EU gives green light to German 2.7GW lignite power reserve

Author: Laura Raus

2016/05/27

A German government plan to force 2.7GW of lignite-fired power plants off the open market and into an emergency-only reserve in exchange for compensation has cleared the EU state aid hurdle, the European Commission said on Friday.

There was uncertainty around whether the plan, in Europe’s most liquid power market, would be approved by the EU’s executive body. Legal experts had said the measure might be considered illegal state aid on grounds there would be no tenders for selecting the plants for the reserve (see EDEM 18 August 2015).

But the German government wanted to remove the plants from the open market and place them in the reserve to help get the country’s 2020 emissions reduction target back on track.

“The commission concluded that the measure promotes EU environmental objectives, as it helps Germany to achieve its CO2 emissions target, without unduly distorting competition in the single market,” the commission said.

The reserve should ensure Germany’s power supply security at times of low renewable energy generation. It would only be used when power supply could not meet demand on the short-term market unexpectedly, although this is unlikely to happen before 2020 according to some experts (see EDEM 10 July 2015).

When Germany first unveiled what was in effect the early forerunner of the lignite reserve – the climate levy proposal – it had a bullish impact on the power market. But this then faded away gradually as participants realised it would be replaced with something less ambitious (see EDEM 10 June 2015).

The lignite reserve will already be providing some support to the far curve of the German power market due to the gradual removal of baseload capacity it involves. But the extent of this would be difficult to value as it would already have been priced in by the initial climate-levy-inspired push higher in June last year.

Compensation

The eight lignite units that have agreed to enter the reserve would be paid €1.6bn in total for being there for four years, after which they would have to close down. They will not be able to sell power on the market while in the reserve.

The European Commission found the planned compensation was not excessive. While the remuneration would go towards profits the plants’ operators would have to forego by not selling power on the market, decommissioning costs would still be borne by operators.

Approval

The regulation for moving the eight lignite units of RWE, Vattenfall and MIBRAG to the reserve is being discussed by the German parliament, together with legislation for the country’s new power market design.

The economic affairs ministry expects the parliament to approve the package in July, just before its summer break.

The units would be moved to the reserve gradually between October 2016 and 2019. They represent 13% of Germany’s lignite-fired capacity. The 352MW Buschhaus plant belonging to lignite mining and electricity company MIBRAG is set to be the first entrant to the reserve on 1 October.

The reserve is expected to cut Germany’s annual emissions by 11-12.5m tonnes of CO2 by 2020, yielding about half the additional reduction needed to meet the target.

The government initially intended to impose a climate levy on fossil-fuel generation to achieve the 2020 emissions target, but gave up this plan in the face of outcry from the coal industry.

However several market participants have expressed concern that lignite plants are an inefficient fuel type for the reserve because they cannot ramp up and down quickly (see EDEM 4 September 2015).

After lignite plants start dropping out of the reserve from 2020, tenders for various technologies will be held for replacing the gap in the reserve. laura.raus@icis.com