German Green Energy Push Begets Reluctant Power Plant Owners (1)

January 30, 2014 by  
Filed under Green Energy News

Henrik Follmann, chief executive
officer of Follmann Co., said he wants to fully focus on
making printing inks and wallpaper coatings in the northern
German city of Minden. To his dismay, he now finds himself
building a 3.5 million-euro ($4.8 million) power plant.

“My hand is being forced,” Follmann said in an interview,
adding that the plant will reign in spiraling power costs. “The
money used for that won’t be available for the expansion of what
is our real business.”

Follmann is one of Germany’s three million small and
medium-sized companies, accounting for about half of gross
domestic product, that are being squeezed by Chancellor Angela Merkel’s 550 billion-euro switch to renewable energy. The so-called Mittelstand is paying a disproportionate amount to
finance the project as bigger companies like BASF SE (BAS) and Lanxess
AG (LXS) get exemptions where they generate their own electricity.

The health of the Mittelstand is not only important for
Germany. The country is key to sustaining the recovery in the
rest of the 18-nation euro area, its biggest trading partner,
after the region’s longest-ever recession. While German business
confidence in January rose to the highest level in more than two
years, high energy costs add to rising taxes that are already
higher than in other European countries.

Until now, companies that generate their own electricity
have been exempt from the fees grid operators charge to fund
Germany’s green-energy switch. The fee that companies without a
power plant have to pay rose 18 percent on Jan. 1, and is now
triple the amount it was four years ago.

Government Threat

Follmann paid 480,000 euros last year for the renewable-energy fee, the equivalent of 10 full-time salaries, or almost a
fifth of his total energy bill. That helped drive his decision
to build his own power plant.

Adding to the plight of the Mittelstand, the government’s
latest proposal may force these companies to pay the renewable
energy surcharge regardless of whether they operate a power
plant, with the rule applying to all stations built after Aug.
1. 2014.

The government’s proposal to curtail the exemption in
August may spark a flurry of construction before the deadline.
Plants coming into operation afterward may pay 90 percent of the
fee, or 70 percent if it is run on renewables or is a combined
heat and power plant, according the economy ministry.

New legislation, to be drafted by April, still has to pass
parliamentary votes in June and July. Uncertainty on what will
eventually make it into the law is causing planning headaches.

Rule Changing

“The big problem is that I’m depending on the German
government not changing the rules,” said Follmann, who is the
third generation of his family to run the manufacturer that
generated 180 million euros in 2013 sales. “We have our permit.
I think we are good.”

Last year 16 percent of German companies said they already
built their own power sources, up from 10 percent in 2012,
according to a DIHK chambers of commerce and industry survey.
Another 23 percent are in the process or have plans to follow.
About half of the Mittelstand say energy and raw-material cost
is their top risk, according to another DIHK survey.

Suppliers of power plants and energy equipment are taking
note. Siemens AG (SIE) merged its small and large gas turbine
operations and carved out a separate energy sales unit in
October, saying utilities are no longer the only customers.
Stephan Reimelt, General Electric Co.’s head of energy
operations in Germany, said in an interview that the energy
switch is having a “fundamental impact” on the Mittelstand.

Fukushima Accident

The Fukushima reactor accident in March 2011 in Japan
prompted Merkel’s decision to phase out nuclear power. Under the
current renewable-energy law called EEG, the government
guarantees above-market prices for renewable generators and
gives them precedence over traditional sources when supplying
the grid.

That has spawned a splurge of wind and photovoltaic
investments and turned Germany into the biggest solar technology
market in 2009, 2010 and 2012.

Even some of Merkel’s allies in her Christian Democrat
Union party are calling on her to help the Mittelstand.

“Reform is urgent,” Dieter Bischoff, a vice president of
the CDU’s Mittelstand Business Association, said in an
interview. “It will be a millstone around our necks that will
drown us” if energy costs continue to rise as they have.

Stifling Growth

Since Jan. 1, consumers and companies that are not exempt
pay 6.24 euro cents a kilowatt-hour in EEG surcharges, up from
5.28 euro cents in 2013. That takes this year’s renewable-energy
subsidy to about 23.6 billion euros, according to Germany’s
power grid operators.

Large companies are in a better position than most of the
Mittelstand to escape energy costs by shifting production
outside Germany, said Jakob Flechtner, a co-author of a DIHK
energy report. Smaller firms resort to cutting costs or are
forced into making bigger investments to become more energy
efficient.

“It’s questionable whether Germany can remain competitive
as an industrial location with its comparably expensive
electricity,” Flechtner said in an interview. “As soon as
measures are exhausted to cushion the higher power costs,
industrial companies will have to think about shifting or
limiting production.”

Getting Paid

In a twist of the subsidy-driven system, some owners of
renewable-energy power plants are actually making, not just
saving, money from their stations. They get paid a subsidy to
feed their electricity into the grid instead of routing it
directly to their manufacturing facilities.

Wood-coatings maker Alfred Clouth Lackfabrik GmbH in
Offenbach near Frankfurt and electrical-connector producer
Harting Technologiegruppe in Espelkamp in northern Germany have
built stations powered by renewable sources to become more
climate friendly, and in doing so, will benefit from subsidies.

Harting, with 484 million euros in annual sales, would like
to generate all its own electricity by 2020, up from about 12
percent now, should the political environment be supportive,
board member Philip Harting said in an interview. The company
may even erect its own wind turbine, after taking the interests
of the region’s inhabitants into consideration, he said.

“For us as a company, it’s important to have continuity of
electricity supply as well as some certainty on costs for
planning purposes,” Harting said. “We are still thinking about
adopting technologies that offer more energy saving
possibilities. We have very specific goals.”

Cutting Aid

In response to the jump in cost, the government plans to
cut aid, especially for on-shore wind parks, and has put an
upper limit on generation goals. Germany wants green power to
supply 40 percent to 45 percent of its needs by 2025, and 55
percent to 60 percent ten years later.

Renewables contributed 23 percent of Germany’s total power
output last year, according to AG Energiebilanzen e.V., an
association of energy lobbies and economic research institutes.

“It’s a cost-benefit calculation,” said Alfred Clouth,
CEO of the family-owned company that bears his name. “With the
building of the block heat and power plant we are able to save
costs and get a positive environmental effect at the same
time.”

Meanwhile Follmann, who along with his father owns the
company he manages, has started talking to builders and has
placed orders for machines. The power plant should be ready in
November and cover two-thirds of his electricity needs.

“We’ve been waiting,” Follmann said. “It’s been like
looking into a crystal ball. It’s a lot of money for something
that isn’t our core business. It should be a utility company
investing and not me.”

To contact the reporter on this story:
Sheenagh Matthews in Frankfurt at
smatthews6@bloomberg.net

To contact the editor responsible for this story:
Simon Thiel at
sthiel1@bloomberg.net

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