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Germany

Germany

Balancing falling market prices against earnings

WORLDWIDE As markets with guaranteed feed-in tariffs are replaced with more volatile auctions systems, how can wind raise its value in the face of falling electricity wholesale prices?

Prices can drop at night, when consumption is low and wind generation remains high.  Credit: germanborrillo
Prices can drop at night, when consumption is low and wind generation remains high. Credit: germanborrillo

As European countries move to replace the support systems that helped build their domestic renewable sectors with a market mechanism in line with EU guidelines, wind-farm operators are trying to work out their likely earnings from selling their power on the wholesale electricity market.

Electricity consumers have a strong interest in the answer, because they have to stump up the difference between what the operators get for their electricity - in future largely to be decided by competitive auction - and wind-energy earnings per kilowatt hour in the wholesale market.

Competitive auctions are hoped to trigger greater efficiency in wind-farm planning, construction and operation that will push down the electricity price needed to be economically viable. But wholesale electricity market prices - and therefore also what wind-generated electricity earns in the market - have fallen steadily in recent years. If this trend continues, the gap between what wind-farm operators are paid per kilowatt hour and the price their electricity achieves in the wholesale markets could widen rather than narrow, increasing the support required from consumers to pay operators what they are due (the so-called strike-price).

So what can be done to raise the market value of wind energy in the wholesale electricity market, and reduce the amount of support needed from consumers?

A basic problem is that when the wind is blowing strongly in a particular region, for example Germany, a large proportion of the substantial onshore wind fleet in that region will generate power. At night and weekends when energy consumption is low, this can lead to a surplus of electricity in the wholesale market for that region, as well as in the markets of neighbouring regions with interconnecting transmission links, such as France, the Benelux countries, and eastern European countries that include Poland and the Czech Republic.

As in any market, the bigger the surplus is, the lower the price. So any surplus created by wind generation reduces its own market value.

Put another way, when the wind is blowing strongly, the more wind-electricity is generated and sold on to the market, the further the price will fall. More wind generation thus usually correlates with lower wholesale market prices, meaning over a period of, say, a year, wind energy's average market value is lower than the average wholesale market price.

Feed-in flexibility

In Germany, consumers make up the difference between the strike-price payment to wind-farm owners and the monthly average wholesale-market day-ahead "reference value" for wind energy, which will generally be lower than the average day-ahead wholesale market price. This stimulates flexibility by encouraging wind-project operators, or those marketing their electricity for them, to find ways of feeding into the market when the wind is not blowing as strongly and wholesale prices are higher, as they can pocket the difference between this price and the reference value. One option they can use is storage.

In the UK, consumers pay wind-farm owners the difference between the strike price and the intermittent market reference price - the UK day-ahead hourly price for each 30-minute trading period. This is a measure of the average market price for electricity and does not take account of the generally lower market value for wind compared with the average wholesale price. In short, it does not incentivise flexibility.

With the German and UK support mechanisms becoming more widespread, can consumers hope for lower wind payments (strike prices) to wind-farm operators and higher wholesale electricity market prices to reduce their support payments? Especially in the UK, where onshore wind has faced much local opposition and a hostile Conservative government, this could help the sector win over sceptics.

The strike price for onshore wind payments is already on a par with generation costs of new fossil-fuel plants and significantly below that for new nuclear plants like the planned Hinkley Point C in the UK. The potential for further reductions therefore looks limited.

The other adjusting screw for reducing support - the wholesale market price level - is currently going in the wrong direction, downwards, again leaving less room for reducing support.

When could this trend reverse? And is there an exit from the catch-22 of higher winds equalling lower wholesale electricity prices? It might be expected that as the wholesale electricity price falls, conventional generating capacity would no longer be able to operate profitably, and would leave the market until the price rises again. But this market logic is stymied by factors that keep conventional generation in the market.

A fleet of conventional power stations is currently required to operate at minimum technical output so that they can be called up as reserve if market players fail to balance supply with demand. While these conventional plants are waiting for a call-up they must continue to generate into a system that may already be well supplied with wind or solar power, adding to overcapacity on the system.

Another factor is the very low cost of generation for German lignite power stations. While CO2 emissions allowance prices are low these lignite units can stay in the market at very low prices and remain profitable. This largely explains Germany's current massive over capacity in electricity, and cheap electricity exports to the rest of Europe.

Reversing the trend

But there are other factors that together have sufficient potential to reverse this trend. Within the next 10-15 years, wind energy sold in the market should be able to achieve an average price high enough to exceed the strike price currently paid to wind-farm operators for their electricity, eliminating the need for support from electricity consumers.

Developments such as battery storage and using wind power itself to support network operation are just beginning to replace the need for the so-called "must-run" conventional power station capacity.

Another factor on which hopes are pinned is the European CO2 emissions trading system. Rising CO2 emissions allowance prices would raise the cost of conventional fossil-fuel generation and push up the overall wholesale market price - and with it the price paid for wind-generated electricity. But, despite efforts to tackle the surplus CO2 certificates in the European trading system up to 2030, only a modest impact on prices looks likely.

Increasing cross-border transmission capacity in Europe is a more promising prospect. The greater geographical spread of the market will facilitate export of wind generation from areas that are windy at any one time to areas where they are not. The surplus in the windy region will be reduced by exporting it to less windy regions, preventing a sharp fall in prices.

But perhaps the most promising route to improving the market value of wind is to absorb large surpluses in generation wherever possible, so the wholesale market price remains higher. Electricity storage and flexible demand are growing in importance for absorbing electricity when prices are low.

The complete phase-out of German nuclear reactors by 2022 and retiral of ageing fossil fuel plants will also help reduce over-capacity in the European electricity market and reverse the downward price trend.

A report examining the impacts of such factors, created for the German economy ministry by consultants Fraunhofer ISI, concluded that by 2030 the market value for both onshore and offshore wind will be around EUR67-73/MWh, depending on scenario. The report, Analysis of selected factors influencing the market value of renewable energies, published last September, indicated that the chances of a higher market value for onshore and offshore wind in 2030 are most favourable in a scenario where cross-border transmission networks are expanded and the amount of conventional must-run power stations in the market is reduced. In Germany this capacity would be cut from 17GW to 4GW and in western Europe as a whole from 115GW to 29GW over the period to 2030.

If the cross-border transmission networks are not sufficiently expanded to create a positive impact, wind's market value and the overall market price can best be boosted, at least initially, by power-to-heat units - a cheap form of storage in which surplus power is used in electric immersion heaters to heat water stored for district heating systems or other use, the report noted.

For Germany, the EUR67-73/MWh market value forecast for 2030 is likely to be sufficient for economic operation of wind projects installed at good wind sites without the need for support, assuming Germany's current plan to reduce the cost of wind generation is successful. A maximum price of EUR70/MWh is planned from 2017, when the German auctioning system begins.

In the UK and other countries where the wind resources are considerably better and wholesale market prices are higher, the crossover point for onshore wind could be earlier.

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