[NGW Magazine] Germany ‘will pay to quit coal’
A forced exit from coal generation in Germany could cost the country’s consumers €29bn ($33.5bn) over the 2020 to 2040 period (in 2017€) on top of what they would otherwise pay, according to a report (in German) by Frontier Economics (FE) released August 21.
The short report, commissioned by utility RWE, draws on previous studies – most notably one by FE and others dated February 2018 that includes an even higher €34bn estimate of the added cost – and was reported in depth by Germany’s leading business daily Handelsblatt.
The February report details the socio-economic and regional job loss impacts of such a forced exit. But the reports do not purport to examine less tangible impacts of sticking with coal, such as damage to health (air quality), the effect on climate change, or to Germany’s green spaces.
Why the interest?
Interests comes as Germany’s commission for growth, structural change and employment – set up in June and often just known as the ‘Coal Commission’ (Kohlekommission) – gears up to present a report due late October 2018 on how fast the exit should be and how to mitigate its impact on lignite-mining areas.
Despite a gradual reduction over time, coal still generated 14.1% of Germany’s 2017 gross power production and lignite 22.5%, according to preliminary data from research unit AG Energiebilanzen. That combined 36.6% eclipses renewables 33.3% and dwarfs both gas 13.2% and nuclear 11.7%.
Frontier Economics
The short report says that CO2 emissions in Germany overall are to be cut, according to the German government’s own energy plans, by at least 40% by 2020 versus 1990 – a target that was dumped in last September’s elections by the now governing parties – and by 80%-95% (vs 1990) by 2050. The Coal Commission is tasked with reducing the energy industry’s CO2 emissions by 2030 by 61%-62% versus the 1990 baseline.
FE said it was asked by RWE to provide an estimate of the effect on electricity prices of such a mandated exit from coal, starting on the basis of a separate, earlier Agora study that looked at a halving of German coal/lignite generation capacity from 43 GW today to 21 GW in 2030. FE said it estimates that over 85% of the lost capacity will be replaced by power plants outside Germany, which it expects will lead to lower emissions at home but an increase outside Germany.
Because of the already mandatory nuclear phase-out in Germany by 2023 along with rising CO2 and fuel prices, FE expects the electricity price to increase by some 15% by 2030 in its reference case – on top of which a forced exit from coal would add a further €9/MWh (2017) – resulting in a total rise in the electricity price by 2030 of more than one-third, compared with today.
That translate into an extra €4bn/yr (2017€) in 2030 for a forced exit, or a grand total of additional consumer costs of around €29bn during the period 2020 to 2040.
Under a reference case, coal-fired plants that technically could keep working for 55 years and coal-fired ones that could keep working for 60 years would – instead- be forced to shut after 40 years’ operation; any such plants still running in 2030 would be forced to close no later than 2040.
While a forced exit would reduce coal/lignite capacity from 43 GW now to 21 GW in 2030, the study estimates that without any obligation some 38 GW of coal/lignite generation capacity could remain in the market in 2030.
Under the forced exit, Germany would need to import 8 GW to 11 GW at peak demand periods (typically in the winter) through interconnectors from abroad.
Were demand not substituted through power imports, Germany would have to build gas-fired power plants (CCGTs), according to FE. Those German CCGTS would have only a low optimisation rate and therefore have higher running costs relative to CCGTs outside Germany.
FE thus forecasts, under a forced exit scenario, lignite-generated power will cost around €30/MWh, coal-fired electricity just under €50/MWh, but gas-fired power produced in Germany €77/MWh. FE says its scenarios are based on flat coal wholesale prices and only slightly rising gas prices, but a much more rapid increase in the price of CO2 permits.
It argues that a forced coal exit would have a negligible effect on European CO2 emissions, as there would be carbon leakage. Foreign generators would benefit; German consumers would not.
RWE view
German generator RWE, which commissioned the study, says its finding is that reducing coal-fired generation can be achieved without a forced exit, which would only have disruptive consequences, such as widespread power outages or lignite coalfield job losses.
It argues that – including the €34bn higher electricity charges to consumers – plus other consequential effects, presumed to include asset writedowns to generators and/or compensation to them from government – the overall economic loss could exceed €80bn along with up to 55,000 job losses, chiefly in the lignite industry. The latter directly employs some 20,000 in Germany and generates €2bn gross value-added .
