Repowering is Germany’s next big challenge

Companies in the German market are under pressure. The dominance of citizen groups in onshore wind auctions in 2017 and the record-low levelised cost of energy have increased uncertainty. This is causing concern for manufacturers, as we wrote here, and developers.
The government now plans to permanently end rules designed to offer favourable bidding terms to citizen groups, which is good news for developers and manufacturers.

However, there's a new challenge looming for the German onshore market, in the form of a major wave of repowering due in the next seven years. Manufacturers and investors should play close attention.

Here's the background. In 2000, the country’s Renewable Energy Sources Act (EEG) came into force to encourage the installation of renewables projects, and onshore wind farms in particular. This made renewables installations eligible for feed-in tariff payments for 20 years, which neatly coincided with what was then the average expected lifespan of wind turbines.

Energy market consultancy ICIS has estimated that around 4GW of wind projects are set to lose eligibility for guaranteed payments in 2020, and around 2.4GW on average would see their subsidies expire annually between 2021 and 2025.

This means that 16GW of ageing wind farms, which represent 28% of Germany’s 58GW installed wind capacity, are due to become unprofitable because of the end of subsidies.

This leaves wind farm owners facing two scenarios.

They could decide to repower the projects and participate in the country’s next onshore wind auctions. This opportunity has opened because the 2017 amended version of the EEG, which replaced feed-in tariffs with competitive auctions, doesn’t make a distinction between new and repowering projects in government’s tenders.

Alternatively, the owners could decommission the projects as soon as the subsidies end.

Let’s look at the two options.

If repowering projects at all older wind farms were to compete in onshore wind tenders, a growing share of winning bids through 2025 would be represented by repowering projects, and reduce the share of new projects coming onto the grid. This is because the 2017 revision of the EEG capped annual onshore capacity awarded at 2.8GW in 2019 and 2.9GW in 2020.

Given the size of the larger projects that could come forward in the next seven years after repowering, this could leave only a small share of available capacity for new onshore wind.

This also links with changes to the power of citizen-led development groups. A recent report from Trend Research has shown that citizen groups accounted for 42.5% of investments in German renewables up until the end of 2016. However, the German government decided on Friday to extend by two years the suspension of the rules that favoured citizen groups in the 2017 tenders, and this includes both new and repowering projects.

Since the government temporarily suspended these rules earlier this year, participation of community-owned groups in the auctions has already dropped. Now, the two-year extension leaves little incentive to citizen groups to participate in future auctions to repower schemes.
In a competitive market, this leaves wind owners with a second option: decommissioning.

German wind agency Fachangentur Windenergie an Land has predicted that at least 40% of wind capacity that faces the end of subsidies from 2021 to 2025, or 4.8GW, would be decommissioned by 2025, mainly due to planning regulations.

This is because repowering old turbines by replacing them with more powerful ones would require a new planning permit. This is likely to be difficult to get as planning regulations are stricter now compared to 20 years ago. The only viable choice for 4.8GW of wind farms could then become decommissioning.

Both scenarios would limit the growth of the German onshore wind market – but we see that this repowering activity presents an opportunity for investors. For example, investors could acquire old wind farms from citizen-led groups and then participate with repowering projects in the government’s auctions.

This is already happening in the US, where utilities are planning big investments to repower their projects by the end of 2019, to qualify for additional production tax credit support.

Also, the country’s big potential for repowering could give to support major manufacturers that have been affected by uncertainty in Germany since last year. But, to guarantee the growth of the market, the government needs to get serious about implementing the tenders for 4GW of onshore wind capacity annually as agreed by the coalition in February.

Germany has the opportunity to regain the initiative on wind. Will it take it?