Renewables in Europe: not the rosy view promoted by Big Wind

As we know, Europe is promoted as the success story for renewable sources of power; German, in fact, was the model for what Ontario did with wind and solar. And if by “model” you mean no cost-benefit or impact analysis was ever done, then yes.
  But what’s the story now? Here from the latest edition of The Economist, a story of the “green dream” gone horribly wrong. (Thanks to Eric Jelinksi for the tip.)

European utilities

How to lose half a trillion euros

Europe’s electricity providers face an existential threat

ON JUNE 16th something very peculiar happened in Germany’s electricity market. The wholesale price of electricity fell to minus €100 per megawatt hour (MWh). That is, generating companies were having to pay the managers of the grid to take their electricity. It was a bright, breezy Sunday. Demand was low. Between 2pm and 3pm, solar and wind generators produced 28.9 gigawatts (GW) of power, more than half the total. The grid at that time could not cope with more than 45GW without becoming unstable. At the peak, total generation was over 51GW; so prices went negative to encourage cutbacks and protect the grid from overloading.
The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast and cannot easily reduce production, whereas the extra energy from solar and wind power is free. So the burden of adjustment fell on gas-fired and hard-coal power plants, whose output plummeted to only about 10% of capacity.

These events were a microcosm of the changes affecting all places where renewable sources of energy are becoming more important—Europe as a whole and Germany in particular. To environmentalists these changes are a story of triumph. Renewable, low-carbon energy accounts for an ever-greater share of production. It is helping push wholesale electricity prices down, and could one day lead to big reductions in greenhouse-gas emissions. For established utilities, though, this is a disaster. Their gas plants are being shouldered aside by renewable-energy sources. They are losing money on electricity generation. They worry that the growth of solar and wind power is destabilising the grid, and may lead to blackouts or brownouts. And they point out that you cannot run a normal business, in which customers pay for services according to how much they consume, if prices go negative. In short, they argue, the growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.

Power down

The decline of Europe’s utilities has certainly been startling. At their peak in 2008, the top 20 energy utilities were worth roughly €1 trillion ($1.3 trillion). Now they are worth less than half that (see chart 1). Since September 2008, utilities have been the worst-performing sector in the Morgan Stanley index of global share prices. In 2008 the top ten European utilities all had credit ratings of A or better. Now only five do.
The rot has gone furthest in Germany, where electricity from renewable sources has grown fastest. The country’s biggest utility, E.ON, has seen its share price fall by three-quarters from the peak and its income from conventional power generation (fossil fuels and nuclear) fall by more than a third since 2010. At the second-largest utility, RWE, recurrent net income has also fallen by a third since 2010. As the company’s chief financial officer laments, “Conventional power generation, quite frankly, as a business unit, is fighting for its economic survival.”
The companies would have been in trouble anyway, whatever happened to renewables. During the 2000s, European utilities overinvested in generating capacity from fossil fuels, boosting it by 16% in Europe as a whole and by more in some countries (up 91% in Spain, for example). The market for electricity did not grow by nearly that amount, even in good times; then the financial crisis hit demand. According to the International Energy Agency, total energy demand in Europe will decline by 2% between 2010 and 2015.
Two influences from outside Europe added to the problems. The first was the Fukushima nuclear disaster in Japan. This panicked the government of Angela Merkel into ordering the immediate closure of eight of Germany’s nuclear-power plants and a phase-out of the other nine by 2022. The abruptness of the change added to the utilities’ woes, though many of the plants were scheduled for closure anyway.
The other influence was the shale-gas bonanza in America. This displaced to Europe coal that had previously been burned in America, pushing European coal prices down relative to gas prices. At the same time, carbon prices crashed because there were too many permits to emit carbon in Europe’s emissions-trading system and the recession cut demand for them. This has reduced the penalties for burning coal, kept profit margins at coal-fired power plants healthy and slashed them for gas-fired plants. Gérard Mestrallet, chief executive of GDF Suez, the world’s largest electricity producer, says 30GW of gas-fired capacity has been mothballed in Europe since the peak, including brand-new plants. The increase in coal-burning pushed German carbon emissions up in 2012-13, the opposite of what was supposed to happen.
So the gas and nuclear bits of the utilities’ business were heading for trouble even before the renewables bonanza, making the growth of solar and wind all the more disruptive. Renewables capacity (which is much higher than output) is almost half of electricity-generating capacity in Germany and roughly one-third in Spain and Italy. Total capacity, including renewables, is way above peak demand in all three countries. So renewables have added mightily to oversupply.

Excess supply plus depressed demand equals lower prices. Electricity prices have fallen from over €80 per MWh at peak hours in Germany in 2008 to just €38 per MWh now (see chart 2). (These are wholesale prices; residential prices are €285 per MWh, some of the highest in the world, partly because they include subsidies for renewables that are one-and-a-half times, per unit of energy, the power price itself). As wholesale prices fall, so does the profitability of power plants. Bloomberg New Energy Finance (BNEF), a data-provider, reckons that 30-40% of RWE’s conventional power stations are losing money.
But that is only the half of it. Renewables have not just put pressure on margins. They have transformed the established business model for utilities. Michael Liebreich, BNEF’s chief executive, compares them to telephone companies in the 1990s, or newspapers facing social media now: “It is an existential threat,” he says.

Peak punishment

Back in the 1980s, providing electricity was a relatively simple affair. You guaranteed a constant supply of power by building plants that ran on coal, nuclear energy (if you wanted it) or hydropower (if you had it). You ran these full blast around the clock—for technical reasons, coal and nuclear plants cannot easily be shut down anyway. And that provided “baseload power” (the amount always needed). Then, to supply extra electricity at peak times (like lunchtime or early evening) you had plants that could more easily be powered up and down, such as gas-fired ones. If you imagine a chart of power provision during the day, it looks like a layer cake: the bottom layers are flat (nuclear, coal and so forth); the layer at the top (gas) is wavy.
Deregulation swept away this tidy, ordered system, letting power plants produce according to the marginal cost of electricity. The advent of renewable energy then speeded up the changes. Renewables have “grid priority”, meaning the grid must take their electricity first. This is a legal requirement, to encourage renewable energy in Europe. But it is also logical: since the marginal cost of wind and solar power is zero, grids would take their power first anyway. So renewable energy slots in at the bottom of the layer cake. But unlike the baseload providers already in place (nuclear and coal), solar and wind power are intermittent, surging with the weather. So the bottom layers of the cake are wavy, too.
Now, when demand fluctuates, it may not be enough just to lower the output of gas-fired generators. Some plants may have to be switched off altogether and some coal-fired ones turned down. This happened on June 16th. It is costly because scaling back coal-fired plants is hard. It makes electricity prices more volatile. And it is having a devastating effect on profits.
Under the old system, electricity prices spiked during peak hours (the middle of the day and early evening), falling at night as demand ebbed. Companies made all their money during peak periods. But the middle of the day is when solar generation is strongest. Thanks to grid priority, solar grabs a big chunk of that peak demand and has competed away the price spike. In Germany in 2008, according to the Fraunhofer Institute for Solar Energy Systems, peak-hour prices were €14 per MWh above baseload prices. In the first six months of 2013, the premium was €3. So not only have average electricity prices fallen by half since 2008, but the peak premium has also fallen by almost four-fifths. No wonder utilities are in such a mess.

Read the rest of the story here.

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