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Subsidy calls grow as southern Germany faces electricity crunch

24 Feb 2012 17:49:31 | edem

One of Germany's southern states is calling for capacity payments to deal with potential electricity generation shortages in its region. But there is political reluctance to introduce further subsidies, and analysts warn these could backfire.

Six of the country's nine operating nuclear plants are in the south, and southern states face the loss of 10GW over the next decade. Three will be shut down by 2019 and with the rest to follow by 2022.

But low wholesale electricity prices are not sending signals to generators to invest in new gas-fired capacity in particular. Baseload spark spreads for the front quarter have been in negative territory since the start of the year, falling further since February (see chart).

The low profit margins are already threatening current generation. Declining margins saw Norwegian utility Statkraft move a 450MW gas-fired plant to cold reserve earlier this month (see EDEM 16 February 2011).

Germany must "hope that the market will send the right investment signals to build additional capacity at the right time or to opt for the insurance policy of capacity markets", Armin Michels from energy consultancy BET in Achen told ICIS Heren.

However, Michels cautioned that the design of capacity markets was key, to ensure the costs did not outweigh the benefits. Markus Peek, CEO of energy consultancy r2b in Berlin, agreed. "Capacity markets have failed to work in numerous electricity markets," Peek said.

The grid problem

The German Energy Agency (DENA) proposed installing 3,600km of new power lines by 2020, but suspicions are growing that the timetable is slipping (see EDEM 28 January 2011). The delay has added to southern states' fears of a supply shortfall.

"I hope we have a better grid in 10 years' time," the president of the country's energy regulator Matthias Kurth said speaking at E-World conference in Essen in early February (see EDEM 9 February 2012). "But if by then we don't have a replacement of conventional power capacity and no storage capacity, then we will have a problem."

The anticipated shortage of capacity for Germany is expected to hit in 2020. But if the grid expansion does not advance as required, then certain regions might experience a shortfall between supply and demand, said Michels.

Such imbalances are already visible through the increase in redispatch measures from transmission grid operators, Michels said. Transmission system operators (TSOs) engage in redispatch measures if the grid is under strain, for example, from high wind power generation in the north of the country. In this situation, the TSOs might reduce the production of conventional power plants in the north, but increase production at a plant in the south.

"The system should be able to handle [the delay]," said Peek, but he warned that grid expansion is urgently needed.

Capacity payments

The potential shortfall in generation has pushed officials of the German state of Baden-Wuertemberg, located in the southwest, to call for the implementation of market incentives to encourage new generation capacity.

"The environment ministry advocates paying producers for the allocation of capacities. However, it is up to the federal government to implement this idea," the state environment ministry said.

A capacity payments system would see the auctioning of production capacity. Producers would bid for the right to have production capacity ready at a certain date in future. The cheapest offer would win and eventually a premium would be paid for the capacity.

Political doubts

But federal politicians are reluctant to engage in a discussion about an additional regulatory component in the German power market, according to Michels.

Indeed, the German economy ministry is sceptical about introducing capacity markets as a solution to potential lack of flexible power plants in certain regions, a spokeswoman said.

An alternative solution might be to build up strategic reserves by the system operators and use the balancing market to meet the shortfall.

"That can fulfil the objectives of policy maker without harmful effects on the European electricity market," Peek said. "Even in the case of a strategic reserve, a wise regulatory design will be essential to get no distortions of the prices on wholesale electricity markets and on the incentives for market participants." MD

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