All parties must come to an end, but the onshore wind energy one in Germany, fuelled by generous feed-in tariffs, has a little while left to run before the government takes away the punch bowl. That’s why Czech utility CEZ and other investors are busy building portfolios ahead of the change.
By the end of the first quarter, Germany’s Federal Ministry for Economic Affairs and Energy (BMWi) will unveil its draft bill designed to rein in the huge costs of supporting onshore wind energy by closing schemes that set guaranteed prices for its power – often higher than market rates – to new entrants, in favour of a system like that in the UK which is based on tenders.
Countries across Europe have been reassessing their schemes to encourage renewable energy as taxpayers tire of subsidising the industry. According to Craig Morris of Energy Transition, renewable development in Italy and Spain has “come screeching to a halt” after reaching about 25% of total supply as the governments either let schemes expire or take active measures to stop projects. Emerging European countries that have taken such steps include Romania, Bulgaria and Poland, with some even taking retrospective steps, which are now being challenged in court.
This has had a huge impact on investment. In 2014 new investment in renewable energy in Europe totalled $57.5bn compared with $120.7bn in 2011, according to REN21, a group of government and industry organisations that tracks the renewable sector.
And change is finally coming to Germany, which has been the most enthusiastic proponent of the shift from nuclear and fossil fuels to renewables through Chancellor Angel Merkel’s policy of Energiewende. This policy aims to lift renewable energy to 18% of the total energy consumed by 2020. The share of renewable energy consumed in 2015 was 14%.
The scale of the subsidies are such that in 2014 German households subsidised clean power through feed-in tariffs to the tune of €23bn, or about €572 per family. But with the Eurozone crisis dragging on, economic growth still poor and the migrant crisis stretching public funds and generosity, Germans are feeling restless. A brewing scandal at Vestas Wind Systems, the giant Danish supplier of wind turbines, over alleged corruption threatens to generate more negative headlines about the industry this year.
Germany’s planned legislation reform will change the current fixed-price schemes of the past to auction-based models, which will bring green energy into the wholesale power market and away from the costly era of subsidies.
“We have a change in the incentives scheme for onshore wind starting from 2017, with a shift from the feed-in tariff system, which has been very comfortable for investors with its predictable cash flows, towards a more market-related scheme with a tender system as seen in the UK,” says Susanne Wermter, head of the Special Infrastructure Team at Aquila Capital, a German-based independent alternative asset manager.
But there is still time. All onshore wind farm developments that have been approved and have building permits before the end of December 2016 will still be eligible for feed-in tariffs, and investors will then have two years to build the projects. All onshore wind farms that haven’t received a permit by then will fall into the new scheme. As such, experts predict the volume of new projects being commissioned over the next two years will rise, followed by a drop-off as the new system comes into effect. Investment in renewables last year in Germany fell by 42% to $10.6bn, according to according to research from Bloomberg New Energy Finance released in January, even as global investment in green energy hit a record $329.3bn.
“I guess then there will be a dip due to the change in systems, as everyone needs to get comfortable with the tender system and we need to find ways to manage the more complex system and the uncertainty you’re going to have,” says Wermter.
Case in point is CEZ, which has mandated Aquila Capital to facilitate its entry into the German market by building a wind portfolio in the country in the “triple-digit-million euro range”, the companies announced on January 4. “The CEZ portfolio is supposed to be a feed-in tariff portfolio and this is still manageable – we are confident that we will be able to source a sufficient number of attractive projects through our network for CEZ,” she says, adding that the projects would likely be those either already under construction or ready to build, though some in their first year of operation might also be considered. The first investment has already been defined.
Energy in hand
But even with a new, less generous system, few expect Germany’s drive towards the abolition of coal and other non-renewable energy sources will stall, especially as improved storage technology promises to fix renewables’ main drawback: reliability.
No sun or wind means no energy. Wind makes up 18% of Germany’s total installed capacity, yet just 8% of its electricity production. However, Lazard Frere noted in a report in November that even without subsidies, certain storage technologies like lithium-ion batteries are already cost-competitive with certain conventional alternatives, while other storage technologies are close to being cost-competitive, and costs are expected to decline in the coming years.
“Although in its formative stages, the energy storage industry appears to be at an inflection point, much like that experienced by the renewable energy industry around the time we created the [Levelised Cost of Storage] study eight years ago,” said George Bilicic, vice chairman and global head of Lazard’s Power, Energy & Infrastructure Group.