Beauty and the beast

Liberalisation of the German electricity sector, now under intense discussion, will eventually mean its death, but the death throes are likely to be violent and could last years. Without an effective shield such as the Electricity Feed Law, just one blow from the beast's frantic paw would crush the still delicate renewables market. The legal matrix into which the EFL was woven is being unravelled and the sections of the wind lobby screaming for its retention are coming dangerously close to the beast's flailing paws.

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Quality costs, especially environmental quality. To demand of wind energy that it deliver its much desired product -- clean electricity -- at prices competitive with dirty fossil fuels is missing the point entirely. Yet this is the market reality in both Britain and North America. Here, short term politics have applied tremendous downward pressure on price and in a remarkably short space of time, wind plant on sites with high wind speeds can indeed generate kilowatt hours cheaper than nuclear and on a par with most modern fossil fuel plant. The sad fact is that this stupendous achievement is backfiring on the industry. The broad expectation has become that the brave new world of wind power should at all times deliver cut price electricity. It would not make sound business sense to do so.

The focus on cheap wind has led to a brewing unease over the relative difference in wind prices from market to market. Nowhere is the contrast greater than when comparing Britain and Germany; prices in Germany are 80% higher than the average in Britain. The suspicion has been that somebody somewhere was making a killing on the German market. But our analysis this month (pages 34-38) indicates that because of lower wind speeds and because of higher capital costs, it actually costs 80% more to generate wind power in Germany. Moreover, the higher capital costs are mainly a result of higher turbine prices, leaving a margin of profit not undesirable for a fledgling industry with much research and development to finance. Indeed, some of the most remarkable innovations in turbine technology have emerged from Germany.

The logic of this argument, however, holds no sway with the German utilities in their bitter fight against the Electricity Feed Law (EFL). The law obliges them to buy wind energy at the much disputed price of 17.15 pfennig a kilowatt hour ($0.10/kWh). For the wind industry up against the enormous might of the utilities, the EFL is seen as its vital shield, not to be weakened and certainly not to be removed. To understand the wind lobby's fear requires an understanding of the power of the beast it is up against. The German electricity sector, far from being a tame creature under government control, is a huge oligopoly empire, with shareholders grown fat on the back of a utility structure conceived in 1935 as a super efficient servant of the war machine. With its hot breath penetrating nearly every walk of German life, the beast is both abhorred and feared by many, not least by those in the wind business.

The prospect of setting the beast free brings little immediate comfort. Liberalisation of the sector, now under intense discussion, might eventually lead to the beast's death once it truly has to fend for itself, but the death throes are likely to be violent and could last years. Budding independent power producers, such as big industrial companies, are already giving up their plans for self generation in the face of offers from utilities too good to refuse. Talk of free and competitive markets is all very well, says the wind sector, but without an effective shield, just one blow from the beast's frantic paw would crush the renewables market. Or the dying beast, once free, might come sniffing around the tasty EFL tariffs and decide to gobble up independent wind producers as an extra snack for shareholders.

Meantime, applying logic to electricity prices would be a sudden departure from the norm in Germany. This is a country which spends around DEM 10 billion a year on aid for German coal, when cheaper coal is available elsewhere. Then there is the DEM 100 million, including wages to 30,000 police, spent recently on ensuring the safe passage through hordes of demonstrators of six containers of nuclear waste to their underground resting place. Having made such major commitments to conventional energies, requiring utilities to pay a few extra pfennigs for wind power is hardly seen as outrageous by Germans. Especially when the whole principle of electricity payments for the past 50 years has been to pay whatever it costs. Just as domestic coal has been protected for decades and lignite is to be cushioned in the years to come, so the EFL shields renewables. With wind meeting 0.7% of German demand, a generous assumption of its extra cost today would add a maximum of DEM 0.00066/kWh to electricity bills. The fact that utilities have so far chosen to foot this bill from their own cash reserves is partly because the sum is minimal, partly because the true cost of wind is a subject of hot dispute.

These arguments for bureaucratic control of price, though, are only relevant in a highly regulated market. German electricity is now on the brink of moving into the world of competition where market forces decide price -- albeit that in energy the forces need some control to ensure long term investment in sustainable solutions. The legal matrix into which the EFL was woven is being unravelled and the sections of the wind lobby scrabbling for its retention are coming dangerously close to the beast's flailing paws. An outflanking manoeuvre would now seem to be the better option. The Green political party is already on this track. Last month it met with wind lobbyists in a brainstorming session in Bonn. The plot being hatched is similar in concept to Britain's Non Fossil Fuel Obligation, but instead of requiring electricity distributors to buy a fixed portion of their demand from renewables, the Greens are suggesting that specific quotas should be applied to consumers. Customers could buy renewables electricity through their utility, or directly from source, or they could even specify a particular clean technology. As yet the wind lobby is sceptical of such ideas, even to the point of opposition. But perhaps it is time to realise that wounded beasts are dangerous animals -- and more beautiful, but delicate, species would be wise to avoid them by taking another path.

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