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Facing up to the free market

The ancient apparatus of Germany's energy arena is being remodelled for the launch next year of Europe's internal energy market. German liberalisation is moving slowly and much of the remodelling remains in the hands of utilities rather than those of government. The wind business, still cocooned in legislation protecting it from the rigours of competition, has yet to ensure that the new framework gives it a fair deal. Until wind is made an integral part of Germany's energy future it remains horribly vulnerable.

The metamorphosis from monopoly to market in Germany's electricity supply industry is five months underway. Utilities have lost their traditional ring-fenced supply areas and customers are exploring new freedom to buy power wherever they choose. One of the most exciting periods in the more than one hundred year history of the German power sector has begun. But the wind energy lobby is not impressed.

So far Germany's thousands of wind turbine owners and operators have accomplished the transition into the market place within the protective capsule of legislation which requires utilities to pay a premium price for wind power -- a renewable energy feed in tariff (REFIT). The wind sector sees the REFIT as the rock on which it is founded and any talk of tampering with the legislation is met with fierce opposition. For Germany's utilities and the liberal minded, however, the REFIT is a market misfit, an unfairly distributed burden and a relic of the command and control economics of electricity industries of yesteryear. Can fixed prices and free markets coexist, or must one be sacrificed to the other? Much depends on the plausibility and success of new market mechanisms.

The most valiant flyer of the REFIT pennant is the Bundesverband Windenergie (BWE), the federal wind energy association. It proclaims the system's success in bump-starting and maintaining the rapid expansion of wind energy development in Germany, despite the country's modest wind speeds. By mid 1998, some 2350 MW of wind power had been installed, more than in any other European country. The REFIT still enjoys wide political support and many wind lobbyists see no reason why this system should not continue and even spread to the rest of Europe. "If development of renewables is to be efficient and earnings sufficient, there has to be a REFIT and we will defend it, tooth and nail," says the BWE's Heinrich Bartelt.

Under siege

The opposition is daunting, however. First, the utilities' association, the Vereinigung Deutscher Elektrizitätswerke (VDEW), damns the REFIT as "inefficient." It wants to see renewables developed over decades rather than years and has all but laughed at a government scenario released earlier this year for doubling the contribution of renewables by 2010. "This could only be achieved if the shares of wind power, biomass and photovoltaic are increased tenfold during the interim period, a political but hardly a realistic target," says VDEW president Heinz Klinger.

Second, the EU is none too pleased that the REFIT mechanism continues in defiance of the aims of Europe's Internal Electricity Market for an electricity trading place with no such market distortions. Brussels recently launched a new broadside against the REFIT when, at the end of July, the EU's Competition Commissioner, Karel van Miert, informed Germany's economic affairs ministry that he was not satisfied with the REFIT's continuing existence as a distorting subsidy, especially since the required "regressivity of the premium payments" was not apparent.

Third, the International Energy Agency blasts the REFIT in its recent country report on Germany. The legislation should be made "compatible with the competitive electricity market and to create stronger incentives to reduce generating costs and favour the techniques which have the lowest production costs," states the IEA.

As if these three barriers were not enough of a problem, a string of German utilities are also individually attacking the REFIT. Earlier in the year, two of the largest power companies, Preussenelektra and Veag, appealed to the federal constitutional court to have the REFIT legislation annulled. The utilities maintain they are unfairly bearing the brunt of the REFIT costs. No wonder that the VDEW's Klinger warns: "The REFIT might not last as long as the renewables industry thinks."

Uwe Carstensen, chairman of the Wirtschaftsverband Windkraftwerke (WWW), the association of wind station operators, remains relaxed behind his ramparts however. He points out that as long as a significant political majority continues to support the REFIT, its defences are impenetrable. "The Conservative coalition parties committed themselves anew to the REFIT law and the SPD and Greens also want to keep the system. The feeling is that we should keep it until we've got something better," he says. Carstensen concedes, however, that a mechanism to iron out the utility imbalance of the current REFIT system, where Preussenelektra in the windy north with most wind plant carries most of the financial burden, will be introduced, possibly as soon as next year.

