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Germany expands renewables targets, considers ‘virtual baseload’

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Germany is expanding its renewable energy targets under a grand coalition agreement by the country’s two major political parties, but is also toying with the idea of introducing the concept of  “virtual base-load”.

In a 168-document released by Chancellor Angela Merkel’s centre right CPD party and the smaller centre left SPD, it is clear that the two parties remain committed to the “Energiewende”, the transition away from nuclear and into an electricity grid dominated by renewables.

The document confirms that nuclear will be phased out by 2022 at the latest, and introduces new “renewable energy corridors” that call for renewable penetration to be lifted to 40-45 per cent by 2025, and to 55-60 per cent in 2035.

This expands and upgrades the current targets, which are for 35 per cent by 2020, and 50 per cent by 2030. The long-term target remains 80 per cent by 2050.

One of the key issues is the cost of the Energiewende, and the structure of the energy market, which analysts say has been broken by the impact of renewables, because their short-term marginal cost is pulling down the wholesale price of electricity. They two parties have agreed that there will be no retrospective changes to the feed-in tariff payments.

The new government is looking at introducing a capacity mechanism, but not before 2018, but one interesting new aspect is the idea of creating “virtual base-load capacity”.

The government intends to investigate whether large renewable energy producers would need to guarantee a contribution to reliable baseload supply to enhance the security of supply.

They could possibly do this with contracts and individual agreements with storage operators, or get “insurance” from other electricity producers, such as gas-fired generation.

“This could mean that renewable generators may be forced to buy “insurance” from conventional stations to provide this baseload capability (given the strong intermittency of wind, solar); this could likely imply some sort of a capacity payments from renewable generators to utilities,” a note from Deutsche Bank analysts said.

This could be positive for the some of the large centralised generation companies such as RWE and EON and it could have an impact on earnings for soalr and wind operators. However, the analysts say that because this is likely to slow the growth of renewables, “and thus the whole Energiewende”, it probably won’t happen.

However, Deutsche Bank also says the new renewables corridors could result in a “banding” strategy of having specific technology targets for renewables. There has been a lot of discussion in Germany about the need to ensure that the right technology is built in the right place.

(Note: We’ll have more on the German market options in coming days as we report more on the recent trip to Germany).

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  • JohnRD

    These are issues that we are going to have to deal with as the % of renewables increases. Technical mix, storage and backup become important. In addition, traditional markets don’t work because the operating costs of renewables is so low. (It always pays to sell renewables no matter how low the price goes.)
    It all supports the case for driving investment in renewables (and associated storage and backup) by using a centralized process of competitve tendering to set up long term contracts for the supply of production, storage and backup CAPACITY. It also supports the idea of centralized control of which capacity is used at any one time. (Things like weather forcasts and grid capacity should affect these decisions –
    I use capacity rather than output as the basis of contracts because of this need to control and the relative unimportance of operating costs.)

    • iskryabin

      John, prior to the centralised “tendering” that you suggested, a market of swap contracts between fluctuating renewable generators and storage ( and in the mean time – between renewables and flexible generation) must be created. German “virtual base-load capacity” is equivalent to the “virtual generator” proposed in Australia some 3 years ago. See http://www.businessspectator.com.au/article/2013/5/31/renewable-energy/getting-green-power-market.

      • JohnRD

        iskryabin: It all comes across as a clumsy system to me. The problem is that it is trying to fit renewables into a system designed for fossil power. A few things to keep in mind:
        The variable cost of renewable power is negligible. Therefore it will almost always make overall economic sense to use all the available renewable power before using fossil power where grid capacity etc. allows this to be done.
        Once renewables get to the point where they can deliver more than the required power the decision re what renewed power (and storage) source to use is a technical decision rather than a market decision. A key strategy here is to top up storage in areas where shortfalls are expected (due to expected weather and/or demand) and run down storage in areas where surpluses are expected.

    • Warwick

      There is no need for “centralised control” as this more akin to a command and control economy rather than the liberalised markets we have in most western energy markets. You might believe that it is convenient to think that capacity is more important than output but tell that to a system operator when a generator fails to deliver on its capacity. There is a spot market for electricity and contracts exist as swaps for baseload and caps for peakers, both of which have an intrinsic capacity payment. Spot prices spike, and contract prices reflect this potential risk. i.e. renewables usually sell at a discount because they cannot usually sell at a firm price. This means that the market is pricing in capacity and the uncertainty of renewables hence there is no need to change the market.

  • Andrew Jones

    While the electricity market structure in aggregate may or
    may not be suboptimal, financial contracts such as those discussed offer mechanisms
    by which renewable energy can benefit under current market arrangements. Contracts can be structured that both recognise
    the benefits that different forms of generation contribute (baseload, peak etc)
    and assign value to those attributes; as well as compensate for the e.g.
    dispatch/intermittency deficiency characteristics that some generation projects
    might demonstrate. In doing so, revenue
    and/or off-take is enhanced, therefore also the potentiality to secure
    appropriate returns for project financing.
    Wholesale restructuring of regulated markets is not needed to do this -
    and the nirvana of a perfectly structured regulated market may never emerge. Financial contracts are already a core part
    of the energy market in Australia, and these contract structures merely
    represent variants of those same financial instruments and a new means of
    applying them which can benefit distributed renewable energy generation.