Gas-Fired Capacity Closures Continue Apace

BMI View: After a number of utilities reported poor half-year results, it appears that the pace at which gas-fired capacity is being mothballed or closed down in the German market is picking up. In August alone, a host of the country's biggest utilities, including E.ON, RWE, and Statkraft, have all announced plans to shutter combined gas-fired capacity totalling thousands of megawatts within months. We note that this is problematic for the German government (regardless of who wins the general election in September) as gas-fired generation will need to be integrated into the energy mix to support intermittent renewables capacity - while calls for reform of Germany's renewable energy policy may grow louder .

With t raditional gas-fired power generation capacity in Germany coming under threat due to unfavourable economics in the power sector , which have been exacerbated by the country's ' Energiewende ' strategy, a host of utilities are now proceeding with plans to mothball unprofitable gas-fired facilities . While the country's renewables targets are ambitious, and financial incentives and preferential access to the grid have led to a huge surge in renewable s capacity, low wholesale prices , dwindling demand and the widening divergence in the spark spread look set to trigger the closure of greater numbers of gas-fired facilities . To this end, BMI estimates that utilities are currently plan ning to mothball almost 5 ,000 MW of capacity, base d on announcements made in recent months . As such, with gas-fired capacity needed to support intermittent renewables supply, we maintain our view that such developments will further ratchet-up the p ressure on Chancellor Angela Merkel to intervene in the electricity market, should she win the Germany general election in September.

Coal And Gas Diverge
First-Month ARA Steam Coal (CIF) & German Natural Gas Price (NGC), Day Ahead

To put the situation in context, wholesale electricity prices are reported to have continued to fall in H113, with Reuters reporting a decline of 20% between January and August 2013. As a consequence, many utilities with exposure to Germany have reported pretty dismal first half results - with weaker demand for electricity across Europe also having an impact. Germany's biggest utility, E.ON, reported a 42% fall in profit over the first half of 2013, while RWE announced that operating profit from conventional power generation fell 62% year-on-year (y-o-y) to EUR690mn. Meanwhile, Norwegian utility Statkraft, which had to accept a US$340mn impairment charge on its German gas-fired power plants in 2012, reported that it would mothball two if its German power plants because they were proving uneconomical.

Planned Gas-Fired Capacity Closures
Power Plant/Location Operator Planned Closure Capacity (MW)
Source, BMI
Knapsack Statkraft 2013 800
Herdecke Statkraft 2013 400
Robert Frank Gas-Fired Power Plant, near Dusseldorf Statkraft 2013 510
Emden Statkraft Announced 2012 450
Tavazzano-8 E.ON End-2015 300
Malzenice plant E.ON End 2013- 418
Kiel plant E.ON End-2015 162
Weisweller (two gas turbines) RWE August 2013-end-2014 2x272
Gersteinwerk-F gas plant RWE 2014 410
Gersteinwerk-G gas plant RWE April 1 2014 410
Marbach Block II ENBW 2013/2014 85
RDK4 ENBW Under discussion 353

A number of factors have converged to shape our bleak outlook for gas-fired capacity in Germany, and we have previously noted that coal is currently gaining greater traction as a more profitable fuel for domestic power generation ( see 'Coal Comeback Continues', June 19). In recent years, considerable government support has driven a surge in non-hydro renewables in Germany, which according to our estimates will account for 43.5% of installed capacity in 2013. With renewable energy having been granted priority access to the grid and the nuclear phase-out yet to be completed, this has led to overcapacity, contributing to a fall in wholesale prices. The collapsing cost of carbon permits under the European Emissions Trading Scheme (ETS) has also favoured the burning of cheaper coal and forced utilities with a significant gas-fired portfolio to consign their plants to backup-source status ( see 'Irsching To Set A Short-Term Precedent', May 16) or mothball them completely.

Making matters worse for companies with a significant amount of gas-fired capacity in their portfolios, it does not appear that this situation is likely to change in the near-term - unless the German government intervenes. To this end, E.ON's CEO Johannes Teyssen claimed that 'at least for 2013 and 2014, no recovery is in sight' when announcing the company's H113 results on August 13. Meanwhile, Essen-based RWE is now planning to take 3,100MW of (mostly gas-fired) capacity offline across both Germany and the Netherlands over the next few months - equivalent to 6% of the utility's total capacity. ENBW said in July that it was considering closing 668MW of capacity in Germany based on growing competition from renewable energy sources.

As we have noted previously, this is causing quite a problem for the German government, which is also under pressure because of the rising cost of its Energiewende agenda for consumers and businesses. As such, although we do not expect any change in policy before the German election on September 22, we have noted that there have been growing calls for reform of the German electricity wholesale market and the German renewable energy law - the EEG - in order to ensure that both green energy and traditional sources of generation can be integrated into the electricity generation mix ( see 'Energiewende To Dominate Pre-election Debate', June 5).

This article is tagged to:
Sector: Power, Renewables
Geography: Germany, Germany, Germany, Germany