A new report published this week has shown how three coal power plants brought online in 2015 in the Netherlands have already begun to underperform, and have subsequently shown themselves to be at high risk of becoming stranded assets for investors.
According to the Institute for Energy Economics and Financial Analysis (IEEFA), which published its report this week entitled “The Dutch Coal Mistake: How Three Brand-New Power Plants in the Netherlands Are at Risk Already of Becoming Stranded Assets,” three coal-fired power plants brought online in 2015 are already proving to be far less valuable than was anticipated, and have already come up short financially. According to the IEEFA, the introduction of these new plants “are fundamentally out of step with electricity-market trends across Europe” given that “markets and existing laws have already undermined the viability of new coal-fired plants in Europe.”
The three power plants in question are run by three major European utilities — RWE (at Eemshaven), Uniper (at Maasvlakte) and Engie (at Rotterdam). Since going online, the report shows that these plants have a current collective valuation, on owner balance sheets, of approximately €2.5 billion, which is not great considering the collective original construction costs amounted to more than €6 billion.
The author of the report, Gerard Wynn, a London-based IEEFA energy finance consultant, explains that the three power plants’ underperformance is the result of numerous market trends, including falling power prices, the rapid growth of renewable energy, flat or falling energy demand, and new emissions-control policies.
“These will very likely be the last coal-fired power plants built in Western Europe,” Wynn suggested. “Our research finds these plants are classic ‘bad examples’ of energy investment due to their failure to compete and their vulnerability in particular to climate-change risk and the rise of renewables.”
Wynn also explains that the three power plants in question are representative of an entire generation of coal-fired power plants that are quickly finding themselves at risk in the face of increasingly ambitious initiatives worldwide to cut carbon emissions. “This is acutely evident today in the Netherlands, where a recent court ruling and a parliamentary motion supporting tougher actions to avert climate change represent a growing trend,” Wynn said. “Mandated, early retirement of these new plants may be the most cost-effective way to meet climate targets in the Netherlands,” Wynn said. “Our analysis finds few if any scenarios under which these power plants can return value to investors.”
The IEEFA explains in the report that its analysis of these three power plants shows them to be uneconomic in a wide variety of plausible policy and market scenarios, and that the investment logic which brought them into being and online in 2015 would not hold up just a year later “without government subsidies in the guise of capacity-market supports.” As such, the IEEFA recommends “mandated, early retirement” for the three plants as the potentially most cost-effective way to meet climate targets in the Netherlands — not to mention as the most cost-effective way to salvage the situation for the utilities and their investors.
“These plants are uneconomic in terms of meeting their original valuation and investment return targets, and their owners may have to take additional impairments,” Wynn said. “Their example rules out any new-build coal power in western Europe, while suggesting difficulties ahead for existing coal-fired generation.”
Further highlights from the report include:
- New regulatory pressures on coal in the Netherlands are creating headwinds for coal-fired power and increasing the penetration of competing renewables.
- RWE, Uniper and Engie have already taken underpublicized impairments on the new power plants collectively worth billions of euros, underlining the weak investment case for coal new-build in Europe.
- The value on the utility balance sheets of these new coal-power plants has dropped to about €1 billion or less each, compared with original capital expenditure of about €1.9 million per megawatt.
- Using a discounted cash flow (DCF) model, and applying very generous assumptions to coal power, we see a net present value (NPV) in the range of €400 million for a comparative 1,100MW power plant.
- The discrepancy between our DCF valuation and the assessed book values of these three coal plants suggests that RWE, Uniper and Engie will have to take another, thorough look at their valuations.
- Given political and market trends, we see even lower future valuations for the three plants examined.
“While this report examines the impact of national and regional pressures on these three coal-fired power plants in particular, we see broader implications for the business case for new-build coal power in Europe and further afield. In markets where utilities are still planning to build new coal power plants, the Dutch Mistake serves as a warning to investors against taking utility profit projections at face value.”