German coal power plants set to scramble for early closures

Author: Roy Manuell

2020/08/12

• Coal plants built pre-1990 to profit

• High competition in early tenders

• Faster phase-out to boost prices

LONDON (ICIS)--Almost half of the German hard-coal fleet will enter the first tender on 1 September standing to gain more from state compensation to close than on the market over the next decade, ICIS analysis has demonstrated.

This means that there is likely to be strong competition in auctions that take place over the next few years in which German coal plants bid to receive government subsidies to close.

More than 10GW of the total 21GW German hard coal assets would make less profit on the market in line with ICIS analyst base case assumptions between 2021 and 2030 than they would if they successfully bid for closure in tenders that begin next month and received the maximum compensation on offer.

ICIS analysts calculated the expected market profit for German coal plants of different ages over the next decade taking into account ICIS base case assumptions for power, fuel and carbon prices. The market profit was then compared with the possible maximum compensation available at each tender.

The findings showed that all plants of any type built before 1990 stand to gain more from bidding for government compensation in tenders over the next seven years than from the market.

This may mean that a flurry of activity in auctions over the next few years is likely as the 10GW coal assets built before 1990 are strongly incentivised to cash in on subsidised early closures.

With the compensation total in each tender lowered if tenders are oversubscribed, high levels of interest may mean less money available to coal plant operators than the maximum stipulated in the coal exit law.

More efficient and flexible plants built post-2000 will remain more profitable than the total offered by the government to close. That said, their collective market profit premium to the compensation total also falls steadily over the next seven years.

Tenders are arranged to take place over the next four years with closure deadlines spaced out up until 2027. Forced closures are envisaged from 2031. Tenders are for hard coal assets only. Lignite plants have a different closure pathway outside of the auction system.

With the later tenders taking place several years prior to the closure deadline, according to the legislation, some operators of the more efficient plants may also wish to participate to ensure a subsidised closure in light of the forced closures from 2031. Operators may wish to cash in on government funding to then reinvest in alternative technologies.

OUTLOOK

ICIS carbon analysts expect EUA prices to rise above €40/tCO2e as early as 2023 which means that current weak profitability for hard coal plants is unlikely to strengthen even if gas prices recover from 2020 record lows as most anticipate. Weak coal generation dynamics will add further pressure to coal operators to close early.

If Germany were to phase out its hard coal fleet faster than current expectations , this would represent a bullish force for power prices.

Germany is already set for tighter thermal supply over the next decade due to a nuclear exit due by the end of 2022. Sluggish renewable expansion may further squeeze margins if onshore wind growth remains tepid.