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Four Reasons German Utility Chiefs Face Sleepless Nights

May 3, 2016 — 12:00 AM CDT
Updated on May 3, 2016 — 5:26 AM CDT
With power prices in Germany, Europe’s biggest market, languishing near 13-year lows, utilities relying mainly on fossil fuels have rarely had it this bad as they get squeezed by wind and solar.

“I spent days and nights considering all options” to save dividend payments, Peter Terium, RWE AG’s chief executive officer, told shareholders in Essen on April 20.

The collapse in wholesale prices eventually forced his hand and Germany’s biggest electricity producer for the first time in about half a century suspended annual payouts to most of its shareholders. Here are four charts showing how and why the conventional fossil-fuel utility model is straining as the region favors renewable energy to cut carbon dioxide emissions.
Slumping Prices

Even the newest lignite power plants need an electricity price of about 23 euros ($26.19) a megawatt-hour to cover cash costs, said Lueder Schumacher, an analyst at Societe Generale SA in London. Lignite, a rock formed from compressed peat that has been a mainstay of German power generation for almost a century, accounted for 24 percent of the nation’s energy last year. For older, less efficient plants, the price required to cover cash costs is as high as 39 euros, he said.
Wind Pushing Coal Out

German wind generation jumped 47 percent last year to average 9,104 megawatts a day, data from the European Energy Exchange AG on Bloomberg show.

“When the wind blows really hard, the utilities have to ramp down because prices are so low,” said Deepa Venkateswaran, an analyst with Sanford C. Bernstein & Co. in London. “The more stop-start the power production is, utilities will either have lower longevity for their plants or they’ll need to spend more to maintain them.”

Lignite plants were previously built to run continuously. RWE has reconfigured its fleet, the biggest in Germany, to react to wind. It can now cut capacity by half in as little as 30 minutes to respond to surges in renewable energy, according to the company.
Investor Skepticism

The cost of insurance against a default at RWE, the region’s biggest emitter, was near a record in March. By comparison, Iberdrola SA’s credit-default swap is 41 percent cheaper. The Spanish utility embraced the renewables revolution earlier than RWE, diversified geographically and also cut debt, improving its credit quality, said Nadege Tillier, utilities credit analyst at ING Groep NV in Amsterdam.

Germany’s government is negotiating with utilities to close coal plants, which along with nuclear shutdowns will cost about 25,000 jobs, according data from association Deutsches Atomforum e.V. and Deutscher Braunkohlen-Industrie-Verein e.V.. Shutting coal-fired stations immediately after forcing through nuclear shutdowns would incur large costs and might “destroy” a company like RWE, Germany’s biggest power producer, Tillier said.

RWE declined to comment.

“The German government doesn’t want to see RWE, or part of RWE, going bankrupt,” Tillier said. “In the last 12 months, the government has decided to negotiate rather than impose measures” to close power plants.

RWE was the biggest loser last year on Germany’s main DAX index with a 54 percent drop. EON, the nation’s biggest utility, slid 37 percent. RWE has gained 6 percent in 2016, while EON has dropped 2 percent compared with DAX’s 7.4 percent slump.
Gloomy Outlook

Even as the German government is considering paying utilities to close plants, power producers are selling coal-generated electricity into forward markets before margins shrink even further or become negative because of a glut of power, said Bruno Brunetti, senior director for electricity at Pira Energy in New York. While margins from cleaner burning natural gas are improving, they’re not yet in profit -- even after five years of losses.

“The German power market is on an unsustainable path,” Brunetti said.