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German Power's Slump Squeezes EON, RWE: Energy Markets - Bloomberg
German power prices are extending their longest streak of quarterly declines as record wind and solar output squeezes profits at coal-fed stations run by RWE AG (RWE) and EON AG to less than a third of their U.K. counterparts.
Baseload electricity for 2013, the European benchmark contract, fell 1.1 percent this month after four consecutive quarterly drops. Utilities in the U.K., including Centrica Plc (CNA), are earning more than three times as much as German generators based on next-month clean-dark spreads, a profit measure that includes coal, power and emissions prices.
Germany is building solar, wind and coal capacity to replace the 17 reactors that supplied about a fifth of its electricity, following last year's disaster in Fukushima, Japan. Europe's biggest economy gives green energy priority access to the grid and has a greater share of renewables than the U.K. Solar and wind generation units cost less to operate than fossil plants, pushing down electricity prices and profits.
"Prices will decline in the second and third quarters," said Paolo Coghe, a senior analyst for European power at Societe Generale SA in Paris, who has covered energy markets for 15 years. "This is due to the additional downward pressure exerted on prices by renewable generation and a realization that there will be lower demand."
German power for 2013 traded at 51.35 euros ($67.34) a megawatt-hour, down 5 cents, at 9:50 a.m. Berlin time, according to broker prices compiled by Bloomberg. The contract has lost 3.3 percent this year, following a 12 percent decline in the last three quarters of 2011.
Shrinking Profit Spread
The clean-dark spread for next month in Germany was at 4.57 euros a megawatt-hour, according to data compiled by Bloomberg. That's down from 16.94 euros in October. U.K. generators were earning 15.31 pounds a megawatt-hour (18.59 euros), the data show. The spread reflects the price of power produced, minus costs of fuel and emission permits.
Germany generates about 20 percent of its electricity from renewables, compared with 9.5 percent in the U.K., according to government data. Chancellor Angela Merkel plans to exit nuclear energy by 2022 and raise the nation's share of renewable sources to at least 35 percent of the power mix by the end of this decade. The Environment Ministry said earlier this month Germany will probably overshoot the target and reach a share of about 40 percent by 2020. Hard coal supplied about 19 percent of the nation's power in 2011, according to data from Bundesverband Solarwirtshaft, a Berlin-based lobby group known as BSW.
Renewables Subsidies
The German government gives financial support to utilities to build solar and wind farms, through feed-in-tariffs, to speed up progress towards its 2020 targets.
Electricity production from solar photovoltaic panels in Germany rose by 62 percent to 19 terawatt-hours last year, BSW data show. In 2011, new solar power capacity amounted to 7,500 megawatts, more than double the 3,000 megawatts the government had forecast. A megawatt is enough to supply about 2,000 European homes.
To curb growth, Germany's parliament approved subsidy cuts of as much as 29 percent from April 1, depending on the size of the solar plant, to reduce the annual pace of installations by half in the world's biggest market for the industry.
Wind production increased by 23 percent in 2011 from a year earlier to a record 46.5 terawatt-hours, BSW data show. The government plans to subsidize an increase in installed capacity of offshore wind turbines from 0.2 gigawatts at the end of 2011 to 10 gigawatts, the equivalent of about nine atomic plants, by 2020, according to the wind industry's lobby group BWE.
"Renewables bring down the weighted average cost of meeting demand because they have zero fuel costs once they are installed," Coghe said. Low-cost generation is meeting peak demand and this has a price-damping impact, he said.
Downside Risks
Industrial demand will probably not pick up. Europe's economy faces "downside risks" amid rising Spanish and Italian borrowing costs, European Central Bank President Mario Draghi said on April 4. Electricity consumption in Germany fell 0.5 percent last year and is poised to drop a further 0.5 percent this year, Deutsche Bank AG said in a March 28 research note.
"I am a little surprised, given that nuclear capacity was removed in Germany, that power prices haven't held up more but it shows that the market was more oversupplied to begin with than anyone realized," said Mark Lewis, a commodities analyst at Deutsche Bank in Paris, said April 4 in a phone interview. Renewables have made a significant contribution to the oversupply, he said.
U.K. Plants
Utilities operating in Britain have announced more plant closures than in Germany because of sliding profit margins at coal and gas-fired power stations.
"Operators in Germany seem reluctant to close plants because of the risk that they would make life easier for their competitors and lose market share in the long run," Lewis said.
Power-plant operators, stung by declining clean-dark spreads, have found some relief as prices for European Union emissions contracts hit record lows, reducing generation costs.
Carbon futures for December delivery dropped to a record 5.99 euros a metric ton on the ICE Futures Europe exchange in London on April 4.
They have dropped 60 percent in the past year, which means utilities are "enjoying reasonable spreads even in an environment of low power prices," Coghe said.
At EON, Germany's largest utility, profit slumped 50 percent last year because of nuclear reactor closures and lower earnings from its power generation and wholesale gas business, the Dusseldorf-based company said March 14. Its share price has dropped 24 percent in the past year.
RWE's full-year profit fell 34 percent in 2011, it said on March 6. Its market value slid by 27 percent in the past 12 months. RWE is the country's second-largest utility.
"The new German energy policy has left its mark," RWE Chief Executive Officer Juergen Grossman said on a conference call that day after announcing full-year results. "The power generation business will suffer from declining generation spreads."
