Market opinion split on impact of German coal mine closure

Author: Tasmin Chowdhary

2019/08/30

LONDON (ICIS)--A key opencast lignite mine will have to shut down operations from 1 September, according to a Berlin court decision on Thursday, posing a bullish risk to German power prices.

But opinion on the extent of the mine closure’s impact was not unified, with some traders expecting it to have a limited effect.

The Janschwalde mine supplies lignite to a nearby 3GW plant, the third largest in Germany and currently 2.5GW of this is in operation, while 500MW is in reserve.

COURT CASE

German environmental lobby group DUH took Leag, operator of the Janschwalde mine and plant to a court in Cottbus on the basis that it did not have the necessary environmental permits.

The court ruled that Leag had until 31 August to conduct the environmental assessments, while DUH later filed a complaint against this deadline and pushed for the mine to be closed immediately.

Meanwhile, Leag requested an extension from 31 August until 30 November, stating that there was not enough time to conduct the assessments but the Cottbus court rejected this claim.

UNCERTAINTY

It means that from 1 September, the mine will be forced into safety mode, which Leag had already been preparing for.

Although the ruling from the Berlin court is “incontestable”, there is a possibility that the mine could reopen in the future and Leag have stated their intention to close the mine for no longer than 10-12 weeks.

“The supply of the Janschwalde power plant would continue to be possible for a short period of time,” Uwe Grosser, mining director of Leag said.

CLIMBING PRICES

German power prices responded on the day; the Cal ’20 contract retraced previous losses to rise over €1.00/MWh from the last session and the momentum continued early on Friday, ICIS data shows.

However, doubts around future production at the Janschwalde plant mean traders are uncertain of the impact on market prices in the mid-term.

One trader said it would have a “really limited” price effect because the plant could still run using lignite from neighbouring mines. According to the source, the four units which are currently online already depend mostly on lignite from other mines to operate.

As the plant contributes to 5.6% of total German emissions, lower output from Janschwalde could ease demand for carbon permits and weigh on EUA prices in the near term, ICIS analysts expect.

Strong carbon prices have already hampered profit margins at lignite plants. On Thursday, the front-month clean brown spread was assessed at €-1.90/MWh, while the front-year spread stood at €7.37/MWh. Clean brown spreads are indicators of lignite profitability, accounting for the cost of carbon permits.

As a result, German lignite generation has been much lower this year in comparison to previous years, while cleaner gas has seen an increased share in the mix.

“I guess that this should be bullish for German power, gas and probably coal, the question is to what extent,” another trader said.