Satisfying the customers5 September 2002
The past year has seen major developments in the evolving German electricity market structure.
The number of companies in Germany supplying electricity to end-users in 2000 amounted to around 1100. Meanwhile, the number of new and independent electricity suppliers/retailers is around 200, including electricity wholesalers. Of these, around 80 are either foreign firms or else subsidiaries of foreign firms. There are also around 400 balancing group managers operating as traders in the wholesale market.
It is estimated that if one includes majority shareholdings, the combined total share of the market accounted for by RWE, E.ON, and EnBW is around 53 per cent. With the emergence of Vattenfall Europe in August 2002 (a result of the merger of Bewag, HEW, Laubag and VEAG), there are now four large companies firmly established on the German market.
Recovering from floods
In August 2002 Germany was hit by the worst floods seen in a century. The cost of the damage in the areas surrounding the Elbe and Danube and their tributaries has been estimated at around E15 billion.
The German electricity industry has united to re-establish power supply as quickly as possible to the flooded areas. VDEW has set up a hotline to co-ordinate the support of companies (which has been given freely), providing men and machinery such as standby gensets, pumps, drills, dredgers, fan heaters and driers.
The total extent of the damage to the transmission grid, transformers, substations and power plants will only become clear when the waters have subsided.
Power plant modernisation
Table 1 shows the breakdown of energy sources used for power generation in 2000. Four new power stations are currently under construction, with a total installed capacity of 2296 MWe, and by 2003, these will replace older, uneconomic plants. The largest of the new plants is a pumped storage hydropower station with a planned capacity of 1056 MW. It should be able to cover short-term changes in consumer demand within seconds. The remaining three new power stations will produce electricity from lignite, blast furnace gas and biomass respectively.
In 2001, plants with a total installed capacity of 1575 MW were shut down, including six hard coal plants, with an installed capacity of 1238 MW.
As of the middle of 2002, total German installed capacity was around 100 000 MWe.
CO2 reduction and cogeneration
The new German law governing cogeneration came into force on 1 April 2002 and reflects the findings of research overseen by VDEW on CO2 emissions reduction and cogeneration, agreed to jointly on 25 June 2001 by the German federal government and an electricity sector partnership working in conjunction with associations and groups such as ARE, VdV, VKU, BDI and VIK.†
Until 2001 there was no special legal framework for the feed-in tariffs of electricity from plants operating in cogeneration mode.
The aim of the new regulations is to help keep existing CHP plants in operation and their modernisation. Provision of a bonus payment is intended to nullify the difference in cost between electricity supply from cogeneration and the market price. Provision is also made in the new law for the development of smaller cogeneration plants and fuel cells.
Steam turbines with extraction of steam and turbines equiped with a condensing tail can alter their mode of operation between full back-pressure mode (all heat can be used) to pure condensing mode where no heat is used for heating purposes. Only when the plant is operating in full back-pressure mode, can all the produced electricity be considered as "genuine" CHP electricity. When the mode of operation is between back-pressure and condensing, then only part of the electricity produced can be called "genuine" CHP electricity.
It should be stressed that, under the new law, only genuine CHP electricity will be eligible for financial support.
On 25 June 2002 all the partners signed the "Agreement between the German government and German industry on CO2 emission reductions and the promotion of the use of combined heat and power as an addition to the climate change agreement of 9 November 2000." This agreement should be seen as a substantial addition to the 9 November 2000 agreement and was the result of negotiations conducted over many months under the auspices of VDEW.
With the additional agreement, the electricity industry associations have promised to introduce measures in the field of cogeneration that will reduce CO2 emissions by at least 20 million t/a by 2010, up to a possible total of 23 million t/a. Meanwhile, measures are to be introduced in other areas to reduce CO2 emissions by a further 25 million t/a. These other measures include power plant modernisation, speedier development of renewable energy, enforced use of improved space and water heating technology and campaigns for using energy more efficiently.
Renewables and conservation law
The Renewable Energies Law stipulated that the German Ministry for Economics and Technology had until 30 June 2002 to present to parliament a report on the future suitability of existing clauses on compensation, and its diminution over time, for power plants within the scope of the law. An expert report commissioned by the Ministry has concluded the following:
• It is necessary to reduce in-feed compensation for electricity generated by wind power.
• The profitability of biomass plants varies in accordance with the type of fuel used.
• Large renewable energy plants are generally effective when given government support.
• The potential exists for further development of both small and large hydro plants.
Plans by the German government to amend the Renewable Energies Law on the back of changes to the German Energy Law that are currently being discussed, have largely been shelved. It is considered important not to make any hasty and inappropriate amendments to the delicate nature of the Renewable Energies Law, before the above-mentioned report has been presented. The only definite change that will be made applies to solar photovoltaic installations where the threshold total installed capacity below which subsidies will continue to be provided is increased from 350 MW to 1000 MW.
The Energy Saving Directive, which came into force on 1 February 2002, was the product of long-standing government aims to integrate two directives on heat insulation and heating plants.
Long political discussions were required to avert drastic restrictions on the free market, arising from discrimination against electric domestic heating systems.
Associations' Agreement II
In autumn 2001 the VV II (Associations' Agreement II) was improved with the help of the consumer associations and signed on 13 December 2001 as VV II Plus.
VV II Plus is, like its predecessors, designed as a transaction-independent point model. A charge is made for grid access at the connection site, which pays for access to all the various levels in the entire German grid. Transparency considerations have led to separate publication of all the various charges for each voltage level and transformation. (Note: even where this is not the case, the charges levied by operators of high voltage grids are readily available on the Internet.)
