By:Nicholas Newman 12 March 2013
It appears that Europe’s gas generators are in danger of turning into zombie companies, [i]suggests Hugh Sharman Owner, Incoteco (Denmark) ApS. [ii] They finding it increasingly difficult coping with the market created by uncontrolled expansion of “free” but heavily subsidised renewables and the dumping of cheap imported coal from the United States. Unfavourable market conditions and negative gas power generation are forcing companies to lose money hand over fist, suggests Guido Custer Managing Director at Delta Energy.
Gas plants in crisis
This is particularly the case in both Holland and Germany which is full of zombie gas power plants. It is not surprising we are hearing about gas power plants like Dong Energy idling its brand new Rotterdam plant for most of the time. It is cheaper for Dong Energy to buy imported German wind and coal generated electricity at €45 per megawatt hour than produce it themselves at €50 per megawatt hour. Throughout Europe, we are seeing plans to moth ball gas plants by major utilities such as E.on, Statkraft, GDF Suez SA and Centrica Plc. Whilst, Gabrielle Seeling-Hochmuth, head of gas strategy at Vattenfall’s gas competence centre, suggested, “that the company is unlikely to invest in new gas capacity until the 2030s”. [iii]
An oversupply of conventional power
Currently, in both in Germany and the Netherlands, both countries are facing a dire oversupply of conventional power capacity. [iv] In Holland, this is due in part to a gas power plant building boom by investors keen to take advantage of the countries natural gas resources. Their ambition was to turn the Netherlands into a major exporter of power to the rest of Europe. As a result, the country is facing an oversupply of conventional generation capacity made worse by the country’s encouragement of biomass, wind and solar power.
At the same time in Germany, the policy of giving renewables the highest priority in supplying the market when it comes to despatching power, and the very success of the €4 billion a year subsidies to promote renewables, has drastically shrunk the market for gas power stations. On sunny and windy days, onshore wind and photovoltaic meet over 85 per cent of Germany’s mid-day electricity needs reports Renewable Energy World. This is despite Germany closing nearly a third of its nuclear power plants reactors in spring 2011, it exports electricity to its neighbours – and indeed sold more abroad in 2012 (23 gigawatts) than ever before. [v]So industry analysts are suggesting Germany is dumping its power on its neighbours.
Cheap coal in Europe has dramatically increased the output from coal generation dramatically. As a result, this is drastically reducing the demand for gas generation in many states. This has resulted in numerous gas plants operating in the red in France, the Netherlands, Spain and the Czech Republic, according to data compiled by Bloomberg. In Britain, gas generation is barely breaking even. It is not surprising operators are making a dash away from gas; after all, they are not charities.
The creation of zombie power companies?
“In fact, most of Europe’s major generators are turning into zombie companies, saddled with huge debts and heritage assets that are fast turning into liabilities,” suggests Hugh Sharman. Unfortunately, this dash away from gas is causing a problem for Europe’s energy leaders concerned about such issues as competition, stability and security of power supplies. Since if there is not adequate conventional reserve backup capacity to deal with lack of wind or sunshine for several days, then Europe faces the threat of continent wide blackouts.
Need for reform?
It has been suggested by various energy leaders, including Guido Custer that something must be done to end this cycle of zombie failure for gas generation and ensure that there is an adequate supply of reserve conventional capacity available. Guido Custer has proposed at Flame a series of measures to ensure adequate investment in maintaining current capacity and encourage new investment when it required. Certainly his proposals for a minimum price for the emissions trading system and widening the scope of members of European emission trading system sound reasonable.
However, it is expected that many European governments will look not look kindly at lobbying efforts by the power sector for further subsidies known as capacity mechanism, given the current recession. [vi] Instead it would be more politically practicable for policy makers if government’s reduced subsidies for renewables and fixed the European emissions trading system so that gas is on a more equal footing with coal, renewables and nuclear. Unless something is done, the prospect of zombified European power companies could be a serious prospect. Even so, it looks like the size of Europe’s gas generation portfolio will be in future years, considerably reduced.
[i] Zombie Company is a media term for a company that needs constant bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not reduce its debts. There are several types of zombie companies. The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program (TARP). A 2002 New York Times article about Japanese companies kept on “life-support” with loans include a headline that stated, “They’re Alive! They’re Alive! Not!; Japan Hesitates to Put an End to Its ‘Zombie’ Businesses