RWE, Germany’s largest electrical utility, will not renew two long-term contracts for coal-fired power, according to Bloomberg News.
In Germany, long-term contracts like this work by allowing utilities to buy power from a producer for a fixed rate over the contracted period of time. Utilities do this if they anticipate being able to then turn around and sell the electricity for a profit. The risk, of course, is that prices could suddenly drop in the middle of the contract, leaving the utility high and dry.
That seems to be what happened here. “German power prices for 2014 slumped 17 percent this year as renewable energy production surged and power consumption fell to the lowest since 2009, cutting margins at gas- and coal-fired power stations,” Bloomberg reports. As a result, the two long-term contracts RWE has with the power generator STEAG GmbH — which expire in the next two years — are looking far less attractive. Bloomberg’s source also said RWE won’t be renewing other contracts with two smaller coal plants.
RWE said in August it plans to shutter 3,100 megawatts of capacity in Germany and the Netherlands, which accounts for about seven percent of its production in northern Europe. In October, the utility’s Chief Financial Officer said it will decide what to do with 1,450 megawatts of coal capacity its contracted with at the end of 2013.
Though the collapse in demand for power could lead to less coal burning and thus fewer carbon emissions, it’s still a mixed bag. Germany has been making progress in energy efficiency, but it’s not clear there’s been enough advancement to account for that kind of drop in consumption. Like many countries in Europe, Germany’s still struggling to emerge from its post-2008 economic slump, which also drives down demand for power.
On the plus side, as Bloomberg notes, production of renewable energy has boomed there, helping to cover the supply gap left behind after German Chancellor Angela Merkel started shuttering nuclear plants in reaction to the Fukushima disaster. The demise of the long-term contracts for coal is also encouraging because, so far, it’s looked like a lot of that gap would be made up by coal power.
Without nuclear, coal also took on added prominence as a source for the base load power Germany still needs despite its massive reliance on renewables. But a recent demonstration project in the country showed how, with better networking and coordination, reliable power can be provided for Germany’s entire grid with renewables alone.