This story has originally been published for ICIS Power Perspective subscribers on 17 July 2018 at 17:24 CET.
A new report, conducted by Frontier Economics on behalf of the Dutch economy ministry suggests that a combination of the proposed coal phase-out and carbon price floor would reduce domestic CO2 emissions, while increasing power prices and potentially creating security of supply issues between 2025 and 2030.
We conclude that the report is significantly misguided by the EUA price assumptions used in the modelling, which are far below the EUA prices we are expecting in the 2020s. The discussion could in our view lead to a reconsideration of the necessity, design and level of the proposed carbon price floor while the coal phase-out is highly likely to go ahead as planned.
Below we summarise the results of the report, then analyse the impact that a higher EUA price would have for the economics of Dutch gas plants and security of supply.Background The Dutch government is planning to phase-out coal by 2030, with 1.2GW due to be forced to close by the end of 2024 and the remaining 3.4GW obligated to go offline or convert to biomass by the end of 2029 The government is also planning to introduce a carbon price floor (CPF), starting at €18/tonne in 2020 and increasing to €43/tonne by 2030 The two policies are driven by the Dutch government target to reduce greenhouse gas (GHG) emissions by 49% in 2030 (compared to 1990 levels) Study results CO2 reduction The coal ban and CPF in combination would reduce domestic CO2 emissions by 26 million tonnes in 2030, compared to a reference scenario in which neither policy was adopted However, due to the impact of both policies on increasing imports from neighbouring countries (especially German coal, lignite and gas), the net CO2 reduction would be only 4 million tonnes in 2030 Thermal capacity The introduction of both policies would significantly reduce the profitability for both coal- and gas-fired generators in the Netherlands, with plants starting to close from 2020 An additional 2.4GW of gas-fired plants would be mothballed (compared to reference case) While reactivations of gas-fired plants should be economically viable in the very long term, the report admits this may be challenging in practice Security of supply The combined policies would have a significant impact on security of supply because of coal and gas plant closures, meaning the country would be more reliant on import capacity throughout the 2020s Adequacy reserve margins are expected to turn negative between 2025 and 2030, meaning that there is insufficient de-rated domestic capacity and import capacity to meet peak demand (report assumes 60% interconnector capacity availability) Prices The combined policies of coal phase-out and CPF would lead to higher Dutch power prices compared to the reference scenario 2023: +€1.2/MWh 2025: +€2.1/MWh 2030: +€2.9/MWh Analysis Study results The biggest concern to the Dutch government will be the anticipated impact on security of supply, as the analysis suggests that additional interconnectors (beyond those already planned) may be needed to ensure positive adequacy reserve margins between 2025 and 2030 The government may also be concerned by the impact on CO2 reductions modelled in the report – while the domestic reduction would significantly contribute to meeting the country’s GHG reduction targets for 2030, the policies would lead to only a minor net reduction in CO2 emissions, due primarily to the increase in German coal and lignite imports EUA forecast We believe that the study results are significantly misguided by the low EUA price assumptions used in the modelling. The study uses carbon prices that are based on the EU Reference Scenario 2016 and the IEA WEO 2017 New Policies, which were published in July 2016 and November 2017, respectively EUA prices were in the range of €5-8/tonne during this period, compared to current prices of around €16/tonne We believe that the recent reform of the EU ETS will produce substantially higher EUA prices through most of phase 4 (2021-2030) As can be seen in the graph below, we are anticipating EUA prices to significantly exceed the proposed Dutch carbon price floor between 2020 and 2025, which means that the price floor will have no impact during these years Dutch carbon price floor and EUA price forecasts
As a result, Dutch gas-fired generators will have a comparative advantage over German coal-fired producers during much of this period as both would be paying the same price for carbonThe graph below shows the difference between the Dutch clean spark spread (50% efficiency) and the German clean dark spread (40% efficiency) using our carbon and power price assumptions and the gas and coal price assumptions used in the report As can be seen, we expect Dutch gas-fired plants to have a slight economic advantage over German coal plants between 2020 and 2025 This would mean that Dutch gas plants produce for more hours, leading to a far lower level of imports compared to the report results In turn, this would mean that security of supply issues do not arise in the mid-2020s as suggested by the study Domestic CO2 emissions would increase compared to the report results, though net emissions would likely be reduced further Difference between Dutch clean spark spread and German clean dark spread
*For 50% efficiency gas with €1/MWh additional costs and 41% efficiency coal with €4/MWh additional costsSource: ICIS We expect the EUA price to fall below the proposed carbon price floor from 2026-2030, meaning that the price floor would start to have the effects outlined in the report as German coal would become cheaper than Dutch gas plants However, between 2026 and 2029 the EUA price would still be above the price forecast underlying in the study, meaning that the impact on domestic generation, imports and security of supply would be less significant than the report suggests Next steps The Dutch government will need to decide whether to adopt the coal phase-out and carbon price floor as currently planned with their coalition agreement The fact that the study was made public could be understood as a signal by the Dutch government to make changes to the policies agreed during the coalition negotiations We think that the coal phase-out is highly likely to remain in place as planned, but that the government could reconsider the necessity, design and level of the proposed carbon price floor It is not yet clear when the government will make a final decision on the policies and whether it wants to await more clarity from the German coal commission,which is tasked to put forward a proposal for a phase-out by the end of the year
Matthew Jones is Senior Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Matthew.Jones@icis.com
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