German energy leaders look to Gabriel for change

FRANKFURT Mon Jan 20, 2014 10:37am EST

1 of 2. File photo of houses in front of the coal power plant of German utility RWE Power near the western town of Niederaussem November 14, 2013. (PREVIEW)

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FRANKFURT (Reuters) - Germany's energy sector gets its first major speech from new economy and energy minister Sigmar Gabriel this week with utilities and households both hoping he can ease the cost burden imposed on them by Berlin's push for greener energy.

Germany is undergoing Europe's deepest energy transformation as it exits nuclear, renewables surge and cheap coal plays havoc with plans to switch to cleaner natural gas.

Among Gabriel's most anticipated comments will be those regarding steps due by April to reform Germany's law on renewable energy.

Some details of his intentions to cut support prices emerged from a draft paper over the weekend.

This week Gabriel is to speak at the annual Handelsblatt energy conference in Berlin which will also hear from utility leaders including RWE Chief Executive Peter Terium.

EU Energy Commissioner Guenther Oettinger is also expected to outline Brussels' views on Germany's role in the bloc's energy future.

Domestically, Germany's drive to promote renewables has proven the most contentious and costly part of its sweeping "Energiewende", or energy transition.

Network companies paid renewable producers 21.8 billion euros ($29.56 billion) last year, in turn collecting the funds through consumers' bills.

That has rankled private customers and drawn the attention of the European Union, which is examining an exception which frees large German manufacturers from the charges.

"It is obvious that something has to be done on renewables incentives," said Jochen Terpitz, a partner at international law practice Simmons & Simmons which advises developers and investors on energy infrastructure.

"Our clients require planning certainty. They will only have a basis for making investment decisions if there is a clear track which the government is following."

Expectations are muted, however, as an agreement reached by the coalition government last November cast doubt on slowing the expansion of renewables or reining in the impact of those already installed.

That agreement upheld targets to generate 40 to 45 percent of Germany's power from renewables by 2025, and 55 to 60 percent by 2035.

These targets are ambitious compared to those of other leading economies and made more so as Germany plans to do it without emission-free nuclear power in response to Japan's Fukushima nuclear disaster of 2011.

GENERATION PROFITS HIT

Germany's success in bolstering its renewable energy output has spurred a drop in wholesale power prices of almost 40 percent in the past three years.

For utilities, this has caused hefty losses as generation margins have become unprofitable at many power stations, especially those that burn gas to generate electricity. They face stranded investments when plants prematurely close, before their costs are amortized.

"Only if the incoming German government decides to fully freeze renewables could power prices... potentially be driven higher," Credit Suisse analysts said in a research note.

Abandoning nuclear energy also burdens consumers with the cost of making up for local supply gaps, as Germany still requires "baseload" power for when intermittent renewables prove insufficient.

Sector leaders E.ON, RWE, Vattenfall and EnBW are banking on vague commitments by policymakers to reward old capacity being kept alive through something loosely called a capacity market.

So far, Germany's energy regulator has addressed regional supply holes through a mix of plant-specific and ad hoc reserve fees, yet analysts are skeptical about whether the government can deliver such a scheme nationally.

Georg Mueller, CEO of MVV, Germany's fifth biggest utility, said the renewable energy law must be integrated into what traders call the "energy only" market, the term for wholesaling without any other charges reflected.

"Basically, two types of markets are working against each other (renewables support and traded power) and there has not been any response to that since 2000," he said last month. "Now something's going to happen, I hope."

($1 = 0.7376 euros)

(Additional reporting by Madeline Chambers in Berlin; editing by Henning Gloystein and Jason Neely)

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