Germany has long been considered an energy transition leader, but the reality is more complicated as the country falls behind in meeting its EU renewable energy targets. Turning to commercial power purchase agreements as an option for selling renewables generation in addition to Germany’s traditional controlled markets could help get wind and solar development moving briskly again, but significant hurdles remain

Little growth:
Development of renewable energy in Germany is not keeping pace with the country’s commitment to deliver on EU climate targets by reducing carbon emissions

Market stimulation:
Power purchase agreements (PPAs) for direct sales of renewable energy to commercial enterprises could boost the market for solar and wind, but there are legal barriers; for energy intensive industries, remaining with fossil fuels is often cheaper than transitioning to clean power

Key quote:
Germany now needs to turn its attention to making sure the owners of new wind farms can sell their generation through PPAs

The development of renewable sources of energy in Germany is not sufficient for the country to meet national and EU emissions reduction targets. The slow growth of wind and solar is bad for the climate, as it means continued reliance on fossil fuels, and bad for the economy as the country could be liable for fines of billions of euros under EU law. Auctions of contracts for onshore wind support in 2019 under Germany’s controlled wind market were undersubscribed and the project installation rate plummeted to 287 megawatts (MW) in the first half of 2019, 87% down on the same period in 2018 which already represented a severe wind market contraction. Growth in the solar fleet was healthier in 2018, with three gigawatts (GW) added, pushing up total capacity to 45.3 GW. Under the 2017 German renewable energy act, however, support for solar will cease when 52 GW of production capacity is reached, unless the law is amended. Corporate power purchase agreements (PPAs) for renewables, signed between customers and energy generators, including independent power producers (IPPs), are routine in the US, Scandinavia and other countries. PPAs with IPPs also give utilities an extra option to expand their renewables portfolios in addition to building renewables projects off their balance sheet, for example. Industrial or commercial companies could, in theory, secure future supplies of green electricity through PPAs, reducing their carbon footprint in the process and improving their environmental image. Germany is exploring the potential of PPAs to provide revenue to owners of wind farms and photovoltaic installations after state support expires in the coming years. State subsidies for around 16 GW of onshore wind capacity will end in 2025. One of the first PPA deals for veteran wind capacity was clinched in Germany in December 2018 by Mercedes-Benz. The vehicle manufacturer signed a corporate PPA with Norwegian utility Statkraft, agreeing to buy electricity for several of its German factories from six wind farms in northern Germany that will lose state support as early as 2021. “Corporate renewable PPAs have been growing rapidly in recent years, but mainly in Nordic countries, the UK and the Netherlands. It is a major breakthrough that they have now started in Germany,” says WindEurope, the European wind energy association. “Shifting to PPAs will help to keep these wind farms operating. Germany now needs to turn its attention to making sure new wind farms can also sign PPAs,” says Giles Dickson, CEO of WindEurope. The solar sector is already demonstrating how PPAs with energy companies can support new projects. In February 2019, EnBW, a German energy company, and Energiekontor, a renewable project developer, clinched a 15-year, fixed-price PPA for 100% of the electricity to come from the 85 MW Solarpark Marlow-Dettmannsdorf near Rostock in the north of the country when it comes into operation in late 2020. The deal was the first of its kind in Germany and makes it possible to build and operate the plant without renewable energy act support, says Energiekontor.

