The global financial crisis could prevent Germany from building enough coal-fired power plants to safeguard its future electricity supply. Germany needs to replace most of its coal-fuelled stations over the next decade and many new coal plants are planned because of strong public opposition to nuclear power and concerns about relying too heavily on gas.
New coal projects already face strong public opposition over their carbon emissions and tougher penalties for operators under the European Union's emissions trading scheme. These obstacles now seem less important than the rising cost of scarce capital to build the new power stations Germany needs.
"There is no indication that prices to build plants are easing and it will become increasingly difficult to get credit for projects unless they can be financed from the cash flow," said Felix Matthes of the Oeko-Institut think tank. Germany, Europe's biggest electricity market, has built 8,000 megawatts (MW) of new capacity since 2000 but needs to replace another 32,000 MW by 2020.
Five out of 16 other projects planned up to 2012 are already under construction and will add another 7,000 MW, according to research by Reuters. But the other 11 projects, with a total capacity of 11,000 MW, face intense scrutiny before getting the credit they need to progress, despite utilities' low risk profile, analysts say. "Operators seeking finance for generation plants will be faced with high costs not because of their own ratings, which are still good, but because money in the capital markets is drying up," said Matthias Heck of private bank Sal. Oppenheim.
Heck said French GDF Suez' issue last week of an expensive two-part euro bond raising 1.9 billion euro ($2.36 billion) was a sign of how hard utilities were finding it to secure loans for their multi-billion euro plans. The coupon prices were 6.25 percent for the five-year part and 6.875 percent for the 10-year part. German utility E.ON said last week it was confident about refinancing several billion euro in debt by next May.
Hopes that the financial crisis could cut, or at least tame, rising labour and materials costs that have dogged the construction sector over the last few years are also fading.
"There is no decline in the cost of power plant construction," said Bremen-based institute trend:research, which regularly polls engineers and their customers. The price for building a hard coal-fired plant, which already rose significantly to 1,500 euros/kilowatt in 2007, has risen by another 200 euros/kW in 2008, it said. Environmental costs of running coal plants are also set to soar from 2012 when generators will be forced to pay for all the carbon they emit.
Coal-biased utility RWE has warned that its coal plants may become unviable if full auctioning becomes a reality and hopes coal-reliant eastern European states like Poland will help defeat moves towards tougher limits on coal. European utilities have made billions of euros from passing on the cost to consumers of emissions rights they were given for free in the early stages of the EU's Emissions Trading Scheme.
But that will all change from 2012 and investors' view of the sector may change with it.
"Special profit boosters such as free CO2 certificates will become a thing of the past for utilities, which may change investors' view of whether this sector is attractive much longer," said Oeko-Institut's Matthes of the big German firms.
Half of Germany's power is generated by burning coal and there are few alternatives. Wind power has grown rapidly in Germany but is too unreliable to fill the void that will be left by coal over the next few years. Meanwhile gas has become unattractive over the last two years because its price is linked to oil and because of heightened concerns about becoming over-reliant on Russian gas.
Southwest German utility EnBW for example is investing in big coal and hydropower projects and studying upgrades to an existing gas plant, but on a much smaller scale. "It does not help gas if oil prices have a temporary dip, I cannot imagine the gas suppliers agreeing long-term supplies this early in the oil down-cycle," said an EnBW spokesman.
The current plan to close all Germany's nuclear power plants over the next decade means the coal-or-gas debate is not the only important issue for the country's future power supply, Manual Frondel, analyst at the Essen-based RWI Institute said. "It is more important whether or not Germany holds on to its nuclear exit programme up to 2021, because if it does, we will get a huge power generation gap between 2015 and 2020 which renewable energies won't be able to fill," he said.
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