Signs of hope for Germany's loss-making power plants

Tue May 20, 2014 9:35am EDT

* Minister to seek talks this year, regulator supports this

* Utilities want support for keeping capacity online

* E.ON CEO says confident government will act

* France set to create capacity market

* Critics say support could undermine free market

By Vera Eckert and Christoph Steitz

FRANKFURT, May 20 (Reuters) - There are signs of hope for German utilities looking for help to keep loss-making plants open as Economy Minister Sigmar Gabriel drives energy reforms and the regulator signals his support for lifting the sector out of crisis.

The government wants utilities to keep gas- and coal-fired plants open to ensure power supply when there is a lull in variable wind or solar energy.

But because most of these plants lose money, RWE and other utilities have called for the creation of a so-called "capacity market", which would involve the government raising funds to pay operators to keep such sites open.

Gabriel announced a first round of energy reforms last month and signalled he would hold talks with utilities regarding a capacity market in the second half of the year.

Jochen Homann, chief of Germany's Federal Network Agency (Bundesnetzagentur), also recently came out in support of discussions, having been sceptical about subsidising capacity in the past.

"I see uncertainty in the market and the need for clarity (about the shape of a capacity market)," Homann said.

"We would welcome it if we could complete discussions soon as many investors have taken a wait-and-see approach, and we would like to break up that attitude."

Homann has warned that energy supplies could become tight if more plants are shut in some regions of Germany and grids are not expanded in time.

Utilities RWE, E.ON, Vattenfall and EnBW say a capacity market is needed to safeguard electricity supply.

Other European states are also looking at the idea, with France's capacity market set to open in the winter of 2016-17.

MARKET WOES

Subsidies have fuelled rapid expansion in renewable energy in Germany, hurting conventional power stations.

Wholesale forward power prices, at 34 euros per megawatt hour, are half of where they were in 2008 and well short of the approximately 60 euros required to run a gas-to-power station profitably.

In contrast, renewable electricity is sold at government-set prices irrespective of demand.

"I'm confident that the German federal government will soon set a course that will enable conventional power plants to provide a continuous, reliable backup for the intermittent output of renewables," E.ON Chief Executive Johannes Teyssen wrote in a letter to shareholders last week.

Industry groups such as BDEW and VKU also say utilities must be rewarded for providing round-the-clock power.

"Without capacity markets, nobody will be able or willing to invest in new power stations, as the costs can't be recovered," said Roland Vetter of energy fund and research firm CF Partners.

Germany's situation also reflects the fact it plans to exit nuclear power by 2022, removing a source of "baseload" steady power and therefore boosting the importance of gas- and coal-fired electricity.

Yet setting up a capacity market in Germany would be expensive, with annual costs estimated at 3-5 billion euros, or up to a quarter of the combined core earnings at the top three utilities.

There is also opposition from the trading community and energy exchanges.

($1 = 0.7289 euros) (Additional reporting by Henning Gloystein in London and Geert de Clercq in Paris; editing by Jason Neely)

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