German lignite closures – bullish for carbon, bearish for power prices

Author: ICIS Editorial

2020/01/23

This analysis has originally been published in an extended version for ICIS EU carbon subscribers on 20 Jan 2020 at 14:40 CET.

The German government and federal states agreed on a phase-out timeline for lignite power plants on 16 January. The plan put forward by the government diverges from the linear capacity closure trajectory foreseen by the coal commission and concentrates capacity closures towards target years. Our modelling shows that the proposed phase-out pathway has the potential to lift EUA prices by €0.6/t on average between 2021 and 2030 while sending power prices lower by approximately €0.5/MWh.

Impact of changed lignite trajectory on power market

  • The lignite capacity reduction plan put forward by the government shows a concentrated capacity closure around target years 2029 and 2030 as well as 2034, 2035 and 2038
  • Figure 1 compares the phase-out trajectory as proposed by the coal commission ("ICIS modelling") to the government announcement
    • Until 2022, the lignite capacity reduction pathways remains similar to what the coal commission proposed as “steady decline” in its final report from January 2019
    • After 2022, the curves start to deviate with around 2.5 GW less closures by end of 2027 for the government plan compared to what we modelled on the basis of the coal commission
    • The gap starts to close again towards 2030 with around 8.5-9.0 GW lignite capacity remaining in the market
    • After 2030, the curves once again diverge with the government’s plan foreseeing to keep a significant amount of lignite capacities online towards the late 2030s while meeting the 2038 phase-out target

  • The abrupt reduction in lignite capacities towards the target points in 2022, 2030 and 2038 results in higher availability of these generation assets before these years
    • This results in 70.3 TWh higher generation of lignite plants between 2020 and 2030 compared to the linear trajectory indicated by the coal commission.
    • Consequently, gas (-18.0 TWh) as well as hard coal (-10.1 TWh) generation decreases over the same period
  • With lignite plants remaining longer online compared to our previous expectation, Germany’s trade balance sees an increase of the country’s power exporter status with 41.4 TWh more power transfer to neighbouring countries compared to the linear trajectory
  • Our pan-European long-term power modelling shows in Figure 2 that the agreed lignite phase-out pathway results in accumulated 58m tons higher emissions between 2020 and 2030 due to the upward adjusted phase-out structure compared to what the coal commission proposed

Impact on power and carbon prices

  • We see German power prices to decrease by an average of €0.47/MWh between 2021 and 2030 due to displacement of hard coal and gas generation by longer availability of lignite plants.
  • The highest gap of around €0.9/MWh can be observed for the years 2025 to 2029 where the difference between the coal commission proposal and the announced closure pathway is the highest
  • Meanwhile, the increase in emissions due to longer availability of lignite plants causes the carbon price to increase by €0.6/t on average for phase 4.

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

Florian Rothenberg is Analyst - EU Carbon Markets at ICIS. He can be reached at florian.rothenberg@icis.com

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