New Market Research Report: Germany Power Report Q2 2016

From: Fast Market Research, Inc.
Published: Thu Apr 28 2016

The Energiewende will sustain downward pressure on margins in the conventional power generation segment and will continue to pose and existential threat to utilities like E.ON and RWE. The government is currently undertaking sweeping reform of the electricity market in order to ensure security of supply as intermittent renewable energy plays a bigger role in the power mix, but - at this stage - there is little to indicate that the redesigned market will support an uptick in thermal generation, with the government eschew ing the introduction of fully-fledged capacity market .

Recent Developments:

Germany will continue to register strong growth in renewable-based electricity generation and the coalition government will not diverge from Energiewende (energy transition) - despite changes to renewable energy subsidy schemes that are aimed at curbing the cost of the transition. This means that we have largely retained our forecasts for growth in electricity generation, consumption and capacity. We maintain that Germany will preserve its status as a global renewables powerhouse but will continue to grapple with the economic and practical implications of the Energiewende.

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We also maintain that the Energiewende presents an existential threat to some of Germany biggest utilities. E.ON and RWE are both moving to separate their conventional power assets and renewables businesses - as traditional thermal assets are marginalised as a result of the influx of intermittent renewables and the subsequent collapse of wholesale electricity prices.

Notably, E.ON reported its biggest-ever annual loss in early 2016 after it was forced to accept impairments on thermal capacity (mostly gas) of EUR8.8bn for full year 2015. RWE made a net loss of almost EUR200mn in 2015 due to impairments and announced that it would scrap its dividend - sparking fury amongst its municipal shareholders.

In an effort to address some of the structural problems caused by the Energiewende, and ensure that the electricity sector can deliver secure supply even as intermittent renewable energy plays a bigger role in the power mix, the coalition government is pushing ahead with some of the most widespread reforms of the energy market since the sector was liberalised in the 1990s. Dubbed 'electricity market 2.0', the government has opted for a market-based approach rather than a state-sponsored approach to Germany's energy market of the future.

There will be a focus on letting the market set prices in a fully liberalised, 'energy-only' market that will incorporate a number of flexible sources of supply. These sources will range from battery storage providers, to companies focused on supply-demand management to flexible gas plants.

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