RWE, one of Europe’s biggest utilities, is keeping faith in its massive coal mining operations in north-west Germany, rooted in a logic based on economies of scale in power generation which defies a shift towards a more modern, distributed, low-carbon grid.
RWE’s mining in Germany’s Nordrhein-Westfalen (North-Rhine Westphalia) is on a truly landscape scale. At its biggest mine, Hambach, the company produces 40 million tonnes of soft-brown coal called lignite annually, across an open-pit area of more than 4,200 hectares (11,000 acres), and in the process moves each year some 250 million cubic metres of earth and rock (see Figure below).
This mining machine has attracted significant public attention lately, as RWE sought to extend the Hambach mine to encroach on the last remains of a forest of the same name, and in the process enlisted German riot police to evict long-standing protesters. In early October, the Münster Higher Administrative Court halted the forest clearances, ruling that the company await consideration of an appeal by Bund, the German environmental group.
In arguing its case to extend Hambach, RWE has warned of an engineering “domino effect”, where halting excavation at the leading edge of the mine would prevent mining of coal at the base of the pit, as well as stop or slow down “recultivation” of the landscape further back.
The company states that it needs 1.7 billion cubic metres of earth and rock (“overburden”) that it will realise by excavating the forest. RWE’s chief executive, Rolf Martin Schmitz, has said that closing Hambach mine permanently and immediately would cost up to €5 billion, partly because of the difficulty finding alternative sources of rubble to shore up and stabilise the pit edges.
Closing even a portion of the mine is hard to stomach, as that would shrink revenues at a business that faces fixed costs to manage the mine and gradually repair the surrounding landscape.
In other words, lignite mining works best, or exclusively, on a monumental scale. Once you start tinkering at the edges, to slow excavation here or close a lignite-fired power plant there, the overall operation starts to make less sense.
The trouble for RWE is that monumental excavation of coal or lignite to burn to generate electricity, emitting in the process tens of millions of tonnes of carbon dioxide annually, has had its day.
At the Institute for Energy Economics and Financial Analysis (IEEFA), we considered lignite headwinds in a report published this week, “Lignite Retreat, RWE’s Short-Term Pain, Long-Term Gain”. We focused on two of RWE’s mines in North-Rhine Westphalia, Hambach and Garzweiler, which going forward will fuel 11 generating units at two major, pit-head power plants, called Neurath and Niederaussem.
Figure: Location of Hambach Mine in Germany (Source: IEEFA)
The first headwind for these power plant units is their age. We found that half of the lignite mined at Hambach and Garzweiler going forward will be burned by units with a combined generating capacity of 3.3 gigawatts (GW) and an average age of 46 years.
The second headwind is their emissions of harmful air pollutants including oxides of nitrogen, or NOx. All these 3.3 GW exceed NOx emissions limits which come into force in 2021, under the European Union’s Industrial Emissions Directive. RWE is planning to upgrade the power plants using unspecified technologies, at what it describes as a rather vague cost of “low three digit million euros”, i.e. more than €100 million.
The third headwind is climate action and the falling cost of renewables, including the reform of carbon pricing in Europe. At present, we see compressed profit margins at these ageing power plants, as carbon prices rise and power prices fall or stabilise, partly as a result of growth in renewables, hiking the financial risk around investing more than €100 million to extend their life beyond 2021.
The fourth headwind is coal phaseout in Germany. Even as RWE was facing off protesters in September, a panel of experts was mulling a proposed coal phaseout date in Germany, creating an unfortunate, backward-looking narrative for a public-facing company. Chancellor Angela Merkel’s government earlier this year appointed the panel, officially called the Commission on Growth, Structural Change and Employment, or simply the Coal Exit Commission, to propose by the end of the year a date for closing the country’s coal-fired power plants, and to develop transition plans for its coal and lignite mining regions.
In contrast to these headwinds, by paring back its lignite mining, RWE could supercharge a strategic repositioning that the company is already embarking on through its prospective acquisition of renewable infrastructure assets from its utility peer, E.ON.
Already, as a result of that asset swap, RWE is poised to benefit from a significantly higher environmental social governance (ESG) score, increasingly valued by investors and rating agencies, where the company historically has performed at the bottom of utility league tables. Such metrics would be bolstered by a more determined shift from coal.
Lignite mining at scale made sense when the market under-valued social costs including carbon emissions and air pollution. Now those costs are impacting margins, through carbon prices and costly upgrades to meet pollution limits.
Sharply lowering lignite production may be a painful transition for RWE, especially as the economics of its wider mining operation may not then stack up, by concentrating fixed costs among less power generation. But the question for RWE becomes how long it intends to continue mining at scale for diminishing returns.