Setting the Agenda for Wind Energy

August 2019 – The German wind energy industry has grown up and is currently going through its most serious crisis. Construction is stagnating, the time of generous subsidies is past. But there are good prospects even for older installations in high-wind locations, thanks to some smart schemes for continued use, new long-term power supply contracts for green energy and technological innovations. As a project funding institution with a thorough knowledge of the industry, the Hamburg Commercial Bank is actively involved in supporting this transformation.

In little more than a year, the first wind farms which have been operating for 20 years will have to hold their own in the market. Without any state subsidies. In the spring of 2020, the “Renewable Energies Act” [Erneuerbare-Energien-Gesetz (EEG)], initiated by the Federal government under Gerhard Schröder, will be celebrating its 20th birthday. The EEG is a success model – it has already driven the costs of power generation from solar and wind energy down to a level where they are almost on a par with fossil fuels. And without the significant expansion of wind energy and photovoltaics (PV), the upcoming phasing out of nuclear energy, followed in the medium term by that of coal-fired power generation, would be unachievable.

Green energy sources now account for almost 40 percent of all electricity generated in Germany. Wind energy contributes the biggest share of this. The once mildly ridiculed sector has now grown up. With systematic further development, future investment models should soon be able to cope in the market without subsidies.

The challenges for project developers, investors and operators of wind farms are growing. But also for the current Federal Government. Germany has undertaken to increase the proportion of renewable energies in the overall electricity mix to 65 percent by 2030. Wind energy is set to deliver the majority of this. According to the Federal Association for Wind Energy [Bundesverband WindEnergie] there were over 29,000 onshore wind turbines in total in 2018. These contribute around a fifth of total German electricity generation. The industry association is working on the assumption that an annual increase in capacity of at least 4.5 gigawatts will be needed to achieve the 65-percent target in eleven years. This corresponds to around 1,200 newly constructed wind turbines each year. But the construction of new wind turbines in Germany has dramatically slumped. At 2.4 gigawatts in 2018, the output from new installations was around 55 percent below the figure for the previous year. The first six months of 2019 saw the commissioning of only 86 new wind turbines with a capacity of 0.3 gigawatts. The University of Applied Sciences in Berlin warned recently that with these construction rates, the climate targets are turning into an illusion.

“New forms of financial participation on the part of affected citizens are necessary”

What are the reasons for this development? “The causes of the crisis are home-made. It is becoming more difficult to find sites for new wind farms and there is simply a lack of legally feasible projects ready for development. Where there are sites, the approval processes are protracted. More than 1,000 citizens' groups are now committed to blocking the construction of new wind farms,” says Nils Driemeyer, Global Head Renewable Energy at Hamburg Commercial Bank. “The German government is now challenged to adapt quickly to the circumstances, to enable adequate project development work in the long term.” But the project developers and the site owners will, in his honest opinion, also have to do a lot more with regard to the necessary public acceptance. “It’s not enough to inform the public about a new project clearly and in good time, and to open it up for the public for investment. New forms of financial participation on the part of affected citizens are required.”

At the end of the coming year, the first round of wind turbines will be coming to the end of their 20-year subsidy period. From this point on, a large number of older wind farms – the “over-twenty” wind farms – will have to manage without subsidies – or be decommissioned. More than half of the current onshore wind turbines and 30 percent of the installed nominal power output will be affected by 2025. In light of the decline in the construction of new wind farms, it is essential to continue the profitable operation of these older turbines, or alternatively to be able to “repower” these older installations with powerful, modern turbines, so as not to fall even further behind in the achievement of climate targets.

"The market potential for PPA in Germany is immense."

