ICIS Long-Term Power: Faster German renewable expansion to reduce 2030 power prices by 10%

This story has originally been published for ICIS Long-Term Power Analytics subscribers on 17 March 2021.

Our ICIS Long-Term Power Analytics customers have access to extensive modelling of different options and proposals. Our long-term price forecast now extends to 2050 for most European countries.  If you are interested in our Long-Term Power Analytics products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).

In May 2021, Germany pledged to bring forward its aim for climate neutrality by 2045 and reduce emissions by 65% by 2030, marking a significant ramping up of the country’s climate ambition.

This will have wide-reaching consequences for the entire German economy but will also mean that current renewable capacity targets will need to be revised up, something most political parties have acknowledged in the run up to September’s general election.

In an analysis in March, we modelled a scenario based on higher renewable capacities that were proposed by Federal Environment Minister Svenja Schulze. The results showed that the installation of an additional 50GW of solar capacity and 25GW of onshore wind capacity by 2030 than the total proposed in the German Renewable Energy Law (EEG) amendment, would reduce German power prices by around 10% between 2027 and 2030.

Environment Minister Schulze proposed in January raising the 2030 capacity targets for solar to 150GW and for onshore wind to 100GW in order to adjust Germany’s emissions reduction pathway following the European Union’s new target to cut CO2 emissions by 55%.

This is a substantial increase from the 100GW for solar and 71GW onshore wind as set out in the EEG amendment that came into effect in 2021.

Our modelled scenario assumed the majority of additional capacity growth would take place post-2025 and the effect would be a significant price downside from 2027 onwards as well as a 36% increase in wind and solar generation by 2030 and a stark reduction in gas-fired output.

Background

• The EEG reform came into force on 1 January 2021 and will regulate the framework for the expansion of renewable energy over the next decade
  • The amendments seek to encourage large-scale solar plants on commercial buildings and smaller-scale rooftop installations as well as outlining sufficient tendered capacity to meet onshore and offshore wind capacity goals, and significant solar capacity
• Germany currently has a target of 65% renewable generation by 2030
  • The current targets set out in the EEG and German climate action package aim for 100GW solar, 71GW onshore wind and 20GW offshore wind
  • Germany plans to review its renewable expansion pathway consistently over the next decade
• The EU’s recent revision of emissions reduction targets to 55% may mean member states will need to revise up clean energy ambition as a result
  • This development was the main driver for the German Environment Minister’s proposed new 2030 renewable capacity targets
• The country plans to hold a discussion on the end of subsidies for renewables to take place by 2027

Scenario set up

• We modelled a ‘RES expansion scenario’ in which Germany adopts and achieves Minister Schulze’s proposed increase in renewable capacity targets for solar and onshore wind by 2030 and compared this with our Base Case  that closely resembles EEG 2021 capacity targets
• We do not expect a change from the current outlook over the next few years and so capacity pathways were kept constant with our Base Case until 2024
  • We then increased growth by 6% for annual additions (onshore wind) and 13% for solar relative to our current Base Case (January) to meet the new 2030 targets
• We assumed that tenders would be revised up to account for 25% of additional solar and 50% of additional onshore wind in the event Germany were to implement the new targets
  • We already expect following the 2021 EEG amendment and current capacity targets that the majority of onshore wind expansion would be achieved in auctions while significant subsidy-free solar expansion would be required
• While we think it unlikely that Germany will adopt such ambitious targets (60% more solar and 33% onshore wind capacity than as set out in the EEG), we do think it likely that Germany will raise its current pathway in light of the revised EU’s emissions reduction target
  • The scenario we have set up demonstrates therefore a highly ambitious scenario that measures the subsequent impact of such an eventuality on power prices, generation and trade flows

Analysis

Generation

• The increase in generation was relatively proportional to capacity additions
  • In the RES expansion scenario, solar capacity would be 58% higher in 2030 than in our Base Case and generation 46% higher (48TWh)
  • For onshore wind, the assumed capacity increase in the same year is 33% with generation 28% (36TWh)
  • The impact of the added capacity on generation increases at a relatively constant rate in each year between 2024 and 2030 for each technology
  • This is with the exception of 2030 itself when an additional 18GW of solar from 2029 only increases generation by 5TWh, suggesting that solar approaches market saturation at around 130GW-150GW in 2030
  • This curtailment effect is reflected in a load factor drop for solar in 2030 of 8% in the RES expansion scenario. Prior to 2030, solar has the same load factor in both scenarios
  • By this year we also expect Germany to have reached its 20GW offshore wind target
• The impact of the added RES capacity on gas-fired generation is significant particularly from 2027-2030 when gas output will fall by an average 20TWh per year – and 30TWh in 2030
• Meanwhile, the added RES capacity has a limited impact on coal and lignite, reducing the total combined generation by an average 5TWh per year between 2024 and 2030
  • Our bullish expectations for carbon as well as statutory phase-outs will mean that the relative profitability of the two fuels compared with gas will remain low over the next decade and that coal and lignite plants will likely run only during periods of low renewable output and high demand
• Overall, the proposed new expansion pathway would reduce German emissions by a total 60mt of CO2 over the next decade and by 19mt of CO2 in 2030 alone