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The Swedish people earlier a few months back voted for a new government and believe it or not one of the election themes was the building of new lignite coal mines in eastern Germany. The background is simple. The Swedish government is at the forefront of global climate change policy with a clear goal of being CO2 neutral by 2050 and fossil fuel independent by 2030. Well at least they are in words. The reality is somewhat different.
The C02 emissions of the Swedish state owned utility Vattenfall actually increased last year by circa 5% to 88.4 million tonnes and appears to be miles away from their 2020 goal of reducing the company’s CO2 exposure to 65 million tonnes. In addition, they are still building new coal power stations so CO2 emissions are likely to increase in the next years especially with the opening this year of the new 1.6GW coal plant in Moorburg outside Hamburg. But there is another way. Simply get rid of the German business which accounted for 80% of Vattenfall’s total emissions! And this is exactly what is happening. There appears to already a process in place to sell the German business. The big question is who will buy it?
It is clearly a good time to sell. Russia and energy security is on everyone’s tongues, and CO2 prices are below €6.00, 20% of what they were in 2008 and act as no disincentive for generating power using coal. To make matters more interesting wholesale power prices in continental Europe are now so low that the only fossil fuel generation source with which utilities can generate money is lignite. This can be clearly seen in the 2013 statistics of Vattenfall, a year in which they produced a record 57.2GWh of electricity using lignite. Finally, it is questionable whether new nuclear power stations will be built particularly in Eastern Europe. The UK decision to grant a 35 year power purchase price to EDF for a new nuclear plant in south England at £87.50 per MWh (plus inflation) and starting in 2023 has not only set a benchmark for the costs of new nuclear which is three time the continental European power price but has also effectively ruled out Eastern Europe replacing its nuclear fleet. This has huge ramifications for Bulgaria, Slovakia, Slovenia and the Czech Republic. Will they go to gas? Probably not given the over-dependence on Russia. That leaves renewables and dare I say it coal and where is the cheapest and most easily mineable coal in Europe? In Eastern Germany.
This of course leads back to the initial question and that is who would dare to buy such power stations and the related mines? A year ago I would have said only the Chinese would take such risk on but given the increasing strategic importance of the German assets I would definitely not rule out a bid coming from an Eastern European utility such as CEZ from the Czech Republic. I also would not rule out a Western European utility coming in or a private equity house. And finally, the craziest possible buyer maybe the federal governments of Berlin and Brandenburg who may be persuaded to acquire the German business of Vattenfall. Hamburg has already bought the local distribution grid from Vattenfall and Berlin has recently acquired the water works in the city. At stake are circa 17,000 work places, and the Energiewende. And I could see Berlin/Brandenburg talking about using Vattenfall Germany as a vehicle to push the Energiewende while at the same time slowly getting out of lignite. And interesting is the region is already leading in renewables. It already has 22.7GW of renewable power capacity enough to meet the region’s peak demand of 16GW. Add to that the coal and gas in the region and the power capacity stands at 44.5GW, enough to meet all of Germany’s power needs at the weekend. Power is big business in the region.