Olav Johan Botnen - Long Term Analysis for the German Power Market

A presentation from

Long term Analysis for the German Power Market

18th German Norwegian Energy Forum, Berlin23rd of October 2014

Olav Johan BotnenSenior Analyst, Nordic [email protected]+47 37 00 97 61

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Long Term Price Forecast for German Power 2014-2035, update to be published in late October 2014

• Focus on German energy policy, Energiewende

• Discussions and tables on powerbalance, fuel/CO2 scenarios

• Power price forecasts

• Discussion of security ofsupply/capacity markets

This presentation is a part of a the analysis service from MKonline

This video is a part of a the analysis service from MKonline 3

“Energiewende”: Major targetsUntil 2020:• Power consumption: 10% reduction from 2008 to 2020, from 618 to 556

TWh• Renewable electricity: 35% of power consumption in 2020, 192 TWh

(2013: 25% reached, 148 TWh) • Ghg emission target: 40% cut in emissions from 1990 to 2020. • CHP law: 25% of power generation in 2020• Renewable energy: 18% of final energy consumption in 2020 is to stem

from renewable energy

Beyond 2020: • Total nuclear phase-out in 2022• Renewable electricity: 40-45% in 2025, 50% in 2030


Energiewende target: 40% ghg reduction in 2020 compared to 1990 levels

• Approx. 750 Mt CO2eq to be reached in 2020

• Structural progress of significance not occurring in power and heat sectors

• Small reduction potential in other ghg sectors than power and heat

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[Mt CO2]

Development in ghg emissions vs. 2020 target of40% ghg cut

Ghg emissions actual 2020 target of 30% ghg cutKyoto target

Major German power balance developments the next couple of years

• Strong expansion in wind power, as offshore projects are gradually

coming online

• 10 new hard coal power plants are coming online (including some

plants having been commissioned already)

• Increasing integration with neighboring countries, more than double

power import/export capacities in sight from 2023 on

• Decreasing electricity consumption


Annual wind power output to increase considerably

• Many offshore projects are coming online the next 12 months, we expect offshore wind power in 2015 to constitute 6 TWh/y

• Continued strong growth of onshore wind power the next couple of years

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2010 2011 2012 2013 2014 2015 2016 2017

[TWh/y] German wind power generation development

Actual Prognosis

New generation of 46% efficient coal-fired plants to come online

Hard coal plants to be commissioned 2013-15

Plant Output [MW] Start of operation

Lünen (Trianel) 750 December 2013

Duisburg-Walsum 10 (Steag) 725 December 2013

RDK8 Karlsruhe (EnBW) 874 May 2014

Westfalen Hamm E (RWE) 764 July 2014

Wilhelmshaven (GDF Suez) 731 December 2014

Moorburg B (Vattenfall) 840 January 2015

Moorburg A (Vattenfall) 840 June 2015

Datteln 4 (EON) 1052 Mid of 2015

Mannheim 9 (GKM) 843 Under 2015

Westfalen Hamm D (RWE) 764 Unknown

Total 2016 8183 Until 2016


New and efficient hard coal plants to be commissioned

• Ten new hard coal plants will be commissioned towards 2017

• The development of new hard coal plants has the last year been characterized by delays

• Efficiencies of 46%, rather than the 37% historical average, and hence lower SRMC

• Challenging economy with too low profit margins

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Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016

[€/MWh]Historical Phelix vs SRMCs hard coal

SRMC hard coal for old condense power plants, assuming calculated average efficiency €/MWh

SRMC hard coal for old condense power plants, assuming fixed 37% plant efficiency €/MWh

Phelix, historical prices and traded fwd prices 13. October 2014 €/MWh

External transmission grid expansions in Germany

Table 5.8: Transnational grid expansion projects

Year Transmission linksImport

Capacity (GW)

