The German government has opted to pay to idle several old coal-fired power plants to meet a shortfall towards its 2020 emission target, rejecting its original plan to instead force them to buy more EUAs for exceeding emission levels.
Around five lignite-fired plants with a capacity of 2.7 GW will be prevented from selling electricity in the regular power market but the government will instead create a capacity mechanism and pay the utilities for keeping the units on standby before phasing them out completely by 2021.
The 2.7 GW of retirements represent 13% of Germany’s lignite power capacity and 6% of its total coal-fired generation capacity.
Analysts said the decision to switch from the original idea would be bearish for carbon prices in the long term because it would curb lignite-burning output without any measure to counteract the resulting lower EUA demand.
“The biggest difference compared to the old climate levy is that companies would not have the possibility to run their units and surrender additional EUAs instead of reducing production,” said Stefan Feuchtinger of ICIS-Tschach.
“In the longer term it’s definitely slightly bearish for EUAs as lignite units would reduce production and consequently emissions,” he said, adding that the full 2.7 GW capacity would only be reached by 2020 in a gradually phased-in process.
In the shorter-term, analysts had speculated that uncertainty surrounding the policy in recent months had led to utilities being more cautious in their hedging strategies, temporarily scaling back their appetite for buying EUAs.
Feuchtinger said the government decision’s impact on hedging behaviour was still unclear because it was not known whether utilities are yet aware which units will be affected or whether they’ll learn this over the summer as the proposal is finalised.
The compromise plan is part of a wider government decision to meet a shortfall in its 2020 target to cut emissions 40% below 1990 levels by 2020. It was a proposal put forward by workers’ union IG BCE and industry association BDI, both of which also vehemently oppose the original coal levy proposed by German economy minister Sigmar Gabriel.
Gabriel’s initial plan aimed to cut power sector emissions by 22 million tonnes a year by 2020, but it was scaled down to 16 million tonnes after industry, unions and several senior members of the centre-right part of the coalition government claimed it threatened jobs and would have forced more plant closures.
The lignite capacity mechanism will lead to a annual reduction of 11 million tonnes and cost €230 million a year, the economy ministry estimated.
The ministry said the rest of the shortfall would be met by boosting energy efficiency, saving a further 11 million tonnes of CO2, while an additional 1.5 million tonnes a year will come from a yet-to-be-negotiated cut from other lignite generators.
Environmental campaigners welcomed what was seen as the first concrete step towards phasing out coal-fired power in Germany, but blasted the government for succumbing to industry pressure and opting for a weaker and more costly measure.
“The coal lobby successfully killed a policy instrument that would have reduced the use of coal in an effective and cost-efficient way. This makes it now much more difficult for Germany to fully achieve its unilateral target of reducing emissions by 40 percent until 2020,” said Christoph Bals, policy director at Germanwatch.
Utility RWE’s shares climbed by as much as 6% on the news, while EON’s rose 3.5%.
By Ben Garside – email@example.com