Lignite of the living dead

In this report, we look at how a scenario for the EU28 that is compliant with limiting the rise in global warming to below 2°C might affect the valuation of coal-fired power plants. The IEA’s Pariscompliant scenario (termed beyond 2°C scenario – B2DS) is used as the basis of below 2°C demand, under which coal
power in the EU is phased-out by 2030. We have developed an asset-level model to determine a retirement schedule and understand the financial implications for investors. This analysis follows on from our recent report No Country for Coal Gen, which focused on US coal power.

From nirvana to disaster
European utilities were once a darling of investors. From 2000 to 2010, utilities outperformed the market (Stoxx 600) by over 60% as investors gravitated towards the power sector for stability and income. The following decade was one of startling decline: from 2010 to 2016, the Stoxx 600 increased 40% while utilities lost around 20% of their value, as overinvestment coupled with a failure to understand policy, technology and business model changes impacted performance. As investors fled and rating agencies issued downgrades, utilities responded by acknowledging mistakes and restructuring their businesses.

Mistakes made, lessons unlearned
“I grant we have made mistakes. We were late entering into the renewables market – possibly too late.” - RWE’s CEO, Peter Terium, 2014
Despite experiencing first-hand the financial consequences of ignoring the transition to a low carbon economy, several utilities appear to believe coal-fired generation will play an important role in the EU power mix for the foreseeable future. Based on company reports and including member state phase-out policies, only 27% of operating coal units in the EU are planning to close before 2030. We believe this view is based on a series of outdated and misguided assumptions about the economic viability of coal, the competitiveness of alternatives and security of supply concerns.

Lignite of the living dead
Confidence in coal-heavy utilities is returning as business restructurings, court rulings and power prices have revived balance sheets after years of huge impairments. For example, at the time of writing, RWE and Uniper have seen their share price increase by 64% and 79% respectively in 2017. However, we find that falling renewable energy costs, air pollution regulations and rising carbon prices will continue to undermine the economics of coal power in the EU, potentially making generation assets unusable by 2030.


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