ICIS Power Horizon: Dutch government maintains plans for a minimum carbon price floor

This story was originally published for ICIS Power Perspective subscribers on 08 October 2018 at 15:58 CET.

The Dutch economy ministry announced on Friday 5 October that the government still plans to introduce a CO2 price floor for the power sector from 2020. ICIS modelling suggests that the floor would not have any impact until 2026 due to the proposed level being below our projections for EUA prices. However, between 2026 and 2030 the floor would be bullish for Dutch power prices, as well as leading to reduced domestic output and increased reliance on imports.

In terms of emissions, the floor would lead to a national reduction of 4.4m tCO2 compared to the base case in 2030. However, net emissions in the EU as a whole would be neutral due to a similar increase in thermal plant output in neighbouring countries.

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)
• Friday’s announcement was part of a letter to Parliament outlining the main points for the Climate Agreement

Analysis

• CO2 floor
  • While the letter sent on Friday made no reference to the level of the price floor, previous statements suggest it would start it €18/tonne in 2020, increasing to €43/tonne in 2030
  • At this level we anticipate the floor to be below the trajectory for EUA prices for the first half of the 2020s, as the recent reforms of the EU ETS will have a bullish impact on EUAs
  • As a result, the price floor would have no impact in its first five years of implementation (2020-2025), though would have an increasing impact between 2026 and 2030 as the gap between the floor and EUA prices widens
  • Power prices

• ICIS modelling suggests that Dutch prices are set to increase to a peak of €58.13/MWh in 2023, driven primarily by higher EUA prices
  • Prices are then expected to fall towards 2030 as EUA prices soften and more renewable capacity comes online
  • If the carbon price floor were to be adopted, this would have a bullish impact on prices between 2026 and 2030. Modelling suggests that prices would be on average €1.48/MWh higher than the ICIS base case over this period
  • In both the base case and carbon price floor scenario, prices can be expected to jump in 2030 as the final three Dutch coal plants are due to close

• Net imports/generation
• Under our base case assumptions, the Netherlands would become a net exporter from 2023 and maintain this position through to 2030
  • The initial switch from net importer to net exporter status is largely caused by the increase in EUA prices, with Dutch gas-fired plants becoming more profitable compared to German coal-fired plants
  • The net exporter status is maintained due to the significant rise in offshore wind output

• However, under the carbon price floor scenario the Netherlands would revert back to being a net importer between 2027 and 2030 as Dutch coal and gas-fired plants would be less profitable than those in neighbouring countries
• By 2030, annual gas-fired output would be 12TWh lower in the carbon price floor scenario, compared to the base case. This is equal to the 12TWh difference in terms of net flows between the two scenarios
• Emissions
  • The carbon price floor would lead to a reduction in Dutch CO2 emissions due to the impact on coal and gas plant running hours
  • Modelling suggest that by 2030 emissions would be 4.4m tCO2 lower than the base case
  • However, the national impact would be almost cancelled out by a 4.2m tCO2 increase in emissions from neighbouring countries

Next steps

• While the government has re-affirmed its intention to introduce a national carbon price floor, the final decision has not yet been made
• The government will likely be keen to await more clarity on the German coal commission, which is tasked to put forward a proposal for a phase-out by the end of the year
• There remains potential for a regional carbon price floor involving several countries, which would likely be implemented instead of the Dutch national plan if agreed

Matthew Jones is Senior Analyst – EU Carbon & Power Markets at ICIS. He can be reached at Matthew.Jones@icis.com

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