COLUMN-Germany, UK offer contrasting visions for electricity: Wynn

Wed Feb 20, 2013 9:36am EST

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By Gerard Wynn

LONDON Feb 20 (Reuters) - Britain and Germany have contrasting blueprints for electricity policy, with Germany funding greater diversity and security of supply that may avert sharp increases in electricity bills in future.

The two countries have a similar starting point - a major decommissioning of conventional capacity within a straightjacket of mandatory European Union targets for carbon emissions and renewable energy.

Their contrasting strategies reflect differing political priorities and geography.

They are at opposite ends of a spectrum of choices on: inter-connection with neighbours compared with relative isolation; nuclear versus more renewables; centralised versus decentralised power; and high state taxes and levies compared with high generation costs.

Each faces risks. Britain in the short-term will be increasingly dependent on international gas markets, with the danger of rising generation costs, while Germany has already swallowed a huge bill for its new wind and solar capacity.

Germany has much higher residential power prices because of renewable energy levies, but lower wholesale and industrial power prices because it has far more low marginal cost capacity.

To increase its diversity and flexibility of supply, Britain could invest more in small-scale, modular capacity, with a natural advantage in energy from waste, and ramp up interconnection with neighbours as far flung as Iceland.

To cut wholesale power prices it needs more low marginal cost plant, which means more nuclear, wind or solar power, given new coal is no longer an option under the country's carbon limits.

Germany must limit taxes on households which presently are more than ten times corresponding levies on British residential power, while it faces additional costs to deal with the intermittency of wind and solar, including reinforcement of its grid.

CLOSED CAPACITY

In Britain, older fossil fuel power plants have run foul of European pollution limits while Germany has chosen to close its nuclear fleet in the wake of the Fukushima crisis two years ago.

Britain will lose about 11.6 gigawatts (GW) of coal and oil-fired power by 2015 or earlier, not accounting for limited retrofits to burn biomass instead, as a result of the demands of the European Union's Large Combustion Plant Directive (LCPD).

Germany, meanwhile, closed some 8.4 GW of older nuclear power capacity in the summer of 2011, after the Fukushima crisis, and will close a further 12 GW from 2015-2022.

Each country will struggle to maintain an adequate capacity margin, measured as the percentage excess installed capacity over peak demand.

Germany has a theoretical capacity margin of about 100 percent after investing hugely in wind and solar capacity.

But the margin is much narrower when it comes to reliable available capacity which can be called upon at any time: RWE calculates such spare capacity at around zero now rising to 5 gigawatts in 2015. (Chart 1)

Britain faces a wafer thin capacity margin from 2015, according to the chief executive of the energy watchdog Ofgem, Alistair Buchanan.

"Life could get very tight and uncomfortable around 2015 to 2018. We have a form of near crisis for our power station stock in the next few years," he told the BBC Today programme on Tuesday.

In a subsequent speech, he reported a base case capacity margin of 4 percent in 2015 (and zero if the country made full use of export capacity) compared with 13 percent now. (Chart 2)

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Chart 1: (slide 112)

Chart 2: (slide 21)

Chart 3: (slide 103)

Chart 4:

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WHOLESALE PRICES

Benchmark, year-ahead wholesale power prices are presently 51 percent higher in Britain than Germany.

German baseload 2014 prices were 42.5 euros ($56.8) per megawatt hour on Tuesday, and British equivalent prices 55.65 pounds ($85.9).

Germany has a greater proportion of low marginal cost plant, including wind and solar (near zero operating cost), interconnectors, nuclear and lignite, which together account for about 50 percent of installed capacity, according to RWE.

It is expected to replace all upcoming nuclear closures with more, low marginal cost wind and solar.

Britain's equivalent low marginal cost plant accounts for just 25 percent of installed capacity, including wind, interconnectors and nuclear power. (Chart 3)

In Germany, power imports and exports accounted for 7 and 9.4 percent of domestic consumption in 2010, according to Eurostat, compared with 1.9 and 1.2 percent in Britain, the third lowest in the EU.

CHARGES

Partly because of the country's massive investment in renewable power German residential consumers pay much higher non-market charges, including a renewable energy levy, cancelling out lower wholesale power prices.

German taxes and levies on household bills were 14 times those in Britain in the second half of 2011, according to Eurostat data, at 11.4 euro cents per kilowatt hour (kWh) compared with just 0.8 euro cents. (Chart 4)

German retail power prices were around 25 euro cents compared with 16 cents per kWh.

But Britain's Department for Energy and Climate Change has confirmed that a maximum low carbon electricity levy on households would rise in Britain, to 7.6 billion pounds (in 2012 prices) in 2020 from 2.4 billion now.

In conclusion, both Germany and Britain face inadequate capacity margins.

Germany's choice of distributed renewable power has high capital and grid reinforcement costs paid for through higher residential power bills, but very low operating costs meaning much lower wholesale power prices, which benefit industry.

The decision to drive a more decentralised, modular approach is less risky regarding project delivery and outages.

Britain's choice of gas and nuclear is probably cheaper up front, but exposes the country to rising import prices and higher wholesale power prices in the case of gas, and in the case of nuclear, project overruns, delays and outages.

Both are edging towards more state intervention where both could be less competitive than international rivals including the United States.

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