Included in the charges for various transmission levels are the costs allocated to use-of-system, power regulation and system losses. All operators are required by conditions decreed by the German Anti-trust Office to meet their baseload power needs by contracting out to tender, thereby achieving fair prices. Distribution charges similarly cover loss provisions and certain system service costs.
Sub section 2.2.1 of the VV II Plus stipulates that in-feeders do not have to pay charges for grid use.
Sub-section 2.3.3 of VV II Plus stipulates that decentralised production plants will receive a payment, unlike grid operators into whose grid the power is fed. This payment should reflect the savings, based on respective in-feed, made on upstream grid levels. Meanwhile, electricity produced independently and which does not use the grid for purposes of general supply at the site of production, are not entitled to such a payment (principle of net roll-over of costs).
Surplus electricity can be freely marketed via the transmission system, while independent generating plant operators can acquire through the transmission system any additional electricity they may require, including reserves. Market prices will apply here.
In the wake of VV II Plus it is now also easier to change supplier. The customer contracts his chosen supplier to deliver at the earliest possible future delivery time, and this applies especially to home users, who are "all inclusive" with power supply including grid use. According to subsection 2.2.6 of VV II Plus, the grid operators are not calling for any separate compensation for change of supplier, at least until the present procedure has been ruled on by the German high court.
New suppliers will deal, as part of their contract with their customer, with matters relating to the former supplier (cancellation etc) and/or with the relevant grid operator (rules for grid use etc). If the customer so chooses, he can make his own grid-use contract with the network operator and then buy a supply deal from a chosen electricity dealer.
Best practice recommendations on how to change supplier (eg, timeframes, data formats) are supplied by the associations of grid operators and grid users (producers, dealers, end consumers), and are the product of discussions with their members and the German Ministry for Economic Affairs. According to sub-section 2.1 of supplement 2 to the VV II Plus, change of supplier (assigned to a balancing group) should take place within a period of one month up to the end of the following month. This period is required in order to give the grid operator time to make necessary administrative changes.
In accordance with the negotiating mandate of VV II Plus, principles for pricing have also been formalised in the form of a code of practice, with a supplementary agreement being signed to this effect on 23 April 2002.
Amendment of energy law
VDEW and the other electricity associations have called for the Associations' Agreement to be given stronger legal status. The German Ministry for Economic Affairs and the German government have understood the need for this and reached agreement in April on a supplementary clause to paragraph 6 of the German Energy Law, in accordance with which observance of VV II Plus will presume non-discriminatory grid access as a principle of good professional practice. This will also apply to regulations on abuses under monopoly law.
A majority of parliament voted to approve the amendment in the Bundestag, but it failed to get a majority vote in the upper chamber (Bundesrat). This was however expected, and, as such approval was not legally required, the government was able to pass the amendment in the Bundestag without any changes.
Unfortunately, due to the impending election, voting issues were removed from the agenda of the last session of the Bundestag, so the measure has not gone into law.
The wholesale market
Trade in electricity takes place in Germany either on the EEX European Energy Exchange, which was formed in Leipzig in July 2002, or else off-exchange via so-called bilateral contracts (also known as over-the-counter trades). These latter trades are generally non-standardised flexible products. Over-the-counter trades include day-ahead deliveries up to and including deals lasting several years, as well as forwards and options.
Most electricity deals are transacted in Germany on the o-t-c market. Currently, about seven per cent of total electricity consumption in Germany is traded on the stock exchange, ie trades with physical completion on the day-ahead market. A useful comparison is Nordpool, where the figure is around 20-25 per cent.
The exchange deals in standardised products on the spot market (base-/peak-load, day-ahead as separate hours, as well as fixed block forward purchases).
A futures exchange for electricity traders has existed since March 2001. Derivatives of base-/peak-load-futures are on offer in fixed monthly, quarterly or annual deals. At the end of their lifespan, these products can only be settled financially, and as such are used primarily as insurance against risk. Futures products are also traded on the o-t-c market, ie forwards or options, mostly with physical completion - however, there do exist o-t-c futures products involving financial completion, eg swaps, cap/floor.
A typical bilateral contract for electricity supply will have a life of 1-5 years.
The wholesale market includes the following characteristics:
• Settlement for amount of energy consumed takes place via the balancing groups to which all charges, feed-ins, and grid exchange programmes are assigned and recorded.
• For individual balancing groups, quarter-hourly power generation balance sheets will be created.
• All suppliers are responsible for ensuring that their balancing groups are settled and updated as quickly as possible.
• Any discrepancies in payment are settled via the grid operator.
• To achieve this, the operator needs to use a standard rate of supply. He is bound by the cartel office regulations to invite tenders for primary and secondary supply and minute reserves. Auctions then take place.
Basic energy costs are allocated partly to the balancing groups, which show imbalances (this is particularly the case for standard rate power generation costs). However, standard energy costs are predominantly allocated to general grid use and settled by the general grid user.
German electricity customer behaviour can be summarised as follows:
• Around 13 million customers have changed - either to a new offer, or to a new supplier
• Change of supplier is infrequent: 4 per cent of households, 6 per cent of business customers.
• Existing suppliers have sold new contracts or products to 28 per cent of their existing household customers and around 50 per cent of existing business customers.
• According to the VIK, 32 per cent of all industrial and business customers have changed supplier at least once since 1998.
Customer satisfaction with suppliers is extremely high, with well over 95 per cent of customers declaring that they are satisfied or very satisfied.
This is a significant reason for customer loyalty.
TablesTable 1. Energy sources for power generation (MW) Table 2. New power plants to be installed by German power utilities up to 2003