No economic prospects: Owners of the Irsching 4 and 5 gas-fired power stations announce their closure

Joint Press Release

An ownership consortium consisting of E.ON, HSE, Mainova, and N-ERGIE has notified the German Federal Network Agency and network operator TenneT of its plans to shut down Irsching 5, a high-efficiency combined-cycle gas turbine (CCGT). Their plan is to take Irsching 5 offline effective April 1, 2016. E.ON, the sole owner of Irsching 4, likewise notified the Federal Network Agency of its plan to shut down this CCGT effective the same date.

The decisions were made because the two CCGTs have no prospect of operating profitably when the current contract with the network operator expires in March 2016.

Irsching 5 has a nameplate capacity of 846 megawatts and entered service in 2010. Its fuel-efficiency of 59.7 percent makes it one of Europe’s most efficient gas-fired generating units. Irsching 4, which has a capacity of 550 megawatts and began operating one year later, is 60.4 percent fuel-efficient, ranking it among the most efficient in the world.

Irsching 4 and 5 have operated during the past two years under a contract between the owners and the network operator. The contract, which was negotiated by the Federal Network Agency, classifies costs according to whether the units operate to supply merchant power or whether they are dispatched by the network operator. Due to the increase in subsidized renewables feed-in and low wholesale power prices, the units can no longer supply merchant power profitably.

Irsching 4 and 5 supplied no merchant power at all in 2014 and were only dispatched when they were needed to stabilize the network in southern Germany in response to temporary fluctuations. Their owners receive contractually stipulated remuneration for the instances when the network operator dispatches the units. This remuneration, which is just enough to cover the cost of operation, is based on general regulatory practice.

When the contract expires, the two CCGTs would have to cover all their costs by supplying merchant power. Low wholesale prices and rising renewables feed-in, however, render this impossible. To avoid operating the CCGTs at a loss, their owners see no alternative but to notify the relevant parties of their plans to shut them down.

If the network operator prohibits the shutdowns by declaring the units to be system-relevant, Irsching 4 and 5 would be subject to the provisions of the German Ordinance on Reserve Power Plants (Reservekraftwerksverordnung). The ordinance was enacted to ensure that power plants that are crucial for ensuring a reliable power supply would remain in operation. At that time, however, lawmakers assumed that the ordinance would only apply to older power plants that were already fully amortized. The ordinance does not recognize the significant costs faced by new plants, primarily depreciation charges and capital costs. In fact, the remuneration it stipulates is even lower than under the current contract. It would therefore be impossible to operate Irsching 4 and 5 profitably on the basis of this ordinance, and the owners would be forced to operate them at a loss. In the event of opposition to the shutdown, they have to consider legal action.

E.ON and the other owners view the shutdown notices—and any legal action that may become necessary if the shutdowns are prohibited—as a last resort. It would be better for all sides to find a regulatory framework that covers the actual costs of maintaining the units as reserve capacity and dispatching them to stabilize the network. This would mean amending the Ordinance on Reserve Power Plants to cover the costs of newer, technologically advanced power plants.

The Federal Ministry of Economic Affairs’ green paper on the future design of the electricity market states that Germany urgently needs a capacity reserve. This statement must now be backed up by legislation. The current ordinance needs to be extended and its inadequate remuneration needs to be adjusted to reflect the altered market situation. The new remuneration should be based on the same regulatory principles used for the grid remuneration and should eliminate unequal treatment. For example, when a network operator invests in its infrastructure, under German law it can include the associated depreciation charges and interest expenses in its cost base. However, if the same network operator dispatches power plants to ensure system stability, it is not obliged to include these costs, even though they serve the same purpose.

This press release may contain forward-looking statements based on current assumptions and forecasts made by E.ON Group management and other information currently available to E.ON. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. E.ON SE does not intend, and does not assume any liability whatsoever, to update these forward-looking statements or to conform them to future events or developments.