Lack of conviction

But not everyone is convinced that PPAs are the solution to expanding the market for renewables. In a market survey of corporate green PPAs to 2030, 128 respondents disagreed they were a good idea. Among the respondents were industrial and commercial companies, energy generators and traders, energy utilities, project developers and investors. The survey by Dena, a German energy agency, was published in July 2019. The respondents complained about the complexity of PPA contracts, lack of price visibility and lack of information on contracts and the German legal framework, the lack of a market place to bring together renewables generators and off-takers for the electricity, and uncertainty about future energy regulation. There are also other hurdles. The transition to renewables would speed up if not only energy utilities like EnBW, but also energy intensive industries, which use massive volumes of electricity, moved into the market to support new projects. Yet, under German energy sector regulations, the more electricity intensive an industry becomes, the more support for buying electricity it receives and the less incentive it has to sign a PPA for green power. This is the result of “a paradox of the interactions between support instruments and exemptions”, says BDEW, the German energy and water federation. Under the European Emissions Trading System (ETS), energy-intensive companies included in a carbon-leakage list receive compensation for the cost of carbon dioxide (CO2) certificates applied to the electricity they consume. This financial return is aimed at reducing the potential risk of the industry relocating to a country outside Europe, where the ETS does not apply and electricity is cheaper. Electricity from renewable energy generation built without a support mechanism is not eligible for this compensation. If an energy-intensive company signs a PPA to help finance a new renewables project, it will not receive CO2 compensation payments for the electricity despite the cost of the investment. As a result, continuing to buy non-renewables electricity is the cheaper option. The new EU renewable energy directive compounds the problem by disallowing compensation for electricity generation where no CO2 is emitted. This situation may sound logical, but can put renewables projects at a competitive disadvantage and encourage companies to remain with coal or gas rather than invest in solar and wind. This is despite the directive’s ambition to encourage PPAs, requiring EU member states to assess regulatory and administrative obstacles to them at a company level, to eliminate unjustified obstacles and to facilitate PPAs.

Legal and economic barriers
German energy-intensive companies also miss out on the potential PR benefits of being able to brand their company as “green” since under the country’s Renewable Energy Act, generators of German supported renewables electricity are banned from issuing guarantees of origin (GOs) that certify the electricity is renewable. The legislation deems that doing so would be considered as additional support on top of renewables subsidies. Instead, companies buy GOs in the European market, which are mainly sourced from existing Scandinavian hydropower stations not from new renewables plants. This practice is criticised by consumer organisations such as Bund der Energieverbraucher as greenwashing and can do the image of companies more harm than good. Another issue making energy-intensive companies think twice about engaging in PPAs is that they can benefit from substantial reductions to Germany’s renewable energy levy, electricity tax, network usage charges, concessions and other payments. Together, these reductions can reduce electricity charges to as little as €0.01 a kilowatt hour (kWh) from the standard charge of €0.116/kWh, according to the Bundesnetzagentur, Germany’s federal energy regulator. To be economically attractive, consumers will aim for a PPA supply contract in which the purchase price is on a par with, or below, the net wholesale electricity market price. For the time being, this is only possible with large renewables projects benefiting from economies of scale in prime wind or solar locations. Energiekontor suggests these arguments are overly focused on the short term. The organisation counters that for many large industrial companies and energy suppliers, PPAs mean secure fixed prices over a long time period, providing customers with protection from extreme price fluctuations and rising electricity prices in the wholesale markets. “This long term advantage makes it worth paying a higher electricity [market] price in the short term,“ says Energiekontor. Efforts are being made to simplify the PPA process. The European Federation of Energy Traders released the first cross-border standard Corporate Power Purchase Agreement in June 2019 aimed at bringing down transaction costs and facilitating the negotiation process between the different parties involved. These actions could encourage smaller industrial and commercial companies with lower credit ratings to engage in the complex contracts. While renewables generators and industrial and commercial electricity users grapple with the intricacies of PPAs, alternative financing options are also getting underway that may become more popular. Construction began in August 2019 on the first entirely crowd-financed, ground-mounted German solar plant in Hecklingen in the German state of Saxony Anhalt without government subsidy. Enyway, a blockchain-based online energy marketplace, founded in 2017 as a spin-off from Germany’s largest green energy supplier, LichtBlick, teamed up with BayWa r.e., a German renewable energy company, to build the 1.3 MW plant with an annual output of roughly 1.3 gigawatt hours of green electricity using micro-investments from thousands of participants.

Writer: Sara Knight