Nils Driemeyer, Global Head Renewable Energy Hamburg Commercial Bank

Over-twenty installations have a future in high-wind locations

The expiry of state funding is by no means the end for an over-twenty wind farm. Whether an older installation that is technically still productive can continue in profitable operation also depends on many factors. Along with maintenance program, future electricity prices and marketing strategy are also of key significance. Wind turbines in high-wind locations still have potential – not least thanks to the Power Purchase Agreements, or PPAs. These represent supply and purchase agreements between an electricity generator and an electricity customer. Wind energy customers include companies which have declared their commitment to sustainability. They want to be able to demonstrate to their customers, suppliers and the public at large, exactly which installation their power is coming from. “The market potential for PPAs is immense in Germany as well,” predicts Driemeyer.

What PPAs are all about

What to do with an over-twenty wind farm after its EEG subsidy has run out?

A wind farm operator generally has the following options: “continued operation”, i.e. the direct marketing of its power generation on an unsubsidized basis, the “repowering” of the installation(s) by building more powerful turbines, and “decommissioning without replacement”. Alternatively it may be possible to sell the installation(s).

Which basic electricity marketing strategies are available for over-twenty wind farms?

Three marketing approaches (plus mixed forms of these) are possible:

  • sale through a direct marketer via the electricity exchange at the current market price, possibly with partial hedging of the price risk (for example via the energy derivatives exchange),
  • sale at a fixed price to an end-consumer company in the context of a PPA contract, together with the transfer of certificates of origin,
  • sale to an energy supplier or trader in the context of a PPA contract, with restriction of the price risk to a certain price bandwidth, together with transfer of certificates of origin.

What exactly is a PPA?

PPA is the abbreviation for Power Purchase Agreement. A PPA is a long-term power supply contract which is concluded between an electricity generator and a customer company, defining primarily the supply quantity obligation and the price for the quantity of electricity supplied.

How does a PPA work?

If there does not happen to be a direct power line connection between the generator and the PPA customer, the power is supplied via the public power grid. The electricity generator usually handles the power flows, the remuneration payments and the transfer of the certificates of origin for the generated green electricity via an electricity trader. In the case of a baseload PPA, the latter is also commissioned with the marketing of any surplus generation capacity or the procurement of any shortfalls via the electricity exchange.

Power Purchase Agreement

Power Purchase Agreement

What is the benefit of PPAs for the continued operation of older installations?

They permit the price risk and the supply quantity risk for all the electricity generated in the course of the contract period to be transferred to the electricity customer (“pay-as-produced PPA”). However, the PPA electricity customer is compensated for accepting such a risk through a discount on the PPA fixed price. Alternatively the contract can be designed as a “baseload PPA”, in which the electricity generator undertakes to supply fixed quantities, for which, however, a higher fixed price can be agreed, in comparison with a pay-as-produced PPA. With a baseload PPA, the plant operator has to procure or sell any shortfalls or excess quantities via the electricity exchange in the event of any deviation from the defined delivery quantity, and carries the risk involved in doing so.

What is the benefit of PPAs for the continued operation of older installations?

They permit the price risk and the supply quantity risk for all the electricity generated in the course of the contract period to be transferred to the electricity customer (“pay-as-produced PPA”). However, the PPA electricity customer is compensated for accepting such a risk through a discount on the PPA fixed price. Alternatively the contract can be designed as a “baseload PPA”, in which the electricity generator undertakes to supply fixed quantities, for which, however, a higher fixed price can be agreed, in comparison with a pay-as-produced PPA. With a baseload PPA, the plant operator has to procure or sell any shortfalls or excess quantities via the electricity exchange in the event of any deviation from the defined delivery quantity, and carries the risk involved in doing so.

"The optimal investor for a wind farm can also come from abroad. Access to international investors is crucial."

