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Enel, Europe’s biggest utility by market value, has given the first hint of the impact of new EU pollution limits, agreed last month, at a shareholder meeting where it announced the closure of two large coal power plants by 2018, and a new commitment to close all its coal and lignite generation by around 2030.
Enel’s annual general meeting (AGM) of shareholders on May 4 gave the first glimmers of the possible impact on Europe’s fossil fuel utilities of pollution limits agreed the week before.
EU member states agreed in April a revised Best Available Techniques Reference Document, known as “BREF”, which sets new, upper limits for NOX and SOX emissions, and other environmental performance, by large installations burning fuels including coal and lignite, to be implemented from 2021.
While Enel made no mention of BREF at its AGM, it would certainly have been aware of the vote.
IEEFA last week made a first-cut analysis of the revised BREF, identifying “low-hanging fruit” which we expected to be especially vulnerable, facing tough choices: to invest substantially in pollution abatement; cut running times dramatically; or shut down.
IEEFA calculated NOX and SOX emissions rates for every large coal and lignite power plant in Europe, using raw EEA emissions data from 2014, the latest available. We defined the 108 “low-hanging fruit” as installations more than 40% above the revised BREF limits, for NOX and/ or SOX emissions.
What did we learn from Enel’s AGM?
First, as IEEFA expected, BREF will make life more difficult for the biggest polluters. Enel confirmed that it would close before 2020 two coal power plants operated by its subsidiary Endesa, namely Teruel (also called Andorra) and Compostilla. Both power plants were among IEEFA’s low-hanging fruit. Teruel was 176% above the revised BREF NOX limit, in 2014, and 917% above the SOX limit, according to our calculations. The two Compostilla units were 363% and 404% above the NOX limit.
Second, utilities will still try and eke some life out of borderline power plants, by investing in NOX and SOX abatement. Investors should scrutinise such plans: in the case of older and more polluting power plants, this may not represent a sound use of money. A future-oriented and environmentally sounds one, would go above and beyond trying to squeeze the old assets for some residual value, attributing value also to the goals of reducing pollution, and investors should push for this.
At its AGM, Enel announced plans to invest €350 million in three Endesa power plants, AS Pontes, Litoral and Alcudia, to make these compliant beyond 2020. It was unclear whether Enel was referring to compliance with the revised BREF, or the present round of IED (Industrial Emissions Directive) limits.
All three power plants are among IEEFA’s low-hanging fruit. AS Pontes (I-IV) was 65% above the revised NOX limit in 2014, according to our calculations. Litoral (I and II) was 93% above the NOX limit, and 528% above the SOX limit (not so borderline). Alcudia I to IV units were between 52%-104% above the NOX limit, and 134% to 370% above the SOX limit.
Enel made no mention at its AGM of other power plants, including its own in Italy, which may exceed the revised BREF. For example, IEEFA identified the company’s Sulcis power plant as exceeding both the revised NOX (by 68%) and SOX (by 83%) in 2014. This power plant is in Sardinia, a relatively poor region of Italy, where we acknowledge possible social issues related to closing it. And Enel did not mention Brindisi Sud, the company’s largest power plant in Italy, a relatively clean power plant by NOX and SOX emissions.
Third, BREF implies greater headwinds for coal and lignite power generally over the next decade, given their status as polluting, potentially expensive to run, and inflexible. Enel illustrated this with chief executive Francesco Starace’s surprise statement that the company expected to close all Enel Group’s coal and lignite power plants by around 2030.
“For me, within 10-15 years we [as ENEL group] will no have any longer coal power plants,” he reportedly told the AGM.
Some Italian ministers have made recent, similar noises. On May 10, the Italian Minister for Economic Development, Carlo Calenda, anticipated a proposed new National Energy Strategy by suggesting the government could consider phasing out coal between 2025 and 2030.
“A total coal phase out between 2025 and 2030 is possible, but will cost about 3 billion euros over the baseline scenario, and the issue of authorization timing for new gas power plants and new infrastructures would have to be addressed,” he reportedly told a hearing on the National Energy Strategy in Parliament.
The revised BREF will be implemented from 2021, introducing stiffer limits than those introduced from January 2016 under the Industrial Emissions Directive (IED). Under the present round of IED emissions controls, power plants had a choice, to meet the new emissions from Jan. 2016; delay full implementation until June 2020 at the latest, under so-called transitional national plans (TNPs); or else “opt out” and close by 2023. Teruel and Compostilla have followed the TNP route, and Enel has made clear they will close before the Spanish TNP expires in 2020.
Now all fossil fuel utilities will have to make similar investment decisions, and quite smartly, given the risk from adopting a wait and see approach, as highlighted in IEEFA’s report.
Enel is an interesting case, as its CEO Starace has vowed to be the world’s first “truly green energy giant”, and already committed to build no more new coal plants, and to be carbon neutral by 2050. One might expect, therefore, the company to embrace stiffer controls on coal and lignite. How other utilities react to BREF will help frame their public image in a similar way, and guide their energy mix and investment returns over the next decade.