Coal Era Beckons for Europe as Carbon Giveaway Finishes

Coal Era Beckons for EU as Carbon Giveaway Ends
Power producers from EON AG to RWE AG will open six times more coal-burning plants than gas-fed units by 2015, UBS AG said in a Sept. 5 research note. Photographer: Hannelore Foerster/Bloomberg

European utilities are poised to add more coal-fired power capacity than natural gas in the next four years, boosting emissions just as the era of free carbon permits ends.

Power producers from EON AG to RWE AG will open six times more coal-burning plants than gas-fed units by 2015, UBS AG said in a Sept. 5 research note. Profits at coal-fired power stations may more than double by then, according to a Goldman Sachs Group Inc. report published on Sept. 13.

The new stations, replacing atomic and aging fossil fuel-based plants, will boost demand for emission permits because coal-fired generators need twice as many credits as gas users under climate protection rules. The price of UN credits may rebound 73 percent by the end of next year from an all-time low on Sept. 18, according to the Euro Carbon Macro Fund in Luxembourg, which manages about $32 million.

“The economics for coal are near the best we’ve seen in five years,” Laurent Segalen, a director at ECMF, said yesterday in an interview from London. Buying UN credits for 2013, after they plunged almost 80 percent in the past year, is “an amazing bargain,” he said.

UN offsets, known as Certified Emission Reductions, for next year had their biggest weekly decline through Sept. 14, losing 29 percent of their value. Credits for delivery in 2013 gained 1.9 percent today to 2.10 euros ($2.73) a metric ton, on the ICE Futures Europe exchange in London. European Union permits for next year fell 2.9 percent to 7.46 euros.

World’s Biggest

Carbon is falling as the European Commission seeks to fix a glut of permits through 2020 in the world’s biggest greenhouse-gas market by traded volume. This year’s supplies have been inflated by credits that the European regulator has banned and need to be handed in by emitters before May.

“The outlook for CERs will improve in the second half of next year,” Matthew Gray, an analyst and trader at Jefferies Group Inc. in London, said by phone Sept. 19. Prices may rise to 2.25 euros by December 2013, he said.

CERs will probably climb to 3 euros in the same period, said Segalen, whose fund has gained 18 percent since its inception in January last year. They may struggle to rise above that, Trevor Sikorski, a director of European energy markets research at Barclays Plc in London, said yesterday by phone.

Utilities will add as much as 10,600 megawatts of new coal plants in seven central European countries in the next four years, compared with 1,600 megawatts of new natural-gas capacity, Patrick Hummel, a UBS analyst in Zurich, said in the report. Generators will retire 3,400 megawatts of stations burning coal in the same period, he said. A thousand megawatts can supply power to about 2 million European homes.

Boom Years

“The buildout has nothing to do with low carbon prices,” Hummel said by e-mail on Sept. 14. “All these projects were already decided and kicked off several years ago, during the boom years of the utilities sector.”

The next-year German power price, the regional benchmark, has fallen 47 percent since exceeding 90 euros a megawatt-hour in July 2008, according to broker prices compiled by Bloomberg. It closed at 48.11 euros yesterday.

Coal plants can boost profit 58 percent by using UN offsets instead of EU permits for as much as 20 percent their compliance needs, according to a Bloomberg clean-dark spread calculator, which takes the cost of the fuel, power and carbon into account. German profits based on prices for next year will reach 15.69 euros a megawatt-hour with a CER, compared with 9.96 euros using an EU permit. Stations burning natural gas make a loss under both scenarios, the calculations show.

Goldman Sachs

Northwest Europe’s coal-fed capacity will rise 4.6 percent next year to 68,000 megawatts and 3 percent to the same level for gas-fired power stations, Deborah Wilkens, an analyst at Goldman Sachs in London, said in the report last week. Capacity will drop after 2013 for both fuels and margins at coal-fired plants may rise as high as 26 euros by 2015, she said.

UBS’s estimates for new coal plants show that Connie Hedegaard, Europe’s climate commissioner, needs to succeed in her attempt to fix the glut in the region’s cap-and-trade system to protect the reputation of carbon markets, Mark Owen-Lloyd, a trader at Leap Trading Ltd. in London and formerly at EON, said on Sept. 11 by phone.

Hedegaard in July proposed to withhold an unspecified amount of carbon permits temporarily from auctions planned in the three years starting in 2013. They would be returned to the market later this decade.

“The worry is her plan to delay supply will merely move the problem to five years down the track,” Owen-Lloyd said.

Isaac Valero-Ladron, a spokesman for Hedegaard, did not immediately comment.

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