Thread: Gone With the Wind: Weak Returns Cripple German Renewables

Gone With the Wind: Weak Returns Cripple German Renewables

By Gunther Latsch, Anne Seith and Gerald Traufetter

DPA

Investments in renewable energy were supposed to be a sure thing, with wind park operators promising annual returns of up to 20 percent. More often than not, however, such pledges have been illusory -- and many investors have lost their principal to boot.

Three broadcasting vans. Ten camera teams. Some 50 journalists. There certainly wasn't any lack of attention being paid to Carsten Rodbertus last Thursday as he stepped up to the podium in an assembly hall in northern Germany belonging to the renewable energy firm Prokon. And the company founder, with his gray ponytail, didn't disappoint. The press conference quickly became a spectacle.

ANZEIGE
Several hundred employees welcomed Rodbertus with applause and shouts of "bravo" -- and that despite the fact that he had brought an insolvency trustee along with him. Still, Robertus insisted that the company was essentially healthy. Recently, he noted, workers had labored "12 days in a row for 12 hours a day" in an attempt to ward off bankruptcy.The fact that they weren't successful is, according to Rodbertus, the fault of the company's investors, who backed the firm to the tune of €1.4 billion ($1.9 billion). Currently, many of them are demanding the returns that they were once promised: at least 6 percent interest per year or a refund of their principle if they wished to back out. Last week, the mounting claims led Prokon to declare bankruptcy -- 75,000 stakeholders could be left out in the cold.
Thus far, it is the highest profile failure of a business model that both politicians and investors praised for being doubly beneficial. Not only would investors boost their own accounts, but they would also help the environment at the same time. And because the state guaranteed high feed-in rates for 20 years, the promises made by financial advisors -- secure returns with a good conscience -- seemed plausible.
Indications are mounting, however, that green capitalism will not be able to meet all expectations. In courts around the country, complaints are mounting from wind park investors who haven't received a dividend disbursement in years or whose parks went belly up. Consumer protection activists are complaining that many projects are poorly structured and lack transparency. In the renewables sector, fear is spreading that the Prokon bankruptcy -- combined with plans for a reduction in the guaranteed feed-in tariff recently released by new German Economy Minister Sigmar Gabriel -- could scare away investors.

Broken Promises
Much of the concern is focused on the large number of projects that are financed by the investment model known as closed-end funds. As a rule, they run for a 20-year period and are open to a limited number of investors. They promise annual dividend payments.
But newly released numbers, collected and analyzed over a several-year period, show what disappointed investors have long surmised: Around half of these commercial wind park enterprises are doing so poorly that investors can count themselves lucky if they even get their initial investment back after the 20 year duration.
The study, based on 1,150 annual reports, comes from Werner Daldorf, head of the Investment Committee at the German Wind Energy Association. Daldorf is actually a tax advisor, and he looks and acts the part. He is reserved and meticulous, wears rimless glasses and keeps his brown hair in a side part. The 63-year-old has worked as an advisor to wind energy projects since 1990 and has been a member of the Investment Committee since 2002.
Over time, Daldorf has collected a vast amount of material, filling shelves and shelves of binders. Taken together, it allows for an unprecedented look at the business affairs of over 170 commercial wind parks over the course of more than 10 years.
The result is sobering. On average, investors have received an annual return of just 2.5 percent. "Over the course of 10 years, that means a return of 25 percent, while according to the prospectus they were to have already seen returns of between 60 and 80 percent," Daldorf says.
Even if returns were to increase dramatically in the coming years -- a possible result, for example, of funds paying down their debts -- only wind parks in the best locations are likely to prove profitable. The picture becomes even worse once one digs into the details. A fifth of all wind parks for which more than 10 years of annual reports are available haven't once paid their investors a dividend exceeding 2 percent of their investments.

