EU gas-fired write-downs near €6bn in 2013

Adverse market conditions have led European utilities to take impairment charges on combined-cycle gas turbines (CCGT) worth nearly €6 billion last year, according to a study released by Oxford University’s Stranded Assets Programme.

In the aftermath of the financial crisis, significant decreases in European Union (EU) electricity demand, the fall of carbon prices, increased renewable energy capacity and the relative depreciation of coal compared with gas have shifted the balance of profits away from CCGTs, the report said.

As a result, the 10 major utilities observed by the authors have mothballed or closed more than 22 gigawatts (GW) of CCGT capacity over the course of 2012-2013, including 8.8GW of facilities built or acquired within the last 10 years.

The sample of companies comprised E.ON, RWE, Statkraft, Vattenfall, EnBW, GDF Suez, Centrica, SSE, Verbund and CEZ.

The changing profitability of base-load thermal power generation has also impacted share prices, with RWE and E.ON falling 33 percent and 15 percent respectively from January to September 2013, before recovering slightly. The upcoming expiration of forward hedging in EU markets – which has helped protect profits over the last three years – suggests utilities could see their financial situations further deteriorate, the study said.

The credit quality of major utilities also suffered, pushing them to rein in spending and increase liquidity. But potential for further savings is now seen as limited.

The study hinted that these combined headwinds had already prompted a change in long-term company strategy, with utilities now in the process of cutting back investments in planned EU baseload investments and redirecting fresh funds towards developing markets. It also encouraged governments to consider ‘stranded assets’ within the design of capacity mechanisms, through competitive, market-based policies.

Investors were advised to press their investee companies for more transparency regarding the profitability of generation assets, regardless of technology, to address risks posed across generation portfolios.