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Coal generators press for compensation as Germany plots power plant closures

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Coal generators press for compensation as Germany plots power plant closures

SNL Image

Utility RWE's lignite-fired power plant in Niederaussem, the second-largest in Germany.

Source: RWE AG

As Germany's closely watched coal exit commission drafts its blueprint for how the world's fourth-largest economy should wean itself off the fossil fuel, the country's biggest power generators stand ready to fight if they see their financial interests are bulldozed in the race to decarbonize the electricity sector.

The commission's recommendations for an exit from coal were originally due in November but have been delayed until the end of this month, highlighting the complexity of the issues at stake as industry representatives, environmentalists, trade unions and other stakeholders negotiate an end date for coal power plants and structural measures to soften the economic blow of the phaseout to Germany's three lignite mining regions.

In a bid to speed up the commission's efforts, Chancellor Angela Merkel this month met with federal ministers, state premiers and the heads of the commission, which reportedly resulted in promises of billions in structural investments and direct financial help for the states most affected by the phaseout.

But for the utilities that operate the approximately 45 GW of hard coal and lignite capacity still producing electricity in Germany, which power plants will have to come offline how soon will be an even more important question. Companies including RWE AG, owner of the largest share of German coal plants, have repeatedly called for compensation if they are forced to close their plants early

"The commission has already said clearly that they don't want to see any socially unacceptable layoffs [connected to coal] and that definitely comes at a cost," Markus Krebber, CFO at RWE, told analysts on a call to discuss the company's third-quarter earnings in November. "If there is a clear interference with existing legislation and company assumptions on investments, then that should also come with compensation," Krebber said.

SNL Image

But moving fast on the phaseout, especially of lignite, is seen as key for Germany to reach ambitious EU-wide emissions reduction goals for 2030.

"Even with accelerated renewable additions and coal closures, Germany will likely achieve its 2030 decarbonization targets with a two- to four-year delay partly due to headwinds from the nuclear exit in the early 2020s," said Deepa Venkateswaran, a senior analyst at Alliance Bernstein. Yet Venkateswaran expects the commission to be pragmatic and set an end date for the mid- to late 2030s since any earlier would be too harsh for the lignite mining regions and endanger security of supply.

"Phasing out 51% of the [electricity] mix is not a trivial challenge," she said, referring to the output from both coal and nuclear plants last year.

A draft report by the commission, seen by Reuters, suggested that compensation for operators should be based on payments made in similar cases in the past. The report is likely to reference an existing strategic reserve for lignite plants in Germany, which paid around €600 million per gigawatt to operators for idling their plants for several years before decommissioning, the newswire reported Jan. 23, sending RWE's share price higher.

Environmental groups slammed the commission for focussing too heavily on paying off coal companies as well as the structural transition for affected regions. Energy minister Peter Altmaier also said he plans to compensate industry if power prices rise as a result of the coal exit. "The coal commission is making headway everywhere, but not with climate protection," Michael Schäfer, head of energy policy at WWF Germany, said in a statement.

Analysts at Bernstein say it will be "critical" for RWE to get compensated for any early closures to defray the costs of shutting down the plants and any lost earnings. RWE's fleet of coal plants is the oldest in Germany, with a capacity-weighted average age of above 31 years, according to data compiled by S&P Global Market Intelligence. In addition, the vast majority of its plants are located in the western state of North Rhine-Westphalia, which is seen as more resilient than coal mining states in the eastern part of the country and therefore a likely target for earlier closures.

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"The conditions in western Germany are a lot better. It's basically prime real estate, in one of the most economically sound regions in Europe," Pieter de Pous, senior policy adviser at climate think tank E3G in Berlin, said in an interview. "That's very different in Lusatia," a poorer region where it makes sense to have a longer transition period, he said.

Eastern states, such as Saxony and Brandenburg, are home to many newer coal plants as well, which would be in line for higher payments if they had to come offline sooner. Companies with a majority of coal assets in the region include the second-biggest operator, Czech Energeticky a Prumyslovy Holding a.s. The company, which bought a large portfolio of eastern German coal mines and lignite-fired power stations from Sweden's Vattenfall AB in 2016, operates plants with an average capacity-weighted age of 28 years.

