The cash cow has stopped giving

Following the recommendations of Germany’s coal exit commission, the German Federal government has begun negotiations with operators for the early closure of 3GW lignite plants by 2022. Understanding the current lignite profitability is critical to these negotiations: how quickly, how many, and for what cost (if any), can lignite units be retired?

This report gives evidence that lignite profits have collapsed very recently.

It shows: 

• • The gross profit of the German lignite fleet collapsed by 54% in the first half of 2019, according to our modelling using out-turn power prices. Their gross profit – before any fixed costs are taken into consideration – fell to €513m, from €1109m in the first half of 2018. Old lignite units (pre-1990) fell the most aggressively – by 62% to €188m from €500m. This was not enough to cover their fixed costs.
  • As a result, the German lignite fleet lost €664 million so far this year, compared to a loss of €68m in the first half of 2018. Old lignite units (pre-1990) lost €476m, against their assumed full six-monthly fixed costs, and new lignite (post-1990) units lost €188m. Not one lignite unit covered their full fixed costs.
  • The start of a new age: 24/7 lignite baseload is over. Half of all hours from March to June this year were uneconomic for old lignite units.
  • Lignite will remain loss-making over the medium-term. Current forward power and carbon prices indicate the old lignite units would lose €1.8 billion over 2020-2022. This compares to a loss of €0.4 billion in 2016-2018. Even new lignite plants barely make a profit against their full fixed costs, according to our modelling. 

Key Recommendations: 

• Policymakers should accelerate lignite closures and push back on excessive compensation claims, knowing lignite profitability has collapsed.
  The case for minimal compensation and maximum early closures is clear. The cash cow has stopped giving: lignite is currently unprofitable and is likely to remain so in the near term.
• The German government should agree a minimum carbon price.
  This would end any arguments that lignite might return to profitability in the future.
• RWE and LEAG must publish their numbers and assumptions and positively engage in the negotiations.
  We have published our full valuation model alongside this report. The truth is, only the lignite operators know the exact profitability and costs. Only by RWE and LEAG opening up, can there be an open and honest conversation about how quickly and how cheaply Germany’s old lignite units can be closed.

"We were surprised at just how aggressive the very recent collapse in lignite profitability has been. The lignite cash cow that’s existed for decades has disappeared. This report should give confidence to policymakers to negotiate the rapid closure of all older lignite units, and without having to write a blank cheque. Now, RWE and LEAG need to be transparent with the German people: how much are their power plants really worth, and how quickly can they phase out these ancient, polluting lignite units?" comments Dave Jones, Electricity Analyst, Sandbag, on the report.