Germany unveils long-awaited coal phaseout bill after cabinet approval

Published 14:08 on January 29, 2020  /  Last updated at 18:00 on December 1, 2020  /  EMEA, EU ETS  /  No Comments

The German government on Wednesday released a final version of its long-awaited coal phaseout bill, providing no new details surrounding how many carbon allowances will be cancelled to offset the impact of the programme on the EU ETS.

The German government on Wednesday released a final version of its long-awaited coal phaseout bill, providing no new details surrounding how many carbon allowances will be cancelled to offset the impact of the programme on the EU ETS.

The legislation, which was approved by the country’s cabinet earlier today, follows recommendations made a year ago by a government-appointed expert commission, which called for the elimination of Germany’s roughly 43 GW in coal generation capacity by 2038.

Most of the elements contained in today’s legislation, which the government expects to have passed by mid-year, had been previously released in draft form or were leaked.  The bill will now be considered by the German parliament.

“With this legislative package, we will end coal power generation in Germany in a legally secure, economically reasonable, and socially balanced manner,” said Peter Altmaier, Germany’s minister for energy and economic affairs.

“Above all, however, we are creating perspectives for a safe and affordable power supply based on highly efficient gas power plants that enable the transition to a greenhouse gas-neutral energy supply.”

The grand reveal comes after months of negotiations with state governments, businesses, and unions – including those to be most affected by the phasing out of coal from Germany’s energy mix, which was until recently highly reliant on the fuel.

It also complements other efforts announced by Berlin in the past year to help it achieve both its 2030 emissions reduction target of a 55% cut on 1990 levels, and carbon neutrality by 2050, all while supporting the country’s goal of phasing out nuclear power this decade.

“This is an important contribution to climate protection, because it saves step-by-step around a quarter of the total German CO2 emissions,” said Environment Minister Svenja Schulze.

“This is also an important international signal … We are showing how an industrialised country can switch entirely from coal-fired power generation to renewable energies, and at the same time create new economic perspectives for the coal regions.”

Germany is aiming to phase down generation from black and brown coal in a somewhat linear manner through 2030, with capacity targets of 8 GW and 9 GW by the turn of the decade, and will in reviews in 2026 and 2029, and before 2032, examine whether it can bring forward the final closures to 2035 at the earliest.

EUA CANCELLATIONS

Germany confirmed that it will seek advice annually from at least two independent consultants to guide the cancellation of EU Allowances to neutralise the effect of the phaseout on the bloc’s carbon market, with the ministries of Economic Affairs and Energy and of Finance also weighing in on the process.

Participants in the EU ETS fear that without corresponding EUA retirements, coal phaseouts can create a so-called ‘waterbed’ effect, where member state climate policies that result in large decreases in emissions in one country can lead to lower carbon prices and increased GHG output in another through the transfer of freed up allowances.

Germany’s cancellation calculation is to take into account the amount of permits absorbed annually by the supply-slashing Market Stability Reserve (MSR), as well as other factors including the replacement of shuttered coal capacity with gas and other ‘business as usual’ considerations.

Once a quantity of EUAs to be retired is determined, the federal government will notify the European Commission in the calendar year after the closure of one or more plants, and the units will be withheld from auctions scheduled the following year.

This is all while Germany complies with Article 12.4 of the ETS Directive, which dictates how many EUAs member states can cancel during the upcoming fourth trading phase (2021-30) to offset the price impact of their domestic abatement activities.

The country has said it will actively campaign for a comprehensive strengthening of the MSR during its first review, which is to take place in 2021.

Based on the government’s tentative schedule, the first batch of coal units – both lignite and hard coal – are to close before the end of this year, meaning a corresponding quantity of EUAs could be withheld from Germany’s auctions starting in 2022.

But the approach was panned by several experts.

“The way the German coal phaseout is reflected in European emissions trading … remains unsatisfactory … The amount of CO2 that is effectively saved can only be determined with great uncertainty,” said Ottmar Edenhofer, director of the Mercator (MCC) and Potsdam (PIK) climate research institutes.

