In the aftermath of the financial crisis of 2008-2009 the public learned that using a so-called “bad bank” concept can indeed work ‘nicely’ if a clear line between good and bad assets can be drawn. In this way, the severely impacted financial institutions were able to improve their financial strength – with toxic assets off their balance sheets – and, above all, stay in business. This averted further harm to the general public, as politicians like to point out. Who would have thought that this “bad bank” concept could find another application in the energy space?
But this is exactly what might happen in the German energy sector. Germany’s Der Spiegel reports a proposal by Germany’s three major electric utilities – E.ON, RWE and EnBW – to create the “energy industry equivalent of a “bad bank” to transfer their biggest risk: nuclear power plants.” Separating the good from the literally toxic assets seems easy enough.
In the wake of the 2011 Fukushima nuclear accident, the German government led by Chancellor Angela Merkel implemented the so-called ‘Energiewende’, a policy shift away from all nuclear energy towards predominantly renewable energy sources. Therefore, all nuclear power plants are scheduled to go offline by 2022.
German Nuclear Power Units
Source: World Nuclear Association
So, what is at stake here? What is the motivation for this unusual proposal by the utilities? German utilities with their traditional business models are going through tough times partly due to Germany’s energy policy and partly due to their own very slow adaptation to new realities. However, the crux of the matter here is to decommission the nuclear power plants once they have gone offline. Der Spiegel notes that the “demolition of a nuclear power plant is a technically complicated undertaking that can take between 15 and 20 years to complete.” Dependent on its size, the dismantling costs are estimated to climb as high as €1 billion each. As for the German utilities’ motivation, Der Spiegel comments as follows while also shedding light on the basic strategy:
“[E.ON, RWE and EnBW] have come up with what they think is a brilliant plan to transfer the billions in risks related to dismantling nuclear plants. They want to punt responsibility to the state and taxpayers. (…) The bad bank for nuclear power plants would belong to the government. According to the plan, electric utility companies would contribute around €30 billion in reserves, which the government required them to build up over the years in order to cover the future costs of dismantling the plants and storing nuclear waste. The government, in turn, would assume responsibility for all the risks that currently reside with the utility companies. (…) What is clear is that it is unlikely that the €30 billion in reserves that have been set aside by the companies will be sufficient to handle the task.”
Prima facie, this looks like it lets the utilities off too easily, allowing them to limit their financial exposure and rid themselves of uncertain and definitely very expensive nuclear legacy costs. However, various complaints regarding Chancellor Merkel’s decision to exit nuclear power after the Fukushima accident, which are pending before the German Constitutional Court, indicate that the government may have significant legal and eventually financial exposure too and may, therefore, be interested in settling this politically sensitive issue quietly. “At issue is whether the government’s decision represented an illegal invasion of the companies’ property rights,” Der Spiegel writes. In addition, given the utilities’ tattered balance sheets, which are a direct result of the ‘Energiewende’, and given the fact that the German federal government functions as a quasi-guarantor in the nuclear sector by having awarded the necessary operating licenses, an orderly nuclear phase-out may require tapping into federal tax revenues anyway.
Der Spiegel lists the following three reasons why the creation of a “bad bank” for nuclear power plants is advantageous for the German government:
- It could remove nuclear power plants from the grid sooner than expected, or allow them to become a reserve supply in case of shortage, and thus speed up the nuclear phase-out.
- They would also have a safeguard in the event that an energy utility went bust, because they would already have been paid the company’s reserves.
- It would allow the government to avoid potentially having to pay billions in damages to the companies through lawsuits related to the nuclear phase-out.
All this will be of little solace to the taxpayer. While the utilities made billions in profits – meaning profits were privatized – billions in unnecessary costs due to government overregulation may now be socialized. Worse, these losses may be financed via additional government taxes on top of already higher electricity prices due to state-mandated feed-in tariffs for renewables. While the taxpayer always seems to lose, the blame should not go to the utilities but instead to the government for unnecessary and devastating market distortions. It makes one wonder whether the US coal industry and impacted utilities could use the same logic and have the federal government share the costs/losses for decommissioning coal power plants.