Renewable energies: Return to realism

September 2017 – 30 years ago, the birth of onshore wind energy in Germany was celebrated in the Kaiser-Wilhelm polder near Marne. Since then, it's growth has been uninterrupted. In the first half of 2017, the increase in onshore wind energy plants rose by 11 percent compared to the same period in the previous year. There were 790 wind energy plants built with a total output of 2,281 megawatts (MW).

While in the 80s wind turbines were laughed at as an exotic craze, wind energy has meanwhile become a recognized and important sector of the economy. Onshore and offshore, it has around a 12 percent share of Germany's total electricity generation. What is the future growth trend? What are the obstacles? Experts from business and industry will exchange their ideas at the “Husum Wind” fair. Around 650 exhibitors are expecting as many as 18,000 visitors at the largest leading trade fair in the sector from September 12 to 15.

Interview with Lars Quandel, Department Manager for Energy & Infrastructure at HSH Nordbank

The calls for bids for onshore wind energy are receiving heavy criticism in the sector. Developers and manufacturers are criticizing the lack of certainty in the level of expansion. Are they justified?

Lars Quandel: Yes, absolutely. The manufacturers and developers are very concerned because the construction of the awarded projects can drag on for a long time and the construction of these projects is in itself uncertain. Many citizens' energy projects have been awarded in the first two rounds of bidding. Citizens' energy projects do not require authorization from the Federal Emission Control Act (BIMSchG) to take part in the bidding. However, this later becomes a requirement for the construction of the project. In addition to this, citizens' energy projects have four and a half years in which to be built. In this respect, it can be good that the expansion of wind energy in Germany is significantly delayed and is perhaps not taking place at the level desired by politics.

Will growth on the German market be sustained or is this likely to be curbed?

Lars Quandel: For 2017 and 2018, following on from the previous years, large additional construction quantities are expected. For subsequent years, from 2019 and 2020 this will begin to slacken off because in recent years calls for bids have mainly been won by citizens' energy projects which have more than four years to complete their projects.

The prices awarded in the auctions are significantly falling, in both offshore and onshore. What are the expectations of bidders who have won?

Lars Quandel: The bidders expect two things: large technical advancement, meaning that the plants are becoming more efficient and therefore the kilowatt hour of electricity is being produced more cheaply. They also expect rising energy prices. In the case of offshore calls for bids, which are won for zero cents, it must be assumed that the energy prices are higher than today so that these projects are worthwile for the investor.

Surely it's a positive thing that the subsidies are being reduced?

Lars Quandel: Absolutely, it significantly accommodates the industry in the medium term and will help its image because the subsidies, if they are reduced, are positive for consumers as this takes the burden off them. If consistently less money needs to be paid out for renewable energies, it promotes its positive image. In the medium term, it is the aim of the industry to manage without subsidies. However, it is important to choose the right time scale for this transition so that all those involved are also able to implement these changes into the framework.

What impact do the limited awards have on the projects?

Lars Quandel: This puts pressure on all price components for the cost of a park. That means that everyone involved, whether it is us a financiers, the manufacturers, or the suppliers, needs to decide whether the products can be offered at a cheaper price. The lower remuneration means the overall remuneration of a project will drop. It can therefore be assumed that around 30 to 40 percent less cash flow is available in a project when comparing the remuneration from the old EEG from 2014 with the awards from the 2nd call for bids in the new EEG.

How do the results of the call for bids for the expansion plan suit the government?

Lars Quandel: At first glance, the results of the first two calls for bids look very good. The entire capacity was awarded. However, as already mentioned, it is not expected that all projects which receive an award will be constructed. It is not in line with the Paris Agreement, according to which almost 100 percent of energy should come from renewable energies by 2050. The German government's political plan to achieve 80 percent by then cannot be relied upon either. With the annual expansion of 2.5 GW net of wind energy passed in the EEG of 2017, in Germany we will only achieve around 60 percent.

What impact does the development have on the plant manufacturers and other participants in the market?

Lars Quandel:There is enormous pressure through the calls for bids and the remuneration being granted, in particular on the manufacturers, to reduce their prices. That is the largest price component and it probably has the most room for maneuver. At the same time, the margins are not so great that the price reductions can be completely implemented by the manufacturers. Those involved in the industry will also increasingly look abroad. Because of the expected limited expansion of wind energy in Germany, the export of wind energy plants plays an increasing role for German manufacturers.

What changes are necessary or sensible?

Lars Quandel: To promote the expansion of renewable energies, it should be considered whether certain aspects of the EEG should undergo further changes. For example, the cap on various sectors could be lifted; the de minimis rule, which has been implemented in France, could be looked at. If it was to be copied, there would barely be a project entering the call for bids, which is politically undesirable, but it could be taken on in stages, e.g. a maximum of three plants with a maximum of nine MW.

The problems of energy storage are also still to be solved. What can be done about this?

Lars Quandel: It is all about creating a stronger link between sectors. Stores are a medium, but at the same time we need to better harmonize the production, the consumption and transportation.

Do renewable energy projects continue to be interesting for investors?

Lars Quandel: Yes, definitely, for institutional investors, but also for other groups of investors. There are still attractive yields to be had in an environment of tried and tested technology and safeguarding of the basic supply of electricity.

