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This €1 Billion Power Plant May Never Be Switched on

  • Utilities RWE, EON are biggest losers on DAX Index this year
  • Both companies to separate traditional generation in 2016

Germany’s unprecedented energy shift is turning newly built power plants into white elephants that will never produce any electricity.

Once the backbone that underpinned growth in Europe’s biggest economy, coal and gas plants are being marginalized in a new world where solar and wind are all the rage. With electricity prices at their lowest level in more than a decade, the outlook is now so bad that RWE AG will never start its 1 billion-euro ($1.1 billion) Westfalen-D plant, while EON SE applied this year to close two new unprofitable gas-fired units.

The plants show the struggle the nation’s biggest utilities are facing. The two biggest losers on Germany’s DAX Index this year will both split in 2016 in a bid to adjust their businesses to Chancellor Angela Merkel’s relentless push to increase the nation’s share of renewables in power production to 45 percent in ten years time, from 30 percent now.

“The price decline on the wholesale power market has caused a crisis for conventional assets and there’s a significant excess supply,” said Marc Oliver Bettzuege, managing director of the Institute of Energy Economics at the University of Cologne, who’s studied the markets for more than a decade. “The persistent price pressure changes the profitability calculations for the new construction or completion of power plants.”

Essen-based RWE, which lost more than half its market value this year, said Friday it wasn’t “economically viable” to complete the unit, which has been dogged by delays and defects including a chemical leak. It’s big enough to supply 1.6 million homes.

EON SE earlier this year filed to temporarily close two unprofitable units in Bavaria, now kept in reserve to ensure the country has enough supply to meet demand. Irsching-4 was commissioned in 2011, while Irsching-5 started a year earlier.

Another large EON plant is five years behind schedule. The company expects to receive approval by the district government of Muenster to build and operate the Datteln-4 hard-coal plant next month, said Adrian Schaffranietz, a company spokesman. It may be built within two years of getting its permits.

Industrial Center

Westfalen-D is located in Hamm, a city on the edge of western Germany’s industrial belt. Power stations share the city’s industrial landscape with industry ranging from tube and wire manufacturers to a chemicals plant. On the site there’s also an old RWE reactor from the 1980s, which shut 423 days into an operating life of 40 years because of technical issues and a lack of profitability.

“In the past, energy generation was very important for Hamm,” Mayor Thomas Hunsteger-Petermann, said in an interview. “I don’t dare to comment on the future,” he said. About 500 people work at the city’s power plants, he estimated.

The future of traditional plants also hangs on how fast large-scale batteries that would soak up power on sunny and windy days to be used in reserve later are developed, said Thomas Deser, a fund manager at Union Investment which holds stakes in both RWE and EON.

“Conventional power plants may be threatened with extinction,” once the cost of storing power gets commercially viable, he said.

The nation’s 94 gigawatts of renewable energy is enough to meet peak demand, but that amount of power is only available if the wind blows or the sun shines.

“We’ll need conventional power plants beyond 2050,” said Garrelt Duin, the economy minister in the state of North Rhine-Westphalia, where Hamm is located. There’s a need for backup capacity of at least 50 gigawatts, or about half of today’s conventional capacity, he said.

Plunging Power

As wholesale power prices plunged almost 70 percent from a 2008 peak, RWE and EON lost faith in the future of conventional power generation. Both utilities plan to have a separate company next year focusing on renewables, grid and energy sales, which they expect will be more profitable.

Germany’s clean-dark spread, a measure of the profitability of coal plants based on year-ahead prices, fell 62 percent from a high of 11.81 euros a megawatt-hour in November 2011. Gas plants have been out of the money since 2012, according to data compiled by Bloomberg.

The cost of wind power generation, including construction, fell 12 percent in the past 4 years, while solar dropped by a third in the same period, according to industry lobby groups.

“This makes investments into large central power plants more risky,” said Dirk Uwe Sauer, a professor at the RWTH University in Aachen, Germany. “You commit to a technology for 30 to 40 years.”

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