The Economic environment – Past, Present & Future

10.2.1. The FIT effect on electricity prices (retail & wholesale)

To understand why the German government have been pushed by the public to change their existing Renewable Energy Act (EEG) into a 2.0 version, a look into the development of the electricity prices in Germany is needed.

The enclosed tables in appendix 4 & 5, illustrates the development of the electricity prices for household and industrial consumers. In solitary and from a 10 year development perspective, these two tables does not indicate an unfair bias of either wholesale nor electricity prices with both

increasing at a similar pace, but when you start to compare where the German level for wholesale &

retail electricity prices lie, compared to their European neighbouring countries, it is quite clear that

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the wholesale prices are, relatively, a lot lower than the EU avg. As it can be seen the electricity retail prices are about 9 % more expensive than the EU28 average, where the whole sale prices are 9.5 % cheaper than the same EU28 avg.

This relatively large gap between retail and wholesale prices are created due to the FIT and the consequential renewable energy surcharge, which is billed back to the consumers that are not feeding electricity into the grid. Combine this surcharge with the fact that the largest industrial consumers are exempt for paying this surcharge, which naturally means that the utility companies has offered relatively lower wholesale prices with the rapidly increasing surcharges for private consumers of electricity.

With the new reform in place, almost a fourth of previously supported industrial high-intensive electricity consumers will need to be liable for paying part of this renewable energy surcharge.

These initiatives that have been agreed upon in April 2014 are therefore expected to help equalize the electricity prices for retail and wholesale consumers over time.⁴¹

10.2.2. Import and export of energy

As mentioned previously, Germany currently imports a large share of their fossil fuels for both the heating and electricity industry from Russia. They are as appendix 6 shows, the largest importer of energy related fuels in Europe.

Though this does not directly relate to HDG and their biomass energy business in Germany, it would be highly thinkable that the German energy industry will start to look at more locally sourced energy, also for the heating industry, to avoid the dependency to foreign supply of more polluting sources.⁴²

If Germany decided to aim for an increasing Energiewende in their heating energy sector, as well as their electricity sector, it is highly likely that HDG will have an increased potential for supplying solid biomass fuel, such as wood chips for German heating plants, as these solid biofuels are mainly

41 Ibid.

42 Postulation made by author

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used in the heating industry, where gas and waste biomass energy is the preferred option for electricity production.⁴³

This statement is backed by the fact that Germany is one of the largest exporters of electricity in Europe (only second to France’s strong nuclear industry⁴⁴), as it can be seen from the table in appendix 7.

This high level of export is also directly linked with the subsidy systems for renewable energy, which is resulting in production of renewable energy, particularly from PV systems, in quantities over the needs of German consumption at peak hours. Also the dual effect the renewable energy surcharge has on driving down the wholesale prices, has a direct effect on the whole sales export prices Germany can offer neighbouring countries.⁴⁵

Another factor that would indicate a current and future preference for domestically sourced

renewable energy is the “Green Electricity Privilege” (§39 of the EEG-Act), which allows for utility businesses to receive a reduced EEG surcharge if they source a minimum of 50 % of their

electricity consumption from domestically created renewable energy. This legislation is however currently under review by the European Commission for discriminatory taxation.⁴⁶

10.2.3. Outlook for the economic environment

With the very recent changes to the German EEG act, listed above, it can be expected that the economic environment surrounding the German energy market will see some noticeable changes in the years to come. If the plans of Sigmar Gabriel and Angela Merkel succeed, this will result in lower retail electricity prices & higher wholesale prices. Considering this fact as well as the capped installation allowances, a deliberate slowdown of the rapid expansion of solar and on-shore wind farms is a certainty. This will also likely cause a slight stagnation or reduction of the German export of electricity, with the higher wholesale prices in mind.

43 See later break down of contribution in the market analysis

44 http://www.renewablesinternational.net/german-power-exports-up-by-62-percent/150/537/68613/

45http://www.renewableenergyworld.com/rea/news/article/2011/09/germany-continues-exporting-electricity- renewables-driving-down-prices-despite-closing-reactors

46 http://europa.eu/rapid/press-release_IP-13-1283_en.htm

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The future of the economy in the energy industry will surely also depend on the outcome of the Russian/Ukrainian crisis, which could spark an even more panic infused change of German and European Energy policies, than even the nuclear phase out has represented!⁴⁷

Finally HDG should keep a close eye on the developments in the EEG subsidies, as these are likely to constantly be amended to ensure as much level and fair competition in the industry over the next 5-10 years.