Stopped Payments
Daldorf's findings are surprising given the substantial subsidies the state has provided to renewable energies over the years. The guaranteed feed-in tariff for a kilowatt hour of electricity generated by a renewable energy technology currently averages 17 cents. That is several times the market price. Indeed, generous state support is one reason that green investment vendors continue to advertise using slogans such as "You Too Can Profit from the Energiewende," as Germany's switch from nuclear power to renewables is called.
Volker Hippe also thought that he was making a safe and beneficial investment. Thirteen years ago, his wife died -- he was in his mid-40s at the time. He received some €35,000 from her life insurance and decided to invest the money for his children. The youngest of his three daughters was six at the time.
Hippe invested the money in a wind park in the state of Saxony-Anhalt. The fund promised annual returns of 5 to 6 percent initially and more than 20 percent beginning in 2012. But it wasn't long before the payments ceased.
Investors who end up with such lemons in their portfolios are often told that they should have been more careful. But Hippe made the same mistake that many have made: He trusted a bank. And it wasn't just any bank; it was UmweltBank (Environment Bank), which specializes in green investments. In an informational brochure from the year 2001, the institution hailed investments "in a solidly calculated wind park" as an "ideal pension supplement."
With many wind park projects, however, the only solid calculations were the fees and commissions scooped up by participating companies. In many ventures financed via closed-end funds, such expenditures amounted to 15 percent or even 20 percent of the invested principal. Because of the complexity of the financing model, up to a half-dozen firms are involved to take care of such tasks as "project management," "equity raising" or, simply, "marketing."

Plenty of Hazards
Given such a starting point, it is difficult to earn high profits. And it doesn't provide for much of a contingency reserve. In addition to the capital collected from investors, large amounts are often borrowed from banks, with the loans sometimes representing 70 percent or even more of the fund's volume. Consumer protection activists say that such a share of bank money is up to twice as large as it should be to limit investor risk.
There are, after all, plenty of hazards associated with the business even without the financing acrobatics. The technology involved is still young and quickly showed its shortcomings in the early aughts when wind parks began sprouting up around the country. Gear boxes, switches and generators failed not infrequently, resulting in the need for complicated and expensive repairs. More than anything, however, Mother Nature wasn't always cooperative. Forecasts as to how much electricity a given facility would generate were often illusory. It was frequently the case that surveyors used insufficient methodology and refrained from carrying out expensive, longitudinal studies.
The ramifications are not insignificant. Even forecasts that are just slightly erroneous can create radically inaccurate expectations for the amount of power that will be generated. Should the average wind speed at a given site be just 10 percent lower than the forecasted value, for example, the amount of power generated will be 30 percent less.
Despite such risks, it was a long time before the claims made by wind park operators were even adequately checked. When Germany's Federal Financial Supervisory Authority BaFin reviewed fund sales brochures, it focused exclusively on formalities.
A new law passed last summer, meant to address the problems with closed-end funds among other issues, is supposed to improve things. But due to the huge number of exceptions written into the law, it remains unclear which funds it will actually apply to. Furthermore, the sector has moved on to new financing models that are no less lucrative for wind-park operators and no less risky for investors.

Losses Coming
The Darmstadt-based wind energy firm Breeze Two Energy, for example, placed company shares on the market worth €470 million, promising returns of between 5.3 and 6.1 percent. In its portfolio, Breeze Two could point to 35 wind parks with an output of 310 megawatts, as much as that of a small coal-fired power plant.
But the company made significant losses between 2008 and 2011. By the end of 2011, the company's balance sheet was "overextended" to the tune of €205.5 million, according to the annual report. The country was able to avoid bankruptcy only because Germany's laws had changed in 2008. Since then, a "positive continuation prognosis" is enough to stay in business.

In the renewables industry, such a prognosis is easy to make: You just have to claim that the wind will blow stronger during the next year. As such, the survival of Breeze Two, according to management at the time, was "probable." Many investors suffered losses nonetheless.Prokon investors are facing a similar situation. Company head Rodbertus announced last Thursday that he intends to sell some wind parks in an effort to restore liquidity. But even if he is successful, it is unclear how and when investors might see their money again. "There are reasons to believe," the insolvency trustee said last week, "that so-called junior claims will not have to be respected in the bankruptcy proceedings."
Under certain legal conditions, that could mean that Prokon -- as long as it is able service some of its debts, yet remains short of cash -- will neither have to pay interest to many of its investors nor will it have to return their principal. And it will remain that way for the foreseeable future.

