With the introduction of unreliable and intermittent wind power comes the risk of widespread blackouts, social and economic chaos. However, to avoid the consequences, grid managers in Germany are paying conventional generators huge premiums to compensate for wind power “outages” – and the costs of doing so are starting to bite – not that the generators mind. Keeping chaos at bay has created opportunities to milk the system for what it’s worth – with some very handsome upside for savvy marketeers.
Here’s Bloomberg on the market debacle created by German wind power.
German Utilities Bail Out Electric Grid at Wind’s Mercy
25 July 2014
Germany’s push toward renewable energy is causing so many drops and surges from wind and solar power that the government is paying more utilities than ever to help stabilize the country’s electricity grid.
Twenty power companies including Germany’s biggest utilities, EON SE and RWE AG, now get fees for pledging to add or cut electricity within seconds to keep the power system stable, double the number in September, according to data from the nation’s four grid operators. Utilities that sign up to the 800 million-euro ($1.1 billion) balancing market can be paid as much as 400 times wholesale electricity prices, the data show.
Germany’s drive to almost double power output from renewables by 2035 has seen one operator reporting five times as many potential disruptions as four years ago, raising the risk of blackouts in Europe’s biggest electricity market while pushing wholesale prices to a nine-year low. More utilities are joining the balancing market as weak prices have cut operating margins to 5 percent on average from 15 percent in 2004, with RWE reporting its first annual loss since 1949.
“At the beginning, this market counted for only a small portion of our earnings,” said Hartmuth Fenn, the head of intraday, market access and dispatch at Vattenfall AB, Sweden’s biggest utility. “Today, we earn 10 percent of our plant profits in the balancing market” in Germany, he said by phone from Hamburg July 22.
In Germany’s daily and weekly balancing market auctions, winning bidders have been paid as much as 13,922 euros to set aside one megawatt depending on the time of day, grid data show. Participants stand ready to provide power or cut output in notice periods of 15 minutes, 5 minutes or 30 seconds, earning fees whether their services are needed or not.
German wholesale next-year electricity prices have plunged 60 percent since 2008 as green power, which has priority access to the grid, cut into the running hours of gas, coal and nuclear plants. The year-ahead contract traded at 35.71 euros a megawatt-hour as of 3:54 p.m. on the European Energy Exchange AG in Leipzig, Germany.
Lawmakers last month backed a revision of a the country’s clean-energy law to curb green subsidies and slow gains in consumer power prices that are the second-costliest in the European Union. Chancellor Angela Merkel’s energy switch from nuclear power aims to boost the share of renewables to at least 80 percent by 2050 from about 29 percent now.
Jochen Schwill and Hendrik Saemisch, both 33, set up Next Kraftwerke GmbH in 2009 to sell power from emergency generators in hospitals to the power grid. Today, the former University of Cologne researchers employ about 80 people and have 1,000 megawatts from biomass plants to gas units at their disposal, or the equivalent capacity of a German nuclear plant.
“That was really the core of our founding idea,” Schwill said by phone from Cologne July 21. “That the boost in renewable energy will make supply more intermittent and balancing power more lucrative in the long run.”
Thomas Pilgram, who has sold balancing power since 2012 as chief executive officer of Clean Energy Sourcing in Leipzig, Germany, expects the wave of new entrants to push down balancing market payments.
“New participants are flooding into the market now, which means that prices are coming under pressure,” Pilgram said. “Whoever comes first, gets a slice of the cake, the others don’t because prices have slumped.”
German grid regulator Bundesnetzagentur welcomes the increase in balancing market participants.
“That’s in our interest as we want to encourage competition in this market,” Armasari Soetarto, a spokeswoman for the Bonn-based authority, said by phone July 18. “More supply means lower prices and that means lower costs for German end users.”
The average price for capacity available within five minutes has dropped to 1,109 euros a megawatt in the week starting July 14, from 1,690 euros in the second week of January, Next Kraftwerke data show. Payments for cutting output within 15 minutes dropped to 361 euros from 1,615 euros in January.
The number of participants has increased as the country’s four grid operators refined how capacity is allocated. In 2007, the grids started one common auction and shortened the bidding periods. Since 2011, power plant operators commit their 5-minute capacity on a weekly basis instead of a month before.
Bloomberg Business week
The same conditions that allow rorting and gaming of the power market in Germany exist in Australia: huge fluctuations in wind power output – with almost daily collapses – allows sharp operators to cash in, with grid managers entirely at their mercy. During wind power “outages” the dispatch price has rocketed from around $40 per MWh to the regulated cap of $12,500 per MWh – see our post: the Great Watt and Pole Swindle.
Wind power has provided Australian generators with the perfect “cover” for pricing tactics of the kind that helped Enron make a killing in the Californian power market during the late 1990s (see our post here.).
The end of the mandatory RET can’t come soon enough.