[NGW Magazine] German Firms Redraw the Energy Map

The European Union's biggest gas market needs to be redrawn with more incentives to invest in clean capacity, says Uniper; while two rivals, E.ON and RWE, embark on what they hope will prove to be a value-creating alliance.

One of Europe’s leading energy executives, Uniper CEO Klaus Schafer, presented his analysis of how government policy might be reformed to address the challenges that Germany’s gas sector faces. He also said Uniper would be willing to invest in new gas-fired generation in southern Germany, under a tender to assure power grid stability.

Speaking at his firm’s results briefing March 8, the tests set by the icy weather and peak energy demand at the turn of the month were still fresh in the industry’s minds.

Infrastructure and power plants generally are at risk of under-investment, he argued, with German gas storage in particular not being adequately remunerated. 

“All of northwest Europe experienced very cold weather during the past two weeks,” Schafer said: “This situation demonstrated yet again how important our gas storage facilities are for supply security during the winter. On average, storage facilities met about 40% of Germany’s gas needs during this period; at peak demand they met more than half.” 

Gas inventories in Germany plunged by half in the space of a month to some 4.5bn m³, just 21% full (as at March 12), which was their lowest for years – and lower than the EU weighted average of 23% full.

Germany’s working gas storage capacity, at 21.6bn m³, is the largest of any EU state and has a pan-European importance – meaning stocks there are often withdrawn to cover shortfalls not just in Germany but elsewhere in the EU and even Ukraine. French stocks, affected by disrupted Algerian LNG exports from Skikda earlier in March, were less than 9%-full as at March 12.

Germany has served as an entrepot too. Russia exported record volumes of pipeline gas towards the end of February, anticipating the icy snap. 

Some of that would have supplied northwest Europe while Russian gas stored in German or Dutch storage went on to the UK a country more normally served by Norway – also seeing record flows – its own gas and supplies of Qatari LNG.

Schafer remarked: “We can be glad that the inventories at Germany’s gas-storage facilities were solid at the start of this cold snap… In short, although it was a close call, Germany’s inventories will suffice. However, we’ll have to hope that another late cold spell doesn’t catch us off guard.

He said that as neighbouring countries have already demonstrated, Germany needs to adjust the regulatory framework for gas storage so that it’s possible to operate them economically. Then no more key storage facilities will face imminent closure. “We’ve advocated this for a long time. The time is pressing for policy-makers to adopt these proposals so that storage facilities can continue to play their key role on securing Germany’s supply of gas.”

It's not only Uniper that sees the storage business as tough.

Verbundnetz Gas (VNG) director of infrastructure Hans-Joachim Polk said in its company’s 2017 results statement March 1: “In the storage business sector, the difficult market environment again remained challenging in 2017 as a result of constantly low seasonal price differences.” VNG is a significant gas supplier in the former east Germany and a big storage operator there. It is 74.21%-owned by Germany power group EnBW.

Capacity auctions are required

Schafer used his briefing as a platform to set out a vision for gas that he hopes for the new German government – which again will be a mix of Merkel’s CDU-CSU bloc plus the centre-left SPD, but with Merkel ally Peter Altmaier holding the economy ministry.

On March 14, the 'old coalition' was moved out, resulting in Brigitte Zypries of the SPD being replaced as minister for the economy and energy by Peter Altmaier.

“Highly flexible gas-fired power plants are the ideal partners for renewables and can come online swiftly at any time if there’s not enough sun and wind,” the Uniper CEO said, adding that gas has the lowest carbon emissions of any fossil fuel.

Uniper, like many other German generators, built up its gas-fired capacity in Germany over the last decade; but found these were priced out of the market from 2011-15 by renewables and cheap coal.

Schafer said that Germany’s gas pipeline and storage infrastructure helps to limit the costs of the energy transition, whereas the power grid would need vast amounts of money to carry windpower from north to south Germany if more and more renewable generation capacity were rapidly developed, also at great up-front cost.  

Uniper’s modern gas-fired plants, such as at Irsching in Bavaria, have been there to help grid stability, said Schafer; but “can’t provide this back-up indefinitely if we can’t operate economically.”

He added: “Shortly before Christmas, the German Federal Network Agency (BNetzA) decided to set price caps for the control energy market. This will mean that our power plants won’t even be able to meet their costs through price spikes any more.”

In January 2017 German wholesale power prices exceeded €100/MWh and the situation was “so tense that Germany had practically all its power plants online and at times was importing from France,” said Schafer.

The cold snap of 2018 came later in the year, and fortunately there was more sun and wind by then. But due to high French demand, it still came close to maximum stress, he said: “That’s why Germany’s policy-makers need to devote more discussion to supply security.”

Schafer said the UK was already ahead of Germany, having introduced regulated capacity auctions to ensure that power plants that guarantee back-up receive additional cash for providing this service: “We advocate a competition-based support mechanism for Germany as well.”

However he criticised national minimum carbon prices, and thus the UK’s minimum £18/metric ton CO2 price – a measure that has undoubtedly lowered Britain’s coal-fired generation in favour of gas, and on which Eni CEO Claudio Descalzi and executives at Statoil and Total have lavished praise.

