Germany’s largest power generator is emerging as the biggest loser in the country’s shift to renewable energy.
EON SE, the worst-performing stock in Germany’s benchmark DAX index (DAX) for the first year since the company was formed in 2000, has ripped up earnings forecasts as a surfeit of electricity from wind turbines and solar panels makes its fleet of gas-fired plants unprofitable. In contrast, RWE AG (RWE) has gained 16 percent because EON’s closest rival has more cheap-to-run coal stations better able to compete with renewables.
The divergence shows the challenges for traditional power generators posed by German energy policy, designed to cut carbon emissions while phasing out nuclear power. Wholesale power prices have dropped 11 percent this year as wind parks and solar farms join the grid. The difference between fuel prices means generators lose about 13 euros ($16.80) for each megawatt-hour they produce from gas, while making 10 euros from coal.
“Gas-fired power stations have become inefficient because the wholesale prices for electricity decreased so much,” said Thomas Deser, a portfolio manager at Union Investment GmbH, which owns shares of both Dusseldorf-based EON and RWE. “The utilities lose market share due to the preferred feeding into the grid of renewables.”
Chancellor Angela Merkel is shifting Germany away from nuclear power in favor of renewable sources such as solar and wind following the meltdown in Japan last year. Her government intends to raise the share of renewables to about 40 percent by the end of the decade, up from 26 percent in the first nine months of this year, and to 80 percent by 2050. The plan may cost 200 billion euros, according to the DIW economic institute in Berlin.
German windmills produced 35 billion kilowatt-hours in the first nine months of the year, up from 32.5 billion kilowatt- hours a year earlier, according to the BDEW utility lobby. At the same time the share of wind power in German power generation rose to 8.6 percent from 8 percent.
The difference between Germany’s largest utilities is their generation mix. Essen-based RWE benefits from generating 63 percent of its energy from coal in the first nine months of the year, about twice EON’s share.
“There’s not much that EON can do except shut down unprofitable gas-fired plants,” said Ingo Becker, an analyst at Kepler Capital Markets. “Gas-fired plants are pushed out of the market through massive expansion of renewables.”
The German clean-dark spread, a measure of profit that utilities can earn from selling coal-generated power after accounting for the cost of carbon-emission permits, is about 10 euros a megawatt-hour for the year ahead, according to data compiled by Bloomberg.
RWE generated 18 percent of its energy from gas, about two- thirds of EON’s share. Utilities are set to lose about 13 euros a megawatt-hour from burning gas for the year ahead in Germany, according to broker data compiled by Bloomberg.
Generating from gas “is very problematic not only in Germany, but in the whole of northwestern Europe,” RWE’s Chief Financial Officer-designate Bernhard Guenther said last month.
EON Chief Executive Officer Johannes Teyssen acknowledged the difficulty last month when he said the company wouldn’t meet next year’s earnings forecasts because of the challenges for the company’s gas-fired fleet.
“We face huge challenges, particularly in our generation business,” he said.
EON shares have dropped 17 percent this year, twice as much as ThyssenKrupp AG (TKA), the second-worst performer in the DAX index of Germany’s 30 leading companies. The company and its predecessors have never been the worst performer in the index, based on data going back to 1993.
Gas utilities face challenges across Europe. GDF Suez (GSZ) SA yesterday declined the most in four years in Paris trading after Europe’s largest utility by market value forecast lower earnings next year and weakness in 2014.
EON shares today closed down 0.6 percent to 13.90 euros in Frankfurt. RWE dropped 0.8 percent to 31.54 euros.
RWE, Europe’s biggest air polluter, started to operate a new 2,200-megawatt coal-fired power plant near Cologne in August. One of EON’s newest gas-fired power plants, Irsching 5 in Bavaria, has operated for less than 1,600 hours so far this year, compared with 4,000 hours a year earlier, according to EON, and may be temporarily closed. Irsching’s older unit 3 has only operated for 87 hours.
That has consequences not only for Germany’s two biggest utilities but also for the environment.
“Germany is currently switching from nuclear to coal, and from gas to coal -- about the worst thing that could be done from a climate change perspective,” Dieter Helm, an energy policy professor at the University of Oxford, said by e-mail. “Its current energy policy is not going to reduce its real emissions.”
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