Dong Misjudged U.K. Power Market in 2009 Purchase of Wales Plant

Dong Energy A/S, Denmark’s biggest utility, mistakenly anticipated power shortages in the U.K. when it bought a gas-fired plant in Wales in 2009 that later became unprofitable, Danish government auditors said.

Dong overestimated demand and underestimated supply before purchasing the 824-megawatt Severn facility from Welsh Power Group Ltd., leading it to assume the U.K. would suffer from a lack of generation capacity, according to yesterday’s report by the national auditor in Copenhagen.

“It would have been appropriate for Dong Energy to assess price and market risks in greater detail before making the decision,” according to the report. The auditor also criticized the Finance Ministry for failing in its oversight of the majority state-owned company’s investments.

Falling prices for emission permits since 2009 have made power production cheaper for U.K. producers that burn coal, displacing gas plants in the nation’s generation mix. European Union carbon allowances for December 2012 fell more than 65 percent since May 2009, when they traded at more than 18 euros ($24) a metric ton, to their December expiration of 6.47 euros.

That has helped boost profits for coal-fired power plants. The clean-dark spread, a measure of power-plant profitability based on coal, power and emission-permit prices, for next-month U.K. power has tripled to 23.70 pounds a megawatt-hour as of 1:21 pm. London time from 7.93 in October 2009 when Bloomberg began tracking the data. The clean-spark spread, a similar measure for gas-fired plants, fell to 1.86 pounds a megawatt- hour from 10.08 pounds in the same period.

Plant Writedown

Dong wrote down about 27 percent of the 5.2 billion-kroner ($929 million) Severn plant investment in the first half of 2012, according to the auditor’s report.

Ulrik Froehlke, a company spokesman based in Gentofte, Denmark, couldn’t comment when reached by phone today. The Finance Ministry won’t comment on the matter until Jan. 30, when auditors give their official statements, a ministry official said from Copenhagen today, requesting anonymity, citing policy.

Dong expects low coal and carbon prices to continue to make gas-fired power stations less profitable than ones operating on coal for the next few years, forcing gas plants to limit operation to a “limited amount of hours,” according to its 2012 first-half earnings statement.

To contact the reporter on this story: Torsten Fagerholm in Helsinki at tfagerholm@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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