The communal deficits of German lignite usage

For a successful phase-out of coal in Germany, it is important to understand the dependence of mining and industrial communities on lignite.

Since German reunification in 1990, lignite mining employment has declined from almost 130,000 to about 20,000 today due to industrial modernization and fuel substitution. The diminished regional significance of mining has commensurately reduced the business income and tax revenues received by local communities from the lignite industry. Although renewable energies provide many more employment opportunities in comparison with fossil fuel power generation, wind and solar installations generate far less energy per square kilometre than a lignite mine. In consequence, the ensuing revenues from new energy technologies are distributed over a wider area at significantly lower density. Formerly prosperous lignite regions are incapable of regaining former levels of communal welfare from wind and solar farms installed on abandoned mining sites.

Nearly one-quarter of total grid power in Germany is currently generated using 152 Mt/a of lignite mined in three geologically distinct regions: Rhineland, Central Germany, and Lusatia. The widely mechanized operations contribute only marginally to regional employment. The lignite industry nevertheless remains the primary source of local tax revenues. In addition, shareholding municipalities in the Rhineland realize dividends from Europe’s largest lignite corporation RWE AG.      

Renewable generation provides electricity to transmission and distribution grids on the priority basis prescribed by Germany’s Renewable Sources Act (EEG). Due to equipment additions, the total connected capacity now exceeds lignite power plant ratings by a ratio of more than 4:1. Total generation during periods of high wind intensity, particularly in coincidence with daytime solar generation, provides electricity far exceeding maximum grid demand.

Declining lignite corporation revenues in competition with renewable energies have affected all mining regions. The 23.1% contribution of lignite to total power generation in 2010 remained unchanged until 2016, providing 150 TWh in absolute terms. In view of this stable demand, the communities benefitting from lignite industry business taxes felt confident of continuing prosperity. Many towns had accrued the highest statewide tax revenues per inhabitant from lignite extraction on their territory. The price of lignite also remained resistant to international fuel market developments due to cost-effective local mining and generation, providing steady community revenues related to production volumes rather than to electricity and fuel exchange price fluctuations.

In recent years, however, some of these same municipalities have reported the highest deficits of any communities in Germany. Not only are lignite industry revenues declining to the detriment of operating profits, but the energy corporations are also entitled to receive retroactive business tax refunds compensating for their financial losses. Information available has confirmed that many lignite community treasuries are critically depleted. Essential financial resources are therefore deficient not only for future regional development, but also for providing regular municipal services to residents. As a result, communal revenues have proven to be highly susceptible to changes in the economic prerequisites that had formerly prevailed as assurances of economic stability.

Germany’s largest (around 90 Mt annually) lignite producer, RWE AG in the lower Rhine basin, accrued 60% of total revenues in 2014 from lignite and coal generation. By that time, however, mounting operating losses underlined the need for business diversification. RWE posted a total year-end loss of €5.7 billion.

Regular RWE stock dividends have been cancelled entirely for cities, counties, regional utility companies (Stadtwerke) and local banks that hold nearly one-fourth of shareholder equity. RWE has discharged 10,000 employees (14% of total staffing) since 2014 to reduce operating costs. By the end of 2018, another 2,000 positions will have been eliminated.

RWE’s municipal shareholders are required to write down stock losses below the original purchase price. For this reason, the city of Essen lost €680 million of equity valuation in 2013 alone. Bochum recently began divesting its 6.6 million RWE shares at a current unit price of around €15, compared with €100 a decade ago.

In contrast with the partial municipal ownership of RWE, eastern German cities and towns have no direct investments in the lignite industry. Tax revenues are allocated only to those communities with corporate assets immediately within their boundaries.

The municipal business tax income nominally reflects the profits obtained from lignite mining and power generation.

The need to establish post-mining economies has been imposed upon the lignite regions by developments unanticipated a few years ago. Communities can no longer expect to receive significant trade taxes or other revenues from local lignite operations. Additional business tax refund obligations could be retroactively imposed, while CO2 reductions have become inevitable. The resulting 2016 standby status of the MIBRAG Buschhaus power plant has simultaneously eliminated lignite deliveries from the company’s Profen mine, affecting local communities unprepared for a rapid post-lignite transision. Seven additional power blocks at RWE and LEAG are also entering standby operation by 2019. Other plants may soon be retired due to declining profitability and climate protection directives. To minimize the inherent risks to local economies, proactive lignite transition strategies have become essential for communities throughout the mining regions.

The extensive financial and human commitments made to lignite dependency likewise constitute the greatest impediments to its abandonment. While some communities are already using reclaimed mining land for solar and wind development, an enduring economic transformation will require measures implemented on a scale comparable with former lignite usage.

Jeffrey H. Michel