In the introductory blog post, I highlighted “tuning” options for your German renewable energy assets considering the nuances of the legislative framework. Next, I will elaborate on the first alternative mentioned: obtaining a slightly higher price for each kWh generated by, and exclusively available to, your (on- and offshore) wind or solar park. This is the so-called “direct marketing”, also commonly referred to as the “Market Bonus Scheme”.

Background

Martin Supancic discusses the opportunities for renewable energy asset owners under the EEG

The German Renewable Energies Act (EEG) of 2012 allows renewable energy assets to generate electricity from different sources and to sell to the market with a guaranteed offtake contract, ie. all produced electricity is sold at the contractually secured Feed-in-Tariff (FiT), regardless of the volatility in output or market circumstances (e.g. prices). Under the EEG, however, owners can select between commercializing their electricity via the FiT, the Market Bonus Scheme or Power Purchase Agreements.

The Market Bonus Scheme was established under the EEG as a way of integrating renewable energies into the electricity market. It was established in a way that would enable operators to improve control on the amount of electricity supplied to the market. Under the EEG Amendment from January 2012, three forms of direct marketing are defined (Art. 33b no. 1 – 3 of the EEG):

a)     Market Bonus Scheme

b)     Green Electricity Privilege (max. 2 MW parks)

c)     Other direct marketing (Power Purchase Agreements)

The cited amendment permits a monthly switching to any of the three direct marketing mechanisms, as well as reverting back to the classic FiT tariff.

Market Bonus Scheme

To better understand the pricing mechanisms, I will briefly explain how the German electricity market has worked to date. Since most, if not all (biomass may be an exception), renewable energy (incl. PV electricity) has a marginal cost of 0 EUR (sun/wind are free!). Renewable energy can also be sold, no matter the current pricing in the market, at times of peak production. At certain instances during the year, supply may outstrip demand causing negative prices. For example, conventional power plants (e.g. coal/gas-fired) sell at the marginal market price (as a function of marginal cost or what is commonly also referred to as the “dispatch curve”), normally quoted on the Leipzig Electricity Exchange (EEX). The burnt fuels cost money, thus, they determine the subsequent market price curve.

For the electricity market to operate efficiently, demand needs to equal supply. When demand shifts abruptly, energy generators need to quickly adjust production to meet the new consumption (price will depend on the “dispatch curve” of the added capacity). Ideally, future demand and supply can be predicted with high precision such that the most competitive prices are achieved to the benefit of all. The goal of direct marketing is dual:

– Reducing the additional costs on the German economy due to imprecise wind and photovoltaics electricity generation forecasts

– Improving demand-based electricity feed-in (esp. biomass)

Instead of the “produce and forget” strategy, which can lead to negative prices or higher EEG costs that are subsequently paid by the majority (there are exceptions!) of German electricity consumers, the direct marketer must make multiple estimates daily on the electricity production for the following day. This forecast is then sold daily on the spot market (day ahead). Any deviation of this prognosis from the actual electricity production results in electricity compensation costs, borne by the direct marketer, who thus is incentivized to make every effort to ensure a precise forecast or otherwise bear the compensation risk.

Under the ordinary EEG framework, the grid operators supply very inaccurate electricity generation estimates to the transmission lines operators, causing additional (compensation) costs. These are covered through the EEG levy account, consequently shared via the so-called “EEG-Umlage” (renewable energy levy) amongst the majority of German energy consumers, particularly households. When a grid connection point is registered for direct marketing, it is the direct marketer who assumes the risk. To illustrate the costs to the German economy, for 2013 the expected compensation costs due to imprecise PV electricity generation forecasts will cost German consumers an estimated 1.9 to 3.1 €/MWh. Currently, grid operators can already disconnect renewable energy assets. For them, grid stability is vital, particularly due to technical risks arising from an oversupply of electricity. The direct marketer does not manage the grid, thus, the reason for disconnecting a renewable energy asset are purely commercial, i.e. negative market price (utility PAYS consumer to CONSUME). In practice, this means that the negative market price must exceed the sum of the EEG FiT and the management bonus. By combining intraday trading with continuously updated forecasts and weather data, that are updated every few hours for all wind and solar assets, managed by the respective utilities,  the direct marketer can immediately respond to prediction changes, thus, minimizing the deviations and costs to both its profit & loss statement, as well as the German economy.

Just as in the case of wind and sun, biomass can also be a source of electricity production. In this sense, the second objective of the EEG amendment is to better integrate into the grid demand-induced biomass-based electricity generation, particularly to make-up for the shortfall between forecast and actual energy production. Currently, this role is primarily played by gas/coal fired power plants.

Green Electricity Privilege

This mechanism is primarily of interest to renewable energy assets with relatively low FiTs (e.g. wind). It is a form of direct marketing as a means of reducing the EEG levy paid by the asset owners. Electricity is sold directly to the final consumer, thus, the electricity generator is legally entitled to savings of 2 cents per kWh on the EEG levy (costs that are shared by all German households). This type of commercialization is subject to very strict rules in terms of contribution of green energy sources to overall electricity production mix of the utility (asset owner and/or distributor). This commercialization option is extremely restricted and will probably be phased out, thus, it is challenging to create a final consumer product considering the regulatory backdrop.

Other direct marketing

Power Purchase Agreements (PPAs) fall under this category. Due to the low FiT and given the current construction and operating costs of PV plants, some PPAs are in fact, reaching break-even but primarily due to tax breaks. Legislators are scrutinizing these fiscal incentives and may scrap them altogether, reducing the attractiveness of PPAs.

Benefits of Market Bonus Scheme

The incentive of switching to the Market Bonus Scheme is revenue-wise. For electricity produced under the EEG since 1.1. 2012, the additional revenues amounted to 12.00 €/MWh (legally established by the EEG), which was and is shared between the direct marketer (e.g. utility, wholesaler) and the asset owner. The revenue sharing depends on the utility’s commercial strategy and the associated costs – some are willing to offer 60% or more, others less, particularly if additional costs have to be assumed (e.g. payment guarantees). In 2012, some utilities and traders offered between 4 to 6 €/MWh of the 12 €/MWh mandated by law. This means in 2012, a park, annually generating 25,000,000 kWh could have achieved additional revenues of approximately (assuming 0.006 EUR/kWh) € 150,000.

For 2013, considering the different payment guarantee levels and associated costs, utilities have offered clients between 3.00 €/MWh and 4.00 €/MWh. The table below reflects the legally sanctioned management bonuses.

Depending on the results of the German parliamentary elections in September 2013, many industry experts predict an end to the market bonus model either in 2014 or 2015. Thus, time is of the essence if one wishes to benefit from this window of opportunity. If you have already switched to the market bonus scheme or are in the process of doing so, feel free to share your experience with a comment. What risks do you see?

This is the second part of a series of guest articles written by Martin Supancic. You can find his first article on managing a renewable energy asset under the German EEG here.