Translated from the German by Charles Hawley

Article...

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CFACT
Germany has gone all in on wind and solar and done great harm to its economy in the process. Now wind farms which promised 20% returns to investors are returning nearly nothing or going bankrupt. Investors demanding to withdraw their principal are being told, "Nein!"

Share the facts (in English) at Der Spiegel.

Germany's Energy Poverty: How Electricity Became a Luxury Good

By SPIEGEL Staff

DPA

Germany's agressive and reckless expansion of wind and solar power has come with a hefty pricetag for consumers, and the costs often fall disproportionately on the poor. Government advisors are calling for a completely new start.

If you want to do something big, you have to start small. That's something German Environment Minister Peter Altmaier knows all too well. The politician, a member of the center-right Christian Democratic Union (CDU), has put together a manual of practical tips on how everyone can make small, everyday contributions to the shift away from nuclear power and toward green energy. The so-called Energiewende, or energy revolution, is Chancellor Angela Merkel's project of the century.

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"Join in and start today," Altmaier writes in the introduction. He then turns to such everyday activities as baking and cooking. "Avoid preheating and utilize residual heat," Altmaier advises. TV viewers can also save a lot of electricity, albeit at the expense of picture quality. "For instance, you can reduce brightness and contrast," his booklet suggests.Altmaier and others are on a mission to help people save money on their electricity bills, because they're about to receive some bad news. The government predicts that the renewable energy surcharge added to every consumer's electricity bill will increase from 5.3 cents today to between 6.2 and 6.5 cents per kilowatt hour -- a 20-percent price hike.
German consumers already pay the highest electricity prices in Europe. But because the government is failing to get the costs of its new energypolicy under control, rising prices are already on the horizon. Electricity is becoming a luxury good in Germany, and one of the country's most important future-oriented projects is acutely at risk.
After the Fukushima nuclear accident in Japan two and a half years ago, Merkel quickly decided to begin phasing out nuclear power and lead the country into the age of wind and solar. But now many Germans are realizing the coalition government of Merkel's CDU and the pro-business Free Democrats (FDP) is unable to cope with this shift. Of course, this doesn't mean that the public has any more confidence in a potential alliance of the center-left Social Democrats (SPD) and the Greens. The political world is wedged between the green-energy lobby, masquerading as saviors of the world, and the established electric utilities, with their dire warnings of chaotic supply problems and job losses.
Even well-informed citizens can no longer keep track of all the additional costs being imposed on them. According to government sources, the surcharge to finance the power grids will increase by 0.2 to 0.4 cents per kilowatt hour next year. On top of that, consumers pay a host of taxes, surcharges and fees that would make any consumer's head spin.
Former Environment Minister Jürgen Tritten of the Green Party once claimed that switching Germany to renewable energy wasn't going to cost citizens more than one scoop of ice cream. Today his successor Altmaier admits consumers are paying enough to "eat everything on the ice cream menu."

