Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Savvy European utilities shield themselves from higher carbon costs

Published 08/30/2018, 08:08 AM
Updated 08/30/2018, 08:10 AM
© Reuters. FILE PHOTO: The Uniper coal power plant in Hanau

© Reuters. FILE PHOTO: The Uniper coal power plant in Hanau

By Vera Eckert and Nina Chestney

FRANKFURT/LONDON (Reuters) - The surging costs of carbon permits have caused some of Europe's biggest utilities to lock in purchases in advance, while nuclear and hydro firms are benefiting from the knock-on effect on power prices.

Carbon permits traded under the EU's Emissions Trading System (ETS) have become the best performing commodity this year, almost trebling in price to over 21 euros ($25) a ton since January on the back of stronger energy prices and measures to reduce supply.

The ETS, which charges power plants and factories for every ton of carbon dioxide they emit, has suffered from excess supply since the financial crisis which dragged prices down to lows of 2-3 euros a ton.

Now at 10-year highs, stronger carbon prices make it more expensive for European utilities to burn fossil fuels, encouraging a shift to cleaner energy sources.

Prices are expected to keep rising, according to a Reuters survey of analysts last month.

Market participants can hedge their exposure to rising prices by buying enough carbon permits when the price is low to cover their future emissions output.

If they have a surplus, they can sell them back to the market and make a profit when the price rises. If they don't have enough, they would have to buy more at a higher price.

"Higher carbon prices mean higher costs for all European utilities, unless of course they hedged or stockpiled allowances," said French energy consultant Hibault Laconde.

One such company is coal-heavy German generator RWE (DE:RWEG), which said it had protected itself against power price volatility by selling fuels, as opposed to selling power production, and simultaneously buying enough emissions permits.

"Our CO2 position is already financially hedged until the end of 2022 and we have also taken steps beyond 2022," chief financial officer Markus Krebber said during recent half-year earnings calls with analysts.

COAL

Coal plants have benefited for years from low carbon prices which kept operational costs down.

Many old German coal plants could be operated at low overheads and they were the price setters in the wholesale market for thermal generation.

RWE's hedging strategy involves nuclear and brown coal-generated power being sold usually up to three years in advance and hard coal and gas-fired ones closer to production.

Rival Uniper (DE:UN01) said it sold the bulk of its hydroelectric output next year. The rise in carbon prices will force inefficient coal plants out of the market, chief financial officer Christopher Delbrueck said this week.

Berlin-based Aurora Energy Research said German producers of coal from locally-mined lignite, a heavily polluting brown coal, such as Leag, EPH and RWE, had reason to worry.

The carbon price rise to 21 euros from 6 euros a year ago could have produced additional costs of 2.3 billion euros, according to Aurora analyst Hanns Koenig.

In coal-reliant Poland, the country's four major state producers are historically heavily exposed to coal generation.

Tauron's chief executive has called the EU carbon price a quasi-ecological tax.

"This is not a comfortable situation for us. Because of the CO2 policy, energy could become a luxury good," he was quoted as saying by state news agency PAP at the weekend.

POWER PRICE GAINS

For companies producing electricity from low-carbon nuclear and hydroelectric plants, higher carbon prices are welcomed.

The wholesale price of power reflects the cost of buying carbon permits and fuels. Coal and gas prices have risen this year due to Chinese demand, a cold winter and a heatwave across Europe. The benchmark German power price is at a six-and-a-half year high.

France's EDF (PA:EDF), which has a generation fleet made up of 77 percent nuclear and 10 percent renewables, should produce more competitive electricity in interconnected European markets.

"The higher CO2 prices are a huge jackpot for EDF as they drive up wholesale power market prices ... This is the case for all nuclear and hydro power producers," said Nicolas Goldberg, energy specialist at Columbus Consulting.

A spokesman for Swedish utility Vattenfall said price rises supported its strategy of becoming less reliant on fossil fuels.

"If current price developments continue, we expect a gradual decrease in profitability of coal-fired assets. However, our diversified portfolio with a significant (combined heat and power) share is rather robust to such developments," he added.

Germany's Uniper, which has inherited the thermal and hydro plants of former parent E.ON (DE:EONGn), said it had factored in significant price increases for carbon, coal and gas-fired power in the coming years.

"That will give our earnings a boost from 2020/21," CFO Delbrueck said.

Germany's E.ON is focusing on low-carbon power, grids and retail activities, and is left with nuclear power production only in Germany and Sweden, where it also operates hydropower.

Czech nuclear, coal and renewable generator CEZ (PR:CEZP) has sold over 77 percent of its expected 2019 output, benefiting from a higher share of nuclear than pure coal generators.

Some analysts say a carbon price around 20-30 euros could encourage more utilities to switch to lower carbon fuels.

Gas-fired power generation becomes more competitive at a carbon price of round 20 euros a ton.

However, margins for gas-fired plants are still mostly negative, despite a cleaner carbon record, as high oil and gas prices mean high purchasing costs for generators vis-à-vis coal.

Uniper's Delbrueck said it should be closer to 30 euros to get a stronger fuel switch.

© Reuters. FILE PHOTO: The Uniper coal power plant in Hanau

($1 = 0.8551 euros)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.