Germany faces the dilemma of carbon emission reductions

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"Les Échos" December, 3rd

THIBAUT MADELIN / CORRESPONDeNT in BERLIN 

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The energy sector shall save additional 22 million tons of carbon dioxide, to be added to the 71 million ones scheduled up to 2020. Rainer UNKEL/REA

The government keeps its targets, but gives up the idea to close coal power plants.

How is it possible to keep its credibility about its awareness on climate change without weakening its energy sector, already facing a structural crisis? That’s the dilemma faced by the German government, which unveiled a list of projects ultimately dedicated to save its targets of carbon dioxide emission reductions Wednesday.

The main part of the reductions (namely 25 to 30 million tons) shall come from energy efficiency measures, for instance tax subsidies dedicated to real estate park renovation. The transport sector shall reduce its carbon emissions from seven to ten million tons, particularly through a toll increase for most polluting trucks. Drivers will thus been given some trainings to use less fuel and agriculture shall play a role by using less fertilizers.

Besides these sectors, it’s the energy field whose contribution will be the most questionable. According to reduction framework, this sector shall save additional 22 million tons of carbon, to be added to the targeted 71 million up to 2020 previously. In 2013, the energy field emitted 377 million tons of carbon dioxide.

Germany experienced an increase of its greenhouse gas emissions during 2012 and 2013, even if the country intended to set the example. Growing coal power plants use accounts for the main part of this point, supplying 45% of the country’s power generation. Without any new step, the country won’t reach its 40% reduction target from 1990 to 2020. So Angela Merkel is facing a credibility problem, as she likes to be presented as the “climate chancellor”. “ I don’t believe that Germany may give up its targets”,  Sigmar Gabriel said, as  Economy and Energy Minister.

Thousand job losses since five years

What a thorny perspective. After considering a possible close of coal power plants, the government gave that idea up (see “ Les Échos” dated October, 10^th), in order to avoid the weakening of a sector facing a sharp drop of power price. Now it counts on the voluntary steps taken by operators. “ I don’t care to know how a company will contribute to the 22 million tons, Sigmar Gabriel said Wednesday. In which plant, following which efficiency measures, by reducing the production of one plant and by increasing the production of one other? That’s corporate decisions.”

Nevertheless, the point shall be raised in the wake of the law to be passed in 2016 about the new frame of the power market. Power majors claim for an additional fee for their conventional power plants. Sigmar Gabriel is concerned that this claim would lead to new price increases, but that’s a touchy issue for him. In fact, E.ON, RWE or EnBW have suppressed thousand jobs since five years.

Former Environment Minister, Sigmar Gabriel focuses on employment as a priority. As he has been asked to be the SPD candidate to the chancellery in 2017, he listens carefully to the trade-unions campaign and launching a petition claiming for “an energetic change without any risk for employment and without any political sharp price increases”.

European energy leaders forced to take radical decisions

"Les Échos" 

ANNE FEITZ / JOURNALIST and THIBAUT MADELIN / CORRESPONDeNT in berlin on dec., 2nd

Sigle de l'entreprise, wikipedia

Lemonde.fr

German major E.ON intends to sell its nuclear and fossil assets. Renewables expansion makes conventional power plants unprofitable.

The European energy market has become frantic. Sunday evening, E.ON announced a kind of reorganization, which may stir the whole sector. E.ON, the German energy major, intends to sell its conventional power plants, among them, nuclear, coal and gas stations – to focus on renewables, power and gas grids then customers services. Analysts think that this movement tends to be an attempt to put less profitable assets in a kind of “bad bank”, namely a defeasance structure, whereas E.ON denies this possibility.

“We are convinced that energy groups shall focus on one of the two worlds to record success in the future”, E.ON Supervisory Board President Johannes Teyssen said. The world of the future, featuring a decentralized energy produced from renewables, or the world of the past, focusing on a centralized energy produced by high capacity power plants. “Thus the company shall be well positioned to act as an actor and a consolidation platform on the production market”, Johannes Teyssen highlighted, pointing out that this decision was not “a job loss programme”. 20,000 staff will join the new structure, on a total of 60,000.

E.ON will be still an energy group, featuring a new philosophy and a new financial profile. Three quarters of the result shall be produced through regulated activities, then renewables, which still benefit from generous fixed tariffs, and through grid management. In its corporate culture, E.ON takes into account that its customers have become more and more producers, solar as wind producers, and that they need new solutions.

Following suit

Others are considering following suit, as the sector faces a deep crisis in Europe, following the wide competition of renewables, the demand drop and the power wholesale price fall. Fourteen years after Germany’s first decision to get out of nuclear, Düsseldorf major surrenders to the German energy change in its way. “This move is deemed as really courageous but progressive”, RBC Capital Markets analyst John Musk said, in a note to his customers. “Now it remains to be seen if other integrated groups dedicated to community services will follow E.ON’s example.”

Presently some sector groups, owning important thermal production capacities, face a drop of their market capitalisation, such as France’s GDF Suez, Italy’s Enel and Spain’s Iberdrola, recording a ratio market price/ book value close to 1 or even less than this threshold. In a document released last month, Credit Suisse analysts observed that GDF Suez recorded a “conglomerate discount”, ranging from 5 to 40% and advised that the group should restructure and rate its grid activities in France separately. The French major already stroke the market by recording a € 14,9 billion of assets depreciation in its 2013 account statements, mainly on its thermal power plants and gas storage facilities in Europe. Then Gérard Mestrallet, the group’s CEO, spoke of a crisis “sustainable and deep” in the sector.

The sector considers that 70 GW of capacities have been closed or mothballed in Europe for now. In view to survive, energy majors hope that a political intervention and some wide scale capacity markets would be implemented, in order to strengthen supply security reportedly, but above all in order to make their fossil plants profitable. In Germany, the government shows its support to E.ON new strategy, as it promotes renewables. “By this decision, E.ON is the first group to adapt to the new deal in the energy supply chain. This move would probably give birth to new opportunities”, Economy Minister Sigmar Gabriel said.