(Updates with details, comments from WWF, carbon analysts and market participants)

Germany wants to force ageing coal-fired power plants to buy extra EU Allowances for breaching emissions limits, government documents seen by Carbon Pulse show, a plan that could shift more production to gas plants and renewable energy sources while helping to mop up excess supply in Europe’s carbon market.

Further details of the plan were published yesterday at a press briefing held by Germany’s economy ministry and suggest the regulations designed to cut emissions by penalising coal-fired generation could actually increase demand for EUAs.

Under the proposed rules, only German coal and lignite-fired power plants older than 20 years will be affected and will face a declining limit on the CO2-intensity of their production.

According to the documents, from a plant’s 21st year it will be allowed to emit 7 million tonnes of CO2 per gigawatt. This limit will decrease in a linear fashion to 3 million tonnes/gigawatt in a plant’s 41st year. That limit will remain constant for plants 41 years and older.

For every tonne of CO2 emitted above that limit, a plant must from 2017 pay a yet-to-be-decided monetary fine, but in the form of EUAs, which the government will retire. That penalty will grow to somewhere between €18 and €20/tonne by 2020.

Example:

If the fine is set at €20/tonne in 2020 and a plant emits 1 tonne over its limit, and EUAs are trading at €10, the plant must surrender 2 EUAs ==> (1 tonne x €20 fine)/€10 per EUA = 2 EUAs.

If the fine is set at €18/tonne and a plant emits 5 tonnes over its limit and EUAs are trading at €6, it must surrender 15 EUAs ==> (5 tonnes x €18 fine)/€6 per EUA = 15 EUAs.

PRIORITY

Environmental campaigners praised the economy and energy ministry’s plan, which aims to implement a December agreement by the government to take extra measures to meet the shortfall to its 2020 target to cut emissions 40% under 1990 levels.

The plan aims to cut the country’s emissions by 22 million tonnes by 2020 and could be finalised by May. But it faces considerable hurdles as the CDU coalition partner has already voiced opposition.

“(This) would be a huge step forward for the credibility of Germany´s efforts to contribute to mitigating climate change. The proposal rightly targets the oldest and most polluting power plants, making their operation more expensive step by step and ultimately pushing them out of the system,” said Regine Guenther, director of climate and energy policy at WWF Germany.

Cheap coal and EUAs compared to more expensive gas has made burning dirtier coal more profitable than cleaner gas in Europe’s biggest emitting nations, but this plan is aimed at shifting that balance.

“Priority is given to cleaner power plants that way. With this instrument, Germany could also contribute to getting the ETS back on track,” Guenther added, suggesting that it could help reduce the glut of more than 2 billion allowances weighing on the market.

IMPACT UNCLEAR

Germany’s plan is likely to heap major carbon costs on the large number of older lignite-burning plants, but its exact effect is not clear even if it survives in its current form, said Jan Frommeyer, an analyst at ICIS Tschach Solutions.

“It’s a big ‘if’, (as) there is already opposition to the plan in the government. And other aspects are also unclear, for instance what happens with plants that provide district heating and by law cannot be fully shut down.”

He added that the nature of the plan also made it uncertain whether Germany would meet the 22 million-tonne emission reduction target.

“I doubt all will reduce their emissions, since some will opt to buy EUAs and keep running.”

He said that if half the affected plants opted to pay the penalty rather than shut down, this would increase demand by around 35 million EUAs.

Thomson Reuters Point Carbon analyst Emil Dimantchev doubted the policy could impact EUA prices, but said high gas prices relative to coal still meant that not all plants would opt to close even with the hefty penalities.

He said that other policies under Germany’s December climate plan such as additional energy efficiency measures were likely to counter any bullish impacts to EUA prices.

Frommeyer said there remained huge uncertainties over the plan, which could even weaken EUA prices in the short-term if utilities opt to ease their hedging of forward electricity sales.

“Utilities are hedging two to three years in advance, so it could have an impact if they decide to wait and see.”

EU FRIENDLY?

Germany’s plan contrasts sharply with the UK’s carbon price floor – a tax on thermal power generation designed to encourage utilities to switch from coal to cleaner gas- which does not require additional EUAs to be surrendered.

The UK floor tax faced criticism because while it theoretically reduces Britain’s emissions, it causes no overall climate benefit as the resulting lost EUA demand lowers the EU carbon prices and allows more emissions to occur elsewhere in Europe.

While Germany’s proposal appears to have fewer impacts on the EU ETS, it could still raise issues with neighbouring governments or Brussels, according to Point Carbon’s Stig Schjolset.

“Is it obvious (under EU law) that countries can cancel EUAs to meet domestic targets? And will Poland and allies like this?,” said Schjolset.

Other market participants were more critical of the plan.

“It’s not a great policy.  Why can’t they just leave market to deliver – i.e. stop setting artificial limits when you have an ETS to do the work for you?  And to boost (EUA) prices for other countries to benefit from makes no sense either,” said Louis Redshaw, director of Redshaw Advisors.

Carbon market policies are highly sensitive politically, with Poland and seven other nations currently pitted against Germany and some 14 other member states over how early to introduce reforms to the EU ETS.

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