German NAP II - Backing of coal-fired power plants
This month the German ministry of environment published the draft version of its second national allocation plan (NAP), covering the period of 2008 to 2012. Its targets underline the general energy policy of the German government.
With the new NAP the German government wants to achieve the following targets: an overall reduction of carbon emissions of 3% (with the burden mainly on the energy industry), the shut down of old inefficient coal fired power plants, investment in efficient new power plants (without frustrating investment in coal-fired power plants), and investment in CHP plants.
The NAP has been agreed with the ministry of economics, though during a consultation period until the end of May all stake holders can comment on the draft.
For the allocation period from 2008 to 2012 a total annual budget of 495 million tonnes (mt) of CO2 emissions is allocated to the industry and the energy sector that take part in the emissions trading scheme. The budget for the energy industry is 212.5 mt. To achieve this budget, emissions for the energy industry must be reduced by 15% compared to the base period 2000 – 2005.
Industry will be given almost all the carbon allowance it needs, where the reduction is a mere 1.25%. The German government argues that industry is exposed to world-wide competition and can’t afford additional costs. There is an ongoing debate including an anti-trust case in Germany that although the carbon allowances for the first allocation period were allocated freely, power companies valued the rights based on the market prices and added the price on top of the power price.
This is one explanation for spiralling power prices and profits of power producers in Germany. The government waived the idea to auction 10% of the carbon allowance – allowed under the EU-Directive – which triggered national legislation on emissions trading. It continues to allocate rights freely. The government does not expect further increases in power prices because the carbon allowances are already valued at market prices. Power producers and customers on the other hand argue that a reduction in carbon allowances will drive up prices in the carbon market which will in turn lead to increasing power prices – as has already happened.
Gas-fired or coal-fired favoured?
The NAP II includes incentives to shut down old coal-fired power plants. Plants that are older than 30 years and have an energy efficiency less than 31% (lignite) or 36% (hard coal) will get an additional reduction of emission rights by 15%.
New power plants will be endowed with carbon allowances according to a specific emissions factor. For coal-fired power plants the factor is 750 g CO2 equivalent/kWh, while for gas-fired power plants the factor is 365 g CO2 equivalent/kWh. These factors are unchanged compared to the NAP I. The rights are granted without any reduction for 14 years. The endowment is sufficient to operate either efficient gas-fired or coal-fired power plants and therefore gives no incentives not to invest in coal-fired plants. What potentially favours coal-fired power plants could be the load factor for which these rights are allocated.
Shortly before the NAP II was published operators of new CCGTs under construction or planned, such as Statkraft and Concord Power, raised concerns that coal-fired power plants will receive rights for a much higher load factor than gas-fired power plants. It was suggested at the time that CCGTs only be awarded allowances for peak load capacity (3,000 h/y) although the current business plans of these projects are based on operation in the middle and base load ranges. This sort of disadvantage would have killed all CCGT projects to date. And although the suggestion has been dropped, it is still discussed within government to award coal-fired power plants with carbon allowances according to a load factor 500 h/y higher than gas-fired power plants. The load factor is currently not stipulated in the draft of the NAP II – it will be determined following the end of the consultation period.
The allocation of free emissions rights is granted for all new projects. If the reserve of 10 mt is not sufficient the German state has to buy additional carbon credits on the market. The government thinks the reserve is sufficient because a significant number of these new projects will only replace old power plants. In this case the carbon allowance of the old plant can be transferred for four years to the new plant. After this time the carbon allowance is adapted to the specific emissions for 10 years without further reduction – a favourable rule for incumbents.
Existing CHP plants will receive carbon allowances compared to historical emissions only with a reduction equal to the industrial sector, i.e. 1.25%. New plants will receive carbon allowances following two specific factors. For power production it will be according to the power factor and for heat production according to the heat factor.
Currently no big changes are expected for NAP II following the consultation period. Eventually the new NAP may lead to higher power prices and lead to greater investment in coal-fired power plants. The incumbent power producers will lose some of their windfall profits but the NAP II does not endanger their dominant market position. Heiko Lohmann
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