Power Plant Capacity Payments Inevitable in Germany, UBS Says

Payments from the German government rewarding hard coal and natural gas-fed power plants for operating during hours of high demand or low renewables output are inevitable by 2017, according to Swiss bank UBS AG.

An increasing number of gas and hard coal plants will no longer be able to recover operating costs by producing and selling electricity at market rates as prices and operating hours shrink, Patrick Hummel, an analyst at UBS, said in an e-mailed report dated today.

Germany gives priority grid access to renewable energy and a surge in supplies has pushed down electricity prices and the number of hours thermal generation is needed to meet demand. The plant payment system would create a so-called capacity market that would allow utilities to fix prices for guaranteeing backup power supply in advance.

“Politics and the regulator have to create an additional source of income, which remunerates the availability of the plant rather than the actual output,” Hummel said.

The German next-month clean-spark spread, a measure of the profit utilities can get from selling electricity after accounting for the cost of natural gas and emissions permits, fell 1.5 percent to minus 21.45 euros (minus $27.87) a megawatt-hour today, according to data compiled by Bloomberg. The measure has been negative since February 2012.

Capacity payments would stabilize profits of hard coal and gas plants just above break-even level, rather than creating “meaningful profitability,” Hummel said. Widespread closures aren’t a viable option because of security-of-supply concerns, he said.

Shutdown Warning

Chancellor Angela Merkel’s government is considering a mandate for power-station operators to inform authorities of a shutdown one year in advance and may block plans in return for compensation payments.

A capacity market in Germany may cost 1 billion euros a year in 2017 and cut current forward electricity prices by 10 percent, Hummel said. German 2014 power declined as much as 0.9 percent to 38.85 euros a megawatt-hour today, according to broker data compiled by Bloomberg.

Lignite, nuclear and hydro plants do not need capacity remuneration until power prices fall below 30 euros a megawatt-hour, Hummel said.

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