ICIS Power Perspective: Coal phase-out in Europe (2/2) – Policy tools and country analysis

Introduction

Governments across Europe are coming under increasing pressure to phase-out coal-fired capacity both to meet decarbonisation objectives and to reduce the impact of emissions on their citizen’s health.

While countries in Eastern Europe have so far broadly resisted pressure to phase out coal from their energy mix, the issue is on the political agenda in most Western European countries, with several having announced the date by which all plants will be taken offline.

However, none of the countries has yet confirmed the policy tools they plan to use to remove coal-fired capacity.

The first article in this two-part series focussed on the measures that can be used to take coal-fired plants offline, while this second part analyses the coal closure debate in the five largest power markets in Europe: Germany, the UK, France, Italy and the Netherlands. Overviews of phase-out plans in additional countries can be found in the table at the bottom of the article.

Germany

Background

• The country has by far the largest coal-fired fleet in Europe, with 54GW of capacity providing the backbone of the German power stack

• The country is behind its commitments for 2020 and 2030 for reducing greenhouse gas (GHG) emissions

• The previous German government did not commit to a coal phase-out plan, instead proposing that a commission under the framework of the Economic and Energy Ministry will come up with a plan in mid-2018

• This might change following the 24 September federal elections after the new coalition is formed, which will likely include the Green party

Method of closure

• Some of the country’s lignite capacity may have to close by 2021 due to new EU emissions rules as many plants currently having NOx emissions way above the allowable level (according to Best Available Technology Reference (BREF) standards)

• The idea of a domestic or regional carbon price floor within the realms of the EU ETS, with France and other countries is unlikely to prove politically feasible as the Liberals and the Conservatives oppose a price floor

• If plants a taken offline by government decree, this could lead to significant compensation costs

• In 2015 the government decided to move 2.7GW of lignite plants into a capacity reserve before subsequently being switched off, which resulted in compensation being paid to the operators

• The upcoming coalition negotiations will define in more detail how fast and how widespread the coal phase-out will be

Analysis

• Of the major parties in Germany, only the Greens have a strong position on coal-fired generation

• During the election campaign they demand to close the 20 dirtiest plants immediately and shut down all coal-fired generation by 2030

• They have made the coal-phase out a prerequisite for joining a coalition following the election

• Given the importance of coal-fired capacity to the German generation mix, the country can only realistically phase-out coal if a significant quantity of gas-fired capacity is built, renewable targets for 2030 are met, and electricity storage becomes a viable option, with Germany investing heavily in such technologies

• Security of supply concerns will remain high-up on the political agenda especially concerning plans for a rapid coal phase-out in parallel to the nuclear phase-out that cuts German generation capacity by December 2022

• A complete coal phase-out within the next decade is highly unlikely

UK

Background

• In November 2015, then secretary of state for energy, Amber Rudd, announced that coal-fired plants would be shut by 2025 if enough gas-fired capacity is available to fill the gap

• In November 2016 the government opened a consultation on how the phase-out could best be implemented

Method of closure

• The UK government implemented a carbon price floor in 2013, which requires heavy energy users to acquire permits for every unit of GHG they emit. The add-on tax has been frozen through to 2021 and the level has not been high enough to force all coal-fired plants to close

• In its consultation, the government proposed two measures for closing plants by 2025:

• Option 1: To force existing plants to meet the standards already in place for new plants, which would include keeping emissions below 450g CO2 per kWh, demonstrating carbon capture and storage on at least 300MW of the plant’s capacity and undertaking modifications to ensure the rest of the plant could be retrofitted with CCS in the future

• Option 2: To modify the existing emissions performance standard (EPS) to apply a concentration-based limit on emissions per unit of electricity generated at any point in time, rather than an annual emissions limit. Instead of mandating the retrofitting for CCS, this would enable plants to reduce their carbon intensity in other ways, such as through high levels of biomass co-firing

• Given the current costs of CCS, which have prevented any large-scale projects from being operated in Europe, this option is unlikely to be taken up by any plants

• Since conversion to biomass co-firing is currently linked to additional payments through the renewable obligation (RO) scheme, the second option would prove costly unless changes to the RO system are implemented

Analysis

• The decision on the closure of plants was taken by the previous Conservative government, led by David Cameron. The current Prime Minister, Theresa May, said in September that her government would “aim” to meet this goal

• In the consultancy document from November, the government stated that coal-fired plants would not close unless there was sufficient capacity to compensate for the lost generation. With no new large-scale gas plants on the horizon and questions over the timeline for the Hinckley Point nuclear reactor, delays could be seen if there are fears over security of supply

France

Background

• The previous president, Francois Hollande, announced that the country would shut down coal-fired plants by 2023

• Current president, Emmanuel Macron, has brought forward the timeline, suggesting plants will close by 2022

Method of closure

• The previous French government proposed two measure which eventually did not enter into force:

• In April 2016 France proposed a national carbon price floor that would have taken effect from 1 January 2017

• This was changed in July 2016 to a carbon tax that would apply only to coal-fired plants, as there were fears that the carbon floor would also push gas-fired plants out of the merit order – however, this plan was also abandoned in October 2016 due in part to union resistance that it would lead to the closure of coal-fired plants

