Wind Blows German Power Swings to Five-Year High

Rachel Morison and Julia Mengewein, Bloomberg
February 22, 2013 | 6 Comments

Germany is getting more power than ever before from sources dependent on wind and sunshine, pushing short-term price swings to the biggest in five years and boosting volume as utilities increase trading.

The gap between the highest and lowest price over two months for electricity deliverable the next day widened to the most since December 2007 through yesterday, according to broker data compiled by Bloomberg. German wind output peaked at a record 23,331 megawatts on Jan. 31, enough to supply 46 million homes. That compares with an average of 5,079 megawatts during 2012, data from European Energy Exchange AG on Bloomberg show.

Chancellor Angela Merkel's government is trying to push the proportion of German power produced by renewable sources to 35 percent by 2020. Solar and wind generation jumped 80 percent over the past three years, damping prices on sunny, gusty days and boosting them when natural gas or coal plants are required to offset shortfalls. Intraday volume on the EPEX Spot SE exchange in Paris rose more than 11-fold over the past five years as traders focused on near-term contracts for speculative buying and selling.

"Renewable generation has brought some volatility to the market," Johannes Teyssen, EON SE's chief executive officer, said on a Jan. 30 conference call. "We have the possibility to earn some extra money."

Germany's biggest utility lost 66 million euros ($88 million) from buying and selling energy commodities for its own account in the nine months through September last year, on an earnings before interest, tax, depreciation and amortization basis. The performance cut EON's total income for the period to 8.82 billion euros, up 35 percent from a year earlier, according to its Nov. 13 earnings statement.

Replacing Nuclear

Day-ahead electricity in Germany traded in a 109.50 euro ($146.31) range from Nov. 23 to Feb. 18, the biggest 60-day price swing since the two months ending Dec. 27, 2007, according to broker data compiled by Bloomberg. Baseload electricity, for supplies delivered around the clock, fell as low as minus 48 euros a megawatt-hour on Dec. 25 and was at 44 euros at 2:42 p.m. Berlin time today.

Germany is expanding its output from climate-dependent renewable energy sources to replace nuclear power that will be phased out by 2022. Installed solar and wind capacity was about 64 gigawatts at the end of 2012 compared with 35.6 gigawatts at the end of 2009, according to a Bloomberg Industries analysis of data from the German Environment Ministry and wind lobby Bundesverband WindEnergie e.V. Renewable plants provided enough electricity to meet about 22 percent of total demand last year, according to BDEW, a Berlin-based utility lobby group.

Higher Bills

The electricity bill for German households with power consumption of 3,500 kilowatt-hours a year will rise to the highest in at least 15 years to pay for the increased generation from wind and solar, according to BDEW. The average price for a private three-person household will increase to 28.50 euro cents a kilowatt-hour this year from 25.89 cents in 2012 and 13.94 cents in 2000, the lobby group estimates.

Germany guarantees operators of wind and solar plants a fixed income for the electricity they generate and smaller users such as households pay for any discrepancy with market prices through a so-called renewable energy fee. The levy, for consumers of less than 1 gigawatt-hour a year, will rise to 5.277 euro cent a kilowatt-hour this year from 3.592 cents in 2012, according to BDEW.

Better Opportunities

It's possible for wholesale electricity prices to fall below zero if supply exceeds demand, prompting utilities to pay consumers to take delivery because power, unlike other commodities, can't be stored. Day-ahead prices turned negative for the first time in December amid above-average wind output, low demand and mild temperatures for the season.

Warmer-than-usual weather damped average hourly demand to 40.9 gigawatts on Dec. 25, according to data from European power grid operator group Entso-e, compared with a mean of 44.2 gigawatts during the last week of the year. Temperatures in Germany rose to a maximum of 18 degrees Celsius (64 Fahrenheit) in Stuttgart on Jan. 25, according to Deutscher Wetterdienst. That was the highest temperature on Dec. 25 since 1961, when the office started recording the data.

RWE AG, Germany's second biggest utility, "benefited from a substantial improvement" in the performance of its energy trading activities in the nine months through September, according to its Nov. 14 earnings report. The Essen, Germany-based company didn't disclose financial details.

'Bearish Weather'

Cumulus Energy Fund, a hedge fund with $176 million under management, surged 39 percent in December after predicting the slump in near-term prices that month, it said in an investor letter. The fund boosted its returns when "extremely bearish weather" caused the collapse in German spot prices over the holiday period, London-based Chief Investment Officer Peter Brewer wrote.

Intraday volume on EPEX Spot, the biggest exchange for short-term German power trading, climbed to 15.8 terawatt-hours last year from 1.4 terawatt-hours in 2007, according to a company statement on Jan. 8. Total electricity traded on the bourse, which covers contracts for as long as one day ahead in France, Germany, Austria and Switzerland, increased by 8 percent in 2012 to a record 339 terawatt-hours.

