The German electricity market

Nuclear power and renewables

So far 2011 has been a year with turmoil n the German electricity market. First the accumulated growth of reneweables in Germany is starting to create substantial volatility in the spot market. The combined installed capacity of both wind and solar power amounts to around 40 GW. This is roughly 35-40% of the total installed generation capacity. Of course it is uncommon to have days which are both windy and sunny so one would not expect the total renewables capacity to reach the 40 GW figure. However, very windy days can have hours with 20-26 GW wind power. Likewise sunny days with low cloud cover factor can have peak hour power solar output close to maximum installed capacity. Wind and solar power typically has very low marginal cost and competes in the day-ahead auction with combined heat and power and nuclear power plants. These energy sources constitute the low cost part of the supply curve. For a given level of demand, a larger share of renewables implies that supply curve is shifted to the right, resulting in a lower price. Conversely, a lower share of renewables implies that the supply curve is shifted to the left, resulting in a higher price. Due to the convex nature of the supply curve, there is an asymmetry between the probability of higher versus lower than expected out turned prices. The weather dependent nature of renewables creates increased volatility and challenges in predicting spot prices. On March 15, 2011, the German government announced a decision to shut the country’s seven oldest nuclear power plants (commissioned before 1980) for 3 months in order to conduct safety reviews. The 3-month closure is obviously elastic, depending on the results of the reviews and unforeseen events at the Fukushima nuclear complex in Japan. On May 18 the nuclear safety commission released that none of the German nuclear power plants passed the highest level of residual risk which includes protection against natural disasters, plane crashes and back-up power supply in case of an outage. It remains to be seen in early July how many nuclear power plants which will be shut down before their estimated life-time. Simultaneously Germany plans to expand its renewable generation to around 40% of total electricity generation in 10 years. There is a plan to enable producers to select between the feed in tariff which is set above the current electricity prices or receive a premium for power when prices are high caused by a tight supply-demand balance. The producer who selects the latter option would receive the difference between the feed in tariff and the EEX baseload spot price plus a premium for any power sold in high price hours. This also encourages the development of storage facilities. Renewable energy could then be stored and sold in the market when prices are high, similar to a hydro storage plant.

Historic growth of solar and wind generation capacity.

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