ICIS Power Perspective: Coal phase-out in Europe (1/2) – Policy tools and country analysis

Governments across Europe are coming under increasing pressure to phase-out coal-fired capacity both to meet decarbonisation objectives and to reduce the impact of emissions on their citizen’s health.

While countries in Eastern Europe have so far broadly resisted pressure to phase out coal from their energy mix, the issue is on the political agenda in most Western European countries, with several having announced the date by which all plants will be taken offline.

However, none of the countries has yet confirmed the policy tools they plan to use to remove coal-fired capacity.

This is the first article in a two-part series and focuses on the measures that can be used by governments to take coal-fired plants offline, while the second part analyses the coal closure debate in the five of the eight largest power markets in Europe: Germany, the UK, France, Italy and the Netherlands.

Policy tools

• There are a range of measures than can be taken by national governments to phase-out coal-fired capacity, some of which are market based, while others are of a regulatory nature

• The options are not mutually exclusive and countries are likely to rely on several of the policy tools to close plants

• However, each policy tool presents challenges in terms of effectiveness and cost

• Regulatory measures will likely be required to achieve even a partial phase-out of coal in Europe by 2030

Option 1: Ageing plants

Overview

• Governments could decide to just allow plants to reach the end of their foreseen lifetime while at the same time setting up a moratorium for building new generation capacities

Analysis

• The average lifespan of a coal-fired plant is around 45 years, which means that the majority of the 300+ plants in Europe are nearing the end of their commercially-planned life

• Simply letting the plants close when their natural lifespan is reached is the least interventionist option for countries, enabling a gradual phase-out of capacity with low associated costs

• However, many plants have come online within the last 20 years, which means they could keep running until at least the 2050s if no decision is taken to close them

• Plant operators could also take measures to extend the life of older plants by replacing ageing equipment, so long as they remain profitable

• The option could be used in the short-term to shut down the oldest and most inefficient plants, but would not enable a significant quantity of European capacity to be taken offline by 2030

Option 2: EU emissions regulations

Overview

• In 2017, EU member states adopted new minimum binding limits for nitrogen oxides (NOx), sulphur dioxide (SO2), dust, thermal efficiency, soil and water pollution in combustion plants, called Best Available Technology Reference documents (BREF)

• The new rules will apply from 2021

Analysis

• Under the new regulations, plant owners will have to retrofit their plants to meet the new stricter standards, or else face the withdrawal of their operating license

• A substantial part of the EU’s coal and lignite capacity is currently significantly overshooting these new limits, which could make retrofitting prohibitively expensive

• However, countries may be able to obtain derogations to avoid the new limits. In 2016, 46% of EU plants were using derogations to avoid the existing limits from the large combustion plant directive (LCPD)

• The EU may decide to go even further in the future in restricting plant emissions to force plants offline, though some member states have voiced their concerns that EU involvement of this kind goes against the principle of subsidiarity

Option 3: National emissions regulations

Overview

• Governments could decide to set their own regulations on plant emissions, above those laid out by the European Commission

Analysis

• The most notable such regulation is the Emissions Performance Standard (EPS) in the UK, which sets a maximum level on the amount of carbon a plant can emit in a year

• The EPS currently only applies to plants that were either built after 2014 or subject to replacement of any main boiler after 2014. However, the UK government has proposed applying the rule to all plants as a way of forcing coal-fired capacity offline by 2025

• The use of retroactive legislation on existing plants can be viewed as controversial and may dent investor confidence in a given country

• A recent proposal from parliamentarians in the Netherlands to introduce unreachable minimum requirements for the efficiency of plants to ensure coal phase-out was rejected by the country’s energy minister, who said such a move “is not allowed an is improper”

Option 4: Reformed EU Emissions Trading System (EU ETS)

Overview

• Reforms to the EU ETS covering the period after 2020, which are currently in trilogue negotiations, could produce a carbon price sufficient to push some coal-fired plants off the market

Analysis

• The proposed reforms to the scheme, which will apply from 2021, are likely to raise the carbon price, though a reformed EU ETS will likely not be sufficient to make all European coal-fired generation unprofitable

Option 5: Carbon floor

Overview

• An EU-wide or regional/domestic carbon price floor could be introduced to decrease the competitiveness of coal in comparison to other energy sources with lower carbon intensity, thereby forcing coal plants off the market

• Carbon price floors have been proposed in several member states as the EU ETS failed to produce a price on carbon high enough to lead to coal closure

Analysis

• A carbon price floor has been in place in the UK since 2013 and has contributed, along with the EPS, towards coal plant closures

• However, it is not easy to set a price floor for carbon that will ensure a sufficient lack of profitability for coal-fired plants in relation to gas-fired plants given the movements of underlying coal, gas and power prices, as well as the country’s generation mix

• There are also concerns that the floor could have the unintended effect of pushing gas-fired plants from the merit order

• The carbon floor can increase energy bills for consumers and undermine the competitiveness of national industries

• A carbon price floor could be argued to work best in conjunction with other policies, rather than as the main tool for coal phase-out

Option 6: Government decree of closure

Overview

• Governments could decide to pass a law stating that plants have to close by a given date

Analysis

• This is the most interventionist approach that can be taken by a government, but is arguably the most effective as it enables the government to determine the date at which individual plants close, thus avoiding plants all going offline at the same time

• However, the policy may open the government up to having to pay substantial compensation costs to plant owners, especially for plants that have only recently come online, or to face legal challenges by the operator

• Since the policy is based on intervention rather than market forces, it would also likely lead to pressure from unions over the impact on jobs

• As with the setting of national emissions regulations, the policy could dent investor confidence in the country

Factors preventing phase-out

• While decarbonisation is a major objective of both the EU as a whole and governments in Europe, there are several factors that will likely slow down coal phase-out:

Security of supply concerns

• One of the main energy goals of any government is to ensure security of supply. It is unlikely that any government will embark upon a full coal phase-out until there is confidence that the capacity being taken offline can be adequately replaced by other domestic resources or by imports

• Furthermore, in many countries power demand most likely will increase in future years which calls not only for replacements but expansion of capacity

• In the case of countries with a heavy reliance on coal, this will mean a substantial quantity of new generation capacity will need to be built before coal-fired plants can be taken offline

Cost

• The costs of constructing additional generation capacity to ensure security of supply, as well as potentially compensating coal plant owners for early closure, will have to be taken into account by governments

• These costs will likely be pushed onto consumer energy bills, which can be politically problematic

• Coal closure is also likely to lead to higher wholesale electricity prices as alternative baseload energy sources tend to be higher up the stack than coal-fired plants

Jobs

• Countries advocating coal plant closure may face political pressure due to the resultant job losses and the wider impact on industry competitiveness. Countries with strong labour unions (like France), or those with a heavy reliance on coal-fired plants (like Germany) are likely to encounter significant resistance to plant closures, even if the majority of the country’s citizens are in favour of such measures

Effectiveness

• There are concerns that if action is taken by one government to phase-out coal-fired plants without similar action taken in neighbouring countries, it could have the impact of incentivising coal-fired plants in the neighbouring countries to make up for the shortfall. This could mean that coal plant closure in one country fails to significantly reduce net CO2 emissions

Market outlook

• Short- to medium-term: Neutral, as coal phase-out plans in almost all member states are likely to be slower than the official targets proposed due to concerns over security of supply and cost constraints

• Long-term: Bullish for European power as coal-fired closures will necessitate higher-cost generation sources being incentivised to produce baseload generation matthew.jones@icis.com

This analysis was originally published as part of the new ICIS power analytics product – Power Perspective. For more info and to get a free trial set up, please contact justin.banrey@icis.com