Germany sets out plan to rein in surging energy costs

Wed Nov 27, 2013 4:31pm GMT

Quotes

   

* New government will gradually reduce all subsidies

* Existing subsidies not to be affected

* Utilities welcome reform plans

* Banks, industry say reform does not go far enough

By Henning Gloystein and Christoph Steitz

LONDON/FRANKFURT, Nov 27 (Reuters) - German parties have agreed to limit the growth of renewables and reform controversial incentives for the sector by next summer in a move to slow the rise in electricity costs for households and give big utilities more time to adapt their business models.

Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) clinched a coalition deal early on Wednesday that puts Germany on track to have a new government in place by Christmas.

One of their top priorities will be a reform of the renewable energy law (EEG), which has sent costs for consumers soaring because of generous incentives for solar and wind power.

The subsidies are largely paid for by households, whose bills have almost doubled to an average of 300 euros ($410) per megawatt-hour (MWh) over the past decade and are now the second-highest in Europe behind bills in Denmark, according to Moody's Investors Service.

For utilities, the subsidy-fuelled renewable boom has eroded wholesale power prices, reduced revenues and forced the closure of several fossil-fuelled power stations.

"The coalition aims for a fast and fundamental reform of the Renewable Energy Law and plans to submit a draft by Easter 2014, with the goal of passing it by summer 2014 in order to a create a reliable energy policy framework," the coalition contract said.

The agreement stops short of promising a reduction in utility bills.

But it says a new government will gradually reduce subsidies for all renewable technologies and completely scrap some grants. From 2018, grants will be handed out through competitive tender offers, which will be based on a 400 megawatt photovoltaic pilot tender scheme to be launched in 2016.

"In the further expansion of renewable technologies, cost efficiency and economic viability of the entire system ... need to have a higher significance," the deal reads.

The coalition deal says the new government will not change any schemes that had been paid out or are already running.

Germany's nuclear exit, accelerated by Merkel after the Fukushima nuclear disaster in 2011, remains in place, with the last reactor to be taken off the grid by 2022.

MIXED FEEDBACK

Germany still plans to generate 40 to 45 percent of its electricity from renewable sources by 2025 and 55 to 60 percent by 2035, according to the agreement.

That is broadly in line with the outgoing government's goal to raise the renewable share to 35 percent in 2020 from roughly 25 percent today. But it falls far short of SPD demands for a target of 75 percent by 2030.

The coalition deal said that renewable expansion was aimed not only at reducing emissions but also at creating new jobs and reducing Germany's dependence on costly imports of oil and natural gas.

To safeguard security of supply, the government will encourage the expansion and modernisation of the grid and the development of power storage technology and find ways for power generators to operate gas and coal power stations profitably as backup for renewable capacity, the agreement said.

Utilities welcomed the announced reforms.

"The agreement includes important and correct approaches for a new energy policy," top Germany utility E.ON said in a statement, but added that some questions remained open and that the timeframe of the reform was too long.

"We see this (reform) as a balanced concept, which will bring together renewable and conventional energy production," a spokesman for second-biggest German utility RWE said.

Bank analysts said, however, the reforms would not be enough to improve utility profits.

"We maintain our view that these measures are unlikely to dramatically improve generators' profitability," JP Morgan said in a research note. Credit Suisse said that "none of the (reforms) will alter the economics of the German power and gas business in the short term".

Industrial association VIK said the planned reforms were too vague and that there was no evidence of a "balanced and industry-friendly energy policy" while industry group BDI said that the costs of Germany's energy policy were still too high and that they "threaten Germany's unique industrial landscape".

Germany's renewable energy association (BEE), on the other hand, warned the reforms would slow the growth of clean energy technology and threaten emissions reduction targets. ($1 = 0.7374 euros) (Additional reporting by Madeline Chambers in Frankfurt and Matthias Inverardi in Duesseldorf; Editing by Jane Baird and Noah Barkin)

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