Germany’s big freeze

Germany faces a freeze on many counts over the coming weeks. Firstly, a cold snap is likely to send power prices spiralling. In addition, a budget freeze could hamper the country’s plans to meet its decarbonisation targets after a court ruled the EUR 60bn earmarked for its green transition was illegal. How will Europe’s largest energy consumer afford to keep the lights on?

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guests: Tobias Federico, Managing Director, Energy Brainpool

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:07

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. In the first pod of 2024, we turn our attention to Europe's largest energy market, Germany. Long seen as the front runner. In the energy transition rapidly expanding both wind and solar power. Last year's decision by the country's constitutional court, which deemed illegal, the German government's plans to shift 60 billion of unused pandemic relief into its climate. And transformational fund could put the brakes on the country's move to decarbonize. Also, the government faces key challenges exiting from coal after having switched off all its nuclear power plants. What will keep the lights on? During a cold, dark winter's night in February, in the years ahead, as is now traditional for the first part of the year. Joining me, Richard Sverrisson is Tobis Federico of Energy Brainpool. A warm welcome to you, Tobias.

Tobias Federico, Managing Director, Energy Brainpool: 1:03

Thank you, Richard. And I'm always happy about our tradition.

Richard Sverrisson, Editor-in-Chief, Montel: 1:05

Perfect. Tobias, if you've gotta just start by rounding up or looking back a bit before we look forward. So what, in your view, were the main issues of 2023 in Germany?

Tobias Federico, Managing Director, Energy Brainpool: 1:16

In Germany we still had the effect of the year 2022 effects regarding huge, in insane electricity prices, insane commodity prices for energies and the impact onto the end user. Even though there in the wholesale market, power prices have been decreasing significantly compared to 2022 average, but we're still on a much higher level than the years before. So the main issues have been how can we handle high electricity prices to the end user, not facing financial problems in households, but mainly facing financial problems in the industrial sector. This was one part. The second part I think was the high inflation rate. Nobody really knew where it was going to. We had inflation rates around about eight to 10%. This has decreased right now, and it was clear that it was driven by the energy prices, but still how to react on that. So those were the big two challenges in the last year.

Richard Sverrisson, Editor-in-Chief, Montel: 2:20

You mentioned the crazy wholesale prices both for power and gas because are we, a long way from such prices or, is there a danger that we could return to those levels?

Tobias Federico, Managing Director, Energy Brainpool: 2:29

No, definitely not. In those price levels. Of course there's a lot of psychology in the prices, even though it was driven by fundamental facts and mostly by fear. We were challenging a situation where we have been expecting gas shortage for the winter 20 22, 20 23. We've lost almost 55% of our natural gas supplier, which was Russia. We had to replace them and we had to fill up our gas storage. So these were mainly the factors of course, fitting up. The gas storage didn't go by market factors or by market drivers. It has been pushed by the government and that has pushed the prices. But this was, let's say the lower negative effect rather than having a real gas shortage in the breakdown of the economy. So that is not going to happen again. Because we saw, especially this winter, 23, 24. The gas storages has been filled up again at very high level, almost 100% just by market prices. So the price gap between summer and winter gas was so good, so natural that it made economically sense to fill up the gas storage with spot market and sell it on the so buy gas on the spot market, sell it in the forward market, and filling up the gas storage. So that situation is gone. We will not come back to these huge prices, but still there's a theoretical chance that we might get a little bit short of gas, but we will not face a situation that we will have no gas at all.

Richard Sverrisson, Editor-in-Chief, Montel: 4:00

I know in certain parts of Northern Europe Oslo and other, parts of Sweden as well, there's a, there, there's a spate of very cold weather, very freezing temperatures. What's it like in Berlin? That's, and in Germany generally, I think we've been quite lucky with the weather so far that it's been very mild. But of course, I'm, you're not a weatherman to obvious, but that, that's quite a big big element here, isn't it? What we can expect to, especially, I mentioned February, but I think, out to March. Really.

Tobias Federico, Managing Director, Energy Brainpool: 4:26

Yeah. Two things. First I wish I could be a weatherman because weather becomes much more important in the future. Regarding protection renewables but also on the demand side. We had a quite cold period in the beginning of December with snow, which was quite nice. Now it's a little bit warm and too wet. We have flooding in Germany, which is an issue, but it's not reflected in the energy prices. But regarding the whole winter, it's the sum of the cold days. Which are important. So how long is it cold and how cold it is. And summing that up defines a cold winter. So having these quite high temperatures right now and going to expect not to go really down. Looking into the gas storage itself, I think regardless where we'll have a really freezing cold winter or a mild winter, the gas delivery will be sufficient enough for this. We have another two months to go. Gas storage is quite fine, so I'm not expecting anything really dangerous ahead.

