Revised German climate levy plan could still harm power sector

Source: Heren

2015/05/12

Revisions to the German plan to make older coal-fired power plants buy more carbon allowances by 2017 would harm the power sector, industry sources said.

The initial proposal published by the German economic ministry in March said lignite plants older than 20 years would have to buy additional carbon certificates on top of EU compliance requirements to cover emissions above a certain threshold from 2017. This would come as a fixed levy, which at the end of the 2017-2020 phase-in period, would correspond to a cost of €18-20 per tonne of CO2 equivalent (tCO2e).

However, opposition to the initial plan has led the country’s economic ministry to consider basing the plan on wholesale power prices, where a higher levy would be charged for higher electricity prices, and lower levy in case of lower wholesale power prices (see EDEM 30 April 2015).

But the new proposal is now also facing criticism. Christian Tode, a power market expert at the institute of Energy Economics at University of Cologne (ENWI) thinks that a plan based on a fixed levy makes it easier for plants to plan when to commission or dispatch power plants. A plan which relies on a variable levy, however, adds greater uncertainty and makes it more complex to forecast when it is profitable for a plant to run.

“The [initial] plan does not try to decommission plants but to shift their operation towards hours of high profitability. Lignite plants should not decommission [plants] but simply lower their output while still remaining profitable,” said Tode.

A spokeswoman at the German economic ministry agreed, saying plants would only need to adjust production, not shut down entirely.

Meanwhile, utilities are concerned that mining costs for lignite power plants are fixed and a plan based on wholesale power prices does not consider that any plant closures would result in fewer power plants having to cover the mining costs.

“When we shut down a lignite power plant, we still have the mines, therefore the overall costs for the whole lignite system would not immediately change. Therefore the remaining power plants would have to take a bigger portion of the overall costs, a source at a German utility said.

Price Impact

A study carried out by research firm Sanford C. Bernstein indicated that German power prices could rise as high as €48.00/MWh by 2020 if 18GW of installed hard coal and gas generation was taken out due to poor profitability although the research does not specify whether the closures would happen because of the fixed or wholesale price-linked levy. On Monday, the German Day-ahead Baseload closed at €27.55/MWh, according to ICIS data.

However, RWE estimated a far more modest increase, saying the original proposal would lift German power prices by at least €5.00/MWh. While Roland Lorenz, head of global energy and consulting practice at Poyry, said power prices would rise by €2.00/MWh if original plan was implemented. Meanwhile, in its quarterly financial results published on Thursday, German utility E.ON said that the impact of the plan was uncertain due to lack of details.

With the plan still being discussed, the German ministry expects the legislative proposal to be formed no earlier than June. saloni.sardana@icis.com