Vattenfall on Monday signed a deal to sell its loss-making German lignite operations to privately-held Czech investor EPH, confirming a move that will substantially cut the Swedish state-owned utility’s carbon footprint.

The deal, still needing around two months to be signed off by the Swedish government, will cut Vattenfall’s ETS-regulated exposure to less than 25 million tonnes a year.  That’s down from more than 80 million tonnes last year, when it was Europe’s second largest emitter.

“This divestment of our lignite assets is good strategically, but also financially given current and expected market conditions. We are now accelerating our shift towards a more sustainable production. The sale means more than 75% of our production will be climate neutral compared to about 50% today,” said Magnus Hall, Vattenfall’s President and CEO.

“After thorough due diligence we are pleased to have found a well-established new owner for the lignite business with approximately 7,500 skilled and committed employees,” he added.

THE DEAL

The deal will transfer the ownership of 8,000 MW of installed capacity in power plants Jaenschwalde, Boxberg, Schwarze Pumpe and a 50% stake in Lippendorf, as well as four open cast mines.

The companies declined to disclose the deal’s value, with some market sources saying it was symbolic, according to Reuters.

Vattenfall said it is expecting have SEK 22-27 billion ($2.7-3.3 billion) in revenues wiped off its quarterly income statement due to the sale.

It said it will transfer SEK 15 billion in cash holdings along with liabilities, including recultivating the pits, that are estimated at SEK 18 billion.  The forward power hedges, worth around SEK 9 billion, will remain with Vattenfall.

EPH, with its financial partner PPF Investments, will be restricted from selling on any part of the business for five years, and will only be able to pay out dividends after three years.

THE MOTIVATION

With German power prices having fallen by around 40% since in 2014, coal-fired generators face a less certain future that is more reliant on capacity payments from governments.

Vattenfall is keen to lessen its exposure to this market and to regulatory risk, and instead focus on developing its low-carbon assets and strengthen its green credentials.

“We want to reduce our CO2 exposure, so for us this is the right thing to do and it frees up resources to focus more on renewable energy. We see significant risks when it comes to the development of future electricity price levels. There are also regulatory risks to take into consideration,” said Hall.

EPH, on the other hand, is betting that German power prices will rebound in the next few years as the German government completes its nuclear phase-out by 2022.

“On a mid-term perspective, the fundamental dynamics of the energy market are set to recover. With our relevant industry expertise and a cost-disciplined and efficient management of operations we are convinced that lignite is in a position to contribute successfully to the rapidly evolving German power mix”, said EPH board member Jan Springl.

The deal means EPH, which is owned by investment bank J&T and Czech businessman Daniel Kretinsky, is to become one of Europe’s top emitting companies.

It has been steadily building its European power asset portfolio over the past two years, acquiring the UK’s Eggborough and Lynemouth power stations, majority stakes in three Hungarian gas-fired cogeneration plants, and part of E.ON’s Italian assets including one coal-fired and six gas-fired plants.

It also owns German coal mining firm MIBRAG, which operates three smaller cogeneration coal power stations.

THE CONCERN

Environmental campaigners expressed concern that EPH was less likely to safeguard jobs and fulfil its environmental obligations than a more measured coal phase-out under Vattenfall with German government funding.

“Handing these assets at a cut-price, or even a negative price, to a faceless organisation is big gamble. EPH have no public shareholders to be responsible to, no electricity customers to be responsible to, and no ownership from regional or national government to be responsible to,” said Dave Jones of Sandbag.

By Ben Garside – ben@carbon-pulse.com