Richard Sverrisson, Editor-in-Chief, Montel: 5:28

But that's quite a success story, wouldn't you say? Managing to replace 50% of your gas supply in the course of a year or two. That's quite phenomenal.

Tobias Federico, Managing Director, Energy Brainpool: 5:36

Absolutely. I think how the government really has reacted on all those issues. It's not only replacing the gas supply by. Floating LNG terminals and then building onshore LNG terminals. It's also how they reacted on different, let's say strategic or market reaction onto high gas prices, looking into the gas pro Gia takeover by the government, and also how they help unipar in being still on the market because both of those companies, when they would have failed, would've had an. Huge impact to the market, regardless whether we would've a gas shortage or not. So we had three issues in the system. So saving gas from mania, saving juniper, and looking into alternative gas supply. So that was definitely a success story and we must be really thankful to the German government beside all the other issues, which might come this year. Yeah. But that's, that was really good move and a good step. That the side effects have been high gas prices. And in that respect also high power risks.

Richard Sverrisson, Editor-in-Chief, Montel: 6:44

And what's your view for the coming months? Tobias, of course they're nowhere near prices, wholesale energy, prices, power and gas are nowhere near the levels we saw, a year or so ago. They've come down significantly, but they're still very high. And I think maybe even too high for some end consumers. Certainly industrials in Germany have complained quite bitterly about the high how price levels. And I know the government is trying to do something about that. We'll turn to that in a minute, but what are your expectations? Are we gonna see prices easing off in the first and second quarter?

Tobias Federico, Managing Director, Energy Brainpool: 7:15

In the first quarter, depends on the weather. Again, if it's getting cold and a little bit, longer cold, then we see a little bit higher prices. But generally speaking of the year ahead, prices not about spot market. We do expect decreasing prices compared to today's level, but not going back to the 2020 hot 2021 level. Because it's just simple math when you double the natural gas price. The gas power plants might be in the merit order, affect the price setting power plant with increasing uua prices. Then of course we'll have higher power prices. So we won't see the 20 euro per megawatt hour. We are expecting something between 80, an average 70 to 90 in the year ahead base prices. So that is still quite low compared to the last years, but still almost. 50% or 100% comparing to what you are looking at, to what we have been used to. So that's definitely an issue because what we've also seen, despite the fact that we underestimated the value of diversification in energy supply we have underestimated the energy as a production factor in the whole economy. I think energy is still underestimated as a production factor in the whole

Richard Sverrisson, Editor-in-Chief, Montel: 8:36

really. You think so? Yeah.

Tobias Federico, Managing Director, Energy Brainpool: 8:36

Yeah, absolutely. We see, we are complaining that energy prices must be low, but we are not looking so much into energy efficiency, into energy losses and in the enter effect when you look into the last year crisis, it was not the energy or let's say electricity turnaround issue. It was the heat turnaround issue. We had a heating problem with the gas prices. Not a power problem.

Richard Sverrisson, Editor-in-Chief, Montel: 9:01

The prices, you mentioned it, Tobias, they're, from what I'm hearing that they're way above the, sort of the pain threshold for lots of German industry. They were looking something 70 euros a megawatt hour and below. They can cope with that. But above that then you get, a lot of companies will face serious problems in their years ahead, will they not?

Tobias Federico, Managing Director, Energy Brainpool: 9:20

Yes. You must. You must a little bit look into what type of companies are there when you are in a worldwide international competition with your products. Then of course you definitely have an issue because in the other competing markets, let's take the US or let's take China. Energy prices are much, much lower than they are in Germany. And then in the same combination when you have high salaries to pay quite high salaries compared to China. And when you also have the, issue that you are energy intensive in your energy consumption for the production of your products you're going to sell. That's definitely an issue. On the other hand of course the growth of Germans in Germany's economy beside of automatization was always driven by low, or let's say cheap energy prices, whether it was hydrology or hot coal or leak night, then it was Russian natural gas. And all of that somehow is either not there sufficiently or we are planning a phase out. So the question is, where does the, let's say low energy prices or competitive energy prices let's call it this way, where do the competitive energy prices come from? We are looking into, facing out from certain technologies, which on the other end definitely makes sense when you look into the climate change and the CO2 emissions, especially looking into Ignite. But ignite is bloody cheap. As a commodity, but amidst a lot of CO2.

Richard Sverrisson, Editor-in-Chief, Montel: 10:49

Absolutely. It's the dirtiest of the dirty fuels, isn't it? Yeah. In many ways. Ignite. But but is this then are you saying, does Germany face the prospect of deindustrialization? That, that's quite a big big question.

