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BMI View: Germany will not diverge from the Energiewende and there will be
structural changes to the way power is generated and consumed. This will
continue to take a toll on traditional utilities - with little indication that
the newly designed 'electricity market 2.0' will reverse this situation. Strong,
albeit slower growth, in renewables-based electricity generation will continue
to depress wholesale electricity prices and drive thermal generation out of the
-We have largely retained our forecast for growth in electricity generation,
consumption and capacity this quarter. Germany will not diverge from its
renewables-focused energy policy - despite the ongoing implementation of the
'energy market 2.0' and reforms to slow the pace and reduce the cost of the
Energiewende (energy transition). As such, renewables capacity will continue to
grow - ensuring that wholesale electricity prices remain depressed and margins
at thermal plants - especially gas plants with higher marginal costs - will
continue to be squeezed.
-In line with our views, and Germany's status as a global leader in renewables-based
electricity generation, it was reported that 90% of total power demand was met
using renewables for a few hours on May 8 2016. The influx of renewable-based
electricity supply sent wholesale electricity prices into negative territory.
This meant that higher marginal cost thermal capacity was forced to pay
wholesale electricity buyers to take the electricity - emphasising the ongoing
threat to thermal capacity in Germany.
-These dynamics pose an existential threat to utilities such as E.ON and RWE.
Utilities are struggling to adapt as thermal capacity is squeezed out of the
generation mix by an influx of subsidised wind and solar capacity, which has
priority access to the grid. At its annual general meeting in June 2016, 99.68%
of E.ON's shareholders approved plans to spin-off its fossil-fuelled generation
assets and supply and trading business into a new entity known as Uniper. It is
hoped the move will allow the slimmed down E.ON to focus on growth areas such as
renewables, networks and energy services - without having to focus on its
declining thermal assets.
-To this end, we maintain that the Energiewende has broken the gas-fired
generation model in Germany and the outlook for gas power remains bleak amid low
wholesale electricity prices and negative spark margins. As such, we have
maintained our forecast for gas-fired electricity generation to contract by 4.2%