* Renewable overcapacity hurting prices
* Reforms seen difficult ahead of election
* Utilities hurt by high fuel prices, cheap wholesale
By Vera Eckert and Henning Gloystein
FRANKFURT/LONDON, Feb 18 Germany's wholesale
power market is teetering as long-term prices trade near
eight-year lows and September elections dim hopes for any speedy
reform of renewable subsidies blamed for overcapacity and weak
Successive German governments have paid out generous
subsidies to develop wind, solar and biomass power generation
capacity. This has guaranteed producers fixed prices and given
green power priority access on transmission grids.
As a result, German renewable power generation capacity
from wind, solar, biomass and small-scale hydro plants has more
than doubled in the past four years.
It has risen to more than 80 gigawatts (GW) from less than
40 GW in 2008, in theory enough to cover Germany's maximum
demand of 82 GW.
But renewables typically only generate around a third of
their installed capacity, so effectively this boom has resulted
in some 25 percent of Germany's total power generation being
generated from renewables.
Spurred by subsidies, the problem is that Germany now
suffers from overcapacity which is pulling down wholesale prices
while gas and coal needed for electricity production in thermal
power stations have remained expensive.
"The current prices have dire consequences for utilities. As
such, we believe the outlook for European utilities remains
gloomy," said Michael Bret, head of thematic research at AXA
Wholesale forward power prices have fallen about 30 percent
on the back of the renewables build-up, and currently languish
close to 8-year lows, Reuters data shows.
"Conventional capacity is under pressure," said Tuomo
Hatakka, country head in Germany for Vattenfall Europe
. "I've seen the generation margins of our plants. It's
not a pretty sight."
For consumers, the surge of renewables has driven up costs,
as their energy bills include fees used to help cover the green
The rise of renewable power capacity - now more than 60 GW
for wind and solar - also means a high degree of volatility as
both depend not on demand, but weather conditions.
That has hurt forward contract trading in Europe's biggest
power market, according to Steffen Koehler, chief operating
officer of the European Energy Exchange (EEX).
"Market participants have to deal with great change and
uncertainty at the moment, and traders deal with uncertainty by
shifting positions from long-term to short-term products,"
"The more renewables you add to the grid, the more the
market will shift towards short-term trading."
Futures trading volumes in 2012 fell 13 percent to under
1,000 terawatt hours (TWh) as participants turned to short-term
"What we're hearing is there was quite a big fall in German
volumes in Q2 and Q3 2012," said Laura Tait, director of Prospex
Tait said that sluggish economic growth, regulatory
uncertainty in Europe, and a partial withdrawal of banks from
energy trading also hurt turnover.
MARKET ON THE BRINK
Analysts say that the changes have been so big that the
market is essentially broken, and that any reform would take a
long time to take effect.
"Without radical overhaul, we conclude the German power
system is structurally broken," Macquarie analysts said in a
research note last month.
"We have arrived in a difficult situation, with 75 percent
of power subject to market forces and 25 percent playing by
their own rules," said Tobias Federico, analyst at the Energy
Brainpool consultancy in Berlin.
"It is unclear how this could be changed and unlikely that
this will happen quickly."
Ministers in the coalition government formed by the
Conservative Party (CDU) and Liberals (FDP) stress the need for
reform and have come up with proposals. They are trying to seek
consensus in March with German states.
But success is unlikely as the opposition Social Democrats
(SPD) and Green Party could block the plan ahead of a general
election set for September.
Should they form the next government the two parties would
likely resist changes to a system that was introduced during
their last time in office.
Political analysts therefore say any change in law is
unlikely before the general election and, depending on who wins,
may not come at all.
(Editing by Jason Neely)