He added that a simpler and more cost-effective solution to avoid the waterbed effect and prevent uncoordinated action by member states would be to implement a bloc-wide floor price for EUAs – an idea that has so far been rejected by most governments but which is gaining some supporters including big players France and Germany.

NEW BITS

Today’s legislation provided a few new pieces of information regarding the plant closure timeline and subsidy scheme, including maximum compensation rates for shuttered hard coal facilities and more detailed schedule for taking lignite plants offline.

The bill reflects a deal clinched earlier this month between Chancellor Angela Merkel’s government, German state officials, and company representatives, to mandate the closure of country’s 21 GW in remaining operational or standby lignite capacity.

A timeline is set out for closing the country’s remaining lignite plants, with the first eight units – with a collective capacity of 2.8 GW and all operated by German utility RWE – to be taken off the grid between Dec. 2020 and Dec. 2022.

A 300MW block at RWE’s Weisweiler plant will then be shut by the start of 2025, with another batch of nine to be closed before the end of the decade, and the remaining 12 blocks exiting the market between 2033 and 2038.

Affected lignite mining and power generation companies will receive €4.35 billion in compensation, with €2.6 bln going to RWE and €1.75 bln operators owned by Czech energy group EPH.  Impacted coal regions are to get a further €40 billion in structural aid.

Environmental lawyer group ClientEarth slammed the decision to pay EPH, arguing that the company was likely to close many of its plants in the country at similar times regardless.

“If you compare the company’s internal plans with the decision to phase out coal, [it] reduces its lignite production and combustion by just an additional 1.5%. This is not only a political scandal, but also legally dangerous,” said ClientEarth’s Hermann Ott.

MAXIMUM MONEY

The bill also outlines a tender process to guide the decommissioning of Germany’s hard coal plants, the combined capacity of which is expected to peak this summer when utility Uniper’s new 1.1GW Datteln 4 unit comes online.  The facility will be the only one to be allowed to circumvent a ban on new coal plants.

The government set out its maximum payments for these tenders, with the first expected to be held later this year, shortly after the bill is passed into law.

The first tender, which target 4 GW in capacity closures, will feature a price limit of €165,000 per MW to pay the units to close.

That falls to €155,000 next year, when 1.5 GW is targeted.  That rate is maintained in 2022, but is then followed by a steeper annual decline to €116,000 in 2023, €87,000 in 2024, and €65,000 in 2025.

The maximum price then sinks to €49,000/MWh in 2026 – the final year the government intends to hold tenders for hard coal plant closures.

The bill reiterated that Germany will force any remaining plants to shut from 2027, ramping up pressure on installations to accept subsidies, after previously saying it would not mandate any closures.

However, critics also found fault with this approach.

“The high direct payments to power plant operators, compensating for shutdowns, are wrong. They undermine the polluter-pays principle, wherein anyone causing emissions should pay accordingly. Now the person who seizes to cause emissions is rewarded financially,” said Edenhofer.

“This is why operators have kept some power plants on the grid longer than is economically feasible – so that they can now collect compensation payments … When it comes to the phaseout itself, politicians should have relied on the carbon price. Everything would have been much cheaper.

OTHER MEASURES

The bill also proposed ways to further develop Germany’s fleet of combined heat and power (CHP) plants, and to catalyse the conversion of coal facilities to those that provide more flexible and environmentally friendly generation.

As well, the legislation contained measures to compensate consumers against a rise in electricity prices due to the coal phaseout, and to fund the ability of impacted coal sectors workers to take early retirement.

Other sectors also heaped criticism on the bill.

“Our industry is committed to climate protection and to a social consensus on the coal exit, however the law passed by the Cabinet today is highly flawed … [It] ignores the economic consequences of the phaseout,” said Germany chemical industry association VCI.

In particular, VCI said the level of compensation for industry due to higher power bills was inadequate and the law was too lax in ensuring a secure power supply.

“Fluctuations in power or a breakdown of a few seconds can cause considerable damage in industry,” the group added.

As a next step, Finance Minister Olaf Scholz said Germany will now look to make “real progress” in expanding its electricity grid and renewables capacity, namely wind and solar.

By Mike Szabo and Ben Garside – mike@carbon-pulse.com

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