that end, the law should be amended in that the requirements for the qualification as a citizen-owned power cooperative should be significantly toughened. But because many politicians prematurely proclaimed the first auction round as successful, it is unlikely that the law will be amended anytime soon before the upcoming Bundestag elections.

A look into other countries

If you look at other countries where the auction model has been implemented, a clear tendency can be observed. The majority of contracts for the implementation of wind farms are awarded to big investors. For example, in Brazil, contracts were mainly awarded to large utilities, investment banks and international project developers. A similar situation is in Spain. The auctioned volume of 500MW was mainly awarded to three large companies Grupo Forestalia (300 MW), Jorge (102 MW) and EDP (93 MW).⁵

Ownership structure in Germany

A similar picture begins to emerge also in Germany. The following

illustration shows, among other things, how the ownership

structures have changed over the years:

Figure 4 (Click to enlarge)

In the meantime, the expansion of ground-based wind turbines has been shaped by many diverse market players. This includes citizen-owned power cooperatives, project developers, utilities, but also international market players.

Thus, an increasing M&A activity has been observed in recent years. More and more often, smaller project developers are bought up by the larger ones. The most renowned examples of the least years include the strategic partnership between Vattenfall and ABO Wind, and the acquisition of Belectric by Eon. Also foreign companies are active on the M&A market. For example, France‘s utility EDF acquired Lower Saxony’s Offshore Wind Solutions.

Mergers between smaller projects developers or between investors

from the private or non-institutional sector are an option to maintain yourself on the market. Thus, also with a smaller project portfolio, you can achieve economies of scale such as e.g. agree more advantageous terms of delivery with manufacturers. Citizen-owned power cooperatives will certainly have to look for alternative ways of developing projects.

Conclusion

Rather tough times are ahead for project developers and investors (excluding the last transactions on the secondary market). Projects will surely be there, but access to them will be difficult. Forming collaborations is surely the first go-to strategy, other than that, market players will have to choose between returning to a smaller-scale business (PV leasing models) and venturing abroad. Abroad, the risk/benefit ratio is totally different, but many countries have a much more fundamental problem than Germany: they simply need electricity

and their electricity markets are not overregulated yet so for example RE power plants must only stay competitive on the market through PPA auctions – and they are fairing better and better.

Rödl & Partner provides active assistance in those activities abroad.

On our platform on www.renerex.com we help you find projects and investors and the most suitable financing programme

at the same time.

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¹ www.netzausbauplan.de – Szenariorahmen 2030
² Climate Action Plan 2050; Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety

³Energate messenger 22. Juni 2017
⁴ Article | Spiegel online | 29/06/2017
⁵Energiezukunft.eu | Article 27/07/2016