Falling payments

Carstensen rejects the accusations of inefficiency levelled against the REFIT. Although in nominal terms the premium rates for wind energy will remain fairly steady over the coming seven years, in real terms, taking into account the costs of inflation, the value of payments will sink, he says. A study by the Rheinisch-Westfälisches Institute für Wirtschaftforschung, an economic institute in Essen, argues that by the year 2000, real wind payments will have dropped to DEM 0.157/kWh compared with DEM 0.1679/kWh this year and will go on falling to DEM 0.143/kWh by 2005, before moving upwards again. The report was commissioned by the WWW and the Verband Deutscher Maschinen-und Anlagenbau, the mechanical engineering federation.

"The REFIT price fall in real terms means turbine manufacturers will be forced to improve their machines and reduce prices," says Uwe Carstensen "As real rates sink, inland sites with lower wind speeds will lose their appeal. A natural upper limit on German wind installations will be reached in, say, five years, by which time offshore developments will be underway," he predicts.

Environment organisation Greenpeace sees the squeeze on the real payment rates as the redeeming feature of the REFIT. "We think the REFIT should be retained as long as rates of payment steadily fall," says Jörg Feddern, renewables expert at the Greenpeace Hamburg headquarters. Renewable payment rates are linked to the price of electricity to the end customer. A decline in REFIT payments is "happening automatically" as electricity prices fall. "We are concerned that renewables should not hang on the drip forever," adds Feddern.

Change on the horizon

It can be argued that the German government, through the economy ministry, supports the existing system of support for renewables, if only by default. It drafted the Electricity Feed Law, which enshrines the REFIT. But the ministry is currently reviewing the law and is due to report to parliament on it next year. Swiss consultancy company Prognos has been commissioned by the ministry to study the various market mechanisms available for federal support of renewables "taking into account the changed economic framework" dictated by the EU internal market Directive on electricity. Prognos says its job is to carry out a scientific analysis of support models consistent with the German legal system and the requirements of the EU for a liberalisation of the electricity market. Adjustments to the REFIT system are likely to arise out of the review. These could take effect in 2000.

Meantime, the first green shoots of ecological power trading are becoming visible in the liberalised landscape. "In five or six years, this market will have developed to the point that the trading companies will be buying green power under conditions equivalent to the REFIT rates paid by the utilities," predicts Carstensen. "By that time we may be asking whether the REFIT is still necessary," he says. There may even be wind operators who see the new market as a way out of financial difficulty. Some older projects were budgeted on the assumption that electricity prices and therefore REFIT rates would remain stable or even rise over the coming years. Instead they are sinking.

Others are not as confident as Carstensen about the potential of green power trading, or even that "green tariffs" will lead to significant activity. BWE is "extremely reserved" about the concept, which has been dubbed "Gucci power" in the United States because only an elite class of consumer chooses to pay more for electricity from a green source. "Everything is very opaque at the moment. Renewables are discriminated against and we are very sceptical about the new models," says Bartelt. As things stand on the legislative front his doubts seem justified.

Slow green tariffs

Several utilities now offer green electricity at a green tariff rate. Customers pay a premium on their normal electricity bill and the utility invests the money, often along with some of its own, in new renewable projects. "But these green tariffs have not been very successful so far, mainly because the utilities lack credibility," comments Jürn Ehlers of the Öko-Institut in Freiburg. Customers find it hard to associate a utility which supplies huge amounts of nuclear generated electricity with a company prepared to invest in renewables, he says.

Nonetheless, utility green tariff models could reach sales of 20% in the long term, says Klaus Wortmann of the Energiestiftung Schleswig Holstein, an independent energy foundation in Kiel. But much depends on the structure of the green tariffs and how customers are approached. Independent, professional green power traders have a better chance of winning customers than utilities, but they have less money, he adds.

