https://www.carbonbrief.org/guest-post-why-german-coal-power-is-falling-fast-in-2019
[People - and for-profit corporations - will do what they are paid to
do. Also, while carbon pricing makes coal-fired generation increasingly
expensive, (unsubsidized) renewables are setting an effective cap on prices.
links and images in online article]
18 July 2019 11:01
Guest post: Why German coal power is falling fast in 2019
Karsten Capion is senior adviser at Danish Energy, the membership body
for the Danish energy industry. In August, he will be joining the Danish
Council on Climate Change (Klimarådet) as chief analyst. This is broadly
equivalent to the UK’s Committee on Climate Change.
Germany generated significantly less electricity from coal-fired power
stations in the first half of 2019, with output down by more than a
fifth compared to a year earlier.
Generation from brown coal (lignite) was down by 14 terawatt hours (TWh,
21%) and hard coal was down by 8TWh (24%). With gas generation only
increasing moderately (3TWh), the German power sector’s emissions fell
by 20m tonnes of CO2 (MtCO2, 19%).
This dramatic shift in Germany’s power sector comes as the Federal
Ministry for Economic Affairs and Energy (BMWi) recently outlined its
plan for a complete coal phaseout no later than 2038, in line with the
recommendations of the country’s coal commission.
The BMWi plan would include auctions for compensation payments to hard
coal plants shutting down early, even though many of these plants have
been sitting idle for large parts of 2019 to date.
In this article, I look at why German coal generation is becoming less
profitable as a result of much higher carbon prices, against a backdrop
of continued increases in renewable generation.
Generation change
The EU’s largest economy is also its most polluting, with Germany
accounting for roughly a third of all electricity-related CO2 emissions
in the bloc. Around half of EU electricity generation from brown coal
(lignite) takes place in Germany, as well as a quarter of the total for
hard coal.
(Lignite is a soft brown coal formed from compressed peat. It has higher
water content than hard coal and so causes much higher CO2 emissions per
unit of energy when it is burnt.)
After years of steady output, German electricity generation from coal
has been falling fast in 2019. Hard coal output had already seen
declines over the past few years, as the chart below shows (black line),
whereas brown coal generation (brown) had been resilient until much more
recently.
In the first half of 2019, hard coal generation is 8TWh (24%) lower than
a year earlier, while lignite is down 14TWh (21%) – with coal down 22TWh
(22%) in total and 44TWh (36%) over five years.
The gap left by coal-fired electricity has been largely filled by
renewables, with output from German windfarms up by 11TWh (19%) and
solar up by 1TWh (6%) in the first half of 2019, while demand fell by
9TWh (3%) and gas generation only increased by 3TWh (16%). The shift
means wind is on track to become the single largest source of
electricity in Germany this year, overtaking lignite.
In total, these changes mean that emissions from Germany’s electricity
sector were down 20MtCO2 (around 19%) in the first half of the year,
compared to the same period in 2018.
The German environment ministry has previously projected a 32% reduction
in power sector emissions by 2020, compared to 1990 levels. The rapid
falls this year mean this estimate is likely to be exceeded.
If savings continue at a similar rate in the second half of 2019, then
emissions from the sector would fall by 40MtCO2. This is equivalent to 3
percentage points towards Germany’s now abandoned 40% emissions
reduction target for 2020, which is nevertheless still likely to be missed.
Idle capacity
Notably, the decline in coal generation in 2019 has happened without any
major power station closures. According to Energy Charts, a website
maintained by the Fraunhofer Institute for Solar Energy Systems, the
installed hard coal capacity is 23.7 gigawatts (GW, red line in the
chart, below), but maximum output this year has not exceeded 17.4GW
(blue line) and has stayed below 11.2GW since March.
This low utilisation means Germany’s hard coal fleet, even at maximum
output, has been running well below half its installed capacity since
March. In the first half of the year overall, the fleet averaged 25% of
its potential output. Similarly, lignite plants have averaged just 57%
of their potential output in the same period – albeit with large
differences between individual power stations.
A number of lignite plants have stopped generating over the past few
years and are being kept open as “reserve” capacity in case of
shortages. Some 2.7GW will gradually be moved into the reserve during
2016-2019, leaving 18.5GW operating in the German electricity market.
While important, however, this can only explain a small part of the
decline in lignite output since last year.
Most of this idleness can be attributed to renewables generating more
electricity and the fact that many gas-fired power plants are now
cheaper than their coal competitors, due to lower gas prices and higher
carbon costs on the EU Emissions Trading System (EU ETS).
This highlights the fact that CO2 emissions from coal can be reduced
without closing down coal-fired power stations – and that coal capacity
does not automatically translate into emissions.
