Photographer: Martin Leissl/Bloomberg

How German Wind Power Is Complicating EU Unity: QuickTake Q&A

Germany says it wants to end Austria’s unlimited access to its cheap power supply, a split that could kick off a lengthy legal and political challenge. The European neighbors have shared an electricity market with power traded at a common wholesale price since 2002, an early step toward what the EU hoped would become a single continent-wide energy market.

1. What’s motivating the split?

The free flow of electricity from wind farms in Germany’s north to Austria, its southern neighbor, has proved smoother in theory than it has in practice.

2. Why’s that?

Germany’s power system hasn’t kept up with rising production of renewable energy as bureaucracy and public protests have slowed network construction. So on gusty days, wind power produced in northern Germany can exceed what the nation’s cables can transport and instead take indirect routes -- called loop flows -- through Poland and the Czech Republic, Germany’s neighbors to the east. 

3. What’s the problem with loop flows?

Poland and the Czech Republic have complained about excess power overflowing their grids, which costs money and could lead to blackouts. The European regulator ACER agreed that this needs to be averted by breaking up the market. Such unplanned flows cost 1.1 billion euros ($1.2 billion) in 2015. Even Germany has suffered. With so much of its low-cost energy being diverted across borders, the nation’s industrial south sometimes needs power from more expensive traditional power plants locally.

4. What is Germany proposing?

German grid regulator Bundesnetzagentur asked network operators to be ready to limit power trading at the Austrian border from July 3, 2018. From that point, trading could be limited to the electricity that can be physically transported on cables across the border.

5. Who opposes a split?

Austria’s energy regulator E-Control said it is considering legal actions against Germany’s plan while industry groups warned that a breakup could trigger damage claims. The energy exchange EEX AG and German utility association BDEW oppose the move, saying it undermines the goal of a common European electricity market.

6. What’s at stake?

Nothing less than 200 billion euros, the total value of contracts for delivery into the German-Austrian market that were traded on exchanges and through brokers last year. This makes it Europe’s biggest electricity market, which also sets the benchmark price for the region. Splitting the market would mean that the place of delivery for these contracts would change. It is also likely going to decrease liquidity and competition, with the danger of no or a very illiquid futures market in Austria, the country’s biggest utility Verbund AG said.

7. Does this spell the end for a single EU energy market?

The European Union seeks to boost the free flow of energy to benefit consumers by increasing competition among suppliers. European consumers could save at least 50 billion euros a year on a “more economically and physically” linked-up energy market, according to a study by the European Parliament. Opponents say that a breakup of the region’s only power market with unlimited trading at the borders opposes the idea of a common market. Supporters of a split say that flows will have to follow available transport capacity.

8. Who may have to pay more?

Austrian customers may pay 15 percent more on their power bills, or 300 million euros annually, if the market is split, according to an estimate by consultants Frontier Economics and Consentec. German and Austrian utilities with customers in the other country would have to renegotiate contracts with these consumers, potentially passing on additional cost to transport electricity across the border. This will increase bills for heavy energy users in Austria, including paper, glass and steelmakers. Voestalpine AG, Austria’s biggest steel company, said the prospect of a split power market will play a part in its decision to reinvest as much as 300 million euros in a steel mill in its home country next year.

9. Who may benefit?

A split could mean a little relief on electricity bills of German consumers, who could pay 280 million euros less per year on grid-balancing fees that are set to soar this year as as clean energy additions surged. These fees are owed to grid companies when Germany has to take measures to balance power production in the north with demand in the south.

10. Could anything keep the market intact?

A split could be avoided if Germany and Austria agree on a solution to share the costs of their common market, or if any Austrian legal action is successful. Also, Germany pledged to adhere to the results of a review by European grid operators on the layout of current power markets. Their findings are due in the second half of 2017.

The Reference Shelf

  • Traders worry about the breakup of a 200 billion-euro power market.
  • A QuickTake explainer on wind power.
  • A QuickTake Q&A on Germany’s exit from nuclear power.
  • German government reply to parliamentary inquiry on power market split with Austria
  • European Parliament study mapping the cost of Non-Europe
  • European energy regulator ACER studies unplanned power flows in its 2015 monitoring report on internal electricity markets
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