Some answers to most often asked questions
1. How would you explain to a foreign audience, why lignite still has such a big part of Germany’s energy mix? What are your projections for the composition of the future mix (say by 2020 or 2030), both primary consumption and power generation – especially in light of the government coalition’s most recent decision to take 2.7 GW of coal fired power generation off the grid (by transferring them to a reserve)?
Germany still has a high share of coal fired power plants, as it is nowadays the cheapest way to produce electricity: the coal price is low, we the global demand is decreasing- especially because in the USA the coal demand has been declined with the increasing share of gas- and the CO2 price is too low. The European emissions trading system is suffering from the over- supply of emissions certificates because of an economic decline and incoming international certificates (CDM). The emissions trading system is not flexible enough and has too static emission reduction goals. The market stability reserve (MRS) which has been recently implemented – a mechanism to remove some of the over supply certificates from the market- comes too late and will not bring the necessary price signals as the amount of removed certificates it too low. In order to substitute coal with gas, we would need an emissions trading price of minimum 40 Euro per ton of CO2. The price is now 7 Euro per ton of CO2. The initial idea by the economics minister Gabriel in Germany to implement a coal tax for old and inefficient power plants was a good one, unfortunately the coal lobby was too strong and the coal tax has been rejected. The instead implemented 2.7 GW coal reserve is inefficient and expensive. We have a big over supply of electricity production in Germany leading to very low stock exchange electricity prices. This low wholesale price lower the profitability of all power plants, including the important gas and pumped hydro storage power plants. By simply phasing old and inefficient coal power plants out of the market, a double dividend could have been reached: the emissions target would be met as well as an improved market balance lading to a reduction of over supply of electricity and increasing wholesale prices. The end consumer price would though not increase as with low wholesale prices the feed in tariff (FIT) share to promote renewable energy would decline- as it is calculated as difference between wholesale price: the higher the wholesale price, the lower the FIT. The projections of the coal share will be declining, as with raising share of renewable energy the share of conventional energy will decrease. The Energiewende aims a coal phase out by 2040.
2. Paying the utilities to build a reserve (rather than imposing a levy on coal) has been criticized as an unnecessary subsidy to the industry. You and others have suggested gas as a more flexible and environmentally friendly way to supplement renewables in the future. But would using more gas increase Germany’s reliance on Russian imports? And might a coal-based reserve make sense for national security reasons?
As there is an over- supply of electricity and no scarcity of electricity, there is enough capacity at all times. There is already a capacity reserve for winter times, which is high enough to provide electricity security at all times. An additional coal based capacity reserve is unnecessary and expensive. Gas fired power plants are more flexible in the combination to volatile renewable energy. There is enough gas on the international gas markets so that the dependency from Russia could even be declined if we strongly diversify gas imports. In the future with increasing shares of renewable energy, excess electricity can be used to produce hydrogen and methane so that gas can even be produced domestically.
3. What are the economics of newer lignite-fired power plants, compared to hard coal, gas, nuclear, wind and solar? In light of the profitability issues big German providers are facing (with Eon reporting tremendous losses this year): Are the German energy utilities that invested in new plants a few years ago regretting their decision?
The Energiewende (energy transition) is not a new plan, so that it is clear since many years that investments into coal fired power plants in Germany are stranded investments. The cost effectiveness of coal fired power plants are low. The profitability of new coal fired powers plants could increase with decreased excess electricity supply by phasing out old fired coal power plants. The better the market balance, the higher the wholesale price, the higher the profitability of all remaining power plants, including the new coal fired power plants. The big utilities were sleeping too long and are suffering now from wrong management decisions in the past. They all underestimated the huge market potentials of renewable energy and new business models including a more decentralized, intelligent and flexible power system.
4. You were recently quoted in an FT article being critical of Germany’s coal renaissance. Would you agree with the article’s underlying assumption though that Germany’s coal dilemma was created by the Atomausstieg after Fukushima?
Not only is the nuclear phase out responsible for the coal renaissance but basically the not existence of any kind of climate policy measure in the electricity sector. The emissions trading system lacks of a well functioning climate instruments. The prices are too low to provide incentives for low carbon investments. The low CO2 price provides wrong market signals. The coal renaissance is basically the result of not existence and ineffective climate policy.
5. Will current government policy be enough to drive lignite as a power source out of the market? How high would a carbon price need to be to make them uneconomic?
Unfortunately the CO2 price is not to be expected to raise high enough to provide market signals to phase out coal. We could need a coal tax or emissions performance standards (EPS). EPS have been implemented in the USA and UK and could provide the right market signals to invest in low carbon technologies and not in coal. A coal tax would be an effective add on the non well functioning emissions trading system. Not to be misunderstood: the repair of the emissions trading system would be always the first choice, but as all European countries have to agree on changes and the minimum consensus was the market stability reserve (MRS), the instrument will not be a relevant climate policy instrument in the next 10 years. In order to provide not again wrong market signals, a second best choice climate instrument should be implemented.
6. With a view to Vattenfall’s plan to sell off its East German coal assets – can you speculate about the economic motivations of the potential bidders from the Czech Republic as well as Steag?
The bidding coal companies have a short term motivation: in order to get some gains, they accept even low profits within the next decade, as long as coal fired power plants are still in place. Vattenfalls coal assets are cheap, as all external costs will be taken over by the German society (as environmental and climate damages). It is the worst solution for Germany, there should be a moratorium to forbid the sell off Vattenfalls assets. The German government should establish a coal phase out plan for the next decades and help with a financial fund to implement structural changes in the relevant region for new and innovative jobs. Unfortunately, only short term visions determine decisions and bring German more problems than solutions. Although the economic chances of the Energiewende are high, five times more jobs are created already in the renewable sector than in the coal sector. Because of Germany investment into renewable energy the costs have been reduced substantially. In the last year for the first time more investment into renewable energy have been made than into fossil fuels, basically because of the drastically reduced costs of renewable energy. The investment into new markets create jobs, technology innovation and improves the competiveness of the whole country.