Export Capacity

(GW)2014 Existing capacity 17,0 14,02016 Germany-Netherlands 2,0 2,02018 Germany-Norway 1,4 1,42018 Germany-Jutland 1,5 1,52018 Germany-Zealand 0,4 0,42018 Germany-Belgium 1,1 1,12018 Germany-Switzerland 3,3 3,32018 Germany-Sweden 0,7 0,72022 Germany-Poland 3,3 3,32022 Germany-Poland 3,6 3,62022 Total capacity 34,3 31,3


Power consumption to decrease, amid energy efficiency efforts and weak industry outlooks

• Stable industrial power consumption the last couple of years, H1 power consumption up some 3 TWh y-o-y

• German industrial outlooks have recently proved pessimistic, and some preliminary August/Sept. output figures are weak

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Total estimated and forecasted quarterly industrial power consumption for Germany

Estimated power consumption Forecasted power consumption

Economical outlooks for rest of 2014 seemrather grim

• Russia/Ukraine crisis to hamper European industrial activity: - EU sanctions against Russia to hurt EU economic growth rate

- German industrial performance faces downside risk, based on national indicators for business climate and industrial orders

• Possibly weaker external demand from China:- China face risk for slightly falling GDP growth rate, based on falling home prices and on reduced activity for investments and retail sales

11This presentation is a part of a the analysis service from MKonline


German power balance development from our LTP Germany March 2014 edition (TWh/y)

Hydro Power Nuclear Wind

powerSolar power

Bio-electricity Hard coal Lignite Gas

Otherproduction, including

oil

Net exchange

Consump-tion

2008 20 149 41 4 28 125 151 89 34 -23 6182009 19 135 39 7 31 108 146 81 32 -14 5812010 21 141 38 12 34 117 146 89 35 -18 6152011 18 108 49 20 38 112 150 86 33 -6 6072012 22 100 51 26 45 116 161 76 33 -23 6072013 21 97 51 28 48 123 162 66 33 -33 5962014 20 96 57 30 49 127 162 69 35 -47 5982015 20 96 59 32 50 123 161 69 35 -47 5982016 20 93 62 35 52 116 156 67 36 -41 5962017 20 92 65 38 53 114 155 71 37 -53 5912018 20 82 67 40 54 115 153 71 37 -51 5892019 20 82 68 43 55 119 151 76 37 -66 5852020 20 70 70 46 57 112 158 74 38 -63 5832021 20 69 72 47 57 105 159 74 39 -60 5822022 20 35 74 48 57 112 157 77 39 -40 5802023 20 0 76 49 57 144 153 94 35 -49 5782024 20 0 78 50 57 141 151 92 34 -47 5762025 20 0 80 51 57 146 139 95 33 -47 574

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MK Coal price scenarios March 2013

• Base prognosis basedon Perret Associates «Long Term Price Forecast 2014-30, February 2014

• Slightly lowered global perspectives for fundamental balance in the coal market

• Base scenario to be lowered in our October2014 edition40

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$(2014)/ton

Coal price development applied in our analysis, CIF ARA

High March '14 Base March '14Low March '14 Base Dec '13

Our EUA 2014-2035 price forecast

• Prices will remain low for a few more years

• We expect EUAs at 10 €/t as an average over the2014-2035 period

• If cement and steel do not recover towards 2020 from recent years’ output levels, and lawmakers failto cut supply, carbonprices could drop towards0-1 €/t

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[€/t]

MK low scenario MK high scenario

Base case scenario Market prices 14th of March 2014


Base spot market scenario incl. capacity market.German SRMC and power prices. Real Euros

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[2014 €/MWh]

SRMC coal 46%SRMC coal, avg. efficiencySRMC coal 37%SRMC gas 50%

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2013 2018 2023 2028

Spot+Capacity priceSpot price

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[2014 €/MWh]

