By Fitch Solutions

Key View

  • Germany’s grid network will continue to draw significant investment as the energy transition continues, with our forecasts showing a vast amount of new intermittent renewables capacity will come online over the next decade.
  • The market will face an ever-increasing challenge of matching intermittent generation with flexible systems, driving a need for greater external interconnections. 
  • Additionally, the impact of limited grid flexibility has led to grid bottlenecks and increasingly problematic pricing dynamics, which will continue to drive the need for investment into internal transmission projects.

The German power grid network will continue to offer significant investment opportunities as vast amounts of new intermittent renewables capacity comes online. Over the coming decade, we forecast Germany’s non-hydropower renewables sector to undergo significant growth, with capacity additions of just under 76GW between 2021 and 2030 and total renewables capacity set to rise to 212GW by the end of the decade. Accordingly, the renewables sector’s share of Germany’s total generation will rise from 47.5% in 2021 to 64.6% by 2030. The natural gas-fired power sector will also play an increasingly important role in the market by adding flexibility to the power system amid rising intermittency from renewables. We forecast gas-fired power will see its share of total generation rise from 17% in 2021 to 19.4% by 2030. This trend will become even more pertinent amid the phase out of coal-fired power, with the gas-fired power share of total thermal generation rising from 40.8% in 2021 to 62.3% by 2030. However, we note that the project pipeline for new gas-fired capacity remains minimal with three projects totaling 1GW in the pre-construction phases.

Germany To Transition To Net Power Importer Amid Capacity Phase Outs
Germany – Net Trade, TWh
e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions

Interconnectivity To Be Core Investment Focus

Germany will face an ever-increasing challenge of matching intermittent generation with flexible systems, driving a need for greater external interconnections. Given our expectations that large amounts of coal and nuclear generating capacity will come offline in the coming years, we expect that Germany’s excess power generation will continue to shrink. Additionally, even as renewables capacity growth accelerates, it will not offset these declines. As such we expect that Germany will enter a phase of net power imports between 2021 and 2025. Accordingly, the market will increasingly need to develop interconnections to neighboring markets to increase the ability to trade electricity, adding flexibility. Germany’s share of intermittent power generation became the dominant form of power over 2020 and it now has a greater share of intermittency to system flexibility, the market’s combined share of trade and flexible generation.

Rising Dominance Of Intermittent Generation Will Outpace Historic Flexibility
Germany – Share Of Consumption By Grouping (see notes provided for details), %.
Note: Flexibility = Gas, Oil, Hydropower, Geothermal. Non-Flexibility = Coal, Nuclear & Biomass. Intermittency = Solar & Wind. Interconnection = Moving Historic Max Traded Electricity. Source: EIA, Fitch Solutions

Furthermore, we note that given the importance of the market to wider EU goals for decarbonisation, Germany will need to increase its investment into grid management. Over 2021 EU member states must submit their National Energy Climate Plans (NECP) to the EU for the 2021-2030 period. As part of these plans, there will be increased interconnections between markets in the European synchronous grid region. Countries must commit to a level of interconnection capacity relative to the size of their total generation capacity. Increased interconnection would allow markets to increase renewable power capacity – with its volatile generation patterns – while still adding flexibility to the power system. Furthermore, economic benefits associated with power trade arbitrage will boost support for interconnection and renewables development. This would enable two markets with different electricity prices the opportunity to buy cheap electricity in one market and sell it at a higher price to others. The EU is aware of this fact and has set interconnection targets of at least 15% by 2030.  We also note that Germany in 2021 will have an interconnection ratio of 13%, which is viewed by the European Network of Transmission System Operators for Electricity (ENTSO-E) as inadequate given its central position, size, share of intermittent power and position in the European power market as we previously outlined.

German Internal Grid Management Creating Regional Friction

The impacts of limited grid flexibility has led to grid bottlenecks and increasingly problematic pricing dynamics, which will support internal transmission project investment in addition to international interconnections. We highlight that north-south grid investments are particularly crucial for facilitating continued offshore and onshore wind power capacity expansion in Germany’s northern regions, with bottlenecks to the country’s southern regions having led the government to curb near-term wind capacity expansion prior to underground transmission lines coming online. These north-south links are currently expected to come online over the 2020s.

For example, we note that a total of three north-south interconnections are to be in place by 2025, with the first is to come online in 2021 (pushed back from 2019) and the other in 2025 (pushed back from 2022). The initial delays to the development of these lines were a result of popular opposition to overhead lines, which culminated into a law from 2015 requiring that these lines were put underground. We also note that Germany’s network regulator Bundesnetzagentur approved proposals by transmission and grid management operators to develop a system of ‘virtual transmission lines’ also known as the ‘grid booster’. The project will strengthen networks against variable power generation by installing large-scale battery storage systems at key transmission sites such as substations. 

Transmission Upgrades Creating Battery Storage Project Growth
Germany – Grid Booster Transmission Project Diagram
Source: Multiple sources, Fitch Solutions

Inflexibility Creating Increasingly Problematic Pricing Dynamics

The market dynamic of competing power suppliers has created pricing conflicts as producers cannot export power from regional pools, damaging investor sentiment. A combination of inflexible coal generators, demand variability, and rising intermittent generation has resulted in several extremes in pricing. We highlight, for example, that 90% of German power demand was reportedly met using renewables for a few hours on May 8 2016 and 85% was reported to have come from wind, solar, biomass and hydropower over a 24-hour period on April 30 2017. In the first instance, the influx of renewables-based electricity supply sent wholesale electricity prices into negative territory. This meant that coal and gas generation plants with higher marginal costs  were forced to pay wholesale electricity buyers to take the electricity from them – emphasising the ongoing threat to thermal capacity in Germany. Stability and flexibility have been exposed during the Covid-19 pandemic as well with a period of sustained demand loss leaving many inflexible generators to supply excess power, causing negative pricing and damaging revenue streams for the entire power sector. This will continue to work against some renewable developers in exposed regions in Germany while grid managers seek to alleviate flexibility concerns.  

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. 

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