Germany Set to Start Coal Phaseout Tenders Amid Legal Challenge
The best compromises tend to leave all parties equally dissatisfied. By that measure, the German coal phaseout looks like a great compromise.
The first tender to pay German coal power plants to close
will begin next week, and no one is entirely happy. Environmental groups say
the closures will come too late to align with the goals of the Paris Agreement.
Utilities have asked for swift compensation payouts, but the European
Commission has yet to give the program its seal of approval. Even with
compensation, utility RWE thinks it will face a €900 million ($1.06 billion)
loss from the deal.
In 2018, Germany appointed a commission drawn from industry,
government and civil society to find a broadly acceptable way to close the
nation’s substantial coal mining and power plant infrastructure. Despite its
long-time leadership in wind and solar energy, Germany still had 44 gigawatts
of coal plants running at the end of 2019, and parts of the country remain
economically reliant on coal.
The final coal deal, approved by Germany's parliament last
month, will see all of the country's capacity closed by 2038, with more than
half of it shut down by 2030. For €40 billion of compensation to actually start
flowing, the European Commission must grant State Aid approval — what
essentially amounts to an endorsement that the government is not distorting the
market with its payments.
In recent earning calls, RWE, one of the major recipients of
compensation, said the European Commission's final approval is not expected
until the autumn. Germany is rolling ahead anyway, working under the assumption
that Brussels will eventually sign off on the plan.
Coal phaseout process set to begin
The process will compensate shuttering lignite, or
"brown coal," plants, which are the most heavily polluting, via a
flat rate. RWE and Leag are the only operators with more than 1 gigawatt of
affected capacity. RWE is set to receive €2.6 billion; Leag will receive €1.75
billion.
Hard coal plants, or those burning more carbon-dense and
less-polluting types of coal, by contrast, will be closed via least-cost
tenders. These will be held sporadically through 2024.
There are also compensation packages for workers in mines
and power plants who lose their job as a result of the coal exit laws. Those
payments will last till 2048 and are estimated at €5 billion.
On September 1, hard-coal plant operators can bid into the
first tender for the early closure of 4 gigawatts of generation capacity. The
maximum payment per megawatt of capacity shutdown is €165,000 ($196,000) for
this initial tender. That price ceiling gradually falls over time, with the
final auction capped at €89,000 per megawatt.
So far, the most intense controversy has centered on the
flat-rate compensation for the lignite plants, which was calculated behind
closed doors. Environmental legal organization ClientEarth has tried, so far in
vain, to have these calculations made public. ClientEarth also alleges that the
Leag payments are contrary to the EU electricity market regulations.
Maximilian Boemke, a partner at the German office of law
firm Watson Farley & Williams, thinks that the calculation of the flat-rate
lignite compensation will be key to the European Commission’s decision.
“The EU Commission will have to review if the calculation
method, as well as the assumptions, are plausible. We cannot exclude [the
possibility] that it might reject the flat-rate calculation in view of the
volatility of the energy markets and the costs of CO2 certificates,” Boemke
told GTM by email.
Essentially, the argument boils down to whether the new
market reality means those plants would have been squeezed out anyway. The
merit order system — the method by which European and many other grid operators
and energy markets choose the lowest-operating-cost resources to be brought
online before more expensive alternatives — means that this is a question of
whether natural-gas prices will keep gas-fired plants competitive with coal
during its sunset years.
The debate over coal plants' future market prospects
In other words, a €40 billion policy's future at least
partly relies on accurate natural-gas forecasting 18 years into the future.
There are reasons to doubt that lignite plants being offered the current
flat-rate payments to shut down early could remain competitive in the market
long enough to earn their equivalent if they were to remain open.
“The lignite plants in the first and second stage of the
phaseout will be approaching 50, and in some cases, 60 years of operation when
they close,” said Dan Eager, principal analyst for European power at Wood
Mackenzie Power & Renewables. “It could be argued...that many of these
assets [would] have been decommissioned around this time anyway or risk falling
to pieces.”
That’s not a universal story, he pointed out. The youngest
plant, Datteln 4, is both flexible and cost-competitive, and it could serve as
a useful counterweight to a renewable-heavy grid, carbon emissions aside.
State Aid approval of a previously completed round of German
coal closures, which paid lignite plants to go on standby, was approved in
2016. The 2016 mechanism also left the level of compensation up to the energy
regulator, but it was set using a formula, rather than a flat rate. This State
Aid approval, and another for a €52.5 million payment to Vattenfall for the
closure of the Hemweg 8 plant in the Netherlands, suggests the German plan is
likely to be approved as well.
But aside from the flat-rate compensation structure, there
is another key difference between those approved plans and Germany’s phaseout:
Those shutdowns happened in the near term, not over the course of 18 years.
Boemke pointed out that it is a reasonable assumption that
the plant closures involved in the 2016 measures were missing out on
money-earning years of operations by going on standby or shutting down entirely
“According to some studies, this seems less certain for the plants in question
today,” he said. “Germany will have to provide evidence to the EU Commission
that the plants would not have closed [due to market pressures] before 2030.”
Broadly speaking, however, coal's market prospects are not
great.
“Growth in low-short-run-cost renewables, expectations of
sustained low gas prices for the next few years, and increasing carbon prices
are putting tremendous pressure on the margins of coal-fired assets across
Europe," said Wood Mackenzie's Eager. "Our data shows that German
coal generation was down 26 percent in 2019 relative to the previous year, with
gas generation up 10 percent and renewables up 14 percent. We can expect
further reductions once the 2020 results are in."
In many parts of Europe, coal is already on the ropes. A
recent report by the think tank Ember estimated that coal power plant
utilization rates in the European Union have dropped to 24 percent.
France and the U.K. have both brought forward their own coal
phaseouts by a year to 2022 and 2024, respectively. In the U.K., the market has
more or less phased out coal this year. It contributed 3 percent of U.K. power
in Q1 2020 compared to 39 percent in Q1 2000.
Given what's happening elsewhere in Western Europe, then,
critics argue the German phaseout plan locks it into an artificially drawn-out
shutdown process.
“Our analysis suggests that the German coal law, and the
contracts with operators that it relies on, actually maintains a situation that
no longer reflects economic reality. Worse still, it is set to make climate
action even more difficult in the future,” said Ida Westphal, an energy lawyer
at ClientEarth's Berlin office, in an email.
What if the State Aid approval isn’t granted?
If the State Aid approval is rejected by the EU Commission,
an already-lengthy process will be stretched out further. An initial rejection
would trigger a month-long public consultation and a fresh round of talks with
the authorities.
“The German government and the coal industry could, of
course, try to challenge a negative decision by the commission...[in] the EU
courts, but that is lengthy, costly and the aid could still not be paid in the
meantime — so amending the law could be quicker and more effective,” Westphal
said, adding that a challenge in the courts could run in parallel.
With so much work already done to develop the existing coal
phaseout laws, anything that jeopardizes it will likely be unpalatable to the
government. Utilities might, for example, try to negotiate higher payouts if
consideration of the law is reopened.
More likely is that the existing agreement, should it be
found deficient by the EC, will be amended until it can be approved.
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