(Montel) Germany will still need to pay utilities to close the country’s most emissions-intensive coal plants, even as slumping gas and rising carbon prices slash their profitability, energy economist Felix Matthes told Montel.
A surprise combination of high carbon and low gas prices has contributed to a sharp fall in German coal use, just as the government prepares to implement the hard-won proposals of a commission that had been tasked with finding a way to exit the fuel.
Some have highlighted the dimming profitability of lignite-fired generation as a reason why utilities are likely to close coal stations sooner rather than later – making multi-billion-euro compensation payments for early closures redundant.
Yet Matthes, who sat on a commission that earlier this year recommended a 2038 phase-out of coal-fired power generation, warns against conflating profitability with a utility's incentive to keep burning lignite.
“The very low short-term marginal costs of lignite plants mean that even a carbon price of EUR 25/t doesn’t change their position in the merit order,” he said in an interview.
Low margins, high load factors
The lignite fleet of Germany’s biggest power producer, RWE, has fixed costs of around EUR 22/MWh, according to its finance chief.
Lignite plants tend to release a tonne of carbon to generate 1 MWh of electricity, so adding the price of carbon suggests RWE's brown coal units on average need power to cost around EUR 50/MWh at present.
While benchmark power prices – trading slightly higher – may not suffice to cover fixed costs extending up to the recultivation of open cast mines, that would not prevent a lignite plant from operating, said Matthes.
He estimates a carbon price of EUR 25/t would displace hard coal plants in favour of gas units in the power mix, but a price of EUR 40/t would be necessary to do the same to old lignite plants.
Indeed, carbon would need to reach EUR 60/t to displace newer lignite units, yet at this price, heavy industry would start to flee the EU, even if it received its emissions permits for free, he added.
Generation data published by AGEB, which gathers German energy statistics, shows lignite-fired power production fell nearly 20% in the first six months of the year – putting wind power on track to become Germany’s biggest single source of electricity this year for the first time.
Yet the declines were not uniform. Bruno Burger, an analyst for solar research centre Fraunhofer ISE, estimates output at Boxberg, an eastern German power station, only declined 0.7% in the first half, while output at Weisweiler in western Germany likely even grew marginally.
“We really see a significant decrease of load factors for hard coal, we don’t see it for lignite,” said Matthes.
Berlin is planning a two-tier approach to phasing out coal generation by 2038. Hard coal power stations will get to take part in auctions aimed at identifying the cheapest plants to close.
This would not work for lignite as these power stations are mainly owned by just two companies that also own the attendant local mines, said Matthes.
This means a special policy for lignite will likely need to be crafted this year. Recent years’ experience of sticking some aging lignite plants in a reserve suggests the government will effectively end up negotiating buyouts with the relevant producers.
“The markets see low gas prices for upcoming years,” said Matthes. “This will decrease the compensation payments – but I’m not sure it will eliminate them.”