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Coal at Record Is Latest Pressure to Weigh on Utility Earnings

These translations are done via Google Translate

May 15, 2018, by Jesper Starn


China’s thirst for energy is roiling markets in Europe, jolting the outlook for coal-hungry utilities as they struggle to cope with tighter pollution and environmental rules.

Coal for delivery next year in Northwest Europe touched a record $90.65 a ton on Tuesday, a fifth consecutive day of gains that together with higher costs on carbon emissions lifted the price of electricity in the process. China’s power generation needs has drawn in more cargoes of both coal and liquefied natural gas, diverting supplies away from Europe.

The market shift is benefiting generators that’s burning no or hardly any coal such as Verbund AG, Electricite de France SA and Fortum Oyj while weighing on the earnings of utilities that use more of the world’s most popular power plant fuel, such as Germany’s RWE AG and PGE SA in Poland, according to Elchin Mammadov, an analyst at Bloomberg Intelligence. It may also benefit those who rely on natural gas, like Centrica Plc.

“Higher power prices increase margins for foremost nuclear, hydro and renewable generation,” said Arne Bergvik, chief analyst at Swedish utility Jamtkraft AB. “Profit margins for gas-power plants look better than in many years. The positive clean spark spreads are here to stay, especially as nuclear generation is being phased out and coal is becoming increasingly controversial.”

Australian Storms

Behind all the moves is a surge in coal prices over the past month, reflecting storms in Australia and Indonesia that disrupted supplies earlier in the season. A weaker U.S. currency also has boosted the appeal of the dollar-priced commodity, analysts at utility Energi Danmark said last month.

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Electricity has climbed along with carbon and coal prices, reflecting higher generation costs for many utilities. German power for 2019 climbed as high as 41.75 euros ($49.40) a megawatt-hour on Tuesday, highest for a front-year contract since April 2013, according to broker data compiled by Bloomberg. Carbon has risen 79 percent so far this year, reaching its highest since 2011, and outperforming all major commodities.

“If this higher price environment is not a blip, it could speed the pace of Europe’s energy transition,” said Meredith Annex, an analyst at Bloomberg New Energy Finance. “Higher power prices boost the economics of renewable energy, while the benefits for thermal power plants have been largely offset by similar rises in fuel costs.”

Coal’s grip on the costs Europe’s utilities pay is a reminder that the power generation industry remains deeply dependent on the fuel even though everyone from policy makers to insurers and fund managers are rushing to move away from the most polluting power fuel. Coal-fired generation makes up about 40 percent of the world’s energy mix, according to the International Energy Agency. That market share will fall to 33 percent by 2040, the IEA said in its New Policies Scenario.

The German government has signaled that a planned phaseout of coal may take many years, potentially benefiting RWE’s reliance on old-style generation. In the first quarter, RWE’s profit fell short of analyst’s expectations as margins from its power plants narrowed.

Read more about RWE’s first-quarter earnings here

Just how hard higher fuel prices hit the utilities won’t be known for months and will depend on myriad factors ranging from currency movements to hedging strategies as well the particular mix of generation plants each company operates. RWE has locked in carbon prices at half of the current level until 2022 and has hedged most of its power output for 2018.

While RWE confirmed its full-year guidance, “the weak first quarter has increased the risks around it,” said Ahmed Farman, a utilities analyst at Jefferies International Ltd. in London.

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