Merkel Facing Power Dilemma as Coal Plants Open: Energy Markets

Photographer: Sepp Spiegl/Bloomberg

Even as the $757-billion energy shift boosts renewable power output to 35 percent of total supply by 2020, from 23 percent now, Merkel will be more reliant than ever on fossil fuels to drive Europe’s biggest economy on cloudy and still days. Close

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Photographer: Sepp Spiegl/Bloomberg

Even as the $757-billion energy shift boosts renewable power output to 35 percent of total supply by 2020, from 23 percent now, Merkel will be more reliant than ever on fossil fuels to drive Europe’s biggest economy on cloudy and still days.

Germany, Europe’s biggest power market, is poised to open its first new coal-fired plants in eight years, just as prices slump because of a glut of electricity.

GDF Suez SA, Trianel GmbH and Steag GmbH will bring three new plants online by December, enough to supply more than 4.4 million homes. The nation is already producing so much electricity that exports will surpass last year’s record in 2013, according to the Fraunhofer Institute for Solar Energy Systems in Muenster, Germany. Power prices may slide 12 percent by 2016, according to UBS AG in Zurich.

Chancellor Angela Merkel, who before the Sept. 22 election said revising the nation’s renewable energy law was her first priority, plans to shut Germany’s nine nuclear reactors within a decade, replacing the round-the-clock output with intermittent solar and wind plants. Even as the $757-billion energy shift boosts renewable power output to 35 percent of total supply by 2020, from 23 percent now, Merkel will be more reliant than ever on fossil fuels to drive Europe’s biggest economy on cloudy and still days.

“Merkel’s government has put itself in a dilemma,” said Danny Graefe, who has traded power and natural gas for four years at AVU AG fuer Versorgungs-Unternehmen in Gevelsberg, Germany. “On the one hand it is promoting green energy, on the other hand, we see all those hard coal plants coming online now. I don’t see anything bullish in the power market.”

Losing Streak

German power for next-year delivery is headed for a third annual decline, its longest losing streak since trading began on the Leipzig, Germany-based European Energy Exchange AG in 2002. Power fell 17 percent this year to 37.47 euros a megawatt-hour at 3 p.m. Berlin time, according to exchange data compiled by Bloomberg. The Standard & Poor’s GSCI gauge of 24 commodities fell 5.7 percent in the period and the MSCI All-Country World Index of equities advanced 17 percent.

Wholesale costs declined almost 60 percent since their peak in 2008 amid record renewable output and two years of weakening demand, according to AG Energiebilanzen e.V., an association of energy lobbies and research institutes. Europe’s biggest economy consumed 606 terawatt-hours last year, the least since 2009.

The three new plants mark the start of Germany’s (GRGDPPGQ) biggest new-build program since its power market was liberalized in 1998. The units will boost the nation’s hard-coal capacity by 8.5 percent, and the total generation ability by 1.2 percent, according to data compiled by Bloomberg.

New Renewables

“With additional renewables and efficient thermal plants entering the system, we believe the downward pressure on power prices toward about 33 euros a megawatt-hour will continue until 2016,” said Patrick Hummel, an analyst at UBS in Zurich.

Steag will start commercial output at its 725-megawatt plant near Duisburg in the “next few days,” Juergen Froehlich, a spokesman based in Essen, Germany, said Oct. 30.

Trianel, an Aachen, Germany-based producer and energy supplier owned by more than 100 regional utilities, will start a 750-megawatt unit outside Dortmund by the end of December. GDF Suez (GSZ)’s 731-megawatt plant in Wilhelmshaven on the North Sea coast will also start by then, according to data from Bundesnetzagentur, the Bonn-based grid regulator. A supply of 1,000 megawatts powers 2 million European homes.

“Investment decisions for those coal plants were made around 2008 or before, before Germany’s nuclear phase-out plans and when power prices were still high,” said Konstantin Lenz, the Berlin-based managing director of Lenz Energy, an energy markets adviser.

