Auctions raise pressure on German manufacturers

Germany’s wind turbine makers were already braced for a tough few years.

In 2016, the German government brought in rules to cap annual onshore installations at 2.8GW a year from this year. That would be way down on the 4.2GW installed each year on average in the last five years and, in real terms, that means less turbine orders.

At the same time, the government has moved to a system of competitive auctions to drive down the cost of wind farms. That means manufacturers also face lower profit margins on the orders they do win. This exposure to Germany is a key reason firms like Siemens, Nordex and Senvion are cutting jobs and restructuring. Businesses have braced themselves, but the reality may be worse than they expect.

Last month, Germany held its second onshore wind auction. Its federal grid agency, Bundesnetzagentur, received bids for support from developers of 281 projects with total capacity of 2.9GW, and awarded support for 67 of them, totalling 1GW, at strike prices averaging €42.80/MWh. This is lower than the €57.10/MWh average strike for 70 projects totalling 807MW awarded in May. In total, 1.8GW has been tendered so far, with a third onshore wind auction for projects totalling 1GW due in November.

The government is making good on its 2.8GW promise. The problem is the results of the first auctions will not give Germany’s turbine makers much confidence that this 2.8GW awarded will lead to that many turbine orders. There are still projects due to be installed that were approved in previous years, which may keep installed capacity higher than the capped level for the next two years, but they will only go so far.

The reason for this concern is the dominance in these auctions of community-based groups, which picked up 96% of the planned capacity in the first auction – or 65 out of 70 projects – and 95% in the second auction. This is a result of the way the system has been designed to offer favourable terms to community-based groups.

For example, these rules do not require these groups to have a development permit in place for a scheme before they submit it into the auction, unlike other developers. These groups are able to win support and then have 54 months – or four-and-a-half years – to secure that permit. Many will not need turbines for some time.

The German government is set to change the rule for two auctions planned in 2018, so that bidders must have a construction permit before they bid, and future auctions will be shaped by whichever government is in place after the elections on 24th September. But this does not fix the decline currently facing turbine makers.

This is not the fault of the community-owned bidders. They are key players in Germany and are simply working with the system that exists. One bidder, Umweltgerechte Buergerenergie, won 42 of the 67 projects in the most recent auction, and 37 of its projects are community-owned.

We can also see the logic of trying to get local communities more involved in sharing the financial benefits of wind farms. It has been shown that this makes it more likely that they will support the project – no surprise there – and the wind sector generally.

However, turbine makers need confidence that government policies will do what they promise: bring competition and certainty to the wind sector. If community groups are unable to take their ideas for schemes through to completion, then rival developers and turbine makers will be right to ask serious questions about this policy failure. We are all for competition, but 96% and 95% show a system that is one-sided.

The troubled introduction of auctions in the German solar sector in 2015 showed that rolling out a similar system for wind would not be easy, but it may be even tougher than those in wind expected. This is another headache for the turbine makers that are already dealing with job cuts and restructuring after their M&A deals.

We knew the construction party from the last few years was coming to an end. Now we need to find out about the hangover.