January 20, 2014 / 3:49 PM / 5 years ago

German coal power generation to become unprofitable next year

* Clean dark spreads to become negative on current price forecasts

* Clean spark spreads are have been negative since 2010

* Coal margin scenarios: link.reuters.com/tep26v

By Henning Gloystein

LONDON, Jan 20 (Reuters) - German utilities will struggle to make money from hard coal power stations by next year, adding trouble to a sector already making huge losses from gas-fired production and which is burdened with a costly government policy to boost renewables.

Reuters data shows German wholesale electricity generated from hard coal and for sale in 2015 has a profit margin (the so-called clean dark spread) of around 6.30 euros ($8.54) per megawatt-hour (MWh).

This is the cost of buying coal and paying for carbon emission certificates against the sale price for wholesale electricity, but excluding costs such as labour and taxation.

The equivalent gas margin (clean spark spread) is below minus 18 euros per MWh, meaning that utilities make a loss using natural gas to generate electricity.

Price forecasts show coal margins could also soon drop to zero or below, adding pressure on a sector that is already plagued by high debt and low profitability.

As the German government has decided to exit nuclear power generation that leaves its utilities, such as E.ON and RWE, lacking a profitable source of income.

“Lower profits from generation has put some stress on the balance sheet of the two companies (E.ON and RWE). The profit decline is clearly reflected in the strong share price decline over the last five years,” said Roland Vetter, head of research at London-based trading and investment firm CF Partners.

Shares in E.ON and RWE have more than halved since 2010, faring much worse than European peers such as Britain’s Centrica , Spain’s Iberdrola and France’s EDF.

Vetter said the big utilities like E.ON and RWE were partly protected from poor generation margins as they were sufficiently diversified through earnings from other businesses such as stable grid and overseas operations, but he added that poor margins could threaten some of Germany’s numerous municipal power suppliers, the Stadtwerke.

“The problem might affect some smaller German players, the Stadtwerke, with higher exposure to conventional generation. This could lead to some consolidation,” Vetter said.

Should power prices drop below 36 euros a MWh, coal average above $90 and carbon prices rise above 7 euros a tonne in 2015, as many analysts predict, coal power margins would drop to zero.

Reuters data shows that German coal margins will fall to zero next April before recovering briefly and falling back towards negative values in 2015 and onward.


The low margins are a result of an oversupplied power market that has pulled down wholesale electricity prices while fuel costs have remained relatively high.

German wholesale power prices have dropped almost 40 percent in the last three years as renewable subsidies created an overcapacity at the same time as rising energy efficiency and a relatively weak economy resulted in stagnating demand.

While natural gas prices, closely linked to the oil market, have remained high, utilities have so far benefited from a weak coal market, as well as low prices for carbon certificates which utilities have to buy for each tonne of CO2 they pump out.

But analysts now say that coal and carbon prices have bottomed out and will gradually rise towards 2015, while wholesale power prices are expected to remain flat or even fall.

Credit Suisse says in its 2014 outlook that it does not see any upside for power prices.

“We believe that neither the supply/demand nor the reforms in Germany will change the pricing environment. The current forward curve is above our price forecast,” the bank said.

German forward power prices for supply in 2015 are currently trading around 36.65 euros a MWh.

European coal prices have recently lingered slightly above $80 a tonne, but Commerzbank says that the market will rise towards $90 a tonne later this year before averaging $95 a tonne in 2015. Morgan Stanley also says it sees prices rising, although the bank added that coal prices were unlikely to rise above $100 a tonne.

Analysts said carbon prices will also rise as the European Union is expected to intervene to prop them up to make a shift to cleaner energy technologies more attractive.

Currently trading around 5 euros a tonne, most analysts say prices will rise to towards 7 euros by 2015, with some experts even expecting 11 to 14 euros a tonne.

If coal and carbon prices rise that high without an equivalent increase in power prices, German coal margins would drop as low as minus 5 euros per MWh.

With gas margins expected to remain even worse, perhaps as low as minus 24 euros per MWh, utilities could struggle to make any money, and Credit Suisse said “investors should refrain from being over-enthusiastic” and that it expected “earnings to remain low by historical standards” for Germany’s two main utilities, E.ON and RWE.

$1 = 0.7376 euros Additional reporting by Nina Chestney, editing by David Evans

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below