E.ON says urgent that EU fix broken carbon market

DUSSELDORF, Germany Fri Feb 15, 2013 11:29am EST

CEO of German utility giant E.ON Johannes Teyssen poses before the annual meeting of German utility giant E.ON in Essen May 3, 2012. REUTERS/Ina Fassbender

CEO of German utility giant E.ON Johannes Teyssen poses before the annual meeting of German utility giant E.ON in Essen May 3, 2012.

Credit: Reuters/Ina Fassbender

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DUSSELDORF, Germany (Reuters) - The head of Germany's biggest utility E.ON is looking to the European Union to make urgent reforms to its broken carbon and energy policy, otherwise he will seek a 'coalition of willing' nations to find an alternative.

Johannes Teyssen, chief executive of E.ON, in an exclusive interview said he was optimistic Germany would back an emergency fix proposed by the Commission for the collapsed EU carbon market, which he sees as a vital first step to more sweeping change.

On Tuesday, a European Parliament committee will vote on the proposal. Later in the month, member states will also consider the plan, with dominant EU member Germany holding the key. So far it has not taken a stance.

A stronger carbon price would provide the signal that is needed to draw investment into Europe's power companies, Teyssen said.

"Nobody is investing any more. Returns are totally unavailable. There is no signal whether to invest in low carbon or high carbon. The message is that for the next 10-15 years, there is no reason to invest in low-carbon technology."

Germany's Energiewende - or shift from nuclear energy towards renewable sources - has led to high levels of subsidies, which have been blamed for price rises and for undermining German competitiveness in world markets.

German politicians on Thursday agreed on a compromise to tackle the cost of renewable energy ahead of federal elections in September.

"There is a duty to be an optimist in difficult times. The government has reached a joint position on renewables reform. That gives me some hope a position could be reached (on carbon)," Teyssen said.

Many of those opposed to carbon market reform cite cost. EU member Poland, which is reliant on carbon-intensive coal, is among those who say action to push up the carbon price is unnecessary and an economic burden.

But Teyssen says the European power sector will remain uninvestable, a word used by many analysts, unless the carbon market is reformed as part of wider EU policy change.

The EU executive's proposal for an emergency fix to the market, referred to as backloading, entails temporarily removing some of the surplus permits that pushed prices to a record low last month of less than 3 euros ($4.00) a tonne.

The current set of European Commissioners are due to step down next year, which means that unless reforms are agreed on soon - the first half of this year according to Teyssen - forging new policy could take years more.

"If Europe can't even get carbon right, then we will have to rely on regional or national reform," he said.

"To use the military phrase, 'a coalition of the willing', I would support any coalition of willing nations to find a way, but I am first accountable to stay with Brussels to see if there are still people who can follow a European strategy towards low carbon energy and environmental policy."

FIRST STEP

Teyssen supported backloading as part of much greater change.

"Backloading is a necessary Step One, but it's too little, too late unless it's embedded in a more realistic reform," he said.

"I personally believe a carbon price floor maybe combined with a carbon price ceiling could be a proper measure. It's very difficult to imagine the current volume-based system alone."

Asked what would be the right level, he referred to the British model. From April, Britain will have a carbon price floor starting at around 16 pounds ($25) a tonne of carbon and rising to 30 pounds by 2020.

The problem with national measures is that they do not solve the overall issue of cutting carbon emissions. Analysts have said Britain will no longer be able to afford to burn coal, which instead will be sold more cheaply elsewhere in Europe.

JUST ONE 2030 TARGET

Apart from tackling the carbon market, the EU executive is trying to agree on 2030 energy and environment policy to succeed 2020 targets, which include cutting carbon emissions by 20 percent, increasing the share of renewables to 20 percent and improving energy efficiency by 20 percent.

Teyssen wants only one goal, for cutting carbon, plus a reformed carbon market.

"We need one target on carbon. It should be approximately 50 percent for industry and power for 2030."

The European Union has no power over the energy mix of member states, he said, arguing against a renewables target.

Renewable sources such as wind are part of E.ON's strategy, but in combination with baseload power from natural gas or coal to offset the fluctuations in renewable supplies.

The weakness of the carbon market, which has undermined the profits from burning gas and made carbon-intensive coal cheaper, together with Germany's dash for renewables and falling European demand has left E.ON facing negative margins at some plants.

One of its most efficient gas plants in Germany ran for only 1,600 hours last year, compared with the roughly 4,000 hours needed to break even.

"Yes, it's hard to mothball. We know that some of our stations are desperately needed to balance the system, but we're not the donkey carrying the burden of the Energiewende for free. I cannot explain this to my investors. Politicians need to understand. Economic realities will come home," Teyssen said.

"We did not create the issue. Why should we pay to fix the problem?"

($1 = 0.7495 euros)

(editing by Jane Baird)

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