Why do Germany’s electricity prices keep falling?

Chancellor Angela Merkel cemented Germany’s shift toward an economy powered by renewable energy in 2010 with her “Energiewende” plan. One result has been a seemingly unstoppable decline in wholesale electricity prices, which tumbled to a 12-year low on Monday. Wind and solar power have surged under Germany’s plan to get as much as 60 percent of its power from renewables by 2035, compared with 28 percent now.

The switch is hurting utilities RWE AG and EON SE, the worst performers this year on Germany’s DAX stock index, as margins at their coal and gas-fired plants get squeezed because cheaper green power gets priority to the grid. By contrast, Danish turbine maker Vestas Wind Systems A/S is one of Europe’s best performing stocks as orders surge to a record.

The commodity price rout is also dragging German power prices lower as oil, natural gas and coal costs slide. The Bloomberg Commodity Index, a gauge of 22 raw materials on an excess return basis, sank to its lowest level since 1999 on Monday.

Falling demand for electricity is also bearish for Europe’s benchmark contract. Consumption slid 3.8 percent last year even as the German economy grew 1.4 percent. Mild winter weather and increased energy efficiency reduced long-term prospects for demand growth and analysts including Societe Generale SA in Paris don’t expect a recovery any time soon. While wholesale prices have fallen 13 percent in the past year, subsidies to fund Energiewende have pushed German consumer bills to the second-highest in the European Union after Denmark. Household prices rose 2 percent in 2014 from the previous year, Eurostat data show.

©2015 Bloomberg News

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