ANALYSIS: German election promise on nuclear comes at a price

London (Platts)--16Sep2005

Germany's utility chiefs can be certain of two things after the national
elections on Sep 19, analysts say. The country will have a new government led
by the conservative Christian Democratic Union. And nuclear power generators
will be allowed to extend the life of their reactors for at least another
eight years as promised in the party's manifesto.
     Less certain is what chancellor-in-waiting Angela Merkel will ask for in
return for the surety of increased utility profits from reactor lifetime
extensions, which Dusseldorf-based investment bank WestLB calculates could
amount to Eur4.2-bil ($5.2-bil) for Eon and Eur2.8-bil for RWE.
     Analysts believe the bargaining chip could take several forms: utilities
could offer energy-intensive industrial clients cheaper deals; they could
commit to R&D work on new technologies; or they could contribute to cutting
state subsidies on renewables by lowering their power prices.
     The problem is that an extension would not affect cash flows until after
2010 and utilities will want to know how changes to renewables support policy
will hurt them, says Peter Wirtz, head of utilities at WestLB's equity
research division. "They argue that the government's decision in 2001 for the
withdrawal from nuclear power by 2020 has already destroyed the value of their
nuclear assets and that they have suffered additional costs," Wirtz says. He
expects utilities to agree to cut prices to large users, but that this will
be achieved via unpublicized lower grid fees in contract renewals. "It will be
a game between those companies and their suppliers with the government acting
as a go-between."
     Any trade-off will not be between utilities and the CDU alone, however,
as opinion polls show the party is unlikely to get the clear 50% majority it
needs to govern the country. With politicians from the anti-nuclear Green
party probably clearing their desks already, the CDU's coalition partner would
be the liberal Free Democratic Party, or current chancellor Gerhard Schroder's
Social Democrats, or both.
     It is understood that Merkel will waste no time on the matter and plans
to invite the big four utilities-RWE, Eon, Vattenfall Europe and ENBW-for an
energy summit with the aim of finding ways to keep power prices low and jobs
secure. This intention has revealed differences in the CDU's approach to the
energy sector with the FDP, which argues that prices should not be subject to
political interference. Instead the liberals would want to use the profits
made from longer nuclear lives to modernize coal power stations. They would
also push for a longer extension to nuclear power plants from the 40 years the
CDU and SPD could probably agree on, to as many as 60 years.
     Another option for utilities that analysts see is a commitment to
research into the latest developments in generation, including renewables and
clean-coal technology. "It has been a trend among utilities over the past five
years to focus on their core business because they know that only very few
venture capital businesses succeed," said Christofer Dittmar, managing
director of Accera Venture Partners in Mannheim, adding that R&D work
accounted for less than 1% of costs in the German energy sector.
     Together with his managing director partner Matthias Helfrich, Dittmar
helped plan the IPO six years ago of Germany's fifth biggest utility MVV
Energie, which is still the country's only listed municipal utility. Accera
Venture Partners recently took over the management of MVV Energie's corporate
venture capital fund, which the utility had established in 2001 to gain access
to new products of interest to its multi-utility business. "In the past MVV
Energie had a broad program that included wind, biomass and photovoltaic
energy. Now it's just biomass, and this is essentially a technology that they
have had in their waste-to-energy plant for 30 years already," said Dittmar.
     While building new nuclear plants is a political hot potato, Germany
needs to replace around half of its 100GW of power generating capacity over
the next 15 years. The extension to nuclear, the country's wealth of
coal-fired plants and high gas prices and gas import dependence on Russia all
mean, Dittmar says, that the current fuel mix of 50% coal, 30% nuclear and the
remainder gas and renewables will be unchanged for years to come. Any
preference for gas-fired generation will depend on competition in the gas
market, which is dominated by Eon-Ruhrgas and Wintershall.
     "The anti-trust authority is getting tough on Ruhrgas and their long-term
contracts with municipal utilities. I expect this trend to continue and that
even the CDU and FDP will continue doing that and somehow not let gas
suppliers claim to be part of a free market while at the same time making
obscene profits," Dittmar said.
     Over the next 10-20 years, the mix may therefore change towards gas and
renewables. "It is the distributed generation model that we are ultimately
heading for. And before the tens of thousands of megawatts in needed new
capacity can be built, we will also need to see how the European unification
process will develop. If there is not only a unified market but a political
integration which mitigates fears like security of energy supply, the question
for nuclear will be, if you can't build in Germany, then perhaps you can build
elsewhere."

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