Gas promoters unconvinced
Major gas producers and marketers are unconvinced by RWE, or the rationale in the reports.
Equinor senior vice president for marketing and trading Tor Martin Anfinnsen provided the view from the largest producer and exporter of Norwegian gas: “The key issue here is that Germany needs to transform its power sector to meet climate targets and the Paris accord. Germany has encouraged and subsidised a considerable development in renewable power generation and this is one important step in the transformation. However, when the reduction in CO2 emissions remains marginal, it is because coal has been allowed to maintain a high share in the mix.”
Rather than warning German consumers of carbon leakage and jobs to coal-dependent Poland and Hungary is inevitable, the Equinor executive says EU and German policy should aspire to best practice – citing Britain as a place where coal has been largely displaced from power generation.
“Higher CO2 prices in the EU increases the competitiveness of gas versus coal and the UK with its CO2 floor price is a prime example,” Anfinnsen told NGW: “The UK now has an energy mix with renewables and gas as the main pillars, complemented by nuclear while coal has become almost obsolete. This transition yields results, and CO2 emissions have come down significantly.”
Anfinnsen continued: “A transition in Germany does not come without investments, be it in more renewables or in more gas power generation. Regardless of where the investments are made, at the end of the day the bill will end up at households and business, either on the electricity bill, on the tax bill or both. In other words, it is important to choose the decarbonisation route that is most cost effective in terms of €/CO2 reduction. We believe gas is important part of the solution both in the short and medium term and also in the longer term when decarbonised to hydrogen.”
German advocates ‘unsurprised’
German gas lobby group Erdgas Zukunft (EZ) said it was not surprised by the report. “The fact that climate protection or emission mitigation comes with a cost should be old news by now,” it told NGW late August.
EZ chair Timm Kehler said: "Taking climate protection targets seriously calls for more conventional generation from gas, not less. The shrinking global carbon budget calls for early action as procrastination only manages to increase the mitigation costs overall."
The cost of emissions certificates has gone up, increasingly punishing coal-fired power generators; and lignite-fired generators even more. This will only grow with emission caps in Europe. “Electricity generation from coal will come to an end if climate goals are taken seriously,” EZ said.
The German energy agency conducted a study on the climate goals and the feasibility of reaching them. The study concluded that coal generation has to be phased out starting in the early 2020s. This is necessary in order to reach a transformation path that allows the realisation of reduction goals in a cost- efficient way, EZ said.
Windpower versus chainsaws
Climate change thinktank Sandbag said August 22 that with EU carbon prices now at €20/metric ton its analysis shows that rising carbon, coal and gas prices mean that for the first time new onshore wind and solar can compete with short-term costs of generating electricity from existing coal and gas plants. Year-ahead coal generation costs had increased by 72% to €46/MWh, and gas generation costs by 43% to €49/MWh based on August 16 market close prices when CO2 was priced at €20.42. New wind and solar prices were trending in the opposite direction, it added: “In Germany’s renewable auctions, both wind and solar have had two auctions each where the lowest bids were around €38/MWh.”
German environment minister Svenja Schulze meanwhile August 23 criticised plans by RWE to level part of the Hambach Forest, near Cologne, in order to develop a new opencast lignite mine. She called on the company to suspend its plan for at least the next three months while the Coal Commission deliberates. The latter held its first meeting on August 23 since the summer holidays.
Poor air quality has a cost too
The International Gas Union (IGU) published a paper in November 2016 from which its then-president David Carroll argued that “air pollution is a significant threat to the environment and human health [but that] action taken in Berlin, Dublin, Krakow and Rotterdam demonstrates the central role of gas in improving air quality in urban areas” as the least pollutive of the fossil fuels.
Not all, but a significant proportion, of air pollutants and the greenhouse gas (GHGs) in urban air remain attributable to use of coal in power generation, alongside diesel used in transport, and industries’ use of fuel.
The latest annual report by the EU’s European Environment Agency (EEA) in October 2017 said that air pollution (including fine particulates, NOx and ozone – from sources not least coal-firing, diesel and others) cause the premature death of more than 400,000 Europeans each year as they have for several years. That estimated toll, based on 41 countries in Europe and latest 2014 data, includes 101,400 in Germany.