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Market reassured by Germany's coal exit plan, but questions remain

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Market reassured by Germany's coal exit plan, but questions remain

Germany's planned pathway out of lignite coal power generation by 2038 and the associated compensation packages for affected operators, revealed Jan. 16, should instill confidence in the market, analysts said as the dust settled on the news.

Investors in RWE AG, the German utility that is shutting off 8,520 MW of capacity, the most of any company, were also buoyant, sending its share price to new highs again Jan. 17.

The agreement on the coal exit, yet to be transposed into law, strengthens the business case for RWE's renewables business and brings certainty to the market, analysts at Berenberg Bank said in a Jan. 17 note, adding that the deal "should clear up one of the main distractions to RWE's renewables story." The trajectory of the closures is "more or less in line with expectations," they added.

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While RWE had said it had taken a hit by accepting the €2.6 billion compensation package, Berenberg said the money "covers the majority of the €3.5 billion financial impact of early closure and importantly neutralizes the overall impact on net debt." The fact that a deal has been struck is even more important for the market, it added, "drawing a line" under a key uncertainty.

Research firm Bernstein took a similar view, saying Jan. 16 that the agreement with the government gave RWE "clarity to execute its new renewable strategy," set to be showcased at the company's capital markets day March 12.

Negotiations rumble on

Other companies owning lignite assets in Germany — Lausitz Energiekraftwerke AG, Uniper SE and EnBW Energie Baden-Württemberg AG — have not yet finalized their discussions with the government over their roles in the coal exit and their potential compensation.

Lausitz Energiekraftwerke, a joint venture of Energetický a prumyslový holding a.s. and PPF Investments Ltd., is set to close nearly 7 GW of lignite capacity in the east German mining regions of Lausitz and Mitteldeutschland and is still talking with the government about its coal exit deal. A spokesperson for the company did not comment on its compensation demands or whether the €1.75 billion earmarked for compensating east German operators was palatable.

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Utility EnBW received a "proposal for an early compensation-free shutdown" of its 875-MW Lippendorf lignite plant in the Mitteldeutschland region by December 2035, the company said in an email. EnBW said it is evaluating the proposal and is looking to continue "constructive" discussions with the government.

Power producer Uniper, which is expected to close its Schkopau lignite plants in 2034, noted that Germany's ministry of economy had said no money would be paid for closures after 2030. The ministry did not respond to a request for confirmation Jan. 17.

Uniper's long-delayed Datteln 4 hard-coal power plant is expected to enter service this year. Asked whether the lack of compensation was being accepted in return for the green light for Datteln, a spokesperson for Uniper said, "We don't comment on ongoing talks. But we do expect that binding agreements on hard coal will be made soon. Uniper has always said that it wants to play a constructive part in the coal exit in Germany."

Coal discussion could be back

Not everybody thinks the last word has been spoken on German coal. Patrick Graichen, CEO of think tank Agora Energiewende, tweeted Jan. 16 that the coal issue "has not been politically completed" by the deal. "The planned exit timetable will probably be back for discussion in the next legislative period."

Germans will go to the polls in October 2021 in an election that will see long-serving Chancellor Angela Merkel leave her post.

Graichen said the financial support for affected regions is the only element of the €40 billion deal that is guaranteed. "The rest will be unwrapped again," the CEO said, arguing that German coal plants will be closed earlier than planned, spurred by more ambitious EU-level targets.