Tobias Federico, Managing Director, Energy Brainpool: 11:00

When deindustrialization, you have to be very careful with that wording because sometimes I have the impression that's. Using the phrase of de-industrialization or brain drain just to get a lot of subsidies. And when you use it too often, it's like a tiny little poison and it has no effect. But on the other hand, when you look into the worldwide competitive players, it is definitely an issue and they have the capacity to move their production raw material production to other countries. Where energy is cheaper. So energy might not be the first driver to do that, but it's, it is a catalysis. So it, it speeds up the industrialization, but it's not the, for my opinion, it's not the main reason. And of course, other companies, they would like to, and we had the same argumentation years ago with salaries. So the ization, because most of workers moved to Eastern Europe. And then they move to Chinas. So the production, when you need a lot of manpower, now they're bringing it back to you, to the geopolitical issues. So it's an interesting movement. On one hand, you have this reduce the complexity of the supply chain, and on the other hand, you have this ideas from this realization we are moving our factory somewhere else. But then you have the problem with the supply chain.

Richard Sverrisson, Editor-in-Chief, Montel: 12:21

Absolutely, I think you, you can also see it quite clearly. One thing we can definitely say is that energy demand has, is substantially lower than what it was two, three years ago. Into sort of double. Digit figures, whether that's due to companies shutting down production sites or, becoming more efficient. Maybe it's a combination of the two. What's your view, Tobias?

Tobias Federico, Managing Director, Energy Brainpool: 12:43

Yeah. If you ask two people, you get two different answers about that. And that's really hard to tell because on one hand it's good that we have energy efficiency factors. Because then we had the financial need to do that. On the other hand, we don't really know whether it's really shutting down or moving down shifts, and sometimes you have overlapping effects. Germany is facing also a problem of workforce. So smaller companies have really an issue getting people to work for them. So that's why they reduced also their shift and, in combination with high energy prices, you had to do both. So I can't tell you what the main part is, whether it's energy efficiency or not. We must consider both. Both has led to a decrease of 10, 15% of energy consumption in gas.

Richard Sverrisson, Editor-in-Chief, Montel: 13:33

No, absolutely. And there were plans on the table to push forward a industrial power price for industry. What's the current thinking there? What's the current status there? Tobias,

Tobias Federico, Managing Director, Energy Brainpool: 13:43

While there were a lot of plans from the ministry of EE economics and climate it was a whole package. They called the Klima Neutral Power Platform. Where had the, they had the package of the industrial prices, they had the package of the CFDs. They had the package of let's say subsidizing also household power prices. So the package was quite big in combination with redesign of the merit order market and so on. So that whole package was a plan. In Germany in the last year, but with the new circumstances, as you said, especially with the court decision they're not officially from the table, but all these measures. When I looked into that, I was always asking myself, yeah, but where's the market? When you have an industrial power process and we did also a podcast with that. I saw it always as a subsidy because you have a price gap. If you promise an end user a lower price and also market price, the money must come from somewhere. When you speak about CFDs, which seems to be interesting as in comparison to PPAs, when investor has a certain guarantee of a price. So if he earns less, he gets paid. The difference, if he earns more in case he earns more. He has to pay the government. So it seems to be a two-sided and quite balanced instrument that why it seems to be quite interesting. But looking into what we have said before, that power prices are going to decrease in combination with increasing production costs, especially for wind. For wind milk. The likelihood of getting money from the government with A CFD is much higher than paying the government money. So all these instruments, especially in the industrial prices, were based on the expectations that there was money left in the budget of the government, and, the money left, it's not there anymore.

Richard Sverrisson, Editor-in-Chief, Montel: 15:42

Absolutely. The coffers are dry. Now a little bit more on that 60 billion euro hole to be honest. So does, you know how would this impact the decarbonization o of German industry?