• The Macron government could revisit either of these plans as a method for phasing out coal-fired plants, but has not yet made any firm announcements of its intention to do so

• Macron recently suggested that a national carbon price combined with a carbon tax at the country’s borders could be implemented, though a regional carbon floor of this kind is unlikely to gain support in Germany

• The government could introduce a law forcing the closure of plants, though as with the other interventionist measures of closure, strong labour unions would likely fight against such a proposal, which could potentially lead to delays

Analysis

• While coal accounts for only a small portion of the French energy mix, with 2.9GW of capacity, the plans could be delayed if there are concerns over security of supply

• The issues with French nuclear reactors in the winter of 2016/2017 led to coal plants playing an important role in baseload generation, and there will be fears over similar events taking place in the future

• France is planning to reduce the share of nuclear energy in the energy mix from 75% currently to 50% in 2025, so the impact of nuclear closures on security of supply will have to be taken into consideration in the decision to shut down coal-fired plants

Italy

Background

• Italy’s new national energy strategy (SEN) was released in May, detailing three potential scenarios for phasing out coal-fired capacity

• The government has indicated that decarbonisation of the energy mix is one of the key elements of its energy strategy, though barriers remain to coal-fired closures

Method of closure

• The three scenarios for coal phase-out laid out in SEN were:

• A slow reduction as plants reach the end of their lifetime

• The active closure of the 2.6GW Brindisi Sud plant, which is Italy’s largest, in addition to the slow closure of other plants

• The active closure of all plants by 2030

• Under the first scenario no measures would be required except for an agreement that no new coal-fired capacity would be built

• EU regulations on emission limits from 2021 could force the oldest, most polluting plants offline

• The second and third scenarios would require active closure of plants, which the government anticipates would require compensation to plant owners whose costs are not yet amortised

• It is estimated that an additional 1GW of gas-fired capacity would be required by 2030 under the first scenario, 1.5GW under the second and 2.9GW under the third scenario

• The Five Star Movement, who are not in the governing coalition but who are currently leading in the polls for next year’s election, have proposed a domestic carbon tax to force coal plants out of the generation mix

Analysis

• The country currently has around 8GW of operational coal-fired capacity, accounting for 12% of electricity production in 2016

• The current government will be concerned over the impact coal closures could have on power prices and competitiveness to other markets

• A slow reduction of coal generation based on existing market forces is the most likely scenario at present, though with three plants having come online since 2005, their lifetimes could run through to the 2040s.

Netherlands

Background

• In June 2015 judges in the Netherlands ruled that the government needed to do more to reduce GHG emissions, increasing the 2020 target from a 17% reduction compared to 1990 levels to a 25% cut

• This led to a non-binding vote in Parliament in September 2015 calling for the closure of coal-fired capacity to meet the new target

• A decision on the future of coal-fired plants in the country will be taken by the new government, following an election in March 2017 – however, coalition negotiations to form a government are still on-going

Method of closure

• Kamp (current Minister for Economic Affairs) rejected a proposal from parliamentarians to introduce new minimum requirements for the efficiency of plants, which would in effect force all coal-fired plants to close

• He said he would prefer a national law specifying the date at which plants would close

• With three of the country’s five coal-fired plants having come online as recently as 2015, significant compensation may be required to close these plants – however, advice from the Council of State to Kamp suggested this may not be the case if there was a sufficient transitional period offered to the owners of the plants to provide adequate opportunities to reduce their damages

• The Netherlands would likely resist any pan-European attempt to force plants offline through a carbon price floor

Analysis

• The conservative-liberal (VVD) party, who won the most seats in the recent election, oppose the closure of plants, while all other potential coalition partners voted in favour of closures in the non-binding vote

• Economy minister Kamp stated in July 2017 that one of the country’s five coal-fired power plants (the 630MW Hemweg 8 plant) could close by 2020 if the upcoming National Energy Outlook shows not enough progress is being made to meet the GHG reduction target

• The new coalition, once formed, is unlikely to propose a full coal phase-out in the short- to medium term, but could propose a longer timeframe for gradually taking plants offline

• While coal accounted for 32% of electricity generation in 2016, the Netherlands has ample gas-fired capacity (operational and currently mothballed) to make up for a complete coal phase-out without endangering security of supply – however, power prices would likely need to rise to incentivise gas plants to produce baseload power

Other countries

• The table below provides an overview of potential coal phase-out in other Northern and Western European countries

• It should be noted that seven EU countries are already coal-free (Belgium, Cyprus, Estonia, Latvia, Lithuania, Luxembourg and Malta)

• Countries in Eastern Europe are excluded from the table as there are currently no phase-out plans in the region

Market outlook

• Short- to mid-term: neutral, as coal phase-out plans in almost all member states are likely to be slower than the official targets proposed due to concerns over security of supply and cost constraints

• Long-term: bullish for European power as coal-fired closures will necessitate higher-cost generation sources being incentivised to produce baseload generation matthew.jones@icis.com

This analysis was originally published as part of the new ICIS power analytics product – Power Perspective. For more info and to get a free trial set up, please contact justin.banrey@icis.com