Vattenfall could partner with German stadtwerke to share risk

05 December 2013 11:22 Source:ICIS
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Swedish utility Vattenfall might look to sell parts of its continental business in bundled chunks to regional German utilities as the Swedish state-owned utility is looking for potential partners in its power generation business, analysts agreed. Polish utilities on the other hand would be unlikely buyers of German power plants.

Like many European utilities, Vattenfall is under pressure from falling margins in power generation, which comes after its ambitious expansion drive into foreign markets such as the merger with Dutch utility Nuon in 2009.

Consequently, Vattenfall proposed splitting up its business into Nordic division, and Continental Europe and UK division in July ( see EDEM 23 July 2013 ).

Vattenfall said on Monday it is looking for “partners to share business opportunities” with, rather than partners “to share risk” as the utility’s CEO Oystein Loseth phrased it in summer. “Exactly how this would be done is a matter that has to be decided by the owner,” a utility spokesman added.

Local interest

Statdwerke, German regional municipal utilities, might be the type of company interested in acquiring parts of Vattenfall’s business, but only on a local level, one analyst at a European investment bank said.

Ties already exist after the municipal utility of the east German city of Leipzig, one of the larger stadtwerke, entered into a cooperation agreement with Vattenfall earlier this year for the supply of district heat from the Swedish utility’s 875MW lignite plant in Lippendorf. “In principle Stadtwerke Leipzig is interested in an expansion of its production capacity,” a company spokeswoman said in an email on Wednesday. But the municipal utility does not have any information currently about if, when or which assets might be sold by Vattenfall, she said.

Selling its continental business in chunks such as a lignite plant and a lignite mine together will increase the chances of finding a buyer, an analyst at a European investment bank said on Monday. “Assets gain value if you bundle them.”

For example, German utility E.ON sold a lignite plant with a mine to a German mining firm MIBRAG in September ( see EDEM 18 September 2013 ). “To divest the entire continental assets will be very difficult [for Vattenfall],” he added.


Gamble on future CO2 price

Lignite plants are among the more profitable operating in subdued wholesale power price environment, because of low generation costs. “In the current environment, lignite plants are very competitive” which would make them an attractive asset to buy, the analyst said. But such an investment would not be without risk as “any potential bidder takes a chance on the evolution of the CO2 price”, he added.

The analyst said he does not expect a pick-up in the price of European emission certificates in next three to five years.

While it is possible the relatively carbon intensive lignite power generation might fall out of favour with future governments ( see EDEM 21 October 2013 ), all but one of Vattenfall’s 13 lignite plants in Germany are combined heat and power plants. The current government and likely new coalition both want to expand this type of facility, because they use energy sources more efficiently than standalone power generation.


Polish utilities

In theory the proximity to Poland of Vattenfall’s German lignite plants, which are all located in the east of the country and where it is also mines the fuel, might make a case for a Polish utility to invest in these plants.

In particular, as Poland may face a power generation capacity crunch by 2015 or 2016 as up to 6GW of older plants are being switched off before about 5.5GW of new plants will be built between 2017 and 2019 ( see EDEM 2 August 2013 ).

A second analyst based in Poland said the Polish state, which has control over utility PGE, would be unwilling to invest at arm’s length in German assets. “It will be extremely difficult to persuade the Polish government to spend money abroad when we have such a strong mining industry locally,” he said. Martin Degen

By Martin Degen