Moody's: Low power prices in Germany keep pressure on generation earnings

Moody's Investors Service expects that German power prices will remain in the range of EUR30-35 per megawatt hour (MWh) to 2020. This compares with around EUR31-32/MWh today, and reflects: (1) new capacity which will shift price-setting from marginal hard coal plants to more efficient ones; (2) Moody's view that coal prices will recover only modestly over the period; and (3) an expectation of broadly flat CO2 prices.

"We expect generation capacity to grow, driven largely by renewables" said Helen Francis, Moody's Vice President-- Senior Credit Officer. "Germany continues to suffer from chronic overcapacity and margins for thermal generators are thin.We believe the German government will favour an "energy-only" market, resisting calls for capacity markets to compensate generators, which will maintain pressure on company earnings and credit metrics", added Ms Francis.

Moody's notes that companies with the greatest exposure to generation are most affected. Low wholesale prices and tight spreads are negative for all companies. EWE AG (Baa1, stable) and EVN AG (A3, negative) are least exposed, whilst Verbund AG (Baa1 negative) is the most exposed, given its high dependence on earnings from hydro generation. In the middle are Germany's largest generators, which continue to suffer: E.ON SE ((P)Baa1, stable), EnBW Energie Baden-Wuerttemberg AG (A3, negative), RWE AG (Baa1, negative) and Vattenfall AB (A3, stable). Companies are seeking to diversify further into lower risk activities such as renewables and energy services, and are taking measures to defend their balance sheets.

However, Moody's also notes that proposed measures to deliver new emission cuts create uncertainty for thermal generators. On 1 July, the German government is expected to announce measures to help it achieve its target of eliminating a further 22 million tonnes of CO2 emissions by 2020 in the power sector. The new initiative will aim to cut emissions either by imposing a carbon levy on older thermal plants, or by phasing out a reported 2700 MW of lignite capacity and replacing some older coal-fired CHP units with new gas-fired CHP plants. The latter option is likely to have a more moderate impact. RWE, Germany's biggest thermal generator and owner of the largest lignite fleet, could be the most affected, followed by Vattenfall, the country's second largest lignite plant owner. These plants may achieve some compensation.

A potential recovery of coal prices or CO2 prices could lead to upward pressure on wholesale prices, as could a significant increase in demand or a significant decommissioning of conventional capacity. Conversely, prices could fall below Moody's estimates in the event of additional pressure on fuel or CO2 prices, higher-than-expected renewable capacity additions, or increased energy efficiency leading to reduced demand.