German Power Market Split May Spur North-South Price Divide

May 21, 2014 10:43 am ET

(Updates power price in seventh paragraph.)

May 21 (Bloomberg) -- Power prices in northern Germany may fall as much as 21 percent if Europe’s biggest economy is divided into regional markets, according to consultant Frontier Economics.

Average day-ahead prices in the north, where most of Germany’s wind power is generated, would drop as much as 8 euros ($11) a megawatt-hour by 2020 under the plan, while those in the south would rise 3 euros from last year’s levels, Christoph Reichmann, a director at Frontier Economics, said at an energy seminar in Stockholm. The European Union is assessing bidding zones as a way to improve the bloc’s power network efficiency.

Germany’s five-fold boom in intermittent wind and solar power in the past decade along with its phasing out of stable nuclear generation is causing grid congestion, which is blamed for uncontrolled power flows into neighboring networks. By dividing the market into separate areas, price differences between regions would signal where capacity is needed most, Reichmann said at the May 19 seminar.

It would be logical to split Germany into a “northern zone categorized by wind and a southern zone categorized by photovoltaic,” said Reichmann, who is based in Cologne, Germany.

Clean-energy sources such as solar and wind met a record 27 percent of demand in Germany in the first quarter because of new installations and favorable weather, the BDEW German utility lobby said May 9. Renewable generation rose 13 percent to 40,200 gigawatt-hours from the same period last year.

Loop Flows

The EU’s Agency for the Cooperation of Energy Regulators is reviewing price bidding zones in Europe’s power market amid an increasing amount of physical power flows between regions. High wind-production in Germany has caused so-called loop flows into Poland and the Czech Republic, who claim this is a burden to their grids.

The jump in renewable energy pushed German power prices to the lowest in nine years. Frontier Economics compared its forecast to the average day-ahead price of EU37.79/MWh in 2013 on the European Energy Exchange in Leipzig, Germany. Next-day power fell 13 percent to 33.45 euros a megawatt-hour at auction on EEX today.

Bidding zones in Germany would be controversial as they may mean higher costs for industrial users in the south, reduced market liquidity and the removal of incentives to build more power lines, Reichmann said.

Sweden was divided into four bidding zones in November 2011 after Denmark filed a complaint to the European Commission that Sweden’s grid operator was limiting exports to its neighbor, where prices were higher.

Germany has limited capacity to Denmark in a similar way for the last couple of years, Sigurd Naess-Schmidt, a director of economics at Danish research institute Copenhagen Economics, said at the May 19 seminar.

--With assistance from Stefan Nicola in Berlin and Rachel Morison in London.