If market price is the benchmark for compensating the early closure of coal assets, this makes a mockery of compensation claims by RWE, according to the Institute for Energy Economics and Financial Analysis (IEEFA).
According to the IEEFA, recent deals indicate that Germany’s coal and lignite power plants and mines have very low value, meaning that compensation claims by Germany’s biggest utility, RWE, under the country’s pending coal phase-out plan are unreasonably high.
RWE wants to be compensated for the premature closure of its coal power plants in line with generous payouts of the past, a position that the IEEFA said ignores the darkening outlook for coal mining and generation, and which pits the company against genuinely affected mining communities for precious taxpayer funds.
German Chancellor Angela Merkel’s government last year commissioned a panel to find a pathway for closing the country’s remaining 43 GW of coal-fired power stations while addressing the effects on coal-dependent communities.
Germany has struggled to meet targets to tackle climate change, as a result of continued dependence on power plants that burn imported hard coal, as well as lower quality German brown coal (lignite).
“The coal exit panel published its findings on 1 February, recommending a final coal phase-out by 2038 or sooner, and proposing billions of euros for affected coal mining communities,” the IEEFA stated.
“The panel was vague on compensation for affected power plant operators, however, saying only that this should be hammered out bilaterally, based on previous compensation levels for plant closures.
“In the resulting uncertainty, RWE has duly made a bid, for ‘at least’ €1.2B (US$1.4B) for every gigawatt of power generation it loses, implying a total of €19B for the company’s 11 GW of lignite and 5 GW of hard coal operations. RWE has based half this claim (€600M per GW) on a previous scheme for mothballing ageing coal power plants, and the rest on compensation for shutting mines.
“The scheme RWE is basing its claim on – the ‘standby capacity reserve’ – in 2015 offered compensation of €1.6B, to some 2.73 GW of lignite generation, or €586M per GW. The European Commission approved the scheme, finding no evidence of illegal state aid in the estimates of lost profits by the affected utilities: RWE, Mibrag and EPH.
“It could be argued that the standby reserve compensation was too generous, forcing energy consumers to foot the bill for closing assets with an average age of 42 years.
“Utilities routinely depreciate their thermal power plants over a period of up to 40 years (RWE applies a 10-40 year rule), meaning that they are then fully paid off, have zero book value, and the utility faces no impairment charge from closing them.
“Regardless, there are important differences between the 2015 scheme and the present day. Compensation under that historical scheme applied to lignite, while the present phase-out also applies to less profitable coal. And the coal phase-out will be extended over a period of nearly two decades, rather than the four-year mothballing of the standby reserve.”
The Institute pointed out that times have changed since the Paris Climate Agreement in 2015, significantly achieving a global consensus later that year on actions that doomed the coal power sector in developed economies.
The International Energy Agency estimated that the Paris Agreement implies near-zero coal-fired generation in Europe by 2030 (see graph).
Investors are acting on such analysis. In a letter to the Financial Times in late December, more than 90 major investors collectively representing assets worth US$11.5T called for a coal phase-out. They said: “We expect explicit timelines and commitments for the rapid elimination of coal use by utilities in EU and OECD countries by no later than 2030, defining how companies will manage near-future write-downs from fossil fuel infrastructure.”
As a result of these and other headwinds, including rapidly rising European carbon prices, valuations of coal assets have plummeted.