(The following statement was released by the rating agency)
Feb 18 - Changes to government energy policy and weak demand for electricity will weigh on the performance of German utilities' power generation arms for the next three to five years, Fitch Ratings says.
Generous subsidies over the last couple of years have driven a surge in renewable energy, which now accounts for 36% of installed capacity and about 25% of electricity produced in Germany. As renewable energy always has priority of dispatch, this trend has compressed the competitive part of the electricity market, contributing to a fall in wholesale prices and together with cheap carbon dioxide and expensive natural gas, relegating gas-fired power stations to a rarely-used backup source.
Along with the phasing-out of nuclear power, this trend is one of the fundamental changes in the industry highlighted in our report "Structural Pressures in German Power Generation," published today.
Sluggish demand is likely to remain because of weak economic growth and increasing energy efficiency by consumers. This exacerbates the base-load overcapacity in Germany, which may persist for years. New net capacity will contribute to margin erosion in generation, while the full auctioning of carbon dioxide certificates from the start of 2013 will be a further drag on profitability as utilities will probably not be able to pass on the full cost to end-customers.
In this environment, the mix of energy sources and the age and quality of a utility's generation fleet will be a key differentiating factor. RWE is well placed among the major utilities thanks to its low-cost lignite-fired generation fleet, which remains profitable even in the prevailing weak pricing conditions. However, lignite's advantage may be taken away by a political change such as minimum carbon pricing or the introduction of a tax on coal as seen in other countries.
E.ON's fleet is more reliant on nuclear power plants that have a remaining life of about seven years and which could be difficult to replace given the market dynamics (lacking commercial incentives) and the level of public opposition to green field projects. EnBW is also reliant on nuclear power, but with slightly longer remaining life, and more contribution from hydro assets, which keep production costs down.