Ökoinstitut explains how the phase-out of CO2-intensive assets should be actively managed.
2015 was not only the year of the groundbreaking climate agreement in Paris. It also marked a new era in political efforts on a more actively managed phase-out of power generation from coal and lignite mining in Germany. After the phase-out decisions on nuclear energy in 2000 and 2011 and hard coal mining in 2007 and 2011, the phase-out of lignite mining and power generation from coal was ultimately established in the German energy and climate policy arena during the course of 2015.
The complicated process that led to this situation was strongly linked to the run-up to the climate conference in Paris. It began in 2014 when the German government was no longer able to ignore the fact that the country was definitely not on course to meeting its ambitious greenhouse gas emission reduction targets for 2020. A comparative analysis of different projections showed that without additional efforts Germany would miss the emission reduction target of -40% for the period 1990 to 2020 by six to seven percentage points. The analysis also found that the country is not on track to meet its emission reduction targets of -55% by 2030, -70% by 2040 and -80 to -95% by 2050.
A significant part of the lack of progress was attributed to the power sector. The heavily coal-reliant power generation constituted a share of approx. 40% of total and greenhouse gas emissions and 45% of total CO₂ emissions in Germany. After an 18% emission reduction from 1990 to 2000, which was mainly due to the collapse and/or the modernisation of the East German economy, the emissions of the power sector stagnated more or less at levels of approx. 380 million tons of CO₂ (out of total greenhouse gas emissions of 945 million tons in 2013). Given the enormous growth in power generation from renewable energy sources, from a share of 6% in 2000 to 24% in 2013, this seems counterintuitive. A closer look at the data shows that the increase in electricity generation from renewables far exceeded the decrease in power production from nuclear power plants (by almost threefold) and that the emission trend essentially results from the huge increase in electricity exports to neighbouring countries. In other words: CO₂-intensive power generation, especially from lignite, was not substituted by the growing electricity generation from renewables but was increasingly exported, substituting (mostly cleaner) power generation in other countries. One of the crucial blind spots of Germany’s energy transition (Energiewende) thus became evident: it is not sufficient to roll out clean and sustainable power options; the phase-out of CO₂-intensive assets needs to be actively managed as a complementary policy approach.
Based on this analysis, the German government had no alternative but to turn special attention on the power sector in its Climate Action Programme 2020, which was approved in December 2014. Among other policies and measures for almost all emitting sectors, the plan foresaw an emission reduction for the German power sector of 22 million tons of CO₂ beyond the projected emission reduction of 375 to 312 million tons in the policy-as-usual case. After the emissions of the power sector decreased to approx. 350 million tons in 2014 (mainly due to the warm weather of that year), the German power fleet would have needed to reduce its emissions by approx. 10 million tons annually from 2015 to 2020 and beyond in order to reach the 2020 and long-term targets.
On the basis of the Climate Action Programme for 2020, the German Ministry for Economic Affairs and Energy analysed different options and presented a proposal for a climate levy in March 2015. The concept of this mechanism was based on the finding that addressing the outdated coal fleet with a special focus on lignite plants would be the most effective and most efficient way of achieving the necessary emission cuts in the electricity sector. Lignite-based power generation constitutes approx. half of the power sector emissions and dominates the power market due to its ostensibly cheap fuel costs. The proposed mechanism consisted of adding a premium to the carbon price in the Emissions Trading System of the European Union (EU ETS) – a premium that is dependent on the age of each plant and some additional parameters (price levels on the fuel, electricity and carbon markets), essentially forming a modernisation-oriented price floor to the EU ETS. The fact that outdated and carbon-intensive power plants would have needed to pay the levy, while modern and less carbon-intensive power plants would not, would have decreased the fuel switching costs and the power price effects of the instrument significantly. In addition to this, the levy was to have been paid by cancelling the equivalent number of EU ETS allowances, thereby making a contribution to an accelerated reduction of the allowance surplus within the EU ETS.
The proposal received broad support from analysts, stakeholders, electric utilities and other sections of the policy arena but also met with enormous and extremely aggressive resistance from the three German lignite utilities, the East German coal states of Brandenburg, Saxony and Saxony-Anhalt as well as the West German coal state of North Rhine-Westphalia, the mining trade union and parts of the Social-Democratic (SPD) and the conservative CDU/CSU party alliance.
The specific situation of the vertically integrated coal mining and power generation companies became the central battlefield. The Swedish-owned Vattenfall in the Lusatian mining region, the Czech-owned Mibrag in the East German central mining region and the publicly traded RWE in the Rhenish mining region own both the open pit mines and the power plants located mostly nearby. These utilities are able to shift costs and revenues between the mines (mainly fixed and/or sunk costs) and the power plants (mostly variable costs) and presented their economic situation so that even small reductions in power generation at the oldest plants or the closure of individual outdated plants would lead to the collapse of the whole lignite system and the loss of thousands of jobs in the mining regions. Due less to the robustness of their (largely weak) argumentation and more to the emerging and (to a certain extent) new coalition between the mining trade union and the conservative party in North Rhine-Westphalia, the Social Democratic Minister for Economic Affairs and Energy watered down the planned efforts at the beginning of June 2015, essentially reflecting the political challenge arising for the Social Democrats as the close traditional ally of the mining trade unions. The ambition level of the new instrument was lowered and a range of alternative mechanisms to support energy efficiency and combined heat and power production were proposed, which are useful in principle but will hardly be able to fill the new gap in emission reductions.
On 1 July 2015 the German government rejected the proposal of the climate levy and fundamentally changed the planned course. The leaders of the ruling parties agreed on an alternative mechanism consisting of a shutdown premium for seven lignite power plant units with a total capacity of 2,700 megawatts. Given the fact that the closure of two of these units (RWE’s Frimmersdorf plant units P and Q) was already planned for 2018 anyway and the shutdown premium for one unit needs to be
seen as a bailout of a failed business model (Mibrag’s project to transport lignite over more than 150 kilometres to the Buschhaus power plant) the decommissioning will only lead to net CO₂ emission reductions of 11 million tons, which is approximately half of the emission reduction that the power sector initially had to deliver by 2020. Instead of putting a price on carbon, the lignite utilities will receive more than 1.6 billion euro, approx. 650 million euro for Vattenfall, 800 million euro for RWE and 250 million euro for Mibrag. The polluter-pays principle has thereby been replaced by the polluter-profits principle …
The extremely intense controversy about the phase-out pathway for the German lignite industry has, however, finally destroyed the fiction that business-as-usual is still an option for the German lignite industry or that the EU ETS could deliver the necessarily steady decline in CO₂ emissions from lignite use at least for the next 15 years. In combination with the fact that the German government has committed itself to drawing up another climate plan in 2016 to outline a more robust framework towards a more or less full decarbonisation of the German energy system by 2050, the debate on the controlled coal decline in Germany has irreversibly established itself in the German policy arena.
Felix Chr. Matthes, PhD
Felix Chr. Matthes, PhD is Research Coordinator for Energy and Climate Policy at Öko-Institut, Berlin, Germany.
