Czech EPH bets on coal's future as backup for renewables

EPH is betting on coal as a backup source for the rapidly expanding renewable energy sector. The company aims to secure contracts similar to the one in the UK for the Eggborough power plant. Through its acquisition of Vattenfall's assets, EPH is targeting profits from Germany's coal reserve.

The strategy of investors Daniel Křetínský and Patrik Tkáč is to profit from the rapid expansion of renewable energy in Europe by securing backup power needed when the sun is not shining and the wind is not blowing.

„While renewable energy sources will undoubtedly continue to grow, without structural changes to distribution grids and efficient electricity storage, conventional generation will remain indispensable for some time,“ EPH chairman Daniel Křetínský told Bloomberg.

EPH acquired the UK coal-fired power plant Eggborough in 2014 and fossil fuel assets in Italy last year. Details of the takeover of Vattenfall's German coal-fired power plants are likely to be finalised this month.

Contract in the UK

When acquiring the Italian assets, EPH announced its plan to enter European markets in order to ensure security of electricity supply. One route is to obtain contracts under which generators are paid to maintain readily available capacity reserves.

According to UK analysts at Sandbag, EPH secured £60 million (more than CZK 2 billion) in a UK auction to keep the Eggborough power plant on standby and provide backup capacity next winter.

„They want to take advantage of the fact that electricity markets are changing. There is no escaping the fact that our system still requires electricity from coal-fired sources in winter,“ says Tom Edwards, a UK consultant at Cornwall Energy Associates.

According to data from UK transmission system operator National Grid, the 46-year-old Eggborough power plant will receive £11,513 (CZK 395,000) for every hour it remains on standby and a further £3,908 per hour when it is dispatched. In addition, the plant will receive around three times the current market price for the electricity it generates.

Opportunities in other markets

Germany is also planning to create a capacity reserve to ensure electricity supplies as it shuts down all nuclear power plants and closes some coal-fired sources. Germany plans to place 8 coal-fired power plants in the reserve, including some assets that EPH acquired from Vattenfall.

Macquarie Group, which owns gas-fired combined-cycle power plants in the UK, is pursuing the same strategy of generating profits from the need to ensure security of electricity supply. According to National Grid, without backup measures, reserve capacity in the UK would fall to zero next winter.

EPH will benefit from its current strategy for as long as EU member states use separate capacity mechanisms. These measures could mean that by 2020, as much as half of electricity bills in Europe could consist of off-market subsidies and taxes, according to Matteo Mazzoni, an analyst at Italian company Nomisma Energia. That would be a substantial increase from the current 36% share.

„The people at EPH are smart and have a clearly defined growth strategy. They are moving into areas that others want nothing to do with,“ says Elchin Mammadov, an analyst at Bloomberg Intelligence.

Lead photo: Wind turbines with the Eggborough coal-fired power plant in the background, author: johnthescone, Flickr