Vattenfall took the unusual step of breaking out separate results for its lignite business, ahead of its transfer of those assets (for a nominal fee) to a Czech-based partnership between energy company EPH and PPF Investments. The deal is expected to close next month.
The Institute for Energy Economics and Financial Analysis (IEEFA) said the disclosure offered some insight into why Vattenfall is selling, and raises the question of why the Czech investors want the lignite holdings – a low-grade form of coal.
The main problem for Vattenfall, said IEEFA energy analyst Gerard Wynn, is declining wholesale power prices in Central Europe, a trend driven by low coal prices and ongoing deployment of zero-marginal-cost renewable power. “It’s conceivable that the lignite unit’s problems will only get worse, as the power plants age and as Germany looks to meet ever more ambitious targets to cut carbon emissions,” Wynn stated.
“German ministries last year proposed requiring older lignite power plants to buy more pollution permits per tonne of emissions than other fossil fuels under the European Union’s carbon market rules, a proposal the European Commission supports.
“The Czech investors, however, clearly don’t see the same risk as Vattenfall. As privately held companies, EPH and PPF may never spell out their strategy in detail in public. But theirs is a subsidy play, part of an acquisition spree for regulated fossil-fuel assets supported by guaranteed payments. Last year, EPH acquired E.ON’s coal assets in Italy and has acquired similar holdings in the UK.
Wynn concluded: “As coal becomes increasingly stigmatised, utilities are scrambling for the exit, a trend EPH seems to think makes assets like Vattenfall’s German lignite mines and power plants cheap, given continued profits from regulated payments.