Eggborough: saved at the eleventh hour

Given the liberal biomass subsidies lavished on Drax, it looked as though its Yorkshire neighbour, the 1,960 MW coal-fired Eggborough plant, was destined to close next year.

From left-of-field, a saviour seems to have emerged very late in the day, in the form of the Czech-based EPH Holdings (EPH) who have struck a deal – subject to EU approval – to acquire Eggborough, which currently generates 4% of UK power.

Few details have been disclosed, not least any payment terms. Since Eggborough seemed to have run out of options, it is unlikely that any payment will have been that substantial.

For Eggborough’s 300-strong workforce, the news is clearly positive, especially since EPH Chairman, Daniel Kretinsky, seems keen to maintain coal-firing there – absent, of course, a mid-term biomass conversion offer that proves financially irresistible.

Whilst CEZ remains the dominant energy player in Eastern Europe, EPH itself is also expanding from its Prague base.

EPH is privately-owned, effectively by Patrik Tkac, an investor, and Kretinsky; it employs some 8,400 people.

Its core operations are the distribution of gas within Slovakia and shipping gas from Russia; it also has an electricity generation capacity of 1,750 MW along with various electricity and heating businesses in the Czech Republic
In Germany, EPH owns Mibrag, a large coal-mine, and the nearby Schkopau power plant; in the 1990s, both were partly owned by the privatised PowerGen and subsequently sold to the US-based NRG Energy.

EPH’s latest available figures confirm earnings before interest, tax, depreciation and amortisation (EBITDA) of c€1.3 billion.
The Eggborough deal represents EPH’s first steps in the so-called liberalised UK energy market; further UK deals may follow.

At a general level, a combination of cheap coal, a weak carbon price, barely competitive gas-fired plant and various technical faults at some nuclear stations have provided the remaining UK coal-fired plants with an Indian summer.

Indeed, despite all the environmental hue and cry about emissions, coal-fired plant is now the largest contributor to the UK’s electricity output.

Buying the Eggborough plant from a company that is clearly hard-pressed to continue its ongoing financing is understandable. Furthermore, with new-build investment stalling, little additional base-load capacity will materialise for some years.

Although EPH has been tight-lipped on this deal – as a privately-owned company, it has every right to be so – Kretinsky has stated that ‘The acquisition of Eggborough power plant reflects our genuine interest in the UK market and our appreciation of the highly competent management, skilled employees, technology and location of the plant’.

Like a stressed estate agent seeking to sell a property, the location aspect is emphasised.

Kretinsky’s team will have rigorously assessed Eggborough’s strategic position on the grid, especially in the context of an electricity supply system currently operating on an ultra-low plant margin.

After all, Eggborough is not sited at the end of a remote peninsula but in the heart of North Yorkshire; furthermore, it has top-class grid connections.

For now, assuming EU approval, Eggborough’s output is likely to remain coal-fired: its former owners will have envied Drax’ consummate political ability to attract prodigious biomass subsidies.

Kretinsky will, no doubt, pursue the biomass conversion route, albeit realising that the Treasury has recently imposed a ceiling on renewable generation subsidies – of £7.6 billion by 2020/21.

Importantly, Eggborough has pre-qualified for next month’s capacity auction – under the auspices of National Grid – in respect of the 2018/19 generation requirement.

With an estimated base need of 48.6 GW of capacity – recently reduced from 50.8 GW – Eggborough is odds-on to be called up. Just 62.5 GW of capacity actually pre-qualified – the less well-sited coal-fired Longannet plant did not.

More generally, given the many fossil-fuel plants currently for sale – officially or otherwise – EPH may expand its UK base further.

Whilst Centrica’s trio of Combined Cycle Gas Turbine (CCGT) plants are the most prominent, E.On and RWE may well be interested in plant disposal options.

Both German companies have expressed dissatisfaction about their financial returns from their UK plant and may well listen to potential offers.

Nonetheless, whilst EPH’s 2012 EBITDA of c€1.3 billion is substantial, it is relatively modest when set against the €16.8 billion EBITDA that EdF reported last year: consequently, any future EPH expansion will inevitably raise funding issues.

Of course, given the non-disclosure of the acquisition terms for Eggborough – or whether any material tax advantages accrue – it is difficult to be more specific.

But EPH is a new kid on the UK generation block and, with GdF Suez and others, may play a more prominent role in the future.

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research.