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Germany takes leave of power market fundamentals

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* Wholesale prices at rock-bottom due low demand, renewable supply

* This undermines utility profits

* But householders pay record prices as state fees balloon

* Solution up to policymakers

By Vera Eckert and Christoph Steitz

BERLIN, Jan 22 (Reuters) - Wholesale power prices in Germany are at their lowest in more than three years, undermining the profitability of fossil fuel power generation and trading, and yet 40 million households pay record prices well above European Union averages.

To explain this state of affairs, look no further than the expansion of renewable energy installations, which provide bursts of subsidised power often enough to trash market fundamentals.

Weather-dependent green energy is given priority on the networks when it is available, securing thousands of private operators healthy earnings while traditional power stations burning coal or gas are reduced to providing reserve power.

The state, which supports green power, also benefits from - and exacerbates - high power bills by collecting fees and taxes.

Industry analysts say this can only change if government curbs run-away renewable subsidies and taxes and spreads their burden more evenly.

"No one expected the rise of solar to be that strong," said Roland Vetter, head of research at financial advisory firm CF Partners in Frankfurt.

"(Utilities) RWE and E.ON did not take that into account when they decided to build new power plants a couple of years ago. They expected power prices to rise. The truth is that they fell," he said.

The big power generators also have renewable units, but they caught on to the trend late, so green producers are typically householders with solar panels on their roofs.

SUPPORT PAYMENTS BALLOON

Delivery of round-the-clock power in the 2014 calendar year is trading at under 43 euros a megawatt hour in the wholesale electricity market, a contract low and the lowest price of a year ahead contract in over three years.

The price weakness reflects the euro zone's economic malaise and mild weather in recent years, which has curbed demand.

It also results from historically low prices of power cost inputs such as steam coal feedstock and EU carbon rights certificates.

While benefiting from low costs for some inputs, utility companies are also grappling with structural changes, above all the loss of nuclear reactors after the decision to exit nuclear energy faster than planned, and expensive gas.

Consequently, E.ON, Germany's top energy group, has said it will not be building any more gas or coal-fired plants for the rest of the decade. It says underused plants will likely post losses because their investment returns were calculated on the basis of full-time production.

Solar operators in the meantime added more than a fifth of new capacity last year and now command 32 gigawatts (GW) of total capacity, as much as hard coal-fired power stations.

Hard coal-fired plants, because they run constantly and not occasionally, provided nearly 20 percent of power supply last year, while solar installation contributed less than 5 percent.

Meanwhile, the total bill for supporting renewable energy rose to 20 billion euros in 2012 from 17.1 billion in 2011, with solar power costing over half the total.

This is because producers receive guaranteed payments at prices above the market for a fixed term, shared by all consumers. While that has encouraged the young industry's development, it has distorted the wider market.

"We are treating ourselves to the luxury of highly subsidised renewables while getting near to destroying existing plants that should be setting price signals," said Erich Schmitz, director of the coal importers lobby VDKI.

PRICE RISES

Householders consequently pay five times the cost of production; the power spot price on wholesale exchange EEX of 6 cents a kilowatt hour contrasts with average bills of near 30 cents.

German media have made much of rising household bills, and opposition parties are trying to put the blame on Chancellor Angela Merkel's government before the September election.

Indeed, state fees levied to support renewables, heat and power co-generation, offshore wind farm liabilities, and to collect energy usage and value added taxes account for 50 percent of the price.

After production costs and government fees, there are also the costs of transmitting and marketing power.

"It is up to politicians to reduce these power price burdens for households," said the chairwoman of industry group BDEW, Hildegard Mueller, defending producers in her lobby. "The part of the price that companies can influence keeps shrinking."

Another divisive political issue is the breaks and exemptions the government has granted to big industrial power consumers to safeguard their competitiveness. The little guy ultimately pays to offset such goodies.

These entail waivers for some renewable energy charges, help with the cost of mandatory emissions trading and with network usage tariffs.

Germany's economic rivals and the EU are unhappy about this.

"The losers of the energy strategy shift are the end consumers, especially low-income households, and our medium-sized companies, which happen to be creating the most jobs," said Ulf Boege, formerly the head of Germany's cartel office in Bonn.

http://www.globalpost.com/dispatch/news/thomson-reuters/130122/germany-takes-leave-power-market-fundamentals