Tobias Federico, Managing Director, Energy Brainpool: 15:53

I'm thinking what I would say significantly it has an impact, but it definitely has an impact. When the court decision was made when I saw the teisha, I said, okay, yeah, I remember when they changed the Corona funding into the climate change funding. I said they can't do that. That's left pocket, right pocket. And it's, but it's not only the climate fund, it's also the economic transformation fund. The core decision was made for the climate fund, but there's a second one. Which is also a special fund, which is also illegal, which is the economic transformation form, which additional billions and the problem is that looking into the expected development of wholesale power prices in combination with increasing production costs for special event pv, not so much, but especially new event. In combination with an increasing interest rate, the gap between income and costs might be negative, which is not a big deal because when you have a CFD it'll be compensated by the government, but the government can't do that anymore. And it has a huge impact because the whole package of industrial end user prices. Very ambitious growth rate in the installation of renewables up to 2030. And the financial support for investors, which is needed somehow to get this growth rate is all at risk with the budget freeze we had from the court decision. We saw this effect at the end of last year where the government. Still had money. So they were ambitious to spend that money. But I think the real shock will come this year where you see that a lot of subsidies, a lot of support, and also a lot of instrument they have planned for this year, which are necessary for the decarbonization might not be there anymore. We still have a budget home of 17 billion for the year, 2024 for us. Simulating prices. Our standard, more or less than a scenario was our central scenario where we had the current policy expectations in that we saw a quite high likelihood because we saw with all the funds and the instruments that it could have been achieved beside of other, some other parameters. But now we are going to change our standard scenario because we don't think that they will reach their targets of 2030. So we will have. A much reduced growth rate in installations in wind and pv and what the growth rate is now, we are internally in the discussion, but might be on half of that. What has been expected, despite of, we had a huge installation rate last year, but this was mostly market driven. So the impact is there at the decarbonization plans, which have been very ambitious, will not be reached by,

Richard Sverrisson, Editor-in-Chief, Montel: 18:59

it sounds like a complete mess in a way. It'll be here. It's, you don't you have very ambitious plans, but a combination of. A lack of funding or lack of cash available to provide that level of support, increased production costs high inflation, high interest rates. It's a combination of factors that is gonna lead to an impasse or just like a fully stopping the entry transition in, in, in Germany as we see it. Is that a way of interpreting what you're saying here?

Tobias Federico, Managing Director, Energy Brainpool: 19:27

No. It's too much. I don't thinkt think it's fully stopping.

Richard Sverrisson, Editor-in-Chief, Montel: 19:29

Okay.

Tobias Federico, Managing Director, Energy Brainpool: 19:30

It's a, some would say a step back to real, to a realistic growth rate of the energy transition. Other would say, okay that's a catastrophe, as you said. So it's a question of who are you asking? But the thing is, compared what their plans have been, the whole budget freeze is a catastrophe. And somehow that's why it's a two-sided coin. When you look into what the government's achievements have been. As I said before, what they did during the crisis in 2022 to solve the energy crisis was really good. Honestly, but what we have seen in the last time and how they're reacting on that it's, they are. They have increased the CO2 price for the end user fuels, which is a fixed price. They went back to the older plants they had from the from the government before. So they've increased that. They have increased certain taxes or let's say, so they have decreased the taxes before and now they have increased them to back to the normal level. We will see much more of those impacts in Germany. What they also want to reduce is a tax benefit for a gasoline for the farmers. And we will see a lot of, blocking off streets in Berlin from the farmers. Within the next weeks we will have a strike there. We will have a strike also from the train system. I think we are facing a little bit of period which remembers me of the eighties under Mar under Thatcher regime with all in the realization. So it, it'll be a quite impact this year. We will have a lot of discussions. Where does the missing money come from, whether increasing income or decreasing the spending. But what is clear, the plans they had, how to where to put the money for the climate fund. And also for the economic transition fund. They are gone off and burnt in paper.

Richard Sverrisson, Editor-in-Chief, Montel: 21:29

Absolutely. So it's I think it's safe to say. Rather than fully stopping the energy transition, as you say, it's slowing it down. And there's a, certainly the road ahead is looking very turbulence for a number of reasons to be us. And I also. The government has very ambitious plans for, building gas fired plants. Are there the, it's up 25 gigawatts by 2030, isn't it? Is that's very ambitious.

Tobias Federico, Managing Director, Energy Brainpool: 21:55

Yeah. Yeah. It is, especially when you look, we have 20, 24 and we are not meeting so many gas power plants. But I remember talks Richards years ago where we said the same thing. And we, I haven't seen the growth rate in gas power plants. But somehow you must also look into the discussion. What I see generally that the the energy community understands that gas power plants must not be fired by nature with natural gas. They can also be fired by hydrogen or green hydrogen. Which the general population doesn't really understand what they say. We have to build gas power plants. They think it's gas, which is their natural gas, which is not true. So yes, we need them in case we are planning and having the hardcore and also ignite phase out by 2030. But I see here a question mark. I think it's necessary to have definitely a phase out. For those type of power plants due to CO2 emissions. But also when you look back into two to three years ago when we had the coal commission where they made the plan under the older government how to phase out of these coal fired the general power plants, the official name of this coal commission was commissioned for economic growth and transformation. And it was not the Commission for Climate or against climate change. Which means that they decided that the more efficient less CO2 emitting power plants, which are the hardcore power plants, will phase out before the more polluting or more emitting lignite power plants. And it makes sense when you look into the name of the commission, but it doesn't make sense in when you look into the economics and also introduce huge emission itself. So that I think was a natural mistake. They should have flipped that. Then you have the issue with, okay it's a natural production. The mining is a national production, sorry, the mining is in Germany. The power plant production is in Germany for Ignite. You have a transformation issue there. So that, that is clear. So I think, and then the current government said, okay, they, we'll face out by 2030 and we replace that with gas power plants and they will be then running by green hydrogen. But I think we have postponed that a little bit further into the future to. Reach the 25 gig of CCGT power plants with field, which we are needing in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 24:17

