Germany fears power market split

OREANDA-NEWS. The German power market could be forced to split into at least two power price zones if the country does not speed up grid development.

Germany suffers from permanent supply bottlenecks between — roughly — the north and the south of the country, which require considerable redispatching activities from the country's four transmission system operators (TSO). The less-industrialised north of the country needs substantially less power than it produces, with the south, generally considered Germany's economic hothouse, bearing the brunt of the country's nuclear power phase-out.

The grid extension needed to carry large volumes of wind power from the north to the south is progressing extremely slowly and an important power line is under fire from the southern state government's of Bavaria and Hesse. Bavaria insists that such links are unnecessary and would rather build the generation capacity it needs — at least two gas-fired power plants — within its borders.

But if Germany does not make significant progress in extending its grid, or at least convey the impression that it is heading in that direction, then EU grid code guidelines could force the country to split into two market zones, TSO 50Hertz chief markets and system operations officer Dirk Biermann said. Germany's TSOs cannot continue redispatching in the way they do now, Biermann said, adding that there must come a time when "we will let the market see these bottlenecks".

"Redispatching was rare 10 years ago but has become a mundane business," Biermann said. "We must end this appalling situation through grid extension," he said.

If Bavaria gets its way "we cannot maintain the single price zone… and we don't want this to happen," junior economy and energy minister Rainer Baake said. Spending money to reduce power generation in the north, while simultaneously investing to activate Austrian power plants in the south, can be accepted only "temporarily", Baake said.

Energy exchange EEX is "extremely concerned" by the debate on splitting up the German market into zones, chief strategy officer Tobias Paulun said.

The German-Austrian bidding zone is a "very, very liquid market" and this is an intrinsic value in itself, 50Hertz's Biermann, said. This liquidity makes Germany's power market very competitive and a uniquely efficient balancing market, Biermann said.

The European Commission has "forced" Sweden to split up into four bidding zones, German consultancy Consentec managing director Christoph Maurer said. "We need to ask ourselves whether this is an appropriate solution," he said.

Exchanges EEX and Epex Spot commissioned Consentec to prepare a study on the effects of splitting Germany into two bidding zones. The study concluded that smaller bidding zones would be up to €100mn/yr (\$113mn/yr) more expensive than a large German-Austrian bidding zone, partly because smaller zones have more insecurities on their comparatively larger outside borders, which necessitate redispatching measures.

It is also questionable whether splitting Germany into two bidding zones would trigger investment in fossil fuel-fired generation capacity in the south — a key argument from proponents of a split — because any split of the Austrian-German zone forced by the European Commission would be reviewed every three years.

No-one will invest in power generation under these conditions, Maurer said. If the regulatory insecurities are greater than the rather low efficiency gains, it is not worth splitting up the German-Austrian bidding zone, he said.

Additionally, north Germany might be tempted to perpetuate market division because it would benefit from lower prices, Maurer warned. In the case of a market split, southern power prices would be "substantially" higher than wholesale prices today,Maurer said — although not as much as twice as high, he admitted.

There was disagreement over when such a split would happen, should it come. Legislation for the new market design is expected next year soa a market split could probably not happen before 2020, Consentec's Maurer said. Although 50Hertz's Biermann said it could happen earlier.