European Government Support for Wind Power Collapses

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Europe winds back the clock on windmills
The Sunday Times
Danny Forston
23 November 2014

Lured by subsidies, the power companies went green. But to keep the lights on they have to burn coal

Sixty miles northeast of Düsseldorf, outside the town of Hamm in northwest Germany, workers are giving a final tune-up to a glittering new power station.

Germany is the biggest proponent of the green electricity revolution, but this plant won’t be powered by the sun, wind or woodchips — it will burn dirty old coal.

Built by German energy giant RWE at a cost of €2bn (£1.6bn), the plant is no aberration. This year the company, which owns Npower in Britain, and its rivals have poured billions of euros into a fleet of new coal-fired plants, the most polluting form of power generation. When finished they will be capable of supplying more than 8m households.

The boom runs entirely counter to the European Union’s mission, led by Germany and Britain, to replace the old fossil fuel-based energy system with a cleaner alternative. Indeed, the Germans source a quarter of their power from solar, wind and other renewables. Yet last year, carbon dioxide emissions actually rose 1.2%, partly due to the resurgence of coal.

This is just one of the surprising and unintended consequences of Europe’s troubled effort to lead the world into the low-carbon era. And the fallout is set to become even more extreme.

Governments from Berlin to Madrid — and London — are dramatically scaling back the huge subsidy programmes introduced over the past decade to underwrite the revolution.

All are struggling to come to grips with an industry transformed by America’s shale gas boom.

In July, Germany — Europe’s biggest power market — passed a new renewable energy act that slashed taxpayer support by a quarter for solar and wind energy.

The reduction is partly a reaction to plummeting costs. Ben Warren, head of environmental finance at the consultants EY, said: “Policymakers underestimated how quickly costs would fall. Five years ago it cost €6m to install a megawatt of solar. That same megawatt today could cost as little as €700,000.”

That drop is what led the Department of Energy and Climate Change to slash subsidies for solar generators in Britain two years ago. A less dramatic drop in costs has meant cuts to aid for wind farms, both onshore and at sea.

In Germany, however, the trend has been much more dramatic. Since 2004 the share of energy generated from renewable sources has jumped sixfold to 27% — nearly double the ratio in Britain.

The boom was much bigger than Berlin bargained for, which means the country is now saddled with a huge supply surplus.

One might reasonably expect a big drop in household bills to follow. That hasn’t happened. Over the decade when renewables exploded onto the scene, Germany’s annual household bills increased by nearly two-thirds to €1,020 (£815).

Indeed, even though the wholesale power price has fallen by nearly 40% in the past five years, German consumer rates have risen steadily. Why? Because more than half the bill is now made up of taxes and ever-rising green charges.

Peter Crampton of the investment bank Macquarie said: “As renewables in Germany are remunerated under regulated tariffs, with the requirement for network operators to preferentially feed-in this power over other generation sources under the Renewable Energy Act, other more expensive power plants are crowded out, thereby depressing power prices.”

Paradoxically, the plunging coal price has made matters worse for some utilities — and not just in Germany. In 2012, RWE commissioned a new gas-fired plant in Maastricht, Holland. This summer it mothballed the €1.1bn facility.

The explanation can be traced back to the desiccated plains of Texas. Since 2011, the coal price has almost halved to $70 (£45) a ton. The fall is a direct consequence of the “fracking” revolution in America’s south and east, which has unleashed the wave of cheap gas now being fed into US power stations — leaving plenty of coal left over for export.

Angela Merkel’s snap decision in 2011 to ban new nuclear power stations shifted even more of the burden for Germany’s round-the-clock “baseload” power to its coal fleet. Yet the drop in the commodity’s price and the pressure of the renewables oversupply have led to a huge dip in the wholesale electricity price. Even new plants, such as at Hamm, struggle to make money.

So they export their power to their neighbours’ grids in the Netherlands and Czech Republic. The influx has wreaked havoc, rendering the Maastricht plant and others like it uneconomic.

Germany isn’t the only country on the Continent grappling with the legacy of policies that were conceived before the recession and, with the benefit of hindsight, were clearly poorly understood.

Spain’s energy industry is on the cusp of a shake-up akin to the one its banking industry went through after the financial crisis.

According to Warren of EY, banks injected more than €50bn over the past decade into project financing for Spain’s burgeoning renewables industry. As in Britain and Germany, the surge was a response to the promise of decades of subsidies.

This summer, just as Germany was haggling over its new renewable energy scheme, Madrid went one better. It slashed support not only for future projects, but pledged to claw back returns retroactively through new taxes.

The move turned many of the associated bonds from sure-fire bets to giant liabilities. Already under pressure to clean up their balance sheets, the banks are now looking for ways out.

This summer the Wall Street giant Blackstone hired a restructuring team from rival Rothschild and opened a Madrid office. So-called vulture investment funds have begun running the rule over deals where banks are desperate to move the problem loans off their books.

Many of the most prominent renewable energy developers have already written down their equity investments in these projects to zero. Warren said: “Now it is the banks’ turn to take some of the medicine.”

Tony Ward, head of power and utilities at EY, said: “This just highlights that the policies under which many of these long-term investment decisions are made often end up getting changed much quicker than promised, and it is very destructive. Governments need to be mindful.”

Britain’s energy policy is not that different. The government has enticed developers to build a new generation of clean energy sources underwritten by decades of inflated rates. It is working: the share of renewables is on the rise and coal plants are shutting down.

But it is far from perfect. Next month the energy department will hold an auction at which it will offer a guaranteed annual income for gas-fired power stations it needs to back up the growing army of wind farms. Even if one of these plants doesn’t fire up all year, its owner will get paid a handsome fee.

The German parliament is looking at implementing a similar system.
The Sunday Times

Where the piece claims “coal plants are shutting down” in Britain it’s because the plants concerned are decrepit and well beyond their use by dates: it’s been 40 years since Britain built a coal-fired plant (see this article).

Far from wind power replacing fossil fueled power sources, Britain has thrown £millions at building a mountain of fast-start back-up capacity – mainly Open Cycle Gas Turbines and a massive network of diesel generators; both of which are ludicrously expensive to run; and both of which spew out 3-5 times the CO2 emissions of a modern coal-fired plant, on a MWh for MWh basis (see our posts here and here and here).

And, as the article says, it’s gas generators (mainly OCGTs) that (at a phenomenal guaranteed price) will do much of the heavy lifting on the hundreds of unpredictable occasions each year when wind Britain’s power output registers a bit fat doughnut (see our posts here and here).

But – all that additional (and unnecessary) wind power back up capacity – and need for extra fossil fueled power to “balance” the grid – comes at a hefty price.

Britain’s back-to-the-future date with diesel power to avoid blackouts when wind power output collapses involves paying: “subsidies equivalent to up to 12 times the going rate for conventional electricity, and even, on very rare occasions, up to £15,000 per megawatt hour (MWh), or 300 times the normal rate of £50 per MWh” (see our post here).

It’s numbers like these that have seen the Spaniards retrospectively slam the bag on their massive subsidies to wind power outfits and start taxing them for “windfall” profits over and above a 7.4% cap, instead  – and Belgium and Italy follow suit with similar efforts to rein in escalating power costs (see our posts here and  here and here).

And the Germans are in there too: cutting subsidies in an effort to curtail escalating power prices that are sending their biggest firms to the US – where power is 1/3 of the cost that they’re being slugged by their Fatherland (see our posts our posts here and here and here) – taking thousands of real jobs with them.

If any of our political betters are looking for examples of what a full-blown debacle the great wind power fraud is, then they need look no further than Britain, Spain and Germany: where the future is happening right now.