The BWE's Bartelt expresses disbelief. "We reckon that a voluntary market for green power will amount to no more than about 8% of overall electricity consumption, the size of the market for organically grown potatoes. In the long term, we want 100% renewable energies and we believe that all electricity consumers should carry the costs, not just a willing few." Even the VDEW concurs with this view. "The success rate of eco-power programs is extraordinarily low, there is much to be done here," admits Klinger of the utility association. The example he gives of a green tariff program initiated by Bavarian utility, Bayernwerk, last July for its 800,000 customers speaks for itself. "There has been one positive response and 59 telephone enquiries," says Klinger.

New hope is being placed in a series of independent green power traders preparing their entry into the market. These include such names as Naturenergie, Naturstrom and Watt Ihr Volt. "Without certain sales expectations these companies would not have been founded," Klinger points out, the indication being that trade of green electricity is commercially viable already. But that could be an over simplification of the real life situation. Fair access to the grid is a major element of German liberalisation, which has yet to be settled. Legal battles with utilities over grid costs and changing suppliers litter the way ahead, says the Öko-Institute. "The debate about grid access and transmission charges has only just started," says Ehlers.


Greenpeace's Feddern shares the scepticism about fair grid access. He fears for the chances of "green power" traders against the power of the major grid owning utilities. "He who owns the grid controls the market," he says. "We believe that if the energy legislation remains as it is, renewable energies and combined heat and power generation may be so disadvantaged that they won't survive."

Greenpeace is not going to passively sit and wait to see what happens, however. "We have decided to take the law as it stands and see what we can do with it, how we can place green power on the market."

A study commissioned by Greenpeace on the breakdown of costs involved in marketing renewables generated power shows that "the highest costs are associated with sending power through the grids." The grid cost arrangements now in force have been agreed in a voluntary deal between the utilities and big industry. This deal is entirely to the benefit of utilities, says Feddern. "The large utilities have created an excellent framework from which to defend their old monopoly positions." Germany's monopolies commission backs the Greenpeace view. In its most recent report on how to open up the market effectively, "Marktöffnung Umfassend Verwirklichen," the commission concludes: "It is to be expected that the dominating market position of the electricity supply companies will be maintained for the foreseeable future."

Greenpeace is now campaigning for a simple system by which renewables generators can access the grid at a low, standard charge per kilowatt hour, independent of transmission distance. It suggests that the details are written into new grid access regulations drafted last year by six federal Länder to oust the current utility-industry grid agreement. Alternatively, a "special postage stamp grid transmission rate for green power" could be written into the REFIT legislation.

Similarly, the Öko-Insitut describes the utility-industry agreement as, "at best," suitable for continuous or programmed supplies and for the supply of large customers. "Marketing of green power is significantly hindered," it warns. The institute's remedy is a standard transmission levy of DEM 0.02/kWh for renewable energies and combined heat and power (CHP) stations. It recommends, too, that the "coincidence factor" -- another element in utility grid charges included to reflect the number of hours the grid is used -- should be ignored until renewables and CHP stations contribute one-third of the country's power consumption. At the moment they deliver under 5%.

The initial response of the VDEW to these suggestions was sharp: "Special arrangements or privileges for individual groups of generators are incompatible with the non-discriminatory treatment of all grid users as required by the utility-industry grid use agreement," it argued. But by last month, Eberhard Meller, VDEW managing director, had mellowed sufficiently to announce that "all parties would sit down together at the beginning of 1999 to see how everything had developed and to consider what should be changed." Presumably, this invitation extends to renewable energy organisations.

Not wishing to rely entirely on utility goodwill or on the future of the REFIT, Greenpeace has launched a new campaign titled "Aktion Stromwechsel" or "Campaign to change your power source." It aims to whip up public demand for a mechanism allowing them to be supplied with clean power. Greenpeace even has plans for a green electricity supply company "if no suitable green power suppliers can be found." The environment group argues that if enough support can be raised, German's electricity supply could be secured with a mix of 50% renewables and 50% power generated in gas-fired combined heat and power stations.

