Price competition drives consolidation in the German wind energy market

• Survey by Norton Rose Fulbright, Berenberg, BayernLB and Hypoport on new wind auctions and strategic options for investors and manufacturers 

The energy industry is expecting the highly competitive nature of the first auctions for onshore wind projects under the new Renewable Energy Sources Act (EEG) in Germany to be reflected in the subsidy prices achieved. Against this backdrop global law firm Norton Rose Fulbright together with Berenberg, BayernLB and Hypoport, surveyed around 60 German wind project developers, investors and turbine manufacturers to see how they are adapting to the introduction of the new tender system.

The majority of larger project developers interviewed (64%) intend to expand their business models and will increasingly act as independent power producers (IPP). To achieve this, they aim for stronger and closer collaboration with investors. All of the investors surveyed look to expand their portfolios internationally, with USA, Canada, Australia and Japan as well as Europe selected as key jurisdictions for growth.

All surveyed turbine manufacturers agree that their focus is on investments in better and more cost-effective turbine technology. Many turbine manufacturers (50%) are also looking at growing their own project development teams or taking over project developers and service companies. They are also increasingly seeing offshore wind as a business opportunity to expand internationally. 

Wave of consolidation to be expected

Dr Klaus Bader, head of energy, Europe, global law firm, Norton Rose Fulbright, comments:

"The auction process increases price pressure on the wind energy sector. This gives further drive to the takeover plans of manufacturers, large project developers and investors. We are therefore seeing signs of consolidation in the market with closer and more strategic cooperation between market players. There is also a move towards new and innovative financing strategies, which may prove to be key for successful positioning. In particular the pressure for small and medium-sized project developers will become increasingly apparent as we see the full effect of the EEG".

The German Federal Grid Agency is currently examining bids received in early May during the first round of tenders for onshore wind projects. The most cost-efficient bidders will be awarded. The federal government is expecting the auction to result in a considerable reduction in the remuneration for produced electricity, with bids significantly below the maximum stipulated by the EEG 2017. Within the offshore wind sector, for the first time  large offshore wind projects were awarded in April 2017, for which EnBW and DONG Energy offered EUR 0 per MWh for the promotion and therefore only wanted to be paid by energy market prices.

Profitability only if investment and financing costs are reduced

Sebastian Schenk, head of corporate customers, Norddeutschland at BayernLB, comments:

“The more the compensation for onshore wind energy falls, the more operators and investors need to adapt their business models. The future profitability of wind farms will depend on investment and financing costs dropping and the efficiency of the wind turbines continuing to increase. However, investors will also have to expect a lower internal rate of return”.

The survey report calculates various scenarios relating to amount of remuneration and the resulting cost structure. If the feed-in premium was reduced from CTS 8.03 / kWh to CTS 6 / kWh, a reduction of the purchase price by 32.7 per cent or a reduction of the turbine price by 50 per cent would be necessary in order to achieve an internal rate of return (IRR) of 5 per cent.

Olaf Lüdemann, head of infrastructure & energy at Berenberg, comments

“Anyone who wants to develop or operate onshore projects in Germany in the future in a profitable manner will have to sustainably reduce the investment costs and the expenses for ongoing operations. Project developers will also expand their asset portfolio and will act as independent energy producers in the future. For this purpose, they will attract new capital from investors; e.g. mezzanine capital is of particular interest.”

Project developers rely on expansion in North America 

Opening up new markets and customers, optimising the business model in German, and international expansion are all on the agenda. In addition to European countries, the majority of project developers favour the USA and Canada. All surveyed investors are intending to significantly expand their investments in the renewable energy sector outside Germany in the upcoming months.

Jan Bewarder, head of corporate finance at DR. KLEIN Firmenkunden, a subsidiary of Hypoport AG, comments:

“The customers of developed onshore wind energy projects are usually conservatively-acting institutional investors. They prefer a stable regulatory environment that they are familiar with. Even if China, India or countries in Latin America and South America attract them with high potential returns, the attention on Germany’s new market structure will contribute to a run for projects in established markets”.

Closer cooperation between market participants

Around a quarter of investors state that they intend to participate in project development in the future or intend to take over developers in order to be prepared for an increasingly competitive environment. Furthermore, almost all investors questioned are working towards closer cooperation. The “preferred partnership” model with project developers is seen as the ideal solution to mitigate challenges of the time and cost-intensive bidding procedures.

Turbine manufactures will also contribute to further market consolidation. Turbine prices currently account for 70 to 80 per cent of the production costs of a wind farm. Manufacturers need capital on a continuous basis for investment in research and development. The vast majority are thinking about expanding on the already established cooperation with project developers. 50% of questioned manufacturers even go one step further and consider taking over project developers or establishing their own project development teams in order to promote sales or to improve their margins.

Conclusion: New auction process will change onshore wind market strategy

With about 46 GW installed capacity and a share of about 40 per cent in electricity production from renewable energies in Germany, onshore wind is one of the most important renewable energy sources. Electricity from onshore wind farms will have to face significantly lower funding in the future. For this reason, electricity generation costs have to be reduced at a sustainable level. The major project developers and turbine suppliers will have to cut costs through continuous innovation, by process optimisation and increasing efficiency of plants. A major factor for future success is the cooperation between market participants. While project developers and investors grow and promote internationalisation with investment into new business models, smaller developers and turbine suppliers could lose out if they do not position themselves adequately. A consolidation wave is expected in this context.

Through the EEG 2017, the German Federal Government has started a process which will see significantly lower prices for renewable energies and a step change in the market. The most important indicator of the intensity of the pace of change will be the result of the first onshore auction in May 2017. The lower subsidy will fall, the stronger the pressure to consolidate.

For further information please contact:

Meeta Vadher, Senior PR Manager
Tel: +44 (0)20 7444 3097; Mob: +44 (0)7595 886 276
meeta.vadher@nortonrosefulbright.com

Stefanie Kerschke, PR & Communications Executive Germany
Tel: +49 89 212148 339; Mob: +49 174 34 528 72
stefanie.kerschke@nortonrosefulbright.com

Notes for editors:

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