Analysis: German shift to renewables is looking harder to achieve

Berlin struggling to deal with the soaring costs related to the ‘Energiewende’

A year and a half since German Chancellor Angela Merkel announced it in parliament, the Energiewende, or Germany’s historic shift to renewable energy, is not going as smoothly as her government had hoped. As reported, renewables are to account for 35% of Germany’s power supply by 2020 against 20% currently. Reaching this goal would preclude the need for nukes, and indeed, Germany’s nine remaining reactors are to be shut down by then. The more ambitious goal is for 2050, when renewables are to account for 80% of the supply.

Yet serious problems have sprung up since Merkel’s speech. The one getting the most attention in the press are the soaring costs caused by Germany’s renewable energies law, known as EEG. Under EEG, green power providers can sell that power at prices that are fixed for 20 years from the time their equipment is installed. These prices are typically above market levels. The subsidy is paid for by an EEG surcharge on the electricity bill of households and companies that do not use a lot of power. Due in part to a rapid build-up of solar capacity, the EEG surcharge is set to jump 40% in 2013 to 5.3 euro cents per kilowatt hour. The press has rightly pointed out that lower income households and people on welfare will have a hard time paying their electricity bills. To deal with the problem, Merkel has promised a review of the exemption for non-energy intensive firms, but nothing concrete has materialised.

Another problem concerns the offshore wind parks that the government says are needed if the Energiewende is to succeed. So far, 29 parks have been approved for construction in the North and Baltic Seas. If they are all completed by 2020, the government’s goal of establishing 10 GW of offshore capacity can be met. But this is looking less likely for a host of reasons, and the German wind energy association BWE has already said that 7 GW is the most that is achievable by 2020.A big damper on the offshore wind plans is the fact that the North Sea parks are being built a long way from the coast – 175 kilometres in one case. This is to protect the ecology of the Wadden Sea mudflats and to not interfere with the shipping routes that begin just after the mudflats. Yet delays in construction have resulted, and indeed, the 400 MW “Bard Offshore 1” facility is already two years behind schedule. Frustration over the delay even prompted a consortium of 65 municipal utilities, known as Südweststrom Windpark, to recently bow out from a deal with German commercial bank HypoVereinsbank (HVB) to acquire the Bard facility.

Another damper is the uncertainty over whether the firm charged with connecting the parks to Germany’s grid, namely TenneT of the Netherlands, can do so in a timely manner. Such uncertainty prompted Energie Baden-Württemberg (EnBW) to announce in late November that it had postponed a €1.5bn investment in a 500 MW North Sea park. However, it is now likely that EnBW will go ahead, as the German parliament just passed a law providing compensation to offshore wind park operators if there are delays in connecting them to the grid. The compensation is to be paid for by another small hike in the EEG surcharge.

There is also great reluctance among commercial banks like Deutsche Bank, Commerzbank and HVB to provide significant funding for the offshore parks. Given the current risks associated with the parks, one can hardly blame them. Besides, HVB has gotten itself into a jam with Bard Offshore 1, for whom it served as the sole financier. The two-year delay has caused the project’s costs to explode – the current estimate is €2.9bn – and frustrated the bank’s plan to sell it to Südweststrom. Now the bank can only hope that the wind park will be fully operational at the end of 2013 so that it can offload it afterward and recoup some of its losses.

HVB has already set aside a risk provision totalling €710m to deal with those losses. Fortunately for the Energiewende, the banks’ reluctance to finance offshore wind has not had a huge impact so far. This is because the government has directed its own bank, namely the Kreditanstalt für Wiederaufbau (KfW), to provide up to €5bn in loans. Additional loans have also come from the European Investment Bank (EIB). The involvement of both state-owned banks has even persuaded some commercial banks to make smaller loans as part of a consortium.
Germany’s offshore wind parks have also attracted investors, but none of them are from the ranks of insurers and pension funds. Instead, they are either big energy firms like EnBW, RWE, E.ON and DONG of Denmark or venture capitalists like Blackstone of the US or Ventizz Capital Partners of Germany. Blackstone alone has invested €2.5bn in the North Sea parks “Meerwind” and “Nördlicher Grund.” Last February, Ventizz formed a 50-50 joint venture with German construction firm Hochtief for the sole purpose of acquiring such parks. The venture has already bought four facilities in the North Sea with a capacity of 2 GW, though these have yet to be approved by the regulator. PNE, a project developer in Cuxhaven, is developing the venture’s fifth North Sea park, a 675 MW facility called “Nautilus.” Said PNE chief executive Martin Billhardt: “These private equity investors have recognised that they can realise decent returns if they enter early and are willing to bear certain risks.”That pension funds and insurers are not investing in German offshore wind is no surprise to Joachim Faber, the former global head of Allianz Global Investors (AGI). “They’re not venture capitalists, but long-term, conservative investors. And the simple fact is that the investment conditions for them are currently not favourable. So they can’t afford to take any unnecessary risks,” Faber told Responsible Investor (RI) in a recent interview. Faber expects that once the parks are operational, pension funds and insurers will take a close look at them, as they need to find investments that provide returns that are stable and significantly above bond yields.
This sentiment was echoed by Oliver Bäte, chief financial officer of Allianz, who told journalists recently that the insurer could imagine investing as much as €1bn in the parks. Yet an Allianz spokesman said later that this was dependent on several conditions. These include unbundling the parks from the infrastructure so that both can be invested in and Solvency II, which currently stipulates a capital charge for renewable investments.
For now though, German institutions like Allianz have been content to invest in onshore wind and solar power (see wind power analysis). Partly because of their involvement, Germany’s Energiewende is not in danger of failing in the short term. For while Berlin may fall short of its offshore wind capacity goal for 2020, institutional investment in onshore wind parks – which are far easier to establish than offshore ones – will help it meet its capacity target of 8 GW for this renewable. Berlin also expects another 22 GW of solar power to be installed by the end of the decade.