LONDON, June 5 – A review of the European Union’s utility sector shows how betting on new and existing coal plants using out-dated business models, that has slashed returns for the bloc’s biggest generators, poses significant future risks for investors.

A new study published today by the London-based Carbon Tracker Initiative entitled Coal – caught in the EU utility death spiral finds that changing market conditions for utilities leaves new coal plants failing to generate positive cash-flows even in the most optimistic scenario.

Highlighting the dangers of continuing to invest in coal-fired generation the report analysed Vattenfall’s new Moorburg hard coal plant in Hamburg, Germany and found that ‘stranding’ is almost inevitable. Modelling of its cash flows found that even if coal prices and carbon prices were low and the load factor high, the power plant struggled to make a profit, making it near impossible to recover its 3 billion euro cost.

“New German coal plants are struggling to break even in an optimistic scenario – there is only downside risk for operators. Utilities need to change their business models and move away from coal to avoid being left with stranded assets that don’t provide a return for shareholders,” said James Leaton, Carbon Tracker’s head of research.

The report is published in the middle of U.N. climate talks in Bonn and ahead of the Group of Seven (G7) summit in Bavaria, two critical meetings that will likely shape the text of the final Paris climate accord in December. It also lands as Norway’s $900 billion sovereign wealth fund, the world’s biggest, is set to withdraw billions of dollars out of coal investments following a unanimous parliamentary committee recommendation.

The committee called for the fund to divest its holdings in companies that generate more than 30% of their output or revenues from coal-related activities. It is almost certainly to be passed by parliament in vote today and this financial analysis explains why capital is fleeing from coal.

The study shows how Germany’s E.ON and RWE, France’s GDF Suez, Électricité de France, and Italy’s Enel, collectively lost 100 billion euros, or 37% of their stock market value from 2008 to 2013. The analysis found evidence that heavily coal-reliant utilities fared worse. Enel, performing best out of the five, generated the most renewable energy as a percentage of total generation, while Germany’s RWE, that performed worst, was more focused on coal generation.

All five, who provide nearly 60% of Europe’s electricity and have been subject to downgrades by Moody’s credit ratings agency, significantly underperformed Germany’s stock market that grew by 18% in the same period.

Profits of the five utilities in the period were hit by a continued reliance on coal-fired generation, renewables policy and technology costs, flat electricity demand and evolving customer needs.

“In many respects, the EU’s electricity sector has been the ‘canary in the coal mine’ with regards to understanding how the low carbon transition will create winners and losers. What has happened in Europe over the last five years should send a stark warning to investors,” said Matthew Gray, advisor to Carbon Tracker and lead author of the report.

“Coal has got caught in the path of the utility death spiral, which is likely to continue wiping out value for shareholders if they keep betting on new coal plants.”

A transformation of the production and consumption of electricity is occurring against a backdrop of falling electricity demand – EU electricity demand actually fell 3.3% in the six year period despite GDP growing by 4.1%.

Not only is the overall level of demand falling — decoupling from economic growth — but the proportion being met by fossil fuels is declining.

Despite claims of a coal renaissance in Europe, use of the fuel in the EU as a whole actually declined 4.7% in total and 4.2% in electricity generation from 2008 to 2013. By contrast, the five utilities covered here, as a collective, increased their reliance on coal generation 9% in the period.

In the future, the death spiral could tighten its grip further. Continued growth of renewable energy, increased energy efficiency and rising carbon prices, will further squeeze out uneconomic coal plants, as operators cannot carry loss-making plants forever.

The companies have recognised that their business models are no longer sustainable, and that they are missing the boat on renewables. Some major investors are already taking note.

As a result we are seeing the restructuring of major European utilities playing out. E.ON, for example, are spinning off their fossil fuel and renewables businesses. This means that large investors such as AXA or the giant Norwegian Government Pension Fund will be able to choose between high carbon and low carbon utility options going forward.