The economics of gas and coal-fired
plants – signs of market failure?
Graham Weale - Chief Economist, RWE AG
Markus Roth - RWE Generation SE
IEA Electricity Supply Security Conference 1st October 2013
Forward Looking Statement
This presentation contains certain forward-looking statements within the meaning of the US federal securities laws.
Especially all of the following statements
 Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items,
 Statements of plans or objectives for future operations or of future competitive position,
 Expectations of future economic performance; and
 Statements of assumptions underlying several of the foregoing types of statements are forward-looking statements.
Also words such as “anticipate”, “believe”, “estimate”, “intend”, “may”, “will”, “expect”, “plan”, “project” “should” and similar expressions are
intended to identify forward-looking statements.
The forward-looking statements reflect the judgment of RWE's management based on factors currently known to it. No assurances can be
given that these forward-looking statements will prove accurate and correct, or that anticipated, projected future results will be achieved. All
forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.
Such risks and uncertainties include, but are not limited to, changes in general economic and social environment, business, political and legal
conditions, fluctuating currency exchange rates and interest rates, price and sales risks associated with a market environment in the throes of
deregulation and subject to intense competition, changes in the price and availability of raw materials, risks associated with energy trading
(e.g. risks of loss in the case of unexpected, extreme market price fluctuations and credit risks resulting in the event that trading partners do not
meet their contractual obligations), actions by competitors, application of new or changed accounting standards or other government agency
regulations, changes in, or the failure to comply with, laws or regulations, particularly those affecting the environment and water quality (e.g.
introduction of a price regulation system for the use of power grid, creating a regulation agency for electricity and gas or introduction of trading
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resulting from pending or future litigation. Any forward-looking statement speaks only as of the date on which it is made. RWE neither intends
to nor assumes any obligationto update these forward-looking statements. For additional information regarding risks, investors are referred to
RWE’s latest annual report and to other most recent reports filed with Frankfurt Stock Exchange and to all additional information published on
RWE’s Internet Web site.
RWE AG – CEA : Weale IEA Conference 01.10.2013
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RWE today: a leading European utility
RWE markets
Leading positions in core markets
Product
Market1
Electricity
Gas
Germany
No. 1
No. 3
UK
No. 4
No. 4
Netherlands
No. 2
No. 1
Central
Eastern and
South Eastern
Europe
> No. 2 in
Hungary
> No. 3 in
Slovakia
> No. 5 in
Poland
> Presence
in the
Czech
Republic
RWE markets with established
market positions
Additional markets
especially for renewables
Growth markets under observation
(initial activities in some cases)
Additional markets
especially for upstream gas & oil
x/y
Forecast average growth
of electricity/gas
consumption
in % p.a. (2011– 2020)
Total Europe
> Presence
in
No. 3
Turkey
> No. 1 in
the Czech
Republic
> No. 2 in
Slovakia
> Leading
position in
Hungary
No. 6
RWE has leading positions in two of Europe’s largest markets as well as in fast growing SEE/CEE markets
and own a large upstream position in both Europe and North Africa.
1 Market positions of the RWE Group in terms of sales.
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Agenda
1. Definition and determinants of „economics“ and key input
parameters
2. Power prices set through merit-order curve
3. Performance of plants and cost recovery
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Economics – extent to which relevant costs are
recovered: new plants
Capex
Depreciation
Power price
Hourly
spreads
Interest
Normal
return
Full costs
(exc. fuel
& CO2)
Fuel & CO2
Price
Gross..
margin
Maintenance
Staff costs
Efficiency
Running
hours
Secondary
market
income
Merit-order
curve
Demand
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Economics – extent to which relevant costs are
recovered: existing plants
Depreciation
Interest
Normal
return
Maintenance
Staff costs
Power price
Hourly
spreads
Full costs
(exc. fuel &
CO2)
Full costs
(exc. fuel &
CO2)
Fuel & CO2
Price
Efficiency
Gross.
margin
Running
hours
Secondary
market
income
Merit-order
curve
Demand
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Renewables capacity grows much more quickly than
total or peak demand
Germany: Demand and Renewable development
TWh
Total demand
GW
Peak demand (RHS)
600
100
580
560
90
540
520
500
80
2009
2010
2011
2012
2013
2014
2011
2012
2013
2014
2015
GW
120
100
80
60
Hydro
Offshore
Biomass
Onshore
Photovoltaic
40
20
0
2009
2010
Source: RWE
2015
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Import coal price has fallen in relation to gas, whilst
CO2 remains continually low
International fuel costs and European CO2
160
140
120
100
Coal ($/t)
80
Gas (€/MWh)
20
CO2 (€/t)
0
2008
2009
2010
2011
2012
2013
2014
2015
>
Coal: Weaker global, especially Chinese demand eroded prices in 2012/13. With a cautious demand recovery
the market expects a moderate upward movement
>
Gas: Strong Asian prices diverting LNG from Europe, a cautious demand recovery and limited pipeline supplies
pushes prices 2012/13 higher. Midterm new LNG supplies to Asia plus some US LNG will end LNG diversions
leading to more comfortable supplies and moderate European price levels
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Fuel costs per MWh generated by plant type – rising
gap between gas and coal (especially older plant)
Fuel cost € / MWh generated
80
CCGT old
70
CCGT new
60
50
Hard Coal old
Hard Coal new
40
30
20
10
0
01.2009
01.2010
01.2011
01.2012
Assumed full load hours:
HC old (36% - 3000Flh), HC new (46% - 5000Flh)
CCGT old (42% - 1000 Flh), CCGT new (58% - 1500 Flh)
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Agenda
1. Definition and determinants of „economics“ and key input
parameters
2. Power prices set through merit-order curve
3. Performance of plants and cost recovery
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Merit-Order 2009: new gas and hard coal plants
competing strongly
Germany: Merit Order 2009 (€ / MWh)
200
Oil / Gasoil
180
Gas
160
Hard Coal
Min load
Peak load
140
Lignite
120
Nuclear
100
Renewables / CHP
80
60
40
20
0
MW
50
Average available
Wind / PV / Hydro / other Renew.