Nuclear Exit

The profit for hard coal-fired plants in Germany, based on next year’s power, coal and emissions prices dropped 7.5 percent in the past 12 months, according to broker data compiled by Bloomberg. The clean-dark spread was at 8.70 euros a megawatt-hour today.

“Right now is indeed not an ideal point of time to start a new hard coal-fired plant,” Alexander Kox, head of Trianel’s energy business, said Oct. 31 by e-mail. “We still opted for running the plant as we’d have to pay for the fixed costs, especially for interest and debt retirement, even if we don’t run the plant.”

The last German coal plant to start generating power was Grosskraftwerk Mannheim AG’s 255-megawatt GMK-6 in Mannheim. It opened in December 2005, the year power prices jumped a record 42 percent on EEX.

The power glut is poised to widen because utilities plan to add 9,397 megawatts of mainly coal and gas-fired plants by 2015, including two units at RWE AG (RWE)’s 1,530-megawatt Hamm plant next year, grid-regulator data show.

Nuclear Reactor

Utilities will shutter less than a third of that, or 3,077 megawatts, in the next two years, the data show. EON SE, Germany’s biggest utility, will close its 31-year-old 1,275-megawatt Grafenrheinfeld reactor on Dec. 31, 2015 after Merkel decided to abandon atomic energy within the next decade after the Fukushima nuclear disaster in Japan in March 2011.

The glut spurred Societe Generale SA analyst Paolo Coghe to cut his forecast for the average price of electricity delivered in 2015 and traded next year by 7.3 percent to 36.7 euros, according to a Sept. 16 report.

“Between today and the end of 2016, the German power system will be more than adequately supplied thanks to existing and planned new generation, moderate retirements and chronically muted demand,” Coghe, said. Consumption will stagnate this year and rise 0.5 percent in 2014, he said.

Expanding Economy

Germany’s economy expanded 0.7 percent in the second quarter, after no growth in the first three months of the year. Europe’s biggest economy will expand 1.7 percent next year, from 0.5 percent in 2013, according to the median of 47 economist estimates compiled by Bloomberg.

The nation’s year-ahead power contract will probably slide to 35 euros by the end of next year, according to Ingo Becker, the head of utilities research at Kepler Cheuvreux, a brokerage in Frankfurt.

At least three of the nation’s biggest power plants being built have been delayed because of public protests and legal action by environmental groups. A court in Muenster stopped the construction of EON’s Datteln-4 coal plant in June 2012 after green groups said the unit was built too close to a residential area. The 1,100-megawatt plant is two years behind schedule and the Dusseldorf-based utility needs a license to complete it.

Swedish Utility

Germany’s 13-year-old renewable energy law, known as EEG, is designed to increase the share of electricity from green sources to 80 percent by 2050 and gives priority grid access to solar and wind over coal, gas and nuclear.

New coal plants and the renewable energy boom, with wind and solar power flooding the grid on sunny and windy days, will probably push net exports to 30 terawatt-hours this year, from 23 terawatt-hours in 2012, said Bruno Burger, a Fraunhofer researcher.

Angela Merkel, who is currently in talks with the Social Democratic Party to form a coalition government, vowed to change the clean-energy subsidy system after she won a third term in the Sept. 22 elections.

“We won’t comment on the question of new coal plants right now, as coalition talks are currently dealing with this issue,” Nikolai Fichtner, a spokesman for the German environment ministry in Berlin, said Nov. 1 by e-mail.

Reserve Power

With gas-fired generation in Europe unprofitable until at least 2016, according to data compiled by Bloomberg, coal-fired plants act as the main backup to solar and wind power, while emitting twice as much carbon dioxide as natural gas.

The profit from burning coal next year compared with the loss from using gas rose to 27.35 euros a megawatt-hour on Oct. 11, the most in at least four years.

“Coal and lignite will continue to play an important role when it comes to complementing the fluctuation of renewable energy,” Hildegard Mueller, head of BDEW, the Germany utility lobby, said. “If you want the energy transition to succeed you won’t be able to renounce coal from the German energy mix for the foreseeable future.”

To contact the reporter on this story: Julia Mengewein in Frankfurt at jmengewein@bloomberg.net

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

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