Influence of thermal power development on German renewables set to grow

Ann-Kathrin Kotte

13-Jun-2016

The profitability of renewable power stations used to be virtually independent of power market fundamentals, and mostly dependent on subsidy levels.

However, the future profitability of renewable plants in Germany will be influenced by changes in the market which are set to determine subsidy design, grid stability and price volatility.

ICIS analyst Ann-Kathrin Kotte looks at conventional capacity scenarios and what the implications are for renewables

Lignite closures

Low commodity prices, high carbon prices, or a regulatory intervention may lead to the closure of lignite fired power stations, which would see flexible gas- and coal-fired power stations run more frequently. Once running, it is easier for these power stations to adjust their output to changes in market conditions, reducing the cost of balancing the grid and dampening volatility.

A scenario where lignite fired power stations close poses two hurdles for renewable energy:

• Lignite mining is concentrated in three areas in Germany and constitutes a considerable share of local employment in two regions. Sudden lignite closures may trigger local opposition to renewables expansion

• Lower CO2 emissions as lignite is replaced by gas or coal which reduces the need to build carbon-neutral generation technologies

However, easier matching of supply and demand will increase network stability, thus overcoming a key hurdle for the renewable expansion on the technical side – that of network stability – and on the economic side, that of balancing costs, as well as grid expansion, the cost of which is relayed to customers in the form of network charges.

This would technically facilitate a further renewables push, and the lower costs may also ensure higher support from the population.

Gas flexibility

The replacement of less flexible lignite with more flexible gas would also bring about a reduction in price volatility, which can be positive for price-driving renewables installations, for example, solar and wind in areas with a high density of units and generally high wind, as these units tend to produce most when prices are low.

Wind parks in areas with lower wind but atypical wind profiles may be less affected from an increase in volatility, depending on how much production patterns diverge from those of price-driving units.

A trader at a German energy management company said gas prices are likely to be weak in the longer term, mostly due to good LNG supply, which will bring more gas-fired generation back to the German market and will limit the upside of power prices.

“Coal and nuclear power are going out,” he said. This view is supported by the last IEA gas outlook, which also anticipates low gas prices for the coming five years.

Lignite remains

High commodity prices, especially with low carbon prices, would encourage lignite-fired power stations to remain online, leaving flexible coal- and gas-fired power stations running less frequently or closing.

This would complicate the matching of demand and supply, thus leading to higher balancing costs and higher volatility.

Several market participants feel that power transmission, particularly the north-south generation capacity imbalance, is a big issue that Germany has to do something about.

But there is no consensus over what solution will be selected.

A trader at an Austrian electricity company was sceptical if the north-south transmission lines, which were postponed from 2022 to 2025 recently, would be complete even by this new, later date.

“Germany has to show the European Commission it is doing something about the problem,” he also said. But limiting wind power expansion in northern Germany, which the government plans to with the new renewable energy law, does not make economic sense, he said. “The problem is in the middle of Germany,” he added, as opposed to a problem on the German-Austrian border.

Innovation pressure

Higher balancing costs may become virtually prohibitive for new renewables developments, and will create considerable innovation pressure. Innovation pressure may be picked up by the regulatory side or by the technological side. Obvious regulatory moves would be:

• Capacity markets, which the German government currently opposes outspokenly

• Regulatory schemes to reduce lignite production, for example, with the lignite reserve or a carbon tax, to create more space in the market for more flexible conventional capacity

• Change in market layout, such as market splitting between Germany and Austria or between different German areas

• Or even the introduction of nodal pricing

On the technological side, plenty of start-ups as well as more established firms have started to invest in solutions. Demand side management is the most well-known new development, on the industrial side or with smart appliances.

One trader suggested innovations in frequency control may help Germany circumvent the problem of congested north-south transmission lines. But companies also invest in less known technologies, such as the use of blockchain technology, known from Bitcoin, to facilitate local trade between consumers and prosumers, which may entirely bypass the transmission grid.

The high volatility in a scenario that purely features volatile renewables and less flexible lignite would likely affect renewables units, particularly those with typical production profiles, negatively.

The future of conventional capacity on the German power market will drive the ease with which supply and demand can be matched, and in consequence network stability, the cost of balancing the grid, and price volatility.

While grid stability will affect the technical and economic feasibility of increasing wind capacity, price volatility will affect the profit that wind units can make on the regular market. Keeping a keen eye on conventional capacity developments, as well as regulatory and technological innovations that may affect grid stability and price volatility is therefore key. ann-kathrin.kotte@icis.com

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?