Reducing operation through a higher price on carbon instead of actively
shutting down plants could even be more effective from an economic point
of view, since it would reduce emissions without necessitating
compensation payments for forced retirements. The UK carbon price floor
has been a significant contributor to the country’s success in phasing
out of coal, for example, helping keep remaining coal plants idle, with
more than half the hours this year seeing no coal generation at all.
Market prices
The recent decline for hard coal generation has also come despite
falling fuel prices. In April of this year, the cost of emitting CO2
(red line) overtook the cost of buying hard coal for a typical power
plant (grey), as the chart below shows. This switch is also a result of
a surge in EU carbon prices since reforms were agreed in late 2017.
At the end of June 2019, hard coal was trading at just above $50 per
tonne. Such low prices are unlikely to be sustained, given it is below
the $66/tonne expected by the International Energy Agency (IEA) in its
Sustainable Development Scenario, where coal demand drops dramatically
worldwide.
With a rebound in coal prices and carbon prices remaining stable – as
expected by the forwards markets – hard coal running costs are likely to
reach around €50 per megawatt hour (MWh), up from closer to €40/MWh today.
This figure excludes fixed operating costs and investments needed to
renew equipment and meet more stringent air pollution rules. A cost of
€50/MWh is also around the same level as expected power prices in
Germany, meaning margins will be small for the country’s hard coal fleet.
While hard coal use has been falling steadily for years, lignite has
seemed less susceptible to the effects of the green transition. This is
because lignite plants have lower running costs, using fuel extracted
from large surface mines nearby rather than from deep mines that are
often overseas.
That position finally changed this year, as increased wind generation,
declining demand and lower gas prices resulted in a smaller market for
coal. It was further exacerbated by the price of carbon rising from just
€5 per tonne of CO2 two years ago to about €28/tCO2 today, which hits
lignite particularly hard due to its very high emissions per unit of
electricity generated.
The net result is that lignite operators’ margins have been squeezed in
recent months, with total revenues across the German fleet (red line in
the chart, below) barely covering the costs of carbon (blue) – let alone
fuel or other fixed costs such as salaries.
This squeeze on lignite profitability has started to produce real
consequences for power plant owners. One major utility, EnBW, took its
900 megawatt (MW) Lippendorf S lignite unit out of operation on 15 June
2019, saying that “current framework conditions do not permit economic
operation”.
This is a reflection of the substantial shift in lignite profitability
over the past two years, shown in the chart, below. In general, lignite
power plants have higher output (shown on the y-axis) in hours when
electricity prices are high (x-axis). Comparing this distribution in
June 2019 (red dots) with the same month in 2017 (blue) shows how much
less the plants have been switching on.
Most remarkable is the increase in the “drop-off price” under which
lignite plants significantly reduce their output, from about €10/MWh in
2017 to about €30/MWh in 2019. This price is the point below which
plants are unable to operate without losing money.
Maximum output has also fallen in 2019 as a few lignite units are
permanently offline, while minimum output has been reduced too. The
latter is due to plants shutting off completely during extended periods
of high renewable generation.
Until recently, lignite plants rarely shut off completely, as periods of
uneconomic operation were typically short enough to justify loss-making
operation instead of paying the associated costs of switching off and
then re-starting the power station. That meant that lignite plants were
running more or less continuously outside of planned maintenance.
A few points in the chart above also shows the new dynamic where lignite
output remains low even during some periods of high electricity prices.
This is due to some plants switching off for economic reasons and being
unavailable to fire up quickly during short periods of high prices, when
prices are otherwise low.
Carbon futures
Looking ahead, the current market expectation is that lignite revenues
will increase slightly over the next few years, with gas prices due to
rise and competition from nuclear plants disappearing as Germany
completes its phaseout of the technology by 2022.
This means lignite generation could rebound in the short term, as plants
are expected to become cheaper to run (brown line in the chart, below)
than their gas counterparts (blue line).
Despite this potential rebound, however, the price difference between
running a lignite and gas-fired power plant seems set to remain small –
whereas, previously, brown coal had a large cost advantage.
This means that the days when lignite running costs were low and power
prices (set by gas and hard coal) were high will probably not return.
Furthermore, the emergence of subsidy-free renewables are likely to cap
long term electricity prices, even in the event of rising gas prices.
The chart above may even overstate the profitability of lignite plants,
as it assumes a short-term running cost of just €10/MWh. Longer-term
running costs – on top of carbon costs – could be as much as €22/MWh,
according to thinktank IEEFA, citing figures from German lignite
operator RWE. This still does not factor in costs for upgrades to comply
with tighter environmental standards for local air pollution.
With renewable generation set to continue growing rapidly and prospects
for carbon prices remaining buoyant, the end for German coal could
arrive sooner than expected.
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