45
Base / Peak spread: 120%
40
35
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Merit Order 2012: hard coal plants with high
utilisation but gas weakening
Germany: Merit Order 2012 (€ / MWh)
200
180
Oil / Gasoil
Gas
160
Hard Coal
Min load
Peak load
140
Lignite
120
Nuclear
100
Renewables / CHP
80
60
40
20
0
MW
50
Average available
45
Base / Peak spread:114%
Wind / PV / Hydro / other Renew.
40
35
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Merit Order 2015: hard coal plants still active but gas
plants only have low utilisation
Germany: Merit Order 2015 (€ / MWh)
200
180
160
140
120
100
80
Oil / Gasoil
Gas
Hard Coal
Lignite
Min load
Peak load
Nuclear
Renewables / CHP
60
40
20
0
MW
50
Average available
Wind / PV / Hydro / other Renew.
45
Base / Peak spread: 125%
40
35
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Base and peak power prices – little sign of increase
despite planned closures and capacity tightness
€ / MWh
80
75
70
65
60
55
50
Peak
45
40
Base
10
Base-Peak
Spread
5
0
2008
2009
2010
2011
2012
2013
2014
2015
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Agenda
1. Definition and determinants of „economics“ and key input
parameters
2. Power prices set through merit-order curve
3. Performance of plants and cost recovery
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Clean spreads – coal still positive whilst gas
increasingly below zero
Clean Spreads Germany € / MWh
40
Hard Coal old
Hard Coal new
CCGT old
CCGT new
30
20
10
0
-10
-20
-30
-40
01.2009
01.2010
01.2011
01.2012
Assumed full load hours:
HC old (36% - 3000Flh), HC new (46% - 5000Flh)
RWE AG – CEA : Weale IEA Conference 01.10.2013
CCGT old (42% - 1000 Flh), CCGT new (58% - 1500 Flh)
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Clean dark spreads, running hours and gross
margins for hard coal plants all still positive….
New plants
Old (fully amortised) plants
100
100
80
80
60
60
40
40
20
20
0
2009 2010 2011 2012 2013 2014 2015
Running hours 100’s
0
2009 2010 2011 2012 2013 2014 2015
Average spread € / MWh
Gross margin € 000 / MW
RWE AG – CEA : Weale IEA Conference 01.10.2013
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…but new coal plants not earning a return on capital
whilst old plants are adequately covering fixed costs
New plants
Old (fully amortised) plants
€ 000 / MW
€ 000 / MW
150
150
Annual proceeds
100
50
0
Normal return
on capital
100
Depreciation
Staff &
Maintenance
2009 2010 2011 2012 2013 2014 2015
Annual proceeds
50
Staff &
Maintenance
0
2009 2010 2011 2012 2013 2014 2015
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Clean spark spreads for gas plants running
disastrously down hill – plants hardly operating
New plants
Old (fully amortised) plants
80
80
60
60
40
40
20
20
0
0
-20
-20
-40
-40
2009 2010 2011 2012 2013 2014 2015
2009 2010 2011 2012 2013 2014 2015
Running hours 100’s
Average spread € / MWh
Gross margin € 000 / MW
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Gas plants never recovered their full costs; from
2011/2012 failed to cover depreciation then O & M
New plants
Old (fully amortised) plants
€ 000 / MW
€ 000 / MW
90
90
80
70
80
Annual proceeds
Normal return
on capital
70
60
60
50
50
40
Depreciation
30
20
10
40
30
Staff &
Maintenance
20
10
Annual proceeds
Staff &
Maintenance
0
0
2009 2010 2011 2012 2013 2014 2015
2009 2010 2011 2012 2013 2014 2015
RWE AG – CEA : Weale IEA Conference 01.10.2013
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Conclusions – strong evidence of market failure,
requiring new instruments to ensure supply security
 Only certain older coal plants are truly „economic“ – covering relevant costs
 New coal plants have earned no return on capital employed whilst new gas plants
are not even covering depreciation – major destruction of capital
 The following factors explain the situation:
• Rapid renewables build with no price signal for new capacity
• Relatively flat power demand due to continuing weak economy
• Relatively shallow merit-order curve
 Strong signs of market failure: despite prospective tight capacity the power price
forwards remain virtually flat
 Highlights limitations of energy-only market beyond efficient dispatching of plant
 New instruments will be required to keep adequate existing capacity online and
incent new conventional plants required for energy transition
RWE AG – CEA : Weale IEA Conference 01.10.2013
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THANK YOU VERY MUCH FOR
YOUR ATTENTION.
[email protected]
RWE AG
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