A Complex Strategic Choice – Coal Power

Iulie 2010

INTERNET SECURITIES ROMANIA S.R.L.

Summary

The resource is available and the delivery is stable, the reserves are more abundant that the natural gas reserves and the energy generated is cheaper than the renewable wind energy. But its carbon footprint is larger than that of the natural gas (not to mention the renewable) – which is furthermore cheaper in terms of final energy generated. The EU apparently opted for the (slightly unreliable but cheaper and cleaner) natural gas, decided to financially encourage the use of renewable resources and embarked for phasing out the use of coal as energy resource under the pressures of environmentalists (including by cross subsidies from fossil fuel and mostly coal power generation under the CO2 certificates system); nonetheless coal-based technologies might improve radically and when other hydrocarbons near depletion the paradigm might change radically so that the coal reserves' value might rise significantly. Romania holds moderate coal reserves compared to other EU countries (Germany, Poland) but they might play an important role at that time. In the meanwhile, the profitability of coal based energy generation remains uncertain and it depends on individual decision of states.

Current situation in coal mining and power generation

The government has already decided to incorporate the state-controlled mining companies CNH, SNLO as well as the vertically integrated (coal-based) power/heating generators Turceni, Rovinari and (partly coal-based) Craiova in the two national power companies, where their rather high operating costs will be offset by the low operating costs of the hydro respectively nuclear power generation facilities. The two national power companies will be set as of July 1st unless the antitrust body delays its approval or formulates supplementary requirements, and will hopefully be floated under IPOs under the most optimistic scenario – because at least one of the two will badly need investments beyond its possibilities.

The oversized, labour-intensive coal sector inherited from the communist regime (more than 100,000 employees against some 20,000 now) has undergone a costly restructuring process over the past decades and the final stages, namely making the sector viable, phasing out the subsidies and privatizing the streamlined companies are approaching an end; the success of the restructuring process range from acceptable (CNH hard coal company – where the main achievement is the personnel downsize) to fairly good (at the opencast mines within the power/heating generators, where profitability was achieved with no subsidy) but generally it was modest given the company’s debts constantly rolled over (an implicit subsidy). The rising awareness for greenhouse gases (a major by-product of coal-based electricity) diminishes however drastically the sector’s attractiveness among investors. Nonetheless, the coal was still seen as an attractive source of power by a series of private investors over the past years – out of which E.ON and Enel have the most developed ongoing project with Termoelectrica in Braila on the Danube (800 MW, EUR 1.2 bn investment cost). The location indicates possible use of imported fuel. There must be therefore economic incentives for such projects, in spite of the downsides outlined above and the coal-based section of the national power companies – soon to come into analysts’ review for evaluation (in the case of IPOs), might have a positive contribution in terms of value and particularly in terms of stability and reserves. Nonetheless, the stories of (underground) hard coal and (overcast) lignite seem to be pretty different and further diverge as the states will lift subsidies for the former.

The losses in the coal mining and related power generation sector are largely the effect of inefficient management plus public money siphoning – and is not entirely due to the low intrinsic profitability of the business. Evaluated and sold at a bargain back in 2004, national power company Petrom increased its market value undeniable due to the private management but also because of its inherited gas and oil reserves. Short-sighted evaluation of the coal mining cold result in similar undervaluation of the national power companies. The evaluation has necessarily to project the balance, ruled by the EU or set under global treaties, between the negative externalities of the coal-based energy (these would be gas emissions primarily) and the positive externalities (stability of energy supplies, higher self-sufficiency, higher employment rates).

Coal vs. other main fuels – environmental cons against strategic pros

The coal prices are Steam Coal (7,000 kcal/kg)) North West Europe ports CIF, oil price is standard Brent and the natural gas price is the import price for Russian natural gas in Romania. All the prices were converted into USD per ton of coal equivalent. Freight costs are quite important elements for the final assessment though. The domestic price for hard coal was around USD 106 per tce recently (the price is regulated) out of which the government covers 60% and the final user paid USD 43 per tce – which is some half of the market price. The domestic price of lignite was USD 69 per tce and USD 63 per tce for the coal mining companies SNLO and Ploiesti respectively (no subsidy paid by the government). While no state subsidy is paid for lignite across EU, the subsidies for high quality (more costly) hard coal are to be lifted in January 2011 – but the issue is currently subject to strong lobby from major hard coal producer Germany that plans to prolong subsidies until 2018 while pledging to close down entirely the hard coal mines afterwards.

The coal is less efficient and pollutes more when used as a source of electricity compared to the natural gas–fired plants that produce power at a higher technological yield and with 50% to 70% less CO2 emissions; furthermore, coal-fired plants need costly desulfurisation units to avoid SO2 emissions. For these reasons, many coal-based power plants world-wide and in Romania were converted to burn natural gas in the past decades.

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