German wind gets a new way to market

Germany report: A new system to get wind energy and other renewables generation to market kicks in from the start of 2010. German energy exchange EEX is to play a central role and will take account of an increasingly urgent need: the new system allows the market to find ways of dealing with large wind and other renewable energy surpluses that may occur at times of low electricity consumption. It also increases transparency and reduces the costs of dealing with the growing amounts of renewables by cutting out some of the current steps in getting the power to the customer. The annual savings could add up to several hundred million euros.

Negative pricing can be avoided with the help of demand-side management  at major users such as Stahlwerke Thuringen
Negative pricing can be avoided with the help of demand-side management at major users such as Stahlwerke Thuringen

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Under the new mechanism, German wind stations and other renewables plant operators will keep their guaranteed feed-in tariff payments for electricity generation. The difference between the feed-in tariffs and the price achieved on the EEX wholesale market is covered by the one-size renewables levy per kWh paid by all electricity consumers (see page 54), aside from some privileged energy-intensive industrial customers. Previously, the levy charged by electricity companies has varied depending on which of two calculation methods was used. The new mechanism was set out in a ruling on the further development of the nationwide equalisation scheme, AusgleichMechV, that took effect in July.

The role of electricity retailers

The system from 2010 foresees Germany's four transmission system operators (TSOs) continuing to take on all of the country's renewables generation and divide it between them. But another key area of the set-up will change. Until the change in policy, the TSOs bought or sold renewables output in order to create an even band of electricity from renewables every month to sell to electricity retailers. The retailers have had to pay for this power at roughly the average feed-in tariff/kWh for every type of renewables. They passed on the additional cost to customers in the form of a renewables levy.

The retailers generally buy their electricity six to 18 months ahead, leaving space for their quota of renewables power each month. Unfortunately, the space left open and the renewables power actually delivered to them rarely matched, so the retailers were forced to buy or sell power at the last minute. The resulting wave of power coming on to the market or being bought from the market had the effect of lowering or raising wholesale prices, to the disadvantage of retailers. If the retailers needed extra power because the renewables quota turned out to be insufficient, the extra demand on the market pushed prices up.

But retailers were unable to claw back the extra expense from customers immediately, since most electricity is supplied under longer-term contracts under which daily adjustments are not possible. Similarly, if the renewables quota is excess to their needs, the retailers will sell power, causing prices to fall, in some cases well below the price retailers paid for it in the first place. Such risks were large enough to threaten the future of some small retailers and hinder market entry of new players, according to the Bundesverband Neuer Energieanbieter, a trade organisation for new energy suppliers.

Size advantage

In contrast, the electricity retailing operations of Germany's four energy majors, E.on, RWE, EnBW and Vattenfall Europe, own not only the TSOs but, together, also around 80% of power stations. Due to this, they are better placed to absorb the fluctuations in renewables electricity supply by, for instance, adjusting their power station operations or using contractual arrangements on power uptake by major industrial power users such as steel or aluminium works.

Much to the relief of the retailers, this unsatisfactory mechanism has been abolished. From the start of this year, rather than sell to retailers, each TSO must market the renewables power that comes under its own umbrella directly on the EEX. The TSOs will smooth the forecasted input of renewables on to their systems for each day into a product that they can sell on the day-ahead auction - the spot market - for each hour of the following day. Any adjustments that need to be made due to inaccurate forecasting or other reasons can be dealt with on the so-called continuous - or intra-day - trading, in which electricity for hourly periods can be bought or sold up to 75 minutes before physical delivery of the electricity begins.

Better forecasting

The government says that, due to more accurate short-term wind forecasting and other factors, moving to the creation of a daily rather than monthly band of renewables power will result in the annual cost of creating the band - currently around EUR570 million - being reduced by EUR40-125 million.

How the wholesale electricity market will react to the new system is not clear. "More price volatility may be expected," says Julian Ewert, an analyst at Energy Brainpool. This could occur because, while electricity retailers must currently calculate a quota of renewables into their monthly portfolio, selling or buying only what is surplus or missing for their needs, from this year they no longer have to hold any space free for renewables. It remains to be seen whether, and to what extent, they will factor in more purchases or sales on the spot market to profit from fluctuations and prices in renewable energy. The more players participate in the spot market, the less dramatic price peaks and troughs are likely to be.

Without the buffering effect of the retailers having to take up quotas of renewables power, negative prices may occur more often. "But the market will probably adapt to avoid this," Ewert says. Negative pricing, allowed to fall to an eye-watering minus EUR3,000/MWh, can occur on the EEX spot market at times when the wind is blowing strongly but demand is low.

The TSOs and conventional generators then effectively pay market players to take up surplus electricity and the wholesale price of power becomes negative. Between January and October, negative pricing occurred on the EEX spot market for Germany and Austria on 18 days. The lowest price, minus EUR500.02/MWh, occurred in the auction on October 3 for use between 3am and 4am on October 4.

Power surpluses and negative pricing could be avoided by improving transmission networks to allow power to reach remote markets within Germany's borders, and markets abroad, stepping up demand-side management and expanding electricity storage systems.

Market transparency

From this year, an improvement in the market's transparency should make it easier to assess the actual performance of conventional power plants and renewables stations compared to their forecast performance.

Under a separate ruling, each TSO is obliged to publish data on the new EEX Transparency Platform every day at 6pm on expected wind generation for the following day in its network region for each hour. It will also publish retrospective data on actual hourly wind generated power two hours after generation. The wind information is published on the Transparency Platform at the same time as planned next-day coal, gas, oil and nuclear power station generation.

This regular publication of data is required by a ruling that was enforced by energy regulator Bundesnetzagentur in April 2009 on creating transparency in electricity wholesale trading. Commenting on the launch of the EEX Transparency Platform on October 30, 2009, a spokesperson for energy trader RWE Supply and Trading says that "Germany leads the way" and calls for the rest of Europe to follow suit.

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