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Mandatory Direct Marketing Raises the Financing Costs for Wind Power Projects

Press Release of May 20, 2015

Plant operators must sell their electricity themselves – costs of forecast deviations and site-specific changes in revenue make wind power unnecessarily expensive

The 2014 reform of the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, or EEG) mandates that operators of new large power plants market their electricity directly in order to create incentives for good wind forecasts and clever sales strategies. However, this also creates new risks about the level of costs caused by forecast deviation and differences in site-specific revenues. Thus mandatory direct marketing can result in an increase of financing costs—and therefore also production costs. “These additional costs must eventually be borne by electricity consumers. Hence the creation of new risks for investors should be avoided in further developments of the EEG ," said DIW energy expert Karsten Neuhoff.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

The 2014 reform of the Renewable Energy Sources Act entailed that a mandatory direct marketing be introduced in phases. Operators of large wind turbines must sell their electricity themselves. In addition to the sales revenues, they receive a so-called floating market premium that arises from the difference between the feed-in tariff determined by the EEG and the average market value of wind power in the previous month. This amount is determined on a monthly basis. Since August 1, 2014, the direct marketing has been mandatory for electricity from new plants whose capacity exceeds 500 kilowatts (kW); from 2016 onward, it will also apply to new plants whose capacity exceeds 100 kW.  

Changes impact costs and revenues for plant operators

The changes affect not only the costs, but also the expected revenues. Firstly, forecast deviations can create additional costs for power plant operators, who initially sell electricity at the day-ahead market according to the projected electricity production from the previous day. If they produce less or more electricity than expected, they must sell or buy electricity from other sources to compensate for the corresponding deviations. The additional costs that arise from this situation are difficult to predict. According to historical market prices and wind data, the average additional costs stand at around 3 percent of the electricity market revenues, but can be significantly higher in individual months and control areas. Secondly, the market value of  wind power may vary due to differences in local wind power profiles compared to the average production profile. 

For investors, two new risks

From an investment perspective, this creates two new risks: Investors now must factor in the costs of forecast deviations and site-specific differences in the market value of wind energy. Thilo Grau, Karsten Neuhoff, and Matthew Tisdale have calculated the resultant uncertainties and analyzed how these affect the capital structures and financing costs of project-financed onshore wind power projects. Based on different scenarios, the DIW researchers found that financing becomes more expensive. The EEG funding would have to increase by three to twelve percent in order to make investment for commercial and institutional investors equally attractive as before the implementation of the mandatory direct marketing. If the financing costs rise, the EEG tariffs would also have to rise accordingly to achieve the same deployment of wind power. These additional costs are eventually borne by the consumer. „To integrate renewable energies into the market, it would likely be more efficient to further develop the short-term market for electricity—for example, through the implementation of intraday auctions. In this way, all actors can efficiently sell electricity, and the creation of new risks in order to achieve good marketing incentives can be avoided,” said Neuhoff.