Group Coal
Germany's long goodbye to coal dashes power price rise prospect
(Minews) - Germany's deferral of the death sentence for its coal sector still condemns power producers to the suffering of engrained falling prices for electricity, analysts say.

Seeking reductions in carbon dioxide emissions and battling overcapacity in Europe's biggest power market could have prompted Berlin to usher in an aggressive phase-out of old coal-to-power plants, supporting languishing prices.

Instead it decided to set up a coal-fired electricity reserve from 2017 rather than collecting levies from such plants to enforce a speedy closure. That is not seen as radical enough to boost power prices.

Costing 230 million euros ($253.69 million) each year, the reserve is not really intended to be activated, and implies the permanent shut-down of the plants after 2021.

"It makes less than 2 euros difference to the power price by 2020," said Stephen Woodhouse of consultancy Poyry. "We are not talking about anything that fundamentally alters the position of plants in the market."

The compromise decision of July 1 was aimed at deferring the loss of mining and generation jobs by a few years, and opted for a lignite (brown coal) reserve.

This involves 2.7 gigawatts (GW), less than 1.5 percent of nominal power capacity to be removed from supply between 2017 and 2020 in a scheme that will be worked out later this year between utilities and the government.

Since the decision, wholesale forward prices have not shown much change from pricing delivery in 2016 at around 31.80 euros a megawatt hour (MWh) and in 2021 at around 33.75 euros, data from the EEX bourse shows.

The mild contango, which is hedgers' term for a premium on a commodity at a future point, shows little expectation that overcapacity will disappear in a meaningful size while Germany continues on its course to consistently add renewable capacity.

The year ahead position is half its level seen in 2011, held down by oversupply, slack demand at home and in the euro zone's key economies that border on Germany, and the politically desired expansion of green energy.

The alternative option - which had been under discussion for over six months - would have involved a levy on coal-fired plants over a certain age, which could have driven many plants operated by RWE and Vattenfall out of the market.

Apart from costing jobs, this choice might also have removed too much of a safety net for times that renewable production is insufficient, as Germany simultaneously switches off unpopular nuclear plants by 2021.

The latest plan allows savings of between 11 and 12.5 million tonnes of CO2, with some hard coal and gas-fired plants due to replace the "missing lignite" on a 50/50 basis, Deutsche Bank and Bernstein analysts said in research notes.

But traders said the replacements would be more modern, running on less fuel and needing fewer CO2 emissions permits. "All things considered, it will not be bullish for coal," said one.
Publish date : Wednesday 8 July 2015 19:30
Story Code: 25925
Source : Reuters