"With more renewable generation increasing volatility we are concentrating more people and more effort into intraday trading," Stefan Dohler, head of asset optimization and trading at Vattenfall AB, Germany's third-largest power producer, said in an interview in Essen on Feb. 5.

Vattenfall made a profit from trading and optimizing the use of its power plants last year, Thorsten Ziegler, a Vattenfall spokesman said yesterday by e-mail. He declined to provide financial details.

Next-Year Contract

In addition to the one-day market, utilities, banks and hedge funds trade electricity several years ahead. Germany's next-year contract is the most liquid in Europe and is used as a benchmark throughout the region. As renewable energy floods the market and increases price swings for next-day and intra-day electricity, it's having the reverse impact on longer-dated contracts as the boom in green power sources creates a surplus. Germany has a buffer of about 5,000 megawatts, Vattenfall's Dohler said.

Price swings in the next-year contract, as measured by 30-day historical volatility, slumped to 5.11 percent on Dec. 21 from 17.14 percent on March 19, according to EEX data on Bloomberg. The measure has recovered this year and was at 15.49 percent yesterday. Year-ahead trading fell 36 percent to 384 terawatt-hours on EEX in 2012 compared with a year earlier, the bourse said by e-mail.

Price swings in near-term electricity contracts may become more pronounced as daily fluctuations in the weather keep supplies in flux, Henrich Quick, an analyst at Poyry Oyj in Dusseldorf, said by phone.

"There used to be 50 extreme hours in a year and by 2020 it will be the new normal where you have 200 to 300 freaky hours," he said.

Lead image: German Reichstag dome with the German national flag, via Shutterstock

6 Comments

Kent Doering
February 27, 2013

As an ex-pat U.S. vet in Germany, it seems Keller´s comments are not at all based on any actual familiarity with the German "energy transition.

ANONYMOUS
February 25, 2013

Bob writes in comment #1: "What's the point of this article? Perhaps to cause a false fear of renewable energy?"

The point seems to be that an increased reliance on intermittent energy sources is leading to greatly increased price fluctuations on the spot market. Solar PV accounted for about 4.6% of total generation in Germany in 2012, but at noon on a sunny weekend in Spring it can reach ~50% of generation. Data such as this suggests that, in the absence of a major increase in storage capability, Germany is going to need a strategy for curtailment during periods of excess supply. Demand on cold January nights is going to hard to supply by wind and solar PV, so backup generation based on coal fired generation or natural gas is going to become increasingly important. Coal plants that are only allowed to operate for brief periods of time will produce expensive electricity. All of this suggests greater volatility in the spot markets and higher electricity prices overall. The article refers to estimates of 2013 prices of 28.5 Eurocents/kWh, which is roughly $0.37/kWh or ~370% of mean US prices. It is easy to predict the direction 2014 prices will take: UP!
Steven

Michael Keller
February 24, 2013

The price German consumers pay is going up, not down. Try reading the article more closely. They are also paying well over twice what the US consumer pays.

Renewable energy exacerbates the volatility of the electrical supply and that is an ideal situation for commodity traders.

Also, try looking at maps of the incidence of solar energy in northern Europe. It's pretty dismal.

The intermittent nature of renewable energy also means more generation must be built than would otherwise be required to cover the shortfalls. That obviously costs more money.

Renewable energy is nothing more than a leftist hoax being inflicted on the masses by the elitist few who, in any case, are not particularly affected by vastly higher energy prices.

Kevin Meyerson
February 24, 2013

A far more accurate and less misleading title for this article would be "Massive Renewable Energy Adoption Drives Energy Prices Down in Germany" ...

The prices are going down in the long term and the short term price variations are being caused by very low prices on windy & sunny days.

Germany has a great problem that we should all wish for: energy prices going down in the long term.

Michael Keller
February 23, 2013

If the objective is "breathing cleaner air", then why phase out nuclear power?

If the objective is to reduce CO2, then why phase out nuclear power?

Germany's ill-conceived mis-adventures in green energy have only served to lift massive amounts of money out of the pockets of the common man while providing few, if any, actual benefits.

Wallace rails against the fossil fuel industry while overlooking the real villains, the leftist "green mafia" fleecing the population.

Bob Wallace
February 23, 2013

What's the point of this article? Perhaps to cause a false fear of renewable energy?

Yes, the cost of electricity for a family of four is going to be about a half a euro per day higher. In exchange they breathe cleaner air and live with less risk of a nuclear reactor going sour which would cause enormous damage and cost hundreds of billions of euros. They stand to enjoy much cheaper electricity once they finish converting from fossil fuels to renewables, a great investment.

Solar and wind are decreasing the wholesale price of electricity in Germany. Apparently those savings are not being passed on to customers. Germany has a long-standing problem of price fixing by the small number of large utilities that control the industry.

http://www.economist.com/node/13527440

I would suggest people be very wary of articles critical of renewables coming out of Germany these days. The fossil fuel industry is very, very threatened by the rapid expansion of renewable energy. Their profits are eroding and they see their end approaching. They are going to fight dirty in an attempt to maintain their profits as long as possible.