Paying Big for Nothing
For society as a whole, the costs have reached levels comparable only to the euro-zone bailouts. This year, German consumers will be forced to pay €20 billion ($26 billion) for electricity from solar, wind and biogas plants -- electricity with a market price of just over €3 billion. Even the figure of €20 billion is disputable if you include all the unintended costs and collateral damage associated with the project. Solar panels and wind turbines at times generate huge amounts of electricity, and sometimes none at all. Depending on the weather and the time of day, the country can face absurd states of energy surplus or deficit.
If there is too much power coming from the grid, wind turbines have to be shut down. Nevertheless, consumers are still paying for the "phantom electricity" the turbines are theoretically generating. Occasionally, Germany has to pay fees to dump already subsidized green energy, creating what experts refer to as "negative electricity prices."
On the other hand, when the wind suddenly stops blowing, and in particular during the cold season, supply becomes scarce. That's when heavy oil and coal power plants have to be fired up to close the gap, which is why Germany's energy producers in 2012 actually released more climate-damaging carbon dioxide into the atmosphere than in 2011.
If there is still an electricity shortfall, energy-hungry plants like the ArcelorMittal steel mill in Hamburg are sometimes asked to shut down production to protect the grid. Of course, ordinary electricity customers are then expected to pay for the compensation these businesses are entitled to for lost profits.
The government has high hopes for the expansion of offshore wind farms. But the construction sites are in a state of chaos: Wind turbines off the North Sea island of Borkum are currently rotating without being connected to the grid. The connection cable will probably not be finished until next year. In the meantime, the turbines are being run with diesel fuel to prevent them from rusting.
In the current election campaign, the parties are blaming each other for the disaster. Meanwhile, the federal government would prefer to avoid discussing its energy policies entirely. "It exposes us to criticism," says a government spokesman. "There are undeniably major problems," admits a cabinet member.
But this week, the issue is forcing its way onto the agenda. On Thursday, a government-sanctioned commission plans to submit a special report called "Competition in Times of the Energy Transition." The report is sharply critical, arguing that Germany's current system actually rewards the most inefficient plants, doesn't contribute to protecting the climate, jeopardizes the energy supply and puts the poor at a disadvantage.
The experts propose changing the system to resemble a model long successful in Sweden. If implemented, it would eliminate the more than 4,000 different subsidies currently in place. Instead of bureaucrats setting green energy prices, they would be allowed to develop indepedently on a separate market. The report's authors believe the Swedish model would lead to faster and cheaper implementation of renewable energy, and that the system would also become what it is not today: socially just.

Trouble Paying the Bills
When Stefan Becker of the Berlin office of the Catholic charity Caritas makes a house call, he likes to bring along a few energy-saving bulbs. Many residents still use old light bulbs, which consume a lot of electricity but are cheaper than newer bulbs. "People here have to decide between spending money on an expensive energy-saving bulb or a hot meal," says Becker. In other words, saving energy is well and good -- but only if people can afford it.
A family Becker recently visited is a case in point. They live in a dark, ground-floor apartment in Berlin's Neukölln neighborhood. On a sunny summer day, the two children inside had to keep the lights on -- which drives up the electricity bill, even if the family is using energy-saving bulbs.
Becker wants to prevent his clients from having their electricity shut off for not paying their bill. After sending out a few warning notices, the power company typically sends someone to the apartment to shut off the power -- leaving the customers with no functioning refrigerator, stove or bathroom fan. Unless they happen to have a camping stove, they can't even boil water for a cup of tea. It's like living in the Stone Age.

Once the power has been shut off, it's difficult to have it switched on again. Customers have to negotiate a payment plan, and are also charged a reconnection fee of up to €100. "When people get their late payment notices in the spring, our phones start ringing," says Becker.In the near future, an average three-person household will spend about €90 a month for electricity. That's about twice as much as in 2000.
Two-thirds of the price increase is due to new government fees, surcharges and taxes. But despite those price hikes, government pensions and social welfare payments have not been adjusted. As a result, every new fee becomes a threat to low-income consumers.

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• Part 1: How Electricity Became a Luxury Good
• Part 2: The Regressive Energy Tax
• Part 3: Incentives for Pollution

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Germany's Energy Poverty: How Electricity Became a Luxury Good

