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Guest Article: The German Direct Marketing Framework and Potential Benefits for your Assets

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.

Management Fee in Cents/kWh

2013

2014

2015+

Without Remote Control

0.65

0.45

0.30

Including Remote Control

0.75

0.60

0.50

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.

 

Guest Article: Market Trend of Solar Energy in Japan

Japan’s solar market has been dramatically expanding.  According to the Japan Photovoltaic Energy Association (JPEA), the domestic shipment of photovoltaic modules in Japan has been grown from 124,370 kilowatts (kW) in 2001 to 1,404,149 kW in 2011.  IMS Research, a market research firm for the global electronics industry, estimates that it will grow by 120 percent in 2013 and install more than 5 gigawatts (GW) of new capacity in the report of “The PV Market in Japan”.  More than 80% of domestic shipment is for residential use.

As of the end of March 2011, the overall penetration of photovoltaic systems in Japanese households was 3.6%.  The penetration rate in the southwest regions, for example Kyushu, Chugoku and Chubu is higher than the northeast regions (Tohoku and Hokuriku) because the formers have longer duration of sunshine.

Yukiko Matsuoka reports directly from Japan on its photovoltaic market

Yukiko Matsuoka reports directly from Japan on its photovoltaic market

More Japanese people have been interested in shifting to renewable energy especially after the Fukushima nuclear disaster in March 2011.  According to the sample survey of 5,000 residents in the metropolitan cities, including Tokyo and Osaka, nearly 90% of respondents showed their interest in installing photovoltaic systems.  Residential system prices may be one of the challenges for them.  According to the annual solar energy survey released by Applied Materials Inc. (AMAT) in June 2012, 51 % of Japanese respondents believed that solar power was more expensive than traditional energy resources.

The feed-in-tariff (FIT) enforced on July 1, 2012 is a great incentive to accelerate investment in renewable energy.  Although the price per kilowatt-hour has been reduced from 42 Yen (0.32 Euro) to 38 Yen (0.29 Euro) since April 2013, it is still attractive.

Several Japanese companies are engaged in building and operating ‘Mega Solar plants’.  SB Energy Corp., a subsidiary of a leading telecommunications company, SoftBank Corp., operates five solar power plants in Japan.  Aeon, a Japanese retail corporation, has also installed solar panels at its stores with generation capacity of 13,000 kW as of August 2012 and plans to increase its capacity to 200,000 kW in total by fiscal 2020.

The solar cell market is dominated by Japanese manufactures so far.  Sharp, Kyocera, Panasonic, Mitsubishi Electric and Solar Frontier are the top 5.

 

EU places import tariffs on Chinese solar modules

The EU has put import tariffs on future solar products coming from China. The tariff is to start on June 6th of this year. This will be the largest anti-subsidy proceedings the EU has ever undertaken. Until June 5th, Member States of the EU can still give their opinions to the Commission, however, they will be unable to prevent the import tariffs. Some experts are concerned that these tariffs could trigger a trade war between Europe and China.

China is currently the largest photovoltaic product manufacturer in the world and has grown significantly in recent years. Their products are demanded by the industry all over the world. Last year alone, China sold 21 billion Euros of solar products and related components in Europe. European manufacturers have found it difficult to compete with the cheap prices of the Chinese manufacturers. Some European solar companies have filed for bankruptcy including Solon, Centrotherm, and Q-Cells. Under this large import tariff, European plant manufacturers with their primary market in China will also likely be impacted.

 

Cheap Low Quality Silicon turned into the Highest Quality Silicon

At the University of New South Wales (UNSW) in Australia, researchers have managed to greatly increase the efficiency of solar cells while simultaneously reducing its costs. These improvements were not expected within the industry for at least another ten years and includes new technology.

Using low quality silicon wafers can decrease the price of solar panels iStockphoto.com©Fernando Alonso Herrero

Using low quality silicon wafers can decrease the price of solar panels iStockphoto.com©Fernando Alonso Herrero

Researchers at UNSW have figured out a method to control the charge state of hydrogen atoms to correct deficiencies within silicon. Professor Stuart Wenham, the head of the university’s photovoltaics centre of excellence said, “We’ve been able to figure out what the secret is that enables hydrogen to sometimes work the way people want it to, and sometimes doesn’t.” Essentially, it allows poor quality silicon wafers to behave like high quality wafers which reduces the costs of solar panels. Currently, the silicon wafer alone accounts for over 50% of the costs required to make a solar cell. This leads to the industry tendency to focus on finding ways to lower the cost of silicon but often instigates a higher number of defects and contaminants that lower its efficiency. However, with this new technology, cheaper silicon is more efficient than using even the highest quality silicon. Using lower quality silicon wafers in this case could be an effective way to lower solar cell prices.

The new technology would allow for solar cell efficiencies between 21-23% , much greater than the 17-19% efficiency of the cells on the current market. The UNSW has patented their technique of controlling hydrogen atoms. Nevertheless, prices for solar panels have fallen by approximately 65% in the last two years, partially due to the huge increase in solar panel production in China. The falling prices have also lead to an increase in the Australian solar market with over 1 million homes with solar photovoltaic energy installed. The industry is also interested in UNSW’s new technology. They are working with industry partners to commercialise the project and with manufacturing companies to implement these new capabilities. The Australian Renewable Energy Agency is supporting the project and is expected to be complete in 2016.

Source: Computer World

Penalty tariffs on Chinese solar modules likely from 6th of June

According to Reuters news agency, the EU Trade Commissioner is being advised to impose penalty customs duties on solar modules from China. This protectionist advance has the potential aggravate the Chinese administration in Peking.

China Europe Solar module tariffs

Penalty customs for Europe? The EU Trade Commission will be making a decision soon. iStockphoto.com©scibak

The actual circumstances are already a delicate topic in Brussels. On the one hand Europe is concerned about the protection of its own manufacturers such as SolarWorld from cheap imports, but on the other hand China is the second largest trade partner and important in helping the Union out of its recession.

Karel de Gucht is expected to propose an increase of duties this Wednesday, in order to protect the EU from Chinese production, which quadrupled between 2009 and 2011, surpassing global demand.

According to EU manufacturers more than 80 percent of the European markets are controlled by Chinese business interests. A few years earlier Chinese market-share was only slightly more than zero, a likely cause of the European Trade Commission’s action now. According to HIS, last year Europe comprised approximately 50 percent of the worldwide solar market with a total value of 77 billion $.

For de Gucht it is clear that dumping is occurring in the EU market. It is perceived to be very likely that his recommendations will be followed and that penalty duties will be imposed starting the 6th of June.

Experts and diplomats predict tariffs to begin at 30%, which would make exportation much less attractive for China. Currently, Chinese modules are on average 45 percent cheaper than those produced in Europe.

The EU Commission declined to comment.

Source: Reuters

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