Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Savvy European utilities shield themselves from higher carbon costs

Stock MarketsAug 30, 2018 08:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© 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 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.


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.

($1 = 0.8551 euros)

Savvy European utilities shield themselves from higher carbon costs

Related Articles

Apple Daily editor, CEO denied bail in Hong Kong
Apple Daily editor, CEO denied bail in Hong Kong By Reuters - Jun 19, 2021 10

By Jessie Pang HONG KONG (Reuters) -Two executives of Hong Kong pro-democracy newspaper Apple (NASDAQ:AAPL) Daily, charged under a national security law, were denied bail on...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email