How does the trend in Germany fit into an international context?

Lars Quandel: Great advances have been made in the expansion of renewable energies in Germany. We will continue to expand and in that respect are trailblazers on the international stage. However, we see the trend in Germany decreasing, and increasing in other countries. The level of support in Germany currently fits the level of other countries. Remuneration or achievable prices in other countries on the level of the 2nd call for bids are already the norm.

Wind turbines - an attractive decorative element at HUSUM Wind 2017
Wind turbines - an attractive decorative element at HUSUM Wind 2017

When it comes to climate protection, Germany is a world leader. Renewable energies such as wind and solar now provide around a third of electricity in Germany. However, the expansion of renewables is coming up against its economic limits. More market-based incentives are therefore urgently required. Lars Quandel, Department Manager of Energy & Infrastructure at HSH Nordbank finds himself in prominent company with this view.

Even “The Terminator” was full of praise: “Germany is currently performing brilliantly”, California's former governor and ex-actor Arnold Schwarzenegger says enthusiastically, when he was asked a few years ago by “Manager Magazin” about the German energy transition. “The country knows where it wants to get to and has a vision”, said Schwarzenegger. And the former “Mister Universe” should know, after all his US State is the number one pioneer for environmental policy.

This ambitious vision still exists today. The coalition agreement of the current grand coalition includes the goal of massively reducing greenhouse gas emissions compared to 1990. “In Germany, we want to codify the further steps towards reduction up to the target value of 80 to 95 percent in 2050.” With a long program, Germany wants to reach its part of the climate protection targets which were agreed at the UN climate summit in Paris in December 2015. Except for Syria, Nicaragua and, after the latest veto by US president Donald Trump, also the United States, virtually every country on the planet agreed to limit global warming to well below two degrees Celsius in comparison to pre-industrial values. No nation seems to be making such determined progress as Germany.

Backlog in the heating and traffic sector

The challenges only start when practical measures are taken.
The challenges only start when practical measures are taken.

But as always, the challenges only start when practical measures are taken. Even in Germany, the model country of the energy transition, renewables still play a comparatively small role. Admittedly, in the case of electricity coming out of normal sockets, up to a third is now eco-electricity. However, even if the Germans were to completely switch without exception to eco-electricity from wind or photovoltaic systems, it would only reduce the climate damaging carbon dioxide emissions by as much as a fifth of the necessary amount. Irrespective of the energy sector, wind, sun and biomass in this country are still trailing behind. In the heating sector, renewables reached 13.4 percent in 2016. Biofuels and renewable electricity in traffic last year contributed to just 5.1 percent of the entire electricity and fuel demand in the traffic sector, according to the Federal Environment Office. In primary energy consumption, renewables only reached 12.6 percent in 2016.

The heating and traffic sectors are primarily responsible for carbon dioxide emissions. The short-term climate protection target for the German Federal Government of reducing the greenhouse gas emissions by 40 percent over 1990 by 2020 “is in all likelihood going to be missed”, according to the latest “monitoring report” on the energy transition, which is issued annually by an independent expert commission on behalf of the German Federal Ministry for Economic Affairs and Energy. According to this report, Germany's greenhouse gas emissions have been stagnant since 2009, and this is despite the construction of around 27,000 wind energy plants and 1.6 million solar plants up to the end of 2016.

By simultaneously exiting nuclear power and fossil fuels, Germany has set itself a very ambitious task, both economically and ecologically. Meanwhile, it has become clear that not everything that is desirable, is also affordable or even sensible. “The rash transition lacked decisive prerequisites, in particular with regard to urgently required, high-performance storage technology for electricity. For heavy industry, the heating market and mobility, convincing solutions are still completely absent. We are partly running two infrastructures today. This is a burden on citizens but also on the industry”, criticizes Professor Dr. Franz-Josef Radermacher, researcher at the University of Ulm and, as a member of the Club of Rome, someone who explicitly warns against the consequences of global climate change.

The direction is clear: better utilization of the market economy

"Changes to the integration of renewable energies are essential", says Lars Quandel, Department Manager of Energy & Infrastructure at HSH Nordbank, here at HUSUM Wind 2017.

What critics like Radermacher are calling for is greater realism in energy policy and economic thought so that the energy transition can finally become a success. “Just by subsidizing photovoltaics in Germany, according to our calculations, more than 110 billion euros in payment obligations have stacked up – so far. The renewable energy law surcharge also includes the immense costs for the grid expansion and other costs. Ultimately, Peter Altmeier's famous cost estimate of one billion euros in costs from his time as Environment Minister is unfortunately, ultimately realistic”, says Manuel Frondel. He is the supernumerary professor for energy economics and applied econometrics at the University of Bochum and head of the competence area of “Environment and Resources” at the RWI - Leibniz Institute for Economic Research in Essen.

“Changes to the integration of renewable energies” are also seen by Lars Quandel, Department Manager of Energy & Infrastructure at HSH Nordbank, as essential, precisely so that the energy transition can stay on course for success. The future of wind and solar energy, after years of politically motivated pushing of subsidies, lies in better utilization of the market economy. The auctions for on and offshore wind plants are the first steps in the right direction.