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(June 2015) In this report we analyse the EU’s largest 5 power generators: Électricité de France (EDF), GDF Suez, Enel, E.ON and RWE, who collectively represent nearly 60% of Europe’s electricity generation, during the period between 2008 and 2013 to help understand:

  • why they lost so much value;
  • the viability of new coal in Europe based on our assessment of future market conditions.

EU electricity markets shifting. On a market capitalization basis, the EU’s largest 5 power generators have collectively lost over 100 billion euros (or 37% of their value) from 2008 to 2013. In contrast, Germany’s stock market increased 18% over the same period. The utility death spiral has called into question the old utility business models. Renewable energy technology, environmental and air quality concerns, and evolving customer needs are transforming the production and consumption of electricity. As a result we are seeing the restructuring of major European utilities to split fossil fuel and renewables businesses.

Figure 1. Market capitalisation of surveyed utilities

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Source: Bloomberg LP data

 

Electricity demand and GDP decoupling. EU electricity demand fell 3.3% from 2008 to 2013, whilst GDP grew 1%. This improved efficiency of economies demonstrates that continued economic growth is not necessarily dependent on parallel growth in energy.

Figure 2. EU electricity demand versus EU GDP and  electricity intensity of GDP (1995 = 100)

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Source: Eurostat data

 

Not only is the overall level of demand falling, but the proportion being met by fossil fuels is declining. Yet utilities have been banking on business as usual which has led to oversupply and excess fossil fuel capacity. In the face of increased competition, EU coal-fired generation fell 4.2% over the 2008-2013 period. However, some of the largest utilities have maintained significant coal capacity, led by RWE which still had more than half of its generation based on coal as of 2013.

Figure 3. Coal (hard and Lignite) generation from 2008 to 2013, GWh

 

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Source: Bloomberg LP data

 

Risk of stranded assets increasing. We evaluated how developments in carbon pricing, energy efficiency and renewable energy will impact fossil generation in Europe in the future and found: (1) reform of the EU’s Emission Trading System (EU ETS) could see carbon prices average 9.7 €/t over the next five years and 19.4 €/t from 2020 to 2030; (2) continued gains in energy efficiency will likely continue to dissipate demand for electricity; and (3) renewable energy generation will continue to increase beyond 2020, as onshore wind and solar PV compete with fossil and nuclear generation on an unsubsidised basis.

New German coal plant economics don’t add up – Moorburg plant case study. To give an idea of the future prospects of new coal plants, we analysed the viability of one of the few recent additions. Our analysis of Vattenfall’s newly built Moorburg plant shows capital costs of over €3 billion are unlikely to be recovered. Even if coal prices are low, carbon prices are low and the load factor is high, the new plant struggles to turn a profit. Under our optimistic and pessimistic modelling scenarios the Moorburg plant would be cash-flow negative throughout its project lifecycle, potentially generating a negative Net Present Value (NPV) range of €2.6 billion to €3.7 billion. This analysis should serve as a warning to shareholders in companies who are considering developing new coal plants in OECD countries.

 

Lessons for Investors

This report highlights the financial consequences of ignoring the transition to a low carbon economy. The false comfort of the status quo has cost the surveyed utilities dearly. There appear to be no signs of improvement for E.ON and RWE. In its 2014 annual report, E.ON wrote off €4,802 million in 2014 for unscheduled impairments on fixed assets.[1] Similarly, in its 2014 annual report, RWE detailed unscheduled impairments of €600 million on power stations in the UK and Germany alone.[2] The RWE Chief Executive Officer Peter Terium recently described German energy policy as an existential threat: “The so-called climate contribution for conventional power stations affects our very existence.”[3]

In the context of this report, we offer two recommendations.

  • New German coal plant economics don’t add up – shareholders should challenge utilities proposing new plants in OECD markets.
  • European utilities need a new business model/structure to reflect the changing market conditions.

 

[1] E.ON, 2014; Annual Report; Available: http://www.eon.com/en/about-us/publications/annual-report.html

[2] RWE, 2014; Annual Report; Available: http://www.rwe.com/app/wartung/hv2014/bpk_docs/RWE-Annual-Report-2014.pdf

[3] Bloomberg LP, 2015; RWE Says Germany’s Coal-Power Policy Threatens Its Existence; Available: http://www.bloomberg.com/news/articles/2015-04-23/rwe-chief-says-german-coal-power-policy-threatens-its-existence