The largest coal plant operators in Germany also include EnBW Energie Baden-Württemberg AG, STEAG GmbH and Uniper SE, the former E.ON SE subsidiary that was sold to Finland's Fortum Oyj last year.

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Uniper CFO Christopher Delbrück told analysts in November that, given the government's ambition of short-term closures "with almost no ability for the plants to adapt and for employees to adapt," the company would expect at least some form of compensation. Delbrück specifically referred to Germany's lignite plant reserve as one option.

Although the federal government will have to deal with hefty financial requests already — the four states most reliant on coal mining have asked for up to €60 billion — it is seen as unlikely to force a confrontation with coal operators, who are likely to sue if they do not get their way.

"The government is keen to avoid another case as they have now with the nuclear phaseout," said de Pous, adding that Berlin may find itself stuck between a rock and a hard place if the commission does not come to an agreement. The government is expected to closely follow the coal commission's findings when it eventually enforces an exit.

"The more consensual the decision [by the commission] is, the more likely it is to just sail through the government and parliament afterwards," de Pous said.

A study by environmental lawyers at the non-profit organization Client Earth released in December recommended that rather than making bilateral deals with coal generators, the government should seek to pass a law to mandate the coal plant closures, which should be staggered by either plants' age or their emissions.

This approach would ensure a strict legal framework for compensating plant owners and avoid shifting any control over the phaseout, even partly, "into the sphere of the operators," the study recommended.


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Coal Forecast Surging Export Volumes Aid Coal Production As Gas Competition Tightens

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Higher export volumes aid coal production as gas competition tightens domestically

Jul. 20 2017 — Coal production made gains through June as modest electricity demand to open the summer was offset by stronger exports. Weekly shipments for June came in 24% higher than the same period last year, continuing the improved production results for 2017. However, easing natural gas prices during June provided little headroom for thermal coal prices. The NYMEX CAPP eased by $0.25/ton (0.5%) for the month, while the NYMEX PRB gained $0.24/ton (2.2%).

Natural gas prices traded lower during June than in May, with low electricity demand doing little to clear surplus storage. After opening the month at $3.05/mmBtu, Henry Hub spot prices varied during mid-month from $2.85-3.12/mmBtu, before closing at $3.07/mmBtu. Natural gas remains in a moderate surplus, with June injections trailing modestly below historical averages. Storage levels as of June 23 stood at 2,816 Bcf, 182 Bcf above five-year averages. The surplus restrained natural gas markets during the month, with warmer weather the last week of June kicking off the cooling season and providing a boost to prices.

Coal inventories remain in surplus as well, with April stockpiles growing to just over 166 million tons, 9.3% above normal. The growth in inventory corresponds to estimated displacement of coal from natural gas generation resulting from Henry Hub prices declining by 20 cents per mmBtu. Looking ahead to the summer season, robust cooling demand could add 1.5 million tons per week to production, which would drive coal production to levels not seen since the summer of 2015. For the four weeks ending June 24, coal shipments averaged 15.5 million tons, as demand into the summer season picks up. Production levels continue to improve overall, about 24% higher than the same period last year. Inventories remain above normal, and low electricity demand shoulder season may do little to clear them, tending to keep a lid on prices.

Higher natural gas prices have boosted coal demand for the first half of 2017, especially compared to the dramatic loss of demand that occurred during the first half of 2016. However, surpluses linger in both the coal and natural gas markets going in to summer. If electricity demand remains low, growth in coal production could taper during the peak season.

On the improved demand picture for the year, the CAPP and NAPP coal regions are projected to beat 2016 production levels. A firmer natural gas strip, easing coal retirements during the year, and stronger seaborne metallurgical markets all contribute to the improved outlook. The markets for Illinois Basin and Southern PRB are also projected to rebound by 44 million tons this year on improved price competitiveness.

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