IEEFA Europe: More Fallout Around the Dutch Coal Stranded-Asset Mistake

In “The Dutch Coal Mistake” report we published late last year we warned of further write-downs to come from the extraordinary commissioning of three brand-new coal power plants in the Netherlands in 2015.

That report spoke directly to the Dutch gaffe but raised broader questions about investing in new coal-powered generation anywhere in Europe.

The policy backdrop here: A recent Dutch court ruling that the Netherlands will have to increase the ambition of its 2020 emissions target. The energy market backdrop: Falling electricity demand and power prices, and a massive rise in renewable energy capacity in neighboring Germany.

Our report went into the scale of investment risk clouding new coal power plants in Western Europe and showed how, by mid-2016, three major European utilities—Engie, RWE, and Uniper—had already written down up to half the value of the new plants in the Netherlands. The takeaway was clear: the utilities had no chance of meeting their target investment returns on those plants.

Indeed they had written down the value of the coal plants to as little as €1 million per megawatt (MW), compared with a construction cost and implied book value of about €1.9 million per MW. The discounted cash flow model we detailed in our report found that, under generous assumptions of load factor and power price, those plants may be worth around half that again.

So we anticipated further write-downs, and those have come to pass now at two of the power plants. In its year-end results in early March, Uniper reported that it had made further impairments to its new Maasvlakte 3 power plant in the Netherlands, by €100 million, at the end of last year. It reported a “recoverable amount” (i.e. book value) of €700 million, or €0.7 million per MW, at the end of 2016. That was less than half the book value of €1.5 billion just 12 months earlier, at the end of 2015, and an original construction cost of about €1.7 billion. Uniper did not mention Maasvlakte 3 explicitly by name, but some basic detective work seems conclusive. We know at the end of 2015, Uniper had written down the value of “one conventional power plant in the Netherlands,” to €1.5 billion. Maasvlakte 3 is the only Uniper power plant with a value nearing that in the Netherlands. Uniper then stated that in 2016 it further impaired a “conventional power plant outside Germany” by €0.8 billion, to a recoverable value of €0.7 billion. Since it also stated that the Netherlands was a major target of its 2016 impairments, alongside Germany and France, its safe to say that this power plant and  Maasvlakte 3 are one and the same.

Meanwhile, Engie noted in its 2016 year-end results a €168 million impairment on its thermal power plants in the Netherlands. Given that its new Rotterdam coal power plant is the company’s only substantial asset not yet largely or fully depreciated, we can assume that much of this impairment applies to the Rotterdam plant.

These impairments on new coal plants in the Netherlands make it all the more surprising that Uniper is now pressing on with plans to complete the construction of a new coal plant in Germany, Datteln 4. While this plant may be more efficient because it is supposed to supply district heating as well as power, Uniper may well still be gambling either on a capacity market in Germany, which pays for flexible back-up to variable renewables, or a big surge in power prices as a nuclear phase-out continues.

It may find, however, that it is caught out, as it was in the Netherlands, by rapidly evolving market trends, which include the falling cost of renewables and lower than expected demand.

Gerard Wynn is a London-based IEEFA energy finance consultant.

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