German Companies Take Back the Power

(by Jan Hromadko, The Wall Street Journal) FRANKFURT – German companies are going off the grid.

Every sixth company in Europe’s largest economy now generates its own electricity, roughly 50% more than one year ago, according to Germany’s Chamber of Commerce and Industry. They range from rural family-owned companies to a vast Dow Chemical Co. plant that consumes 1% of the country’s electricity.

The reason? Ever-higher electricity prices – driven in part by a 22% government-mandated levy [tax] to fund renewable-energy sources – are prompting companies large and small to invest in their own power-generation infrastructure. Doing so not only shields them from the government surcharge, but also makes them eligible for subsidies designed to encourage energy efficiency and so-called green electricity.

Michael Salcher, head of the energy and natural-resources practice at consultancy KPMG in Germany, estimates that companies that avoid the surcharge and receive subsidies can cut their electricity bills by around 50%.

Part of the electricity that Warwick produces comes from a boiler that burns wood waste from its guitars. (Photo: Martin Jehnichen)

Warwick, an electric bass-guitar maker based in the eastern town of Markneukirchen, near the Czech border, produces all the electricity it needs through its own natural-gas-powered plant, solar roof-mounted facilities and a boiler fueled by wood waste from its guitars.

Warwick, which has annual sales of about €24 million, or roughly $33 million, spent more than €3.7 ($5.1) million on self-generation, and founder Hans-Peter Wilfer isn’t sure when the investment will pay off. “But in times of ballooning power prices, this will be worthwhile,” he said.

Partly because it aims to drop [eliminate] nuclear power within the next eight years and most fossil fuels by midcentury, Germany is aggressively promoting solar, wind and other green renewable-energy sources. To pay for this shift, the government has slapped a surcharge [extra fee] of about 22% on power bills for businesses and households. The levy [tax], first imposed in 2000, has nearly tripled since 2010. As a result, industrial electricity bills have risen by more than 10% since 2005, while wholesale power prices have held steady.

Roughly 16% of German companies were producing their own power by the middle of last year, according to the German Chamber of Commerce—up from about 10% a year earlier. A further 23% of companies are considering joining the fray, the chamber said.

In response, Chancellor Angela Merkel’s cabinet plans to revise Germany’s energy laws in coming weeks. The new regulations would have self-generating companies pay part of the renewables surcharge and raise the bar [increase requirements to qualify for] some green subsidies, according to a published draft of the bill.

Car-parts maker ZF Friedrichshafen AG, which spent €2 ($2.8) million on a new two-megawatt electricity- and heat-generation plant, is now reassessing whether to proceed with a second generating unit as a result of the potential change to energy legislation, said Mario Heusinger, the company’s maintenance chief.

Electrical self-reliance has its share of drawbacks. It can require large initial investments and force companies to manage equipment unrelated to their core business, though most contract out maintenance. Companies also usually keep some link to the [German power] grid for emergencies.

But the increasing instability of Germany’s power grid, along with higher electricity costs, is leading many companies – whose highly automated facilities demand stable current – to take the leap.

Germany’s electrical network was built to move gigawatts from relatively few large plants to users nationwide. New wind farms and solar [fields] are scattered geographically and require new grid capacity to ship electricity from mostly rural areas to urban centers. Power-grid companies are struggling to adapt, and regulators say the grid’s stability has suffered as a result.

Decentralization now adds yet another headache for traditional producers like utility giants E.ON and RWE. With fewer industrial customers, they face plunging revenues, exacerbating difficult market conditions.

In response, the utilities are trying to cash in on decentralization by installing and managing companies’ on-site generators. E.ON, for example, last year struck a deal with retailer Metro AG to build four heat-and-power units at stores in Germany and Russia.

E.ON and RWE both say decentralization offers them opportunities but acknowledge the new businesses don’t yet offset falling traditional revenues. One problem is that utilities’ background in industrial-scale generation means they aren’t focused on small companies.

Small players like bass-maker Warwick tend to turn to more nimble engineering firms for generators.

For some companies, the financial and technical advantages of independence are [appropriate/merited] benefits of necessary investments. Dow Chemical needs both steam and electricity for its complex in Stade, near Hamburg, so several years ago decided to invest roughly €400 ($556) million in generating equipment that yields both. Spokesman Joachim Sellner says rising energy prices have confirmed the wisdom of Dow’s choice.

Mr. Sellner said government plans to end exemptions from renewables subsidies could significantly increase Dow’s power bill, which are now in the hundreds of millions of euros each year. Dow is planning another on-site power plant to cope with rising bills.

Still, cutting ties with the grid can lead to unexpected knots. Warwick, the bass-guitar maker, is based in an economically depressed agricultural region of the former East Germany, and Mr. Wilfer is struggling to attract qualified staff willing to relocate to that region.

“I have invested too much” in this site, he said. “I’m stuck here and can’t move, even if I wanted to.”

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved. Originally published at WSJ March 2, 2014. Reprinted here for educational purposes only. Visit the website at wsj .com.