Warsaw and Frankfurt -- German Chancellor Angela Merkel's campaign to limit climate change with an energy system based on renewable sources is cutting into profits of companies that still provide 57 percent of the power that keeps Europe's biggest economy humming.
The continent's fivefold increase in solar and wind power in the past decade flooded electricity grids with power, displacing fossil fuels so fast that coal- and gas-dependent utility RWE AG lost money last year for the first time since 1949. Earnings at European coal-fired plants fell 23 percent last year, the biggest drop since 2010. Margins may vanish in the next two years, according to Kepler Cheuvreux SA, a Paris-based broker.
Wind and solar may account for about half of Germany's generation capacity by 2020, from 37 percent in 2013, according to data from Bryan, Garnier & Co. Losses would threaten electricity supplies, Bernhard Guenther, RWE's chief financial officer, said March 4.
"The situation is clear: power plants that can no longer operate economically and that are not needed to maintain system stability will be withdrawn," EON SE's Chief Executive Officer Johannes Teyssen told reporters in Dusseldorf, Germany, on March 12. "If this trend continues unabated, we will very soon see serious capacity shortages. And in that case absolute security of supply would no longer be axiomatic."
Coal plant profitability dropped 11 percent in February and was at 5.96 euros ($8.27) a megawatt-hour today. The so-called clean-dark spread, a calculation based on year-ahead power, fuel and emissions prices, reached a low of 1.22 euros a megawatt-hour in December 2010, according to data compiled by Bloomberg since October 2009.
Margins at gas-plants have been negative since 2012. Losses widened 62 percent to 20.34 euros a megawatt-hour last year.
Utilities from RWE in Essen, Germany, to GDF Suez (GSZ) SA in Paris are losing money at conventional plants as wind turbines and solar panels, which get priority access to the grid, cut into the running hours. The average operating margin, a measurement of profitability, of 15 European electricity generators declined to 11 percent in 2013, from 18 percent in 2006, according to data compiled by Bloomberg.
RWE reported a loss of 2.76 billion euros in 2012 after writing down 4.8 billion euros on assets, mostly power plants, the company said March 4. EON expects profit to fall as much as 33 percent this year after a 46 percent drop to 2.24 billion euros in 2013, Germany's biggest utility said March 12.
Nine out of 10 European coal and gas plants are losing money, Patrick Hummel, an analyst at UBS AG in Zurich, wrote in a report last month. They will endure aggregate net income losses of almost 2 billion euros by 2016, according to the bank.
Germany is replacing fossil fuels and nuclear energy with renewables under its 550 billion-euro energy transformation, or Energiewende. The nation wants green power to supply 40 percent to 45 percent of its needs by 2025, and 55 percent to 60 percent 10 years later.
"Germany has decided to leave behind the decades-old energy mix consisting mainly of fossil fuels and nuclear energy. The vast majority of Germans support this decision," Merkel said in a speech to parliament on Jan. 29. "If there is one political task that must center on people, not on vested interests, it's the energy shift."
The next week, she took the message to a meeting of Germany's biggest business lobbies, including the BDI industry association. She called the energy shift "one of the great tasks" of her third term, which runs through 2017. Merkel's cabinet plans to approve legislation on April 9 to move the renewable-energy plan forward.
The government's legislation will aim to "make sure that German renewable-energy subsidies are in line with European law, while also safeguarding Germany's energy security," Tanja Alemany Sanchez de Leon, an Economy and Energy Ministry spokeswoman, said today.
Wind and solar capacity will increase by 59 percent to 103,572 megawatts of the total 205,033 megawatts by the end of the decade, according to London-based Bryan, Garnier & Co. Hard coal capacity will rise 11 percent and gas will drop 38 percent.
About 35 percent of German oil and gas imports come from Russia. Those supplies could be at risk if the Ukrainian crisis escalates and sanctions banning purchases of Russian gas are introduced, Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects Ltd. in London, said in a research note March 12.
The U.S. and the European Union are threatening sanctions against Russia if it doesn't back down from annexing the Black Sea province of Crimea, which is holding a referendum in two days to join Ukraine's former Soviet-era ruler.
The share of natural gas in Germany's electricity production fell 1.6 percentage points to 10.5% last year as some plants are loss-making, utility lobby BDEW said in January, citing preliminary data.
"Negative spreads can certainly happen, especially in a system like Germany where the renewable generation capacity is more than demand at times," said Stephen Woodhouse, a director at Poeyry Management Consulting in Oxford.
EON doesn't expect negative year-ahead clean-dark spreads, Mike Winkel, a member of the management board, said March 12. The measure is unlikely to turn negative as this would lead to supply cuts and inevitably boost prices, pushing it back to profit, Sikorski said.
While Germany needs to run almost all its thermal generation on cold, windless winter evenings, huge amounts of green energy flood the grid and drive down prices under different weather conditions and at periods of lower demand, RWE said in its annual report.
"Of course dark spreads can turn negative, but then we have to ask ourselves where the power in Germany would come from," Guenther said. "Then the lights would go out."
Europe increased its output from wind turbines and solar panels fivefold to 8.4 percent of power production in the 10 years to 2013, according to data from Energy Brainpool GmbH, a Berlin-based consultant. That compares with a 16-fold gain in production in the U.S. to 3 percent of the total in the decade to 2011 and an 11-fold advance in India to 2.7 percent, U.S. Energy Department data show.
Germany has to ensure that old coal plants drop out of the market while efficient gas units are brought in, according to Oliver Krischer, an energy policy spokesman for the Green Party.
"The old coal plants should enter their well-deserved retirement," Krischer, 44, said by phone from Dusseldorf. "Most of them are a lot older than I am."
Copyright 2013 Bloomberg
Lead image: Illustration of a German city sign, via Shutterstock