Texas and Germany: Energy Twins?

Ben Paulos writes in Texas & Germany: Energy Twins?: Germany and Texas have some intriguing similarities when it comes to their electricity systems, and may share a common future. Policy makers in both Texas and Germany believe strongly in competitive markets and have largely deregulated their power industries. Both regions have a large and growing amount of renewable energy and are likely to see much more in the future — in Germany, due to the strong policies of the Energiewende and in Texas, driven by abundant natural resources and the increasing maturity of wind and solar power. In both places, belief in competition has led to "energy-only" wholesale markets, where generators compete to sell their juice on daily and hourly markets, an approach lauded by market economists as the most economically efficient approach. Many other states and countries provide long-term payments to power producers to be ready to provide power as needed, called a "capacity" payment. These factors (and others) have led to very low wholesale prices in both Germany and Texas. Low prices are driving incumbent utilities toward bankruptcy, shuttering power plants and tightening operating margins, as well as triggering a contentious debate about reforms to market designs. In Texas, near-outages in 2011 triggered the debate. Power plant owners argued that prices were too low, no new plants would be built, and power shortages were just around the corner. They were countered by large consumers, maintaining that low prices were simply the result of market forces at work, capacity payments were a form of welfare and adding them would drive up costs. Earlier this year, under substantial political pressure, the state utility commission in Texas decided the market was "healthy" and made relatively minor fixes. In Germany, the same debate is just heating up. The ongoing growth of wind and solar is pushing conventional technologies out of the market, inflicting serious financial damage on the incumbent generation companies. Yet those traditional "dispatchable" power plants are needed for when the wind doesn't blow and the sun doesn't shine. European generators E.ON, RWE, GDF Suez and Vattenfall all saw major losses in 2013. RWE has called it "a crisis in conventional power generation," and has closed 12,600 MW of capacity since the start of 2013. Another 15,000 MW of conventional power plants have requested permission to shut down. The companies are also lobbying hard for capacity payments to reduce their losses. Just as in Texas, though, there is strong resistance to capacity payments, for the same reasons of economic efficiency and competitiveness. Energy Minister Sigmar Gabriel recently compared capacity markets to an unemployment program. "When it comes to capacity markets, this cannot be a [welfare program] for power plants—where you do not work but earn money," he told an energy industry conference in June. Given that the goal of the Energiewende is an 80% share of renewable power by 2050, these market concerns are fundamental to the future of energy in Germany. And they are a harbinger of things to come in places like Texas, where wind and solar are competitive, the resources are large, and the pressure for pollution reduction is growing. In this future, conventional power plants run less and less, but are still needed for reliability. If they aren't going to make a living selling electrons, they need to make it selling reliability and integration services. And they must compete with "smart grid" technologies that are making the demand side more interactive. To make it work, the money flows of power systems dominated by renewable energy will have to look fundamentally different from those designed for traditional power plants. What's missing in the discussion is the role storage will play. With cheap battery storage due to change the playing field dramatically in the future, the need for conventional fossil fuel power plants will wither and die. The utilities will be stuck with power plants built to pay back their costs over a period of decades being unable to compete. Bankruptcy or corporate welfare will be the alternatives for many electric utilities who fail to see the oncoming 800-pound gorilla of renewables. It won't be government which forces renewables down consumers' throats. It will be that old reliable: free market capitalism which drives the electric utilities into a financial hole from which they will never emerge.

Posted in: Wall Street Trading