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Watch: German-Austrian power price zone split: Changing power landscape causes grid bottlenecks

Europe's most liquid power market -- the German/Austrian price zone -- is to be split next year. In this video, S&P Global Platts senior writer for European power, Andreas Franke, looks at the reasons that caused the split as well as the implications for the market with some traders starting to think about the ‘unthinkable’ - a potential split of Germany. Something the government in Berlin wants to avoid at all costs, but slow progress on the grid expansion and the nuclear phase-out will make inner-German grid bottlenecks worse before the new power cable projects will be ready by 2025.


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Video Transcript


German-Austrian power price zone split: Changing power landscape causes grid bottlenecks


Welcome to The Snapshot – our series examining the forces that determine global commodities markets.


GERMANY TO SPLIT POWER PRICE ZONE WITH AUSTRIA


Europe's most liquid power market - the German/Austrian price zone accounting for two-thirds of trading volumes - is to be split next year. From October 2018, capacity on the border will no longer be unlimited and billions of euros in forward contracts need to be settled differently.


Background to this is Germany's changing power landscape with rising renewables - especially wind in the North and the nuclear exit mainly impacting the industrial demand centers in the South. This shift creates a growing regional imbalance and grid bottlenecks within Germany.


According to one TSO, the German grid was already near breaking point last winter. For next winter, the regulator has more than doubled the winter reserve capacity with over 10 GW of power plants needed to keep the grid stable.


The much needed expansion of the grid is lagging behind with new cables delayed due to local resistance and unlikely to be finished before 2025. Plans to lay the cables underground have also pushed up costs with grid operators estimating some 50 billion euros to make Germany's power grid fit for the future.


Because of the bottlenecks within Germany, surplus power often flows in loop flows through Poland and the Czech Republic into Austria. A complaint by Poland to European regulator ACER triggered the process back in 2015 with Germany and Austria now finally agreeing on the details of the congestion management.


GERMANY, AUSTRIA AGREE ON 5 GW CROSS-BORDER CAPACITY


With Germany guaranteeing almost 5 GW of capacity on the Austrian border there will be still plenty of power flowing south into Austria, but the end to the ‘unlimited open border’ reduces the need for German winter reserves and cuts costs.


Traders say that the price impact from the split is limited on the German side, but bullish for Austria. Trading volumes may also be impacted with some suggestions that uncertainty about the split has already shifted volumes from exchange-trading to the OTC market.


Most importantly, some traders have started to think about the 'unthinkable' - a potential split of Germany. Something the government in Berlin wants to avoid at all costs.


DENMARK COMPLAINT TO EC FORCED SWEDEN PRICE ZONE SPLIT IN 2011


The price zone split with Austria will help, along with the installation of phase-shifters on the Eastern borders and an agreement with Denmark to guarantee rising flows on the equally congested Northern border. The Denmark deal is important as Danish complaints to the EC have previously forced Sweden to accept a price zone split.


Germany's power grid has become the focus of its energy policy as the weak spot of the energy transition. Berlin has already restricted wind turbine growth in the North and won't lift its offshore wind targets until the grid can deliver the power to Munich or Stuttgart. With grid fees also rising there is new conflict ahead between regions inside Germany about who pays the bill for the 'Energiewende' - that's German for energy transition.


Until next time on The Snapshot, we’ll be keeping an eye on the markets.