Germany: the power glutton

Samuel Dodson examines the current oversupply of power generation capacity in Germany, and discusses the implications of oversupply on the nation’s coal-fired power industry.

New coal-fired power plants coming online in Germany have set the European powerhouse on course for the biggest glut in power and electricity since 2011.

Wind and solar energy increases have played their part in creating an oversupply of power, but it is coal power generation that is set to weigh most heavily on power prices, which have already dropped consecutively for three years.

Since the Fukushima Daiichi nuclear disaster in Japan in March 2011 and the subsequent decision by the German Government to wind down its nuclear capacity, coal-fired generation has boomed, as has investment in renewable energy sources. The government wants renewable power to supply as much as 45% of the nation’s energy by 2025, compared with about 27% in Q1 2014.

When Chancellor Angela Merkel's government accelerated the nuclear exit in 2011 and set the country on a course to switch to renewable energy, some experts warned that there would be power shortages as a result. In fact, the opposite has been the case.

RWG AG and EON SE are poised to bring coal-fired power units online from December this year, which will supply 8.2 million homes (20% of the nation’s total), according to data compiled by Bloomberg. This extra power generation will increase spare capacity in Germany to 17% of peak demand, according to four companies that operate the nation’s high-voltage grids. The benchmark German electricity contract has slumped 36% since the end of 2010.

The new coal plants are starting as Germany aims to almost double renewable-power generation over the next decade. Wind and solar output has priority grid access by law and floods the market on sunny and breezy days, curbing running hours for nuclear, coal and gas plants, and pushing power prices lower. The profit margin for eight utilities in Germany narrowed to 5.4% last year from 15% a decade ago.

“The new plants will run at current prices, but they won’t cover their costs,” Ricardo Klimaschka, a power trader at Energieunion GmbH, said. “The utilities will make much less money than originally thought with their new units because they counted on higher power prices.”

A trail of blood on company’s balance sheets

As power prices slump, they “leave a trail of blood in our balance sheet,” Bernhard Guenther, chief financial officer at RWE, Germany’s biggest power producer, said during a conference call after the company lowered its goal for annual net income.

German utilities plan to start new hard-coal plants with 5606 MW of capacity this year and next, data from Bonn-based national grid regulator Bundesnetzagentur show.

This coal-fired generation capacity will coincide with planned increases in renewable power generation to drive the power market into a bigger slump.

“We have a huge oversupply of power and Germany wants to switch to renewable energy,” Claudia Kemfert, who heads the energy unit at the DIW economic institute, a research group in Berlin, said. “That’s why investments in new coal plants are bad investments.”

Data compiled by Bloomberg shows that the year-ahead clean-dark spread plunged to € 5.10/MWh in mid-May: down 46% from the nine-month high of € 9.48/MWh on 7 October 2013.

Vincent Gilles, London-based head of utilities research at Credit Suisse Group AG, said that coal-generation margins are poised to turn negative in 2016, suggesting that coal power investors are on the edge of a precipice.

EnBW Energie Baden-Wuerttemberg AG said it had written down the value of its power plants by € 1.2 billion. The company said that any earnings from generation, particularly coal-fired units would be eaten away by low prices.

The effects of oversupply on the energy grid are already felt in Germany on days of low-electricity and power demand, such as weekends and national holidays when offices and factories are shut. The average weekday spot power price over the past 12 months was € 39/MWh, compared with € 21.10/MWh on Sundays, according to Deutsche Bank AG.

The “Sunday discount” costs generators as much as 26% of group earnings, Martin Brough – an analyst at Detsche Bank, said in a June report. He also added that RWE faces a reduction in income of € 164 million in 2015 due to the downward trajectory of German power prices. EON could also lose 5% of per-share profit, while Austria’s Verbund AG stands to lose 26%,  according to Brough.

Cover its costs

Alfred Hoffman, vice president of portfolio management at Vattenfall, remains adament that the company’s 757 MW Moorburg-B unit, planned to come online in December, will cover its costs – and remain a valuable company asset.

“We are generating a positive margin with our coal plants and cover our variable and operational costs, such as coal purchases or personnel expenses,” Hoffmann said.

Electricity oversupply: where does it go?

The lower prices German power generation companies are receiving have not been picked up by German consumers. Instead, the cheap wholesale power prices make them attractive for exports: neighbouring European countries are picking up German-generated power and passing the cost benefits of cheap electricity onto their own consumers.

The Netherlands have been the biggest recipient of German electricity, with 22.6 billion kWh (the equivalent of 2.5 power plants), followed by Austria's 15.1 billion kWh (2 power plants), and Switzerland's 12.7 billion kWh, which equate to an output of 1.5 large power plants each year. This surge of in-flowing electricity has knocked Dutch prices down by 20%, according to data from Reuters.

These halcyon days

According to analysts at Credit Suisse, as much as 40 000 MW of electricity would have to come offline in order for electricity prices in Germany to rebound. Data from the company suggests power prices are likely to stay around € 35/MWh until 2020, as retirement of power generating units in the next six years seems “unlikely”.

While he is keen to focus on the positive margins at Vattenfall, Hoffmann is less optimistic about nationwide electricity prices. “The boom of coal plants is over for now,” he said. “And the situation won’t improve before the next decade, when old coal plants and nuclear reactors go offline.”

In a presentation from RWE, the company said that the downward spiral of power prices means that the end could be near for profit-making coal-fired power plants. The company said, “for a number of thermal plants, the energy market is no longer viable.”

However, RWE added that 2014 would be the last year of coal-fired capacity additions to the German power grid, as delayed new-builds are “finally” commissioned. The company said that “from 2015 onwards, announced plant closures will tighten capacity”. If this is the case, then any predictions of doom for power prices are perhaps shortsighted. Indeed, RWE said that the likely decommissioning of coal-fired power plants could “intensify the discussion on security of supply.”

Until the markets tighten, or indeed fall off the precipice predicted by analysts at Bloomberg and Credit Suisse, they will likely drift sideways. Insights from RWE and Vattenfall indicate that short-term spikes will induce rising forward volatilities and risk premium and a change in hedging behaviour of large power consumers. The interim period, therefore, appears to be one of uncertainty. Concerns about where the market will go will no doubt be held by power generation companies, investors, and consumers alike.

A shorter version of this article first appeared in the July 2014 issue of World Coal.

Written by Sam Dodson

Read the article online at: https://www.worldcoal.com/special-reports/07072014/german_power_market_oversupplied_sr6/