German power prices are extending their longest streak of quarterly declines as record wind and solar output squeezes profits at coal-fed stations run by RWE AG (RWE) and EON AG to less than a third of their U.K. counterparts.
Baseload electricity for 2013, the European benchmark contract, fell 1.1 percent this month after four consecutive quarterly drops. Utilities in the U.K., including Centrica Plc (CNA), are earning more than three times as much as German generators based on next-month clean-dark spreads, a profit measure that includes coal, power and emissions prices.
Germany is building solar, wind and coal capacity to replace the 17 reactors that supplied about a fifth of its electricity, following last year's disaster in Fukushima, Japan. Europe's biggest economy gives green energy priority access to the grid and has a greater share of renewables than the U.K. Solar and wind generation units cost less to operate than fossil plants, pushing down electricity prices and profits.
"Prices will decline in the second and third quarters," said Paolo Coghe, a senior analyst for European power at Societe Generale SA in Paris, who has covered energy markets for 15 years. "This is due to the additional downward pressure exerted on prices by renewable generation and a realization that there will be lower demand."
German power for 2013 traded at 51.35 euros ($67.34) a megawatt-hour, down 5 cents, at 9:50 a.m. Berlin time, according to broker prices compiled by Bloomberg. The contract has lost 3.3 percent this year, following a 12 percent decline in the last three quarters of 2011.
Shrinking Profit Spread
The clean-dark spread for next month in Germany was at 4.57 euros a megawatt-hour, according to data compiled by Bloomberg. That's down from 16.94 euros in October. U.K. generators were earning 15.31 pounds a megawatt-hour (18.59 euros), the data show. The spread reflects the price of power produced, minus costs of fuel and emission permits.
Germany generates about 20 percent of its electricity from renewables, compared with 9.5 percent in the U.K., according to government data. Chancellor Angela Merkel plans to exit nuclear energy by 2022 and raise the nation's share of renewable sources to at least 35 percent of the power mix by the end of this decade. The Environment Ministry said earlier this month Germany will probably overshoot the target and reach a share of about 40 percent by 2020. Hard coal supplied about 19 percent of the nation's power in 2011, according to data from Bundesverband Solarwirtshaft, a Berlin-based lobby group known as BSW.
Renewables Subsidies
The German government gives financial support to utilities to build solar and wind farms, through feed-in-tariffs, to speed up progress towards its 2020 targets.
Electricity production from solar photovoltaic panels in Germany rose by 62 percent to 19 terawatt-hours last year, BSW data show. In 2011, new solar power capacity amounted to 7,500 megawatts, more than double the 3,000 megawatts the government had forecast. A megawatt is enough to supply about 2,000 European homes.
To curb growth, Germany's parliament approved subsidy cuts of as much as 29 percent from April 1, depending on the size of the solar plant, to reduce the annual pace of installations by half in the world's biggest market for the industry.
Wind production increased by 23 percent in 2011 from a year earlier to a record 46.5 terawatt-hours, BSW data show. The government plans to subsidize an increase in installed capacity of offshore wind turbines from 0.2 gigawatts at the end of 2011 to 10 gigawatts, the equivalent of about nine atomic plants, by 2020, according to the wind industry's lobby group BWE.
"Renewables bring down the weighted average cost of meeting demand because they have zero fuel costs once they are installed," Coghe said. Low-cost generation is meeting peak demand and this has a price-damping impact, he said.
Downside Risks
Industrial demand will probably not pick up. Europe's economy faces "downside risks" amid rising Spanish and Italian borrowing costs, European Central Bank President Mario Draghi said on April 4. Electricity consumption in Germany fell 0.5 percent last year and is poised to drop a further 0.5 percent this year, Deutsche Bank AG said in a March 28 research note.
"I am a little surprised, given that nuclear capacity was removed in Germany, that power prices haven't held up more but it shows that the market was more oversupplied to begin with than anyone realized," said Mark Lewis, a commodities analyst at Deutsche Bank in Paris, said April 4 in a phone interview. Renewables have made a significant contribution to the oversupply, he said.
U.K. Plants
Utilities operating in Britain have announced more plant closures than in Germany because of sliding profit margins at coal and gas-fired power stations.
"Operators in Germany seem reluctant to close plants because of the risk that they would make life easier for their competitors and lose market share in the long run," Lewis said.
Power-plant operators, stung by declining clean-dark spreads, have found some relief as prices for European Union emissions contracts hit record lows, reducing generation costs.
Carbon futures for December delivery dropped to a record 5.99 euros a metric ton on the ICE Futures Europe exchange in London on April 4.
They have dropped 60 percent in the past year, which means utilities are "enjoying reasonable spreads even in an environment of low power prices," Coghe said.
At EON, Germany's largest utility, profit slumped 50 percent last year because of nuclear reactor closures and lower earnings from its power generation and wholesale gas business, the Dusseldorf-based company said March 14. Its share price has dropped 24 percent in the past year.
RWE's full-year profit fell 34 percent in 2011, it said on March 6. Its market value slid by 27 percent in the past 12 months. RWE is the country's second-largest utility.
"The new German energy policy has left its mark," RWE Chief Executive Officer Juergen Grossman said on a conference call that day after announcing full-year results. "The power generation business will suffer from declining generation spreads."
