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In Germany's Plan to Phase Out Coal, a Big Polluter Will Benefit

In Germany's Plan to Phase Out Coal, a Big Polluter Will Benefit

(Bloomberg) -- A proposal to stop Germany from using coal for power generation within two decades may leave an unexpected beneficiary: The company that burns the most of the fuel.

While RWE AG was quick to say it’s “too soon” to shed all fossil fuel plants by 2038, the recommendations outlined this weekend by a panel advising Chancellor Angela Merkel called for compensation for the utilities and 40 billion euros ($45.6 billion) for regions coping with the transition.
Together, the measures would significantly soften the blow on industry from Merkel’s vow to scale back greenhouse gases. They show how far the government has moved away from a quick clampdown on the most polluting fossil fuel and give more certainty for the future of some of RWE’s most valuable assets. And while the proposals could yet be watered down by politicians, they signal a longer life for many of the utility’s plants than environmentalists had hoped for.
“We believe that clarity, compensation payments, and a relatively long phase-out period should trigger a re-rating for the company’s conventional power generation,” said Guido Hoymann, an analyst at the private bank B. Metzler Seel. Sohn & Co. KGaA who added RWE to a list of top 10 German stocks.
Germany’s 120 or so remaining coal and lignite plants have a combined capacity of about 45 gigawatts. That’s enough to feed 40 percent of the nation’s power demand or about 32 million homes. Germany is already falling short on its targets to slash greenhouse gas emissions and sees closing coal plants as one of the most important ways to make the reductions needed. The coal commission includes members from the main political parties, environmental groups and industry charged with developing a consensus that Germany can live with for years to come.
In Germany's Plan to Phase Out Coal, a Big Polluter Will Benefit

The commission began outlining its proposals on Saturday ahead of a its final publication on Feb. 1. It recommended closing the last of the coal plants in 20 years – by 2038 – a much slower phaseout for coal than the abrupt closure ordered for nuclear reactors in 2011. Then, an meltdown at the Fukushima plant in Japan set in motion plans in Berlin to close all of Germany’s atomic plants within 11 years. While the nuclear industry had to sue for compensation, coal operators will be paid for closing their plants.

To read details of the latest proposals from the commission, click here.

RWE said the commission’s proposals are at the edge of what the power industry can deliver and would do significant damage to the company. It said the panel calls for closing some coal and lignite plants by 2022 and would have a “serious impact’’ on its operations. It’s still analysing the initial conclusions in the report, which didn’t set out exactly what plants will have to close and when. Some of those details may come with the final publication, while others are likely to be a matter for negotiation with the government.

The commission's proposals have serious consequences for RWE's lignite business,’’ Rolf Martin Schmitz, chief executive officer of RWE, said in a statement on Saturday. “The yardstick for the assessment must be that politicians find solutions that neither disadvantage the affected employees nor the company. We are committed to safeguarding the interests of our employees and shareholders. Of course, we are open to discussions."

The coal phaseout is part of a 500 billion-euro switch away from fossil fuels and toward renewables ordered by Merkel and her colleagues – part of the fight against global warming. 

In Germany's Plan to Phase Out Coal, a Big Polluter Will Benefit

The shift for Germany is much more painful than the decision the U.K. and other European countries took to scrap coal in the middle of the next decade. That’s partly because Germany and RWE still employ thousands at lignite mines, which produce a soft form of coal that’s both cheap and highly polluting.

Germany needs low-cost and reliable energy to stay competitive against rival manufacturing powerhouses like the U.S. and China. That leaves a further hurdle before the government can order a total exit from coal – and it’s only one of the political complexities Merkel is struggling to balance. 

A few events boosted voter concern about climate change this summer.

  • Hotter than usual weather caused this summer.
  • Rivers dried up in the heat and because flows from glaciers have declined.
  • Protests at RWE’s lignite mine at Hambach made the site an emblem for the environmental movement, which wants to protect an ancient forest there. The unions that want to preserve jobs also demonstrated at the site.

Those issues bled away support from Merkel’s party, boosting both the anti-coal Green Party to second place in national opinion polls and the right-wing AfD. The commission has recommended preserving the forest at Hambach, something RWE says will require major changes at the pit.

RWE has warned that scrapping coal plants and halting mining would cost thousands of jobs and lead to hundreds of millions of euros of writedowns. Hoymann, the analyst at Metzler, estimates that RWE’s market value of about 13 billion euros includes a valuation of negative 4 billion euros for its conventional power generation assets. Guaranteeing the life of some of those facilities could be a boost for RWE in the eyes of investors, who were concerned the company may face a stricter schedule of closures. The company also could benefit from higher electricity prices as more of its big power plants close, reducing baseload generation.

Economy Minister Peter Altmaier has indicated concerns about jobs and energy security are at the top of his mind. The shift away from coal “has to be affordable, has to ensure power security and it has to be sustainable,” Altmaier said in a speech in Berlin on Jan. 19. “The issue of affordability isn’t just any old issue. The exit from coal will lead to big upheavals in the coal regions including jobs and we’re preparing the necessary finance for that.”

In Germany's Plan to Phase Out Coal, a Big Polluter Will Benefit

Jobs appear to be on Merkel’s mind, too. The populist AfD -- which stands against Merkel’s energy transition -- has made gains in disadvantaged coal regions where elections are due later this year. Analysts say poor showings there could push the center-left Social Democratic Party to pull the plug on Merkel’s coalition, bringing a swift end to her record-breaking reign as chancellor.

The coal commission itself has indicated its sensitivity to those issues. 

“These regions and the people that live in them expect, justifiably, solidarity from society and politicians,” the coal commission draft report says. “Structural reform policies must take account of the experiences of those living in east German states.”

A lengthy period of negotiation with the government over which coal plants must retire and when could result in costly court  battles and a bitter end to German miners once dubbed “black gold.” For RWE, a slower phaseout would lend it a lifeline that would allow profit to keep flowing a little longer from those assets on its books.
 
“But RWE is about more than just coal,” Schmitz said in Berlin last week. “The commission’s results should give us planning certainty.”

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net, Rob Verdonck

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