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Europe’s Energy Fiasco: Gas Power Plants Shutting Down

Tino Andresen & Tara Patel, Bloomberg

Three years ago, Germany’s largest utility spent 400 million euros ($523 million) building a natural gas-fired power station. Later this month, the company may close the plant because it’s losing so much money. Cheaper coal, requirements to buy renewable energy and the collapsing cost of carbon permits are undercutting gas-fired plants.

EON SE’s Irsching-5 in Bavaria last year operated less than 25 percent of the time as slumping power prices made burning natural gas unprofitable by record margins. As Europe’s weak economy holds back electricity demand, cheaper coal, requirements to buy renewable energy and the collapsing cost of carbon permits are undercutting gas-fired plants.

Europe Gas Carnage Shown by EON Closing 3-Year-Old Plant

EON SE’s Irsching-5 in Bavaria, Germany. Photographer: gomaPix/Getty Images

The pattern is repeated throughout Europe as utilities including France’s GDF Suez (GSZ) SA and Centrica Plc mothball gas plants. The impact is both environmental and commercial. Switching to coal increases emissions, while it lower profits for gas plants, which generate almost a quarter of European power, and shrinks the market for suppliers led by OAO Gazprom. (GAZP)

“Gas-fired plants are stopped three days out of four,” Gerard Mestrallet, chief executive officer of GDF Suez, France’s former gas monopoly, said at a briefing on Feb. 28. “The thermal industry is in crisis. There is overcapacity.”

The difference between the cost of fuel and the price paid for the power generated reached a record low yesterday. The so- called spark spread for the month ahead is minus 18.30 euros a megawatt-hour ($23.85). Gas plants are also unprofitable in France, the Netherlands, Spain and the Czech Republic, according to data compiled by Bloomberg. In the U.K., they’re barely breaking even.

At the same time, spark spreads for coal plants are profitable in every European market tracked by Bloomberg as prices for the fuel drop.

Idling Stations

The idling of power stations built to last a generation is holding back Europe’s consumption of the fuel. The region’s demand will drop 3.5 percent to 550 billion cubic meters in 2015 from 2010 levels, according to International Energy Agency forecasts. Russia’s Gazprom lost its position as Europe’s largest gas supplier to Norway last year as shipments slid, Societe Generale SA said.

“The switch from gas to coal in Europe is a very serious retrograde step from a climate change perspective,” Dieter Helm, an energy policy professor at the University of Oxford, said by e-mail. “In Germany it is worse — building new coal power stations which will be locked in for decades.”

RWE AG (RWE), Germany’s second-largest utility and Europe’s largest carbon dioxide emitter, churned out 11 percent more greenhouse gases last year as coal-fired plants increased production, according to the company’s annual report. Their profitability has been increased by the collapse in carbon permits to record lows, cutting the cost of burning coal.

The share of natural gas in Germany’s electricity output fell by 2.3 percentage points to 11.3 percent in 2012 from a year earlier, according to BDEW, a Berlin-based lobby group.

“Under these conditions it is not possible to operate gas- fired power plants however clean, efficient and good for the climate and the country they may be, neither old nor new,” EON Chief Executive Officer Johannes Teyssen said in January. “We are not willing to run loss-making plants where we don’t see any chance of a recovery.”

EON, which reports annual earnings tomorrow, and GDF were both forced to scrap 2013 profit forecasts because of prospects for gas-fired generation. Turning the situation around will probably require more plants closures, according to UBS AG

Shut Plants

Utilities in Europe need to shut more than 30 percent of fossil-fuel fired stations to counter increasing production from wind turbines and solar, UBS analysts led by Per Lekander said in a note last week. Gas-fired plants will lead shutdowns, they said.

Electricity output from French gas-fired plants dropped 24 percent in 2012, according to grid manager Reseau de Transport d’Electricite, or RTE, the French power grid operator owned by Electricite de France SA. GDF plans to close or mothball 10,000 megawatts of European capacity across Europe, mostly gas plants, Mestrallet said.

Centrica Energy Plc is considering permanently closing at least one gas-fired facility in the U.K. this year. EON has already withdrawn two gas plants from the grid, reserving them only for periods of peak demand. RWE, where plants are operating near half their capacity, has said it will idle two units for six months of this year.

In Spain, the under-use of gas-powered plants is “outlandish,” said Antonio Llarden, chairman of Enagas, the operator of the country’s natural-gas transportation network. Gas-fed plants were only used 19 percent of the time in 2012, compared to 51 percent in 2008, he said.

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