Absolutely. We could get to 2030 and we have these hydrogen ready gas plants, but the hydrogen may not be ready, so they'll be burning gas anyway. But to be honest. I'd just like to finish off this week by asking you what, are there any kind of rays of light out there? Are there any sort of positives we could focus on that we could look forward to in 2024?

Tobias Federico, Managing Director, Energy Brainpool: 24:35

Yeah when I was reflecting about our PO podcast, which we are doing, I think the fifth time, so since five years, and I'm always speaking about the negative sides. I think it's part of my job looking into the negative side, I think, we might be also surprised how maybe commodity prices are going much more down when commodity prices are going much more down. We have definitely lower power prices much lower than we might expect that we saw. We have also a scenario for that. But in, in that scenario we see that all these parameters, industrial deindustrialization household to power prices. That's not an issue anymore. We still have the gap of refinancing, but I think I believe strongly in the market and in the healing power of the market when they are overheated they will come down again. And same applies also for the production cost for WHI milks and maybe also for inflation rate. So in case inflation rate will really go down because energy prices are going down. Then maybe the interest rates will also go down. And when the interest rates go down, we will have an economic push. And that's the good step ahead so that also the production costs will decrease and also the expected return on my investments will decrease. So therefore that is there. How big is the likelihood? I don't know. I'm for me, the glass is always half empty rather than half fulls. Because we haven't spoken about geopolitical tensions which might arise. So there are more factors where we have dark clouds rather than white clouds.

Richard Sverrisson, Editor-in-Chief, Montel: 26:07

Yeah. Or the ray of light in between the dark clouds. But but let's let's hope for the best of us anyway. And it's nice to finish on a few positives anyway. I know even though that goes against the grain somewhat and there are, as you do, as you said, there are dark clouds looming. So always a pleasure to have you on the podcast Tobias. Thank you very much. For being a guest today.

Tobias Federico, Managing Director, Energy Brainpool: 26:24

It is always a pleasure for me too. Thanks a lot, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 26:27

Hello, listeners, since we recorded this episode. The weather has seemingly turned a little bit colder. Forecast now indicates a cold snap in Northern Europe, in Germany, France, and the Nordic region. And I put Tobias what this would mean for power demand and for wholesale electricity prices. Tobias. What this sudden cold snap, the forecasts indicate ever colder weather. What does it mean for power prices and, gas prices as well for that matter in, in Germany for next week and beyond?

Tobias Federico, Managing Director, Energy Brainpool: 27:03

In general, of course a cold period in winter time is one of the, I wouldn't call them horror scenarios, but it's one of the scenarios where, of course, crisis will definitely peak, especially in peak demand times. In winter time, obviously this is in the early evening where you switch on the light, where you still have production and therefore it's around about between five o'clock and seven o'clock in the afternoon in Germany looking into the different commodities. For gas prices, historically we have seen that gas prices are going to increase only after three days of a cold period. This cold period will be a little bit longer. Especially for Germany not speaking about Eastern Europe and also Northern Europe, but for Germany it'll be a few days. So therefore we will see increase in gas prices. That's a fundamental parameter. The other fundamental parameters on the power side, of course, are that though there the electricity prices will increase. Then it depends whether it's a weekend or a working day. So the cold snap in the next week will start during the weekend, which is not so critical. Of course, we will have higher prices and no negative prices on those days. But during the week in combination with no wind, and that's a combination which might be interesting. Looking into power prices in the next week, we might see very high power prices, 300 Euro, 500 euro. Certain peak hours as an hourly price per mega hour in Germany.

Richard Sverrisson, Editor-in-Chief, Montel: 28:28

Tobias, thank you so much for clarifying that. So I think we needed an update given what we talked about with the the famous German expression, Dunkelflauten, so the, yeah the cold snap in the winter where there's no wind. So thank you for clarifying, explaining that.

Tobias Federico, Managing Director, Energy Brainpool: 28:42

Always a pleasure, Richard.