Prices may rise as German coal plant plans ditched

FRANKFURT (Reuters) - Germany risks higher power prices and even supply outages after a series of firms dropped plans for new coal-fired plants due to tighter regulation and higher construction costs.

Earlier this year, German utilities said they were planning 20,000 megawatts of coal-fired generation plant capacity by 2012 to replace old equipment and boost electricity supply.

But the latest government figures show the number of projects has more than halved and less than 8,000 megawatts of new coal-fired capacity will be added.

"If more projects were shelved, this would become dangerous for supply and could result in rising electricity prices," said Dirk Briese, managing director of Trend Research, a company that has studied Germany's power generation plans.

New capacity is seen as particularly necessary because Germany has decided to phase out nuclear energy by 2021. By that date, it also needs to replace well over a third of its total 100,000 megawatt power station capacity, which currently includes nuclear.

Germany's initial enthusiasm for coal, which already provides the feedstock for half its electricity, is based on the fact that coal is widely available and coal-fired generation is in theory relatively cheap and easy to build.

Industry sources say there is still no viable alternative to coal and technology should eventually be able to neutralize the carbon emissions associated with coal-fired generation.

But surging demand for coal power in countries like China has helped to bring about manpower shortages and push up the price of building materials.

Trend Research data has shown hard coal-fired capacity prices have nearly doubled in the three years to 2007 to 1,500 euros per kilowatt.

To justify the higher investment costs, Sal. Oppenheim bank has raised its long-term forecast for German year-ahead wholesale power prices to 55 euros a megawatt hour from 47 euros quoted in 2006.

IMPACT OF LEGISLATION

Costs have also been pushed upwards by German legislation that has made access to carbon emissions allowances up to 2012 -- needed to offset carbon produced by coal-fired power generation -- more difficult and more expensive.

The government has said the carbon regime will be even harsher after 2012, although details are not yet available.

The new energy regulator, empowered to cut utilities' network earnings to help reduce prices for consumers, has ordered utilities to lower transmission grid charges by two billion euros. This money will not be available for investment.

There is also still debate about tighter antitrust rules that Economy Minister Michael Glos wants to implement, to rein in dominant players and encourage smaller ones.

They entail tougher supervision of pricing practices and quicker connections for independent power generators.

Obvious steps such as fairer access and more capacity auctions are already being taken voluntarily by utilities.

But as for the more aggressive measures, such as price caps, even allies of Glos fear they could do more harm than good.

The pending changes are creating uncertainty.

And it is the smaller players, rather than the heavyweights, that have been deterred from entering the generating sector, said analyst Matthias Heck of Sal. Oppenheim bank. Incumbents have felt better able to take investment risks.

"At the end of the day, the political uncertainties cement the current market concentration," Heck said.

Those who have abandoned coal plant projects include utilities in Cologne, Bielefeld and Bremen, while big players such as E.ON EONG.DE and RWE (RWEG.DE) have maintained theirs.

The prospect of new European legislation, to be agreed next week, that could require the separation of energy production and distribution has added to nervousness.

Analysts have said German utilities are among those who have most to lose from the planned measures, although the European Commission's aim is to encourage competition and a liberalized market, and some say investment is likely to continue.

"So long as supply and demand regulate the market, investments will flow," the head of leading coal-based producer RWE's generation arm, Ulrich Jobs, told a conference this week.

"If there are doubts, then things become difficult."