On a different track, the Energie-Stiftung Schleswig-Holstein, or Energy Foundation Schleswig Holstein, is working in co-operation with Danish and Dutch counterparts to develop a quota and green credit trading system to underpin the market for renewable energies. Such a system, the foundation feels, dovetails with the aims of a liberalised market, can be introduced step-by-step, and can be grafted "organically" on to the REFIT system. Energy policy which mandates fixed quotas for renewables in the supply system also allows both buyers and sellers wide flexibility in deciding when, where and at what price they wish to act. Quotas are better than competitive tenders, the foundation says. National quotas and green credit trading can be integrated into international quota trading, whereas a tender model like that in Britain will always be a "closed" system, the organisation argues.

A utility QUOTA model

VDEW is both critical and supportive of the British Non Fossil Fuel Obligation (NFFO). It is "extremely bureaucratic and has a deterrent effect," argues Eberhard Meller, the utility association's managing director. But president Heinz Klinger praises NFFO for pushing down the cost of renewables and because it avoids "both senseless subsidies for uneconomic plant and tax write-off models." VDEW is examining several alternatives to the REFIT, "but there is no unified position yet," says Meller.

Preussenelektra, which bears the brunt of REFIT payments in the windy north, seems to have the most advanced plans. It proposes a mandatory renewables quota in the supply mix of every utility, with an obligation for any shortfall to be made up by buying power competitively from independent generators or from another utility, or by buying green credits from a renewable energies foundation. The foundation's income would go to the European Commission for investment in more renewables.

Preussenelektra suggests that existing renewables plant continue to be paid the REFIT rate for five years before being required to enter the tender system. The proposal has been met with a cool response from other utilities and the VDEW who see at as an attempt by Preussenelektra to share its REFIT costs among all utilities.

For its part, the BWE is against all quota and tender systems which, it claims, have paralysed the market in countries where they operate. "Such systems make it possible for the established electricity industry to squeeze out non-polluting competing generators by offering alternative supplies at dumping prices," it says.

The Lower Saxony Energy Foundation proposes that utilities start by voluntarily adopting a standard for renewables power. The foundation concedes, however, that political encouragement may be necessary to persuade utilities with no renewables -- and no obligation so far to pay REFIT rates -- to shoulder their share. The system would be balanced by trading credits. In the early days, such trade would mainly be in the form of bilateral utility deals, perhaps at fixed prices. During this period, utilities would learn about green power labelling and credit trading and could stimulate the market for green power.


Later on, the foundation's plan is for consumers to be obliged to buy a fixed amount of renewables each year, similar to the plans in Denmark and to those being aired in the Netherlands. At this stage a voluntary quota trade could be initiated which introduces competition in price and location for new renewables capacity. Arrangements would have to be made to ensure that "old" renewables generators are not disadvantaged.

Under certain institutional conditions, quotas could be traded on the stock exchange and in the longer term, assuming a unified credit system is developed, trade should be possible between neighbouring countries. Denmark and Holland are already building up a trading relationship and "inevitably, the question will arise at some point whether a German consumer can fulfil its quota obligation by buying Danish or Dutch certificates," says Holger Krawinkel of the foundation.

"Above all, the quota model chosen must ensure an expansion of the industry, not merely a redistribution of renewables supplies," he stresses. Without quotas there are genuine grounds for concern that financially strong players in the new commercialised world of electricity trading can push out smaller players, such as independent wind power producers. "But their advantage is not so marked with a quota model as with a competitive tender system," says Krawinkel. The BWE is again sceptical. "Quotas favour only the utilities. With time, the middle-sized and small renewables companies will be bought out or pushed out. The utilities will then rule and control development of the renewables sector," Bartelt says.

Krawinkel admits that much has to be discussed with German wind operators to allay such fears. Company associations, whether for German industry, the utilities or wind energy tend to be conservative on behalf of their members. "This is rational," he says. "But we still have to discuss whether, with certain protective mechanisms, wind has developed sufficiently to be introduced to the market."

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