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Germany's Wind Energy Industry: Growth, impact and policies

IHS Markit analyzes how German targets for renewables-generated electricity strengthen long-term wind energy prospects locally and for Europe.

Under Germany’s energy transition policy, known as Energiewende, renewables play a growing role in the country’s long-term energy mix. Wind and solar are expected to lead the transition after the government ordered all remaining 12 GW nuclear plants to be shut down by 2022. The successful phaseout of nuclear power generation depends largely on Germany’s ability to deploy and integrate sufficient renewables capacity into the power system. In total, IHS Markit expects that Germany will be the largest European market in terms of renewables capacity additions to 2020. The outlook is dominated by onshore wind and solar photovoltaics, with offshore wind power in Germany scaling up over the period. Offshore wind capacity in Germany is targeted to reach 6.5 GW by 2020, while a proposed tender mechanism is designed to drive 2.6 GW of annual net additions for onshore wind.

In the short run, the wind energy sector faces several challenges. Recent wind and solar tenders in Germany signaled strong investment interest around the expansion of renewables. However, the lack of country-specific power targets from the European Commission, a rising captured price discount and tradeoffs between curtailments versus grid expansion strategies present additional questions.

Nevertheless, German offshore wind continues to attract growing support for a variety of reasons. Continuing advances in wind technology ultimately could contribute to a decline in wind energy costs. Changes in global supply chains have enabled wind equipment manufacturers to scale rotor sizes, while lowering the capex needed. Coupled with significant decreases in costs for battery storage, the investment to manage higher levels of renewables penetration in the German energy mix is decreasing beyond earlier expectations, even without government subsidies or agreement on coal supply issues.

Anyone involved in the European energy market would do well to consider the broader impact and key topics. Learn more about prospects for German wind energy.

Highlights

German offshore wind energy poised to rise without government support
When three offshore wind projects in Germany won a 2017 tender to operate without support, solely based on wholesale market revenues, it took many market participants by surprise. If subsidy-free offshore wind materializes, it will have significant ramifications for the European power sector. German project economics benefit from ideal locations, expected sizable technology improvements and recovering wholesale prices.

IHS Markit analysis indicates the required reductions in project capital expenditures would be much faster than historically observed – as high as 36% over seven years. If the cost reductions are achieved, will meet standard financial return targets, although the projects’ revenues are back-loaded. The IHS Markit captured price for offshore wind remains below the German projects’ levelized cost of electricity through 2035 but increases with time.

The economics of these projects might be uncertain; nevertheless, their value exceeds their simple financial return. Developers might be willing to accept more risk to prove the competitiveness of offshore wind power in Germany relative to other technologies as well as benefit from the cost synergies that a large-scale deployment of offshore wind could produce.

Policy issues surrounding German wind energy
Climate and energy did not emerge as issues in the German election, but the issues of significant emission mitigation and grid capacity constrains now loom large on the political agenda. A stated target to reduce Greenhouse Gas emissions by 55% by 2030 would require returning to earlier levels across power, heat and transport topics.

Decisions must focus on the power sector – Amid grid constraints, Germany is committed to an ambitious energy transition, addressing increased grid capacity development for resource expansion and differences in demand in different parts of the country.

The pathway leads toward coal fleet closure – IHS Markit analysis shows the German market is both well supplied and well interconnected with its neighbors, and any movement toward closing coal plants would have a marginal impact on prices. However, the timeline and extent of any proposed coal phaseout is unknown and will be determined by a yet-to-be formed commission.

Opportunity continues for renewables, but risks are on the horizon – In the short and long term, stronger measures to boost renewable capacity in the German power sector would guarantee that Germany remains Europe’s engine for renewable capacity growth. In the German power market, the largest investment opportunities will continue to be in solar and wind, both onshore and offshore wind. Renewable additions, however, especially if today’s grid constraints remain, will increase risks to existing and new projects: the number of curtailments could well increase, and the discount between wholesale and capture prices might widen.

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