Utilities Shut 12% of Europe Gas Plants; “Utilities have completely failed to anticipate changing carbon prices, coal prices, and the impact of renewables deployment and how these could affect the economics of gas investments”

January 19, 2014 Leave a comment

Utilities Shut 12% of Europe Gas Plants, Oxford Study Shows

Ten of Europe’s biggest utilities mothballed 21.3 gigawatts of gas-fed stations last year, or 12 percent of Europe’s generation fleet, as plants lost money for a second year, according to an Oxford University study.Six of the utilities, including GDF Suez SA and RWE AG, reported impairment charges on their European generation assets in 2013 equivalent to 6 billion euros ($8 billion), the study shows. Gas-fired generation in Germany, Europe’s biggest power market, won’t be profitable before 2019, according to data compiled by Bloomberg. Negative clean-spark spreads, a measure of plant profitability, falling power demand and an increase in renewable energy contributed to the closures, the study said.

“Utilities have completely failed to anticipate changing carbon prices, coal prices, and the impact of renewables deployment and how these could affect the economics of gas investments,” Ben Caldecott, director at Oxford University’s Smith School of Enterprise and Environment, said by phone yesterday. “Energy markets have seen high-performing gas plants rendered stranded assets, while coal generation has gained market share.”

Gas-plant profitability has been in decline since 2009 and utilities have been losing money by burning the fuel for power since 2012, according to data compiled by Bloomberg. Governments are concerned that security of supply may be reduced as these plants shut and are contemplating so-called capacity mechanisms to pay utilities for making plants available during times of peak demand, according to the report.

The German next-year clean-spark spread dropped 62 percent in 2013, according to data compiled by Bloomberg. The measure was at minus 20.42 euros a megawatt-hour today and will remain negative as far as 2018, the data show.

Coal Prices

European coal prices declined as increased U.S. shale gas production damped domestic demand from power stations, increasing supply and making coal more profitable than gas in Europe, Oxford University said in the report. Next-year coal prices slumped 28 percent since Jan. 1, 2011, according to broker data compiled by Bloomberg.

Coal plants emit about twice as much carbon dioxide as gas facilities. The European Union has a target to cut emissions by 20 percent from 1990 levels by 2020.

“We need markets that are going to strand the most polluting assets, not the least polluting ones,” Caldecott said.

About 8.8 gigawatts of the European gas plants that closed last year were either built or acquired within the last 10 years, according to the study. One gigawatt is enough to supply about 2 million European homes.

The 10 utilities in the study were EON SE, RWE, Statkraft AS, Vattenfall AB, GDF Suez, Centrica Plc (CNA), SSE Plc (SSE), Verbund AG (VER), EnBW Energie Baden-Wuerttemberg AG (EBK) and CEZ AS.

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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