By SPIEGEL Staff

DPA

Part 3: Incentives for Pollution

More and more wind turbines are turning in Germany, and solar panels are basking in the sun, yet the amount of pollutants and greenhouse gases emitted by smokestacks increased last year. This dramatic turn of events is especially evident in small town of Grosskotzenburg, just east of Frankfurt.
Germany's largest energy provider, Düsseldorf-based E.on AG, has been operating a large coal-fired power plant in Grosskotzenburg for many years. The oldest of the five units at the Staudinger plant was built in 1965 and operates at a ridiculous 32-percent efficiency level. Even at E.on, the Staudinger plant is now seen as "completely unacceptable, both economically and environmentally."
State-of-the-art gas-fired power plants, like the one in the Bavarian town of Irsching, operate at almost double the efficiency levels of coal plants, or about 60 percent. They are also more flexible and emit far less carbon dioxide. This may explain why E.on officials were not particularly upset when the operating license for the oldest of Staudinger's five units expired on Jan. 1 of this year.
"To be on the safe side, we informed the relevant authorities several times that we are shutting down the unit," says E.on CEO Johannes Teyssen. When regulators did not object, the company began in May to dismantle key components of the power plant and transfer employees to other sites. E.on had planned to complete the work by the end of the year and remove what was left of the ancient plant.
But the situation suddenly changed on June 30, when E.on received a letter from the grid operator associated with the plant, Tennet, and the regulatory agency. The unit, the letter read, was needed to maintain grid stability, and E.on was to reestablish the coal plant's operational readiness without delay.
This is one of the most curious developments in the story of German energy reform. The country's most heavily polluting plants are now also its most profitable: old and irrelevant brown coal power stations. Many of the plants are now running at full capacity.
This leaves a dirty stain on Germany's environmental statistics. While the amount of electricity from renewable energy rose by 10.2 percent in 2012, the first year of the new energy policy, the amount of electricity generated in hard coal and brown coal plants also increased by 5 percent each. As a result, German CO2 emissions actually increased by 2 percent in 2012. Environment Minister Altmaier was clearly upset, saying: "This development cannot become a tendency."
But experts expect Altmaier will be humiliated once again at the end of the year, if he's still in office. A study released last week by the Federal Network Agency shows that energy generated with brown coal will remain virtually stabile, at 148 terawatt-hours, until 2022. It reached the depressing conclusion that brown coal's competitive position will be "hardly diminished by an increasing share of renewable energy in the mix."

Beyond Sweden
Sometimes the best ideas are borne of necessity. At least that's how Gustav Ebenå sees it when he looks back on the turn of the millennium, when Sweden entered the age of green energy. His country was suffering from the effects of a painful economic crisis at the time. "One thing was clear," the expert with Sweden's energy agency recalls. "Renewable forms of energy had to be developed as cost-effectively as possible."
Sweden developed a system based on government-mandated quotas for green energy and a market for certificates. "In a sense, our model at the time was the opposite of the German subsidy scheme," says Ebenå, who lived in Germany for many years and is well informed about Germany's energy reforms.
The Swedish model has prevailed among the competing concepts. Under the model, a kilowatt-hour of clean power costs only 10 percent more than conventional electricity. "This means that our consumers pay only a fraction of what Germans are spending to enter the renewable energy era," Ebenå says.
Still, Sweden is moving forward briskly with its expansion of green energy. The country already derives about 45 percent of its electricity from hydroelectric power plants. As a result of the subsidy system, biomass and wind turbines have contributed about 10 percent to the energy mix in recent years. Norway implemented the Swedish system last year. But can the model be applied to Germany?
The members of the commission appointed by the German government believe it can, and are due to submit a detailed plan to Economy Minister Philipp Rösler on Thursday. The plan was developed by economist Justus Haucap and legal expert Jürgen Kühling, and is supported by the economic think tank RWI and the German Academy of Science and Engineering (Acatech).
The experts propose that the government impose a green energy quota on energy providers, and gradually increase this quota in accordance with their targets for renewable energy production. The cutoff date would be Jan. 1, 2015. In the ensuing 12 months, 27.5 percent of electricity would have to come from renewable energy, followed by 29 percent in 2016 and, finally, 35 percent in 2020.
But it would be left up to the individual energy companies and municipal utilities to choose their respective sources of clean energy. The commission believes energy providers should decide how to spend their money on wind, solar or biomass. The municipal utilities would seek the lowest possible price for their clean electricity. This would encourage competition between offshore and terrestrial wind power, as well as between solar and biomass, and prices would fall, benefiting customers.