Dr. Roland Schulz, M&A Transactions Energy Hamburg Commercial Bank

As one of the leading project funding institutions in Europe, the Hamburg Commercial Bank offers its clients a variety of services associated with the conclusion of a PPA. On the basis of experience in the Scandinavian wind energy markets, the bank provides advice on the design of a PPA contract, for example, and assistance in finding suitable electricity customers. The bank's specialists also advise project developers and plant operators on the sale of wind farms, etc. For example, the M&A team of Hamburg Commercial Bank recently advised getproject GmbH & Co. KG, the Kiel-based project developer and operator of onshore wind farms in Germany, on the sale of its shares in two turn-key wind farms in Brandenburg. The wind farms, which began to feed the grid in June and September last year, have a total nominal output of 20 megawatts. The buyer was EWE Erneuerbare Energien GmbH, a subsidiary of the Oldenburg-based energy supplier EWE AG. “But, depending on the parameters of the wind farm in question, the ideal investor can also come from abroad. So for the successful sale of a wind farm, access to international investors is also crucial. Thanks to its extensive international network, the bank is very well positioned in this respect,” explains Dr. Roland Schulz, who is responsible for providing advice on transactions in the area of renewable energies at Hamburg Commercial Bank.

"Wind turbines will continue to be produced in Germany in the future. There are a number of factors playing into the hands of wind energy."

Nils Driemeyer, Global Head Renewable Energy Hamburg Commercial Bank.

Higher and higher

Average size and performance of onshore wind turbines 2000 to 2018 (Source: Bundesverband WindEnergie [Federal Association for Wind Energy])

Opportunities for an upturn in the wind industry

Is the wind energy sector now threatened by a wave of bankruptcies, plant closures and mass redundancies - just as the solar industry was a few years ago - as a result of the current decline in the construction of new wind farms? “No,” is the firm response of Driemeyer, “wind turbines will continue to be produced in Germany in future.” According to the banking expert for renewable energies, there will in fact be “a large number of developments which will favour wind energy, and could well deliver new buoyancy in the industry.” These include not only the increasing internationalization of the industry and the repowering process, but also the development of storage technologies, and not least the development of Power-to-X technologies. In these processes alternative energy sources such as the wind or the sun are used to produce, for example, hydrogen for fuel cells or liquid synthetic fuels for aircraft.

The latter in particular are still far too high for a real market breakthrough; the most critical estimates range from 4.50 euros to even more per liter. As a scientist, Tremmel is more optimistic and believes that e-fuel production costs of around one euro per liter are feasible within the next five to ten years. A prerequisite for this, however, is the roll-out of the technology, which so far has not progressed much beyond the experimental stage in Germany.

The end of the boom

Newly installed onshore capacity in Germany, in megawatts (Sources: Bundesnetzagentur [Federal Network Agency]; Deutsche WindGuard GmbH)

What Power-to-X is all about

What is Power-to-X?

Power-to-X is a collective term for technologies with which (surplus) electricity from renewable energy sources such as solar radiation energy or hydroelectric power are used to produce liquid or gaseous fuels from water and CO2, for example.

How does Power-to-X work?

The technical basis is always water electrolysis, with the aid of which water is split into oxygen and hydrogen. Using carbon dioxide from the ambient air, the hydrogen obtained in this way can be used in subsequent process stages to create synthetic gaseous or liquid hydrocarbons (e-methane, e-fuels).

What benefits does this offer?

Power-to-X solutions enable the production of climate-neutral fuels. The preconditions for this are as follows: The electricity used to split the water must come from regenerative energy sources and the carbon dioxide needed must be taken from the atmosphere. Power-to-X enables the urgently necessary linkage of the sectors: For example, while renewables enjoy a significant market share in the electricity sector, the transport sector still relies largely on fossil fuels. If green energy were used in future both to power more e-vehicles and to produce climate-neutral fuels, the power generation and transport sectors would be genuinely linked for the first time.

What is the government doing?

For a long time, e-fuels, etc. were only of interest to specialist circles. But the government has now also recognized that climate change will be difficult to handle if the focus is solely on e-mobility. Peter Altmaier, the Federal Minister for Economic Affairs and Energy, recently made headlines with a plan to trial hydrogen and alternative energy storage systems on an industrial scale in 20 “real-world laboratories” throughout Germany. According to his statement, there are around 100 million euros per year available for this.