SRMC coal 46%SRMC coal, avg. efficiencySRMC coal 37%SRMC gas 50%


Three scenarios for German spot power price – real Euros

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€/MWh

Forecasted German spot price of base loadpower, in real 2014 euros

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€/MWh

Forecasted German spot price of peak loadpower, in real 2014 euros

High Feb '14 Base Feb '14 Low Feb '14


Three scenarios for German spot power price – nominal Euros

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€/MWh

Forecasted German spot price of base loadpower, in nominal 2014 euros

High Feb '14 Actual EEX spotBase Feb '14 Low Feb '14

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€/MWh

Forecasted German spot price of peak loadpower, in nominal 2014 euros

High Feb '14 Actual EEX spotBase Feb '14 Low Feb '14


“Energiewende”: Capacity market probably necessary

• “Energy-only” market (spot market) is perfect for optimization of generation

• Spot price level now and for coming years represents non-sustainable income for several power utilities, for thermal generation plants in particular. New thermal investments are nearly impossible to introduce

• Phase-out of 11 GW large share of thermal generation is in the pipeline, partly reaching end of lifetime, partly to save costs. More decommissioning in the pipeline? 8 GW new thermal generation capacity entering

• Some thermal plants will be needed for security of supply, either now in south of Germany or later on at national level with 100% nuclear phase-out

• Strategic reserves will be a cost-efficient capacity mechanism for consumers. Spot price when strategic reserves activated: 3000 €/MWh


“Energiewende”: Capacity market price mechanisms

• Some struggling power utilities want to go for capacity market solution to increase profit margins

• More renewable generation to enter (40-45% in 2025, 50% in 2030) give nearly no incentives for owners of thermal generation capacity to upgrade existing or invest in new plants without a capacity market

• Illustration of a potential capacity market price first years (2016-2019): 4-7 €/MWh for keeping some old coal-fired plants available

• Gas-fired CCGT plants need a price to fill the gap of the costs of negative clean spark spread (2021-2024). Indication: 7-14 €/MWh

• After 2024: investment costs for new capacity, probably 15-25 €/MWh

Status for introduction of capacity markets in the EU countries: France

• Decentralized capacity auction scheme: Reserve obligation put on each supplier.

Volumes defined by TSO based on Loss of Load Expectation (LOLE) of 3 hours after

forecasting demand levels at the peaking months in the delivery period. Thermo-

sensitivity in demand included when calculating suppliers reserve obligation.

• First delivery period: winter of 2016-2017. All capacity providers (generators and

demand side resources) obliged to bid, receive certification and commitment to provide

MWs. After delivery TSO will check compliance for all suppliers, penalty for shortfall

• Standard delivery period: one year

• Interconnected capacity: imports included when calculating suppliers reserve

obligation (factor 0.93 for imports at peak hours)

Status for introduction of capacity markets in the EU countries: UK

• Centralized capacity auction scheme. Volumes defined by TSO based on Loss of

Load Expectation (LOLE) of 3 hours after forecasting demand levels, 4.5 years ahead of

delivery.

• First auction: December 2014. First delivery period: winter of 2018-2019.

• Participation in auctions will be voluntary and only for generation facilities not receiving

some level of support such as via Renewables Obligation scheme. Providers of capacity

divided in two groups: Price takers (existing plants) and price makers (new capacity and

demand response resources)

• Standard delivery period: one year. New projects: up to ten years

• Interconnected capacity: possibly to be included later on, but not in the first capacity

auction

Status for introduction of capacity markets in the EU countries: Italy

• Centralized capacity auction scheme: Zonal volumes defined by TSO based on

variable adequancy targets for coming ten years period.

• First auction: probably 2014. First delivery period: at earliest 2017. Participation in

auctions will be voluntary. Generators will receive an annual premium (EUR/MW) – the

clearing price at the auction for the actual zone (subject to a cap and a floor) – with an

ex-post adjustment equal to the difference between reference price and a strike price

each time the reference price rises above the strike price.

• Standard delivery period: 3 year. Forward horizon: 4 years

• Interconnected capacity: not included

You have watched a presentation from MKonline

Thank you for your attention

Olav Johan BotnenSenior Analyst Nordic Analysis

[email protected]+47 37 00 97 61


Espen AndreassenSenior Analyst, Continental Analysis

[email protected]+47 37 00 97 71

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Olav Johan Botnen - Long Term Analysis for the German Power Market

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