Keeping the System Honest
In Sweden, the system ensures that the electric utilities' investments automatically flow into the technology they see as the most cost-effective. This doesn't always have to be the cheapest technology at a given time. But like any normal company, the Swedish utilities have an interest in maximizing their return on investment. This is different in Germany, where the most inefficient technology at a given time is the most heavily subsidized, based on the bizarre logic that it has to be brought into the market over a particularly lengthy period of time.
To prevent energy providers from cheating the quota model, Sweden requires them to submit a certain number of green energy certificates. Each certificate represents one megawatt-hour of clean electricity. Those that cannot prove they have met their quotas are slapped with a hefty fine.
The rest is left up to supply and demand, based on the usual rules of the market economy. When the amount of green energy being generated is low, there are fewer certificates on the market and their price increases. This, in turn, gives investors an incentive to build additional wind turbines or solar arrays. They can also invest their money in storage systems, which make energy production more efficient. Or they can invest in technologies that play no role in Germany today but are being studied elsewhere in the world.
For Swedish Energy Minister Anna-Karin Hatt, the greatest benefit of the quota model is that it contains few bureaucratic restrictions. The government defines the objective, but not the method. In contrast to the German system, the government is not forced to constantly adjust subsidy rates for wind, solar and biomass. "As a result, the energy market doesn't depend on new political decisions every year," says Hatt. "Investors in renewable energy greatly value this predictability."
In heavily forested Sweden, energy providers initially focused on biomass in the form of wood and paper industry waste. They used this material to fuel conventional power plants, which generate electricity and supply long-distance heating to households. But this potential is now largely exhausted, which is why the industry has shifted to building or modernizing wind farms -- mostly those on land, says Ebenå, "because offshore turbines are still very costly."

Election Liabilities Silence Debate
In Germany, a quota model would also likely lead to more wind turbines being built on land. The government's expansion targets for offshore wind power would no longer be feasible -- and with good reason. Due to the challenging environment, the technology is prone to failure, and the cost of construction far away from the coast is very high. To make matters worse, the electricity also has to be transported hundreds of kilometers across the country.
It is clear that the next German government will have to plan a shift in energy policy. But the price of electricity is a toxic issue in the campaign, given the bad prognoses and broken promises. In a government statement in June 2011, Chancellor Merkel had promised to keep prices stable. "The renewable energy surcharge should not exceed current levels," Merkel said in the Bundestag. Economy Minister Rösler claimed there might even be room for energy tax cuts. When prices increased, Rösler and then Environment Minister Norbert Röttgen shifted blame instead of coming up with a solution.
None of the parties has a coherent concept of how to approach the problem after the parliamentary election on Sept. 22. The few current proposals are disturbingly simplistic. Altmaier and the CDU are considering paying for next year's green energy subsidies with borrowed funds, so as to delay the next electricity price increase by a few months.
Gerda Hasselfeldt, a member of the CDU's Bavarian sister party, the Christian Social Union (CSU), favors saddling the next generation with at least some of the costs. Under her proposal, the government-owned KfW development bank would assume some of the costs of solar panels and wind turbines. The amount could then be repaid over the course of the next 40 years.
The proposals being floated by the SPD, the Greens and the FDP amount to reducing the electricity tax or the value-added tax. But that wouldn't solve the structural problems, which would require the sort of radical reform the government commission. The problem is that the next government would have to be willing to tangle with the electricity industry's powerful interest groups.
Until the issue comes up in the next legislative period, Environment Minister Altmaier prefers to send consumers on their way with some money-saving tips: "When I cook, I try to keep the lid on the pot."

BY FRANK DOHMEN, MICHAEL FRÖHLINGSDORF, ALEXANDER NEUBACHER, TOBIAS SCHULZE AND GERALD TRAUFETTER

Translated from the German by Christopher Sultan

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• Part 1: How Electricity Became a Luxury Good
• Part 2: The Regressive Energy Tax
• Part 3: Incentives for Pollution

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