Savvy European utilities shield themselves from higher carbon costs

FRANKFURT/LONDON (Reuters) - The surging costs of carbon permits have caused some of Europe’s biggest utilities to lock in purchases in advance, while nuclear and hydro firms are benefiting from the knock-on effect on power prices.

FILE PHOTO: The sun rises behind the Uniper coal power plant in Hanau, Germany, early morning November 23, 2016. REUTERS/Kai Pfaffenbach/File Photo

Carbon permits traded under the EU’s Emissions Trading System (ETS) have become the best performing commodity this year, almost trebling in price to over 21 euros ($25) a ton since January on the back of stronger energy prices and measures to reduce supply.

The ETS, which charges power plants and factories for every ton of carbon dioxide they emit, has suffered from excess supply since the financial crisis which dragged prices down to lows of 2-3 euros a ton.

Now at 10-year highs, stronger carbon prices make it more expensive for European utilities to burn fossil fuels, encouraging a shift to cleaner energy sources.

Prices are expected to keep rising, according to a Reuters survey of analysts last month.

Market participants can hedge their exposure to rising prices by buying enough carbon permits when the price is low to cover their future emissions output.

If they have a surplus, they can sell them back to the market and make a profit when the price rises. If they don’t have enough, they would have to buy more at a higher price.

“Higher carbon prices mean higher costs for all European utilities, unless of course they hedged or stockpiled allowances,” said French energy consultant Hibault Laconde.

One such company is coal-heavy German generator RWE RWEG.DE, which said it had protected itself against power price volatility by selling fuels, as opposed to selling power production, and simultaneously buying enough emissions permits.

“Our CO2 position is already financially hedged until the end of 2022 and we have also taken steps beyond 2022,” chief financial officer Markus Krebber said during recent half-year earnings calls with analysts.


Coal plants have benefited for years from low carbon prices which kept operational costs down.

Many old German coal plants could be operated at low overheads and they were the price setters in the wholesale market for thermal generation.

RWE’s hedging strategy involves nuclear and brown coal-generated power being sold usually up to three years in advance and hard coal and gas-fired ones closer to production.

Rival Uniper UN01.DE said it sold the bulk of its hydroelectric output next year. The rise in carbon prices will force inefficient coal plants out of the market, chief financial officer Christopher Delbrueck said this week.

Berlin-based Aurora Energy Research said German producers of coal from locally-mined lignite, a heavily polluting brown coal, such as Leag, EPH and RWE, had reason to worry.

The carbon price rise to 21 euros from 6 euros a year ago could have produced additional costs of 2.3 billion euros, according to Aurora analyst Hanns Koenig.

In coal-reliant Poland, the country’s four major state producers are historically heavily exposed to coal generation.

Tauron’s chief executive has called the EU carbon price a quasi-ecological tax.

“This is not a comfortable situation for us. Because of the CO2 policy, energy could become a luxury good,” he was quoted as saying by state news agency PAP at the weekend.


For companies producing electricity from low-carbon nuclear and hydroelectric plants, higher carbon prices are welcomed.

The wholesale price of power reflects the cost of buying carbon permits and fuels. Coal and gas prices have risen this year due to Chinese demand, a cold winter and a heatwave across Europe. The benchmark German power price is at a six-and-a-half year high.

France's EDF EDF.PA, which has a generation fleet made up of 77 percent nuclear and 10 percent renewables, should produce more competitive electricity in interconnected European markets.

“The higher CO2 prices are a huge jackpot for EDF as they drive up wholesale power market prices ... This is the case for all nuclear and hydro power producers,” said Nicolas Goldberg, energy specialist at Colombus Consulting.

A spokesman for Swedish utility Vattenfall said price rises supported its strategy of becoming less reliant on fossil fuels.

“If current price developments continue, we expect a gradual decrease in profitability of coal-fired assets. However, our diversified portfolio with a significant (combined heat and power) share is rather robust to such developments,” he added.

Germany's Uniper, which has inherited the thermal and hydro plants of former parent E.ON EONGn.DE, said it had factored in significant price increases for carbon, coal and gas-fired power in the coming years.

“That will give our earnings a boost from 2020/21,” CFO Delbrueck said.

Germany’s E.ON is focusing on low-carbon power, grids and retail activities, and is left with nuclear power production only in Germany and Sweden, where it also operates hydropower.

Czech nuclear, coal and renewable generator CEZ CEZP.PR has sold over 77 percent of its expected 2019 output, benefiting from a higher share of nuclear than pure coal generators.

Some analysts say a carbon price around 20-30 euros could encourage more utilities to switch to lower carbon fuels.

Gas-fired power generation becomes more competitive at a carbon price of round 20 euros a ton.

However, margins for gas-fired plants are still mostly negative, despite a cleaner carbon record, as high oil and gas prices mean high purchasing costs for generators vis-à-vis coal.

Uniper’s Delbrueck said it should be closer to 30 euros to get a stronger fuel switch.

($1 = 0.8551 euros)

(This version of the story has been refiled to fix spelling of Colombus in paragraph 25)

Additional reporting by Geert de Clercq in Paris, Lefteris Karagiannopoulos in Oslo, Susanna Twidale in London, Stephen Jewkes in Milan, Agnieszka Barteczko in Warsaw, Jason Hovet in Prague, Igor Ilic in Zagreb, Bart Meijer in Amsterdam, editing by Nina Chestney and David Evans