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Highlights

Lower capture prices for renewables as fuel, carbon costs drop

Demand decline to ease in Q3, prices already rebounded

Little long-term impact as pressure to build renewables won't ease

London — The onset of subsidy-free renewables in Germany may be delayed by a couple of years due to lower capture prices in the wake of the coronavirus pandemic, Aurora Energy Research said in an interview with S&P Global Platts.

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"PPA [power purchase agreement] negotiations will certainly be affected even if long-term price expectations do not move much because of COVID-19," said Hanns Koenig, who leads Aurora's consulting business in central Europe.

"It is more of a subjective point as it is hard to negotiate a PPA at a time when it is Eur10/MWh ($11/MWh) to Eur15/MWh out of the money...Long term, I do not see the pressure to build more renewables easing because everyone understands that [this crisis] is a freak event and nothing structural," said Koenig, whose team advises energy market participants in Europe.

Koenig saw little near-term impact on Germany's hydrogen strategy, which he said was a "long-term vision".

Key for future projects' economic viability is carbon prices, with Germany set to extend carbon pricing to transport and heating from 2021 at a fixed starting prices of Eur25/mt.

"As German marginal CO₂ intensity [in the power sector] is likely to remain near 0.5 for quite a while, carbon prices play a very important role. Eur10/mt lower carbon prices mean Eur5/MWh lower capture prices for new renewable projects," Koenig said.

"A price floor would certainly help, but is probably not realistic in the near term" he said, noting this could be part of European Green Deal negotiations in the next years."

Lower wholesale power prices typically also lead to a rise in the green levy (EEG Umlage) through which consumers finance German renewables.

"Rises in the EEG levy tend to be political with voters; however, the rise we can expect to see next year is not likely to be very noticeable in overall household bills," Koenig said, adding that average household power prices were already Europe's highest at around Eur300/MWh.

For 2020, the levy was set at Eur67.56/MWh, some 5% above 2019, with the estimated Eur26 billion income financing 226 TWh of green electricity, system operators said.

Near term vs long term

For the current quarter, German power and gas demand could drop 10%-15%, Koenig said.

"Q3 demand could also be up to 10% lower if lockdowns or supply chain interruptions persist, but more likely closer to 5%," he said.

Demand destruction expectations saw German power prices plunge in March with April contracts hit the most, falling to a record low Eur18/MWh as EUA carbon prices fell a third to Eur15/mt.

However, many contracts have recovered since as carbon prices traded back up above Eur20/mt.

"I think anything lower than Eur20/MWh for German power is extremely unlikely as carbon is unlikely to fall below Eur15/mt," Koenig said, pegging marginal costs for lignite generation (including carbon at Eur15/mt) at Eur23/MWh, with a similar floor price for gas-fired generation.

"At current prices, no one is earning money."

Current conditions made financing of merchant projects harder, Koenig said, adding that a price floor for carbon would help.

"The best thing a developer can do is to pass on this risk to someone who has a natural hedge, for example an industrial off-taker that is short carbon, while a market-exposed renewable project is long," Koenig said.

"In Germany there is currently a discussion about carbon CfDs, but these are likely to focus on industry (for example guaranteeing a certain carbon price to steel mills to incentivize emission-reducing investments), rather than the power sector."