Industry Trend Analysis - Grand Coalition: Key Power And Infrastructure Sector Takeaways - APR 2018

BMI View: We expect policy continuity under Germany's new Grand Coalition, with a coal power phase-down remaining controversial and renewables growth slowing under the EEG2017. The presence of the SPD in the coalition will see greater government-driven spending into infrastructure.

On March 4 the centre-left German Social Democratic Party (SPD) overwhelmingly voted to remain in a coalition with Chancellor Angela Merkel's centre-right Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU). The vote ends a gridlock in German politics, where the country had been without a formal government since the federal elections on September 24 2017 ( see 'Quick View: SDP Gives Approval For Grand Coalition', March 5).

Key Power & Renewables Takeaways:

  • Coal-Fired Power Generation Will Cling On Under The New Government. This is due to the core supporters of the SDP being located in the coal-heavy Western Germany. We see little scope for the SDP risking the alienation of its core supporters, particularly after what was a disappointing election for them. As a case in point, the only provision towards a coal-phase down in the coalition agreement is the establishment of a commission that will assess its potential, with little detail being provided.
  • Renewables Capacity Growth Slowing Under Auction scheme. The newest reform to the EEG (Renewable Energy Act) implemented in 2017 will curb renewables capacity growth as Germany deals with grid bottlenecks and elevated retail electricity prices. We see limited scope for a deviation away from this policy under the new government, with auctions for under the EEG2017 being scheduled for the next few years. There is some scope for more capacity being auctioned than expected, but this would not alter any of the broader power mix dynamics we see in the market ( see 'Power Sector Outlook Intact Under Grand Coalition', February 20).
  • Nuclear Phase-Out To Progress Unabated. Germany's last nuclear reactor is set to go offline in 2022, and we expect the phase-out to progress in line with this schedule. This will further cut southern Germany's access to baseload power generation, and further complicate the decommissioning of coal power assets.
  • Grid Bottlenecks To Dictate Energy Policy. The reduction in power generation capacity in the south, coupled with bottlenecks for the transmission of electricity from wind farms in the north to industry based in the south, will make grid upgrades an essential component of energy policy considerations. We expect renewables development in the North to be curbed until new underground north-south transmission lines come online in the mid-2020s, highlighting the continued importance of conventional power generation to supply the German south.
Limited Scope For Coal Phase-Down
Germany - Power Generation By Type, TWh
e/f = estimate/forecast. Sources: EIA, BMI.

Key Infrastructure Takeaways:

Public Investment To Rise: The SPD presence in the newly formed 'Grand Coalition' will translate into heightened government-driven infrastructure investment. Increased public investment into infrastructure was a key condition of the SPD joining the coalition, with a pledge of EUR46bn in increased spending - a portion of which will be directed into infrastructure sectors like transport and social housing -- ultimately inducing the SPD to enter the government. As part of the agreement, the SPD will control Germany's finance ministry, a fact which bolsters our expectation that the agreement will ultimately be implemented and that a substantial portion of Germany's 2017 budget surplus of EUR37bn will be allocated into the country's infrastructure sector. Given the early stage of the coalition arrangements and therefore a lack of clear spending plans as of yet, we have elected to keep our current construction industry and infrastructure sector forecasts in place. We note that our current forecasts are for slowing and tepid growth given a history of under investment and as such risks to this outlook lie significantly to the upside under the Grand Coalition.

Lack Of Investment Informing Muted Growth Forecast
Construction Industry Value, EURbn & Real Growth, % y-o-y
f = BMI forecast. Source: Federal Office of Statistics, BMI