He said the concept pitted neighbours “against each other, weaken Europe, and ultimately do nothing to help the earth’s climate.” An EU-wide approach, based on a reformed Emission Trading Scheme rather than national measures, would encourage the use of gas.

Schafer’s comments here may be directed at the Netherlands, now talking of introducing a carbon tax, and a ban on coal-fired power from 2030 – a country where Uniper two years ago opened a new coal-fired plant at Maasvlakte near Rotterdam.

Gas-Fired Generation Tender Coming

A year ago, Schafer had said that two modern combined-cycle gas-fired plants at Irsching in southern Germany are "sitting on the substitutes' bench," mothballed until the market or regulatory incentives improve. So it may seem odd that Uniper is now thinking of building new German CCGTs.

Schafer explained that a tender process is scheduled to add capacity in southern Germany but did not say if the regulator, BNetzA, or one of the grid companies will organise it.

“Yes, we are interested in gas-fired plants,” he told press: “We think it’s a topic fit for the future. They are going to be highly relevant for the German market. In April, I believe, if the conditions are right especially for the power plants in southern Germany, those plans will be published… But before we know the conditions, we can’t say anything.” 

NGW has ascertained that BNetzA (the federal networks regulator) asked Germany’s four main power grid operators to come up with ideas for such a tender. One of these (50Hertz) has no grid in the south, so it has been left to Amprion, TenneT and the much smaller Transnetz BW to formulate ideas.

While a formal tender has yet to be issued, NGW says the industry has been consulted on the broad outline. BNetzA has told the three TSOs to devise a tender for 1.2 gigawatts of new back-up capacity, which is open to any form of technology.  

One source said new units should be able to fire up at a moment’s notice and operate for maybe only hours each year – just when grid security is at its most critical.  

The location is expected to be primarily the two southernmost states of Bavaria and Baden-Wurttemberg, which have large cities and have historically been heavily reliant on nuclear. By law, all nuclear units in Germany must close by 2023.

The industry source tells NGW that because the tender, when published probably in April, is "open to any technology". 

That is expected to mean that offers will be considered from gas-fired generation - ranging from larger combined-cycle (CCGT) and combined heat and power (CHP) gas-fired power stations, mothballed or newbuild, and all the way down to small quick-start gas turbine units - but equally from battery projects, and potentially also demand-reduction proposals from large industrial complexes in the region. However, the focus of new proposals coming from the generation sector is expected to be gas-fired.

The legal requirement for BNetzA, in consultation with the TSOs and industry, to introduce such a South German capacity regime was introduced in 2017, the source told NGW.

Asset-swap for rivals

Utility giants RWE and E.ON have given more details of their plans to break up Innogy, and remove any overlaps in their existing businesses. The asset-swapping exercise will take two years and could encounter regulatory hurdles.

E.ON will offer some €5.2bn ($6.4bn) for the 23.2% of Innogy shares not held by RWE. Innogy assets will be split out, with networks and retail going to E.ON and renewables and gas storage reverting to their former owner, RWE.

E.ON will also transfer its own renewables business to RWE, plus minority stakes in two German nuclear units, but receive €1.5bn cash from RWE. 

RWE-EON joint press conference (Credit: NGW/the companies)

The latter will receive a 16.67% equity stake in the enlarged E.ON, so that it receives some long-term value from the deal if E.ON thrives. Without any voting rights, the one-sixth stake could give RWE a seat on the board. 

Although the overall transaction “could be completed by the end of 2019”, it would not be fully effective until 2020 – and would require approvals from two German financial regulators, plus relevant antitrust and regulatory authorities.

It has been argued that Innogy was in Enel and EDF’s takeover sights and that its management was weakened. Innogy CEO Uwe Tigges was just three months into the job, after his predecessor Peter Terium was forced out and CFO Bernhard Gunther lay seriously ill after acid was thrown in his face in a Dusseldorf park on March 4.

The swoop seemed calculated to embarrass Tigges, who insisted at a long scheduled March 12 results announcement that his board would run Innogy as a going concern and it was “too soon” to comment on the RWE-E.ON move.

Nonetheless it seemed odd for former German economy and energy minister Brigitte Zypries to suggest that same day that the deal might bolster competition. In fact, RWE and E.ON have structured a deal that reduces their business overlaps – likely reducing competition in German and European energy markets.

RWE CEO Schmitz said there would be no change to its overall gas strategy and that gas already accounts for nearly 40% of RWE’s overall [European] generation capacity: “We intend to grow and selectively supplement our portfolio especially in the gas business.”

Stock markets liked the Innogy carve-up, perhaps taking their line from E.ON CEO Johannes Teyssen’s message: “We're turning three companies – E.ON, RWE and Innogy – into two strong, innovative and clearly focused German companies for a better future of energy in Europe.” Shares in all three firms rose March 12, with Innogy stock up 12% at that day’s close. 

Uniper itself this year escaped a full takeover from Fortum but has had to put a brave face on the Finnish state controlled firm's purchase of E.ON's 47.12% stake and work out some form of co-habitation with its new undesired majority owner.

Mark Smedley