Queen Merkel Still Loves Green Power

By: Andrew_McKillop

SHE MIGHT NOT LOOK ECOLOGICAL
Angela Merkel has stayed faithful to alternate, renewable and energy-saving green themes and dreams since 2011, which is a long time in politics. One major reason (we know its paradoxical) is that Germany has been radically increasing its coal-burn, this winter, which itself is delaying large increases of power prices to consumers. Other reasons are also to be found there, in the power sector.

Chancellor Merkel is however losing support from her two biggest allies in the utilities industry. EOn and RWE, as their escalating, even runaway debt prompts them to beat a retreat from renewable-power expansion. In theory, this undermines her Energy Wonderland 600-billion-euro ($725 billion) program - called the Energiewende - which among other goals would entirely reshape Germany’s power market.

Germany's two biggest utilities are reducing clean-power spending for the first time since 2009 because their combined debt pile now stands at nearly 70 billion euros ($89 billion). Funding for the North Sea offshore wind energy program, the centerpiece of Merkel’s plan to achieve at least 33% renewable-source power supply on a year-round basis by or before 2020, may be insufficient. This could call into question her 180-degree turn on nuclear power made in 2011, when she set a law to completely abandon nuclear power within 10 years, by January 2022.

Analysts say that consumer power bills now weigh heavily on Merkel's mind as she prepares for a challenging re-election attempt in September. Merkel-opposing and Merkel-neutral media have given major coverage to recurring "technical problems" for wind farms in the North Sea and linking their turbines to the grid. Costs have "unexpectedly risen" to the point that future profitability of these windfarms are unsure, and the original investment calculations of German utilities, and Berlin political calculations of their role and costs in the Energiewende program are invalid.

PROBLEMATIC OR WORSE
Queen Merkel had few problems with her rousing one-liner "Off with their heads!" when it concerns small Club Med islands with too many Russian bank account holders, but until now has stayed faithful to spurring the development of massive wind farms at sea -- like her opposite numbers in Whitehall, England. Unlike them, she wants to exclude nuclear power dependence but as a physical chemist by training she appreciates the technical argument that baseload power capacity is one thing Germany will not have - unless it keeps its coal-fired capacity. North Sea winds may well be 30% stronger and more reliable than onshore wind regimes, but most renewable sources outside hydro and geothermal energy, and biomass power cannot provide baseload power like coal or nuclear plants.

In the realms of theory, toyed with at Queen Merkel's court for some while, non-German neighbor countries, meaning coal-fired Poland or nuclear France might supply baseload power, but European surplus baseload power capacities, and transport system capacities are far too small to permit this nice idea from becoming real. Much more real, EOn, the country’s biggest utility, said in March it will cut clean-energy investment by about 67% to less than 1 billion euros in 2015 from 1.8 billion euros in 2012, while second-biggest utility RWE has announced will cut its spending by 50% to about 500 million euros in the next two years.

Making the subject complex for average court jesters in the Merkel entourage, both utilities face a constantly rising "wall of costs" related to their ageing nuclear reactors, of which a disputed and variable number must be decommissioned whether or not the Energiewende program continues. Queen Merkel's "photo op" announcement of May 2011 shutting down all Germany's nuclear power plants within 10 years, that she made a month after Japan’s Fukushima disaster, started with her ordering the immediate closure of 8 reactors owned by EOn and RWE. This prompted the rage of their CEOs and major financial partners, especially Deutsche Bank, due to this early closure wiping a combined 24.9 billion euros off their stock exchange value in 9 months.

As long as the reactors were running, they were cash cows. When they stop, the become nearly bottomless pits of spending for decades ibto the future. Overall costs of Germany's reactor shut down and dismantling program to 2030 may total 550 billion euros according to government studies.

Both utilities had existing nuclear phase-out plans and scenarios, all of them overshadowed by the probable, possible and potential costs of decommissioning. Both were preparing for these corporate-decided writedowns of nuclear assets turning into extreme high liabilities, when they cease generating and need dismantling and Safestor over periods as long as 35 years ahead. In preparation of this, EOn had already sold, or had programmed the sale of close to 10 billion euros of assets. Merkel's theatrical announcement of May 2011, totally reversing her previous pro-nuclear stance, added close to 9 billion euros of new and additional asset sale needs. RWE is at present far behind in building its nuclear decommissioning treasure chest of provisions, but has already decided the shedding of its highly profitable Egyptian offshore gas and oil development unit tapping into large resources in the eastern Med, its DEA oil and gas unit, in an asset disposal program brokered by Goldman Sachs, for a hoped-for 5 - 8 billion euros.

DEBT, DEBT AND DEBT
Some analysts claim that RWE’s debt situation is even worse than EOn's colossal debt, and simply does not permit any investment growth at all. Whatever the progress with the DEA sale, they say, more and bigger divestment is needed. EOn's strategy, as of early April, is to not only move outside Grmany, but to put its money outside Europe wherever it sees good chances for revenue growth.

It has recently announced plans to either buy, or add more power assets in Turkey, possibly including geothermal capacity, to increase its holdings in Brazilian power utilities by about one-half, and to also consider potential investment in offshore gas and oil projects, outside Europe. It has also publicly slowed, and may later on try to completely extract itself from its North Sea windfarm undertakings, notably the 1 billion euro Amrumbank West project, already set back more than a year, to late 2015.

While Amrumbank West shows “clear commitment” to the offshore wind industry, this is only the visible part of the green power iceberg, which overall creates such enormous market challenges that beating a corporate retreat is now the best, or only option. RWE is set in eactly the same situation, with its own very high-cost offshore wind project, the Nordsee Ost windfarm bedevilled by grid interconnection delays and mounting costs, pushing back its completion to at least late 2014.

RWE has now set its wind program to “one farm at a time” to reduce investment risks, its CEO said in March while abandoning previous "firm commitment' to develop 4500 MW of non-hydro renewable power capacity under construction or in operation by end-2014. Its divestment program in renewable energy assets to date include sales of three US windfarms to a Danish pension fund and stepped-up search for non-German partners for its German projects.

Debt-forced risk spreading is the one-liner for the new corporate strategy of Germany's biggest power producers, in a retreat from the previous policy of being sole owner and exclusive operator of wind farms. Both EOn and RWE intend to make money on wind-farm design, planning, construction, power line connection and operational management services, and do not intend developing own-company construction and operation of the 10 000 MW of offshore wind capacity by 2020, and 25 000 MW by 2030 called for by Energiewende.

Corporate debt and the ever-rising costs of Energiewende can only slow offshore wind expansion in Germany, shown by the increasing use of coal-fired power "on a stopgap basis" that may well become stretched in time. Other German utilities and power transport entities, including EnBW (Energie Baden-Wuerttemberg) and Swedish-owned Vattenfall, with less than 7% of present German renewable-power capacity (excluding biomass power capacity) will almost certainly also reduce risk exposure, and not seek expansion of their "green power" capacities.

While Queen of Hearts Merkel can continue extolling the "German example" of fiscal rectitude and (approximately) balanced budgets for the ruined Club Med countries, rising power-sector corporate debt and rising costs of Green Power have triggered a major political retreat in Germany. Her Energiewende may not be doomed, but its goals will be trimmed and "high emission" coal and natural gas will be stretched as "bridging fuels".

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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