Draft German coal phase-out law postpones decision on EUA cancellation

Author: Marcus Ferdinand

2019/11/15

This analysis has originally been published in for ICIS EU carbon subscribers on 12 Nov 2019 at 13:10 CET.

The first hard coal plants in Germany are expected to close as of next year. On 12 November a draft legislative proposal from Germany’s Energy Ministry emerged which highlights many of the details regarding the planned approach. The reduction of hard coal capacities until 2026 solely relies on tenders without further regulatory enforcement. Details on lignite are spared out for now. It seems that the German government will postpone the decision on EUA cancellation related to the coal phase-out until the first review in August 2022. We expect the final legislative proposal to be proposed by the German cabinet on 20 November.

Key points

  • In principle the draft legislation follows the recommendation of the coal commission to reduce hard coal and lignite capacity
  • The target capacity levels are defined as
    • 30 GW until 31 December 2022 (15 GW hard coal and 15 GW lignite)
    • Equal linear capacity reductions to reach 17 GW until 31 December 2030 (8 GW hard coal and 9 GW lignite)
    • Complete phase-out by 2038
  • Until 2026, hard coal-fired power plants are to be taken off the grid solely by means of tenders, no enforcement is foreseen if tenders remain undersubscribed
  • Until 2022 legislation needs to be adopted how the phase-out trajectory will be regulated for the still operating hard coal plants. This will be done by applying a lifetime analysis that extends the lifeline for retrofitted plants
  • The part in the legislative proposal that regulates how to reduce lignite capacities is left blank
  • The legislative proposal foresees that no new lignite and hard coal plants are allowed to go online, unless they already have obtained an emission permit which is the case for the controversial Datteln plant that is announced to go online in January 2020
  • By 2032 the energy ministry will assess whether hard coal capacities can be phased-out earlier than 2028, at the earliest by 2035
  • Reviews are foreseen in August 2022, 2026, 2029 and 2032 whether the closures follow the foreseen trajectory

How the hard coal tender works

  • Starting in 2020, the state will set a premium that operators can collect in return for the withdrawal
  • The tendered volume is the annual capacity that is required to close according to the linear pathway
    • First tender will take place on 1 July 2020, tender volume for 2020 will be 4 GW
    • 2022 tender will take place 22 months earlier
    • 2023 tender will take place 28 months earlier
    • After 2023, the tender will take place 34 months earlier
  • The time between the award of the tender by the BNetzA (3 months after the tender takes place) and the closure of the first 4 GW in 2020 will be only seven months, for the tendered capacity in 2022 it is 18 months and for 2023 it is 24 months. Therefore, the closures related to the first tender will have to be completed by 1 May 2021.
  • If there are not enough offers on the part of the operators a forced shutdown of the oldest plants is not foreseen
  • It is therefore considered certain that the state premiums will have to be higher than initially planned in order to implement the phase-out as planned by the government’s coal commission
  • The legislative draft leaves blank spots for the maximum amount for closure bids which will determine the highest possible compensation
  • In case an operator continues to generate electricity despite having agreed to close will have to pay a maximum fine of between 75 and 100 million euro

Wind onshore – new distance rules confirmed

  • Wind onshore projects will only be allowed if they are erected with a minimum distance of 1000m to the next residential area, defined as five or more houses
  • This has caused heavy objection by wind associations and is considered as significant obstacle in ramping-up the currently low capacity additions

Not much on cancellation of emission allowances

  • The draft legislation mentions that the option to cancel EUAs in order to balance the effect of a coal phase-out on the EU ETS is transposed into national law
  • The cancellation topic will likely play a role in the review process associated with the legislation with the first one to take place on 15 August 2022
  • We currently do not see any implications that Germany would take an earlier decision in this regard
  • We estimate that the amount of allowances to be cancelled associated with a European coal phase-out to be in the range of between 432m and 645m between 2021 and 2030 (see update here)

Next steps:

  • The ministerial cabinet meets on a weekly basis on Wednesdays
  • We expect a final draft law to emerge from either tomorrow’s but rather next week’s gathering of ministers (20 November)
  • After an agreement in cabinet, the file would enter the German Parliament (Bundestag) where it could be amended
  • The final step is the approval by the Bundesrat

Marcus Ferdinand is Head of European Carbon & Power Analytics at ICIS. He can be reached at Marcus.Ferdinand@icis.com

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