Investors Bet Coal Has a Future as Backup to Renewable Energy

Source: By Mathew Carr, Rachel Morison, Bloomberg • Posted: Monday, June 6, 2016

Two investors are betting they can make a profit from coal by burning hardly any of it.

Daniel Kretinsky, 40, and Patrik Tkac, 43, are trying to capitalize on Europe’s rapid expansion into renewables by embracing the fuel, a mainstay of European energy before efforts to curb global warming, in its new role as a backup for when the wind dies down and the sun fails to shine.

Their Prague-based company bought the U.K’s Eggborough plant in 2014 and last year acquired EON SE’s fossil-fuel stations in Italy. This month, they’ll probably hear if they can take over Vattenfall AB’s German coal-fired facilities. They’ve secured a deal in a U.K. auction where the biggest payout will be about $87 million for keeping a plant on winter standby. Their eventual goal is to get similar backup agreements throughout Europe.

“They’ve cottoned onto the reality that electricity markets are changing,” said Tom Edwards, a consultant at Cornwall Energy Associates Ltd. in Norwich, England, whose clients include the U.K. government. “There’s no getting around the fact that our system still requires coal-fired power over the winter.”

Acquisition Mission

Energeticky a Prumyslovy Holding AS’s proposed takeover of Vattenfall’s 8,000-megawatt business will make it the biggest power producer based in the Czech Republic, overtaking government-controlled CEZ AS. Since its inception in 2009, the company, known as EPH, has expanded in the region, operating energy assets from Czech heating utilities and coal-fired plants to German lignite pits and a coal mine in Poland.

At the time of the Italian purchase, EPH said its plan was to enter European markets seeking to ensure security of supply. One way is through grid contracts where generators can get paid to keep power capacity in reserve.

Eggborough was the biggest U.K. plant that secured a contract to provide reserve power next winter in a tender where the winner got 60 million pounds ($87 million), according to analysis by Sandbag, a London-based environmental group. If called on, the 46-year-old station would get above-market rates for its power plus payments for being on standby and for starting, according to National Grid Plc, which held the auction. The network operator and EPH declined to comment on the contract.

Conventional Power

“While renewables will no doubt continue to grow, without structural changes in distribution networks and effective power storage, conventional energy will remain indispensable for quite some time,” Kretinsky, EPH’s chairman, said by e-mail.

Before helping start EPH, Kretinsky and Tkac worked together at J&T Group, the Slovak investment firm started by Tkac and his banker father. The pair are familiar faces in Czech media, with Tkac known for polo matches on frozen glacial lakes, while Kretinsky holds stakes in Sparta Prague soccer team and a national tabloid newspaper.

Reserve power stations will be staffed around-the-clock in case they’re needed. A typical coal plant can take about 80 minutes to start up, while a natural gas-fired station can be running within 15 minutes, U.K. government data show.

No Margin

Germany is planning to set up a reserve of stations to ensure supply as the nation exits atomic energy and closes some fossil-fuel generators. The backup would have eight lignite plants, including some of Vattenfall’s, that would be paid to stay offline except in emergencies.

EPH isn’t alone in seeking to profit from the need for energy security. Macquarie Group Ltd., the largest infrastructure fund manager, owns U.K. gas-fed stations that it fires up at peak times in the balancing market. The country’s margin of spare capacity would shrink to zero next winter without the backup measures, according to National Grid.

EPH will reap benefits as long as European Union members stick with separate national reserve plans, according to Matteo Mazzoni, an analyst at Nomisma Energia Srl in Bologna, Italy. Such backup provisions may mean subsidies and taxes will make up almost half of European electricity bills by 2020, he said. That’s up from about 36 percent now, according to Eurelectric, the utility lobby group.

“The EPH guys are smart,” said Elchin Mammadov, a utility analyst at Bloomberg Intelligence. “They have a clearly defined M&A growth strategy. They get into areas that others don’t want to get involved in.”