Germany takes leave of power market fundamentals

By Vera Eckert and Christoph Steitz, Reuters

BERLIN — Wholesale power prices in Germany are at their lowest in more than three years, undermining the profitability of fossil fuel power generation and trading, and yet 40 million households pay record prices well above European Union averages. To explain this state of affairs, look no further than the expansion of renewable energy installations, which provide bursts of subsidised power often enough to trash market fundamentals. Weather-dependent green energy is given priority on the networks when it is available, securing thousands of private operators healthy earnings while traditional power stations burning coal or gas are reduced to providing reserve power. The state, which supports green power, also benefits from — and exacerbates — high power bills by collecting fees and taxes. Industry analysts say this can only change if government curbs run-away renewable subsidies and taxes and spreads their burden more evenly. “No one expected the rise of solar to be that strong,” said Roland Vetter, head of research at financial advisory firm CF Partners in Frankfurt. “(Utilities) RWE and E.ON did not take that into account when they decided to build new power plants a couple of years ago. They expected power prices to rise. The truth is that they fell,” he said. The big power generators also have renewable units, but they caught on to the trend late, so green producers are typically householders with solar panels on their roofs. Delivery of round-the-clock power in the 2014 calendar year is trading at under 43 euros a megawatt hour in the wholesale electricity market, a contract low and the lowest price of a year ahead contract in over three years.

The price weakness reflects the euro zone’s economic malaise and mild weather in recent years, which has curbed demand. It also results from historically low prices of power cost inputs such as steam coal feedstock and EU carbon rights certificates. While benefiting from low costs for some inputs, utility companies are also grappling with structural changes, above all the loss of nuclear reactors after the decision to exit nuclear energy faster than planned, and expensive gas.