German Coal and Lignite Phase-Out

Argus White Paper: German coal and lignite phase-out

Germany’s final hard coal mine closed at the end of 2018 and the country is now moving to eradicate lignite mining. To this end, its commission on growth, structural change and employment (WSB) has published recommendations for phasing out coal and lignite-fired power generation. The WSB recommends, as a first step, the closure of around 20pc of coal and lignite-fired capacity by 2022 — the same timeframe as for Ger- many completing its exit from nuclear power generation. This white paper highlights the impact on the generation mix and wholesale trading in Europe’s largest power market.

THE WSB PROPOSAL

The WSB has recommended the closure of up to 8.6GW of into the night. This reflects the difficult task of weaning lignite and hard coal-fired power capacity by 2022, and an end Germany off power sector coal and lignite burn, given that the to power sector coal and lignite burn in 2038. country’s economic prosperity continues to centre around The commission on 26 January presented its final industry in the west and south, leaving east German lignite recommendations on Germany’s phase-out from lignite and states fighting for their mines. coal-fired power generation, as well as on support for lignite The recommendations, if implemented, will have a strong mining regions because these economies will go through a impact on the German merit order, as they would force a structural change. significant amount of coal and lignite-fired capacity off line in WSB members had struggled to come to an agreement in the short to medium term, and offer additional state support the previous meeting, which began on 25 January and lasted for gas-fired combined heat and power (CHP) generation.

German generation mix TWh German coal and lignite generation GWh

Lignite Gas Hard Coal 50.0 14,000 Renewables Nuclear Lignite Hard coal 45.0 12,000 40.0 35.0 10,000 30.0 8,000 25.0 20.0 6,000 15.0 4,000 10.0 2,000 5.0 0 0 Jan 18 Dec 18 Jan 17 Dec 18

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Short-term measures 2018-22 European coal and lignite phase-out plans The WSB recommends reducing the lignite and hard coal-fired Country Possible closure year capacity available to the wholesale power market to 15GW each by 2022. This would be a 5GW reduction for market- Denmark 2020 based lignite-fired capacity compared with 2017, and a 7.7GW Austria 2020 fall in installed hard coal-fired capacity over the same period. But additional capacity closures would be below this 12.7GW, France 2022 as market-based lignite and coal-fired capacity fell in 2018 UK 2025 and additional closures or exits from the wholesale market are already earmarked for 2019-20. Italy 2025 Lignite-fired capacity stood at around 20GW at the end of Hungary 2025 2017. Around 1.1GW joined the existing lignite plant reserve in Portugal 2029 October 2018. Another 700MW will join it this October, leaving 18.2GW available to the wholesale market by the fourth quarter. Spain 2030 An additional 3.2GW then has to shut down to get to the 15GW Netherlands 2030 of market-based capacity proposed by the WSB. The WSB said in its final document that it would prefer the Hambach Ireland 2030 forest in North Rhine-Westphalia to be preserved, suggesting Finland 2030 that its proposal on near-term lignite-fired closures could hit German utility RWE’s Neurath and Niederaussem plants, which Germany 2038 are supplied primarily by the Hambach mine. A court order on — Argus research logging in Hambach forced RWE to scale back output at Neurath and Niederaussem by 9-13TWh in 2019-21, as the mine would have to be extended to allow the plants to run at full load. Energy sector emission targets The hard coal capacity closures are less certain. Coal- fired capacity stood at 22.7GW at the end of 2017. The WSB’s Emissions, actual/target in mn t/ CO2e 600 20 final document pegs the closures in 2018-20 at 3.2GW. Nearly Cut in % relative to 1990 900MW shut down last year, around 1.4GW is earmarked to Cut in % relative to 2018 10 500 close by the end of March, and another 200MW is scheduled 0 to shut by 2020. And the WSB includes the potential closure of 400 -10 German utility Uniper’s 760MW hard coal-fired Scholven plant -20 by the start of the next decade. The firm plans to replace the 300 -30 unit with a smaller gas-fired CHP plant at the same site. These closures would cut hard coal-fired capacity available 200 -40 to the market to 19.5GW by 2020 if Uniper’s 1.1GW Datteln 4 -50 100 plant does not come on line, or to 20.6GW if it does. Uniper -60 intends to bring the delayed Datteln 4 on line next summer. 0 -70 But the WSB recommends that the German government 1990 2014 2018 2030

German power sector emissions by fuel 2017 % Emissions by lignite plant 2017 mn t

300 250 200 150 Coal Gas 100 Lignite 50 Nuclear 0 Oil Neurath Boxberg Wahlitz Deuben Schkopau Weisweiler Buschhaus Lippendorf Goldenberg Martinswerk… Janschwalde Fortuna Nord Frimmersdorf Niederaussem HKW Merkenich Schwarze Pumpe

seek negotiations with the owners of under-construction coal- based on the process used when the previous government set fired plants — which only applies to Datteln 4 — to ensure that up the 2.7GW lignite-fired reserve, or through an auction. these plants are not commissioned. Energy sector greenhouse gas (GHG) emissions would fall Based on the 2020 outlook for coal-fired capacity by at least 45pc against 1990 levels with the implementation available to the market, Germany would have to shut down of the proposed measures, the WSB said. Energy sector GHG 4.5-5.6GW of hard coal capacity by 2022 to get to 15GW of emissions stood at 427mn t of CO2 equivalent (CO2e) in 1990. installed capacity, depending on the future of Datteln 4. The outlook for market-based coal-fired capacity in 2021- Medium-term measures: 2023-30 22 is uncertain, according to the WSB report. Gas-fired CHP Market-based capacity should fall to 9GW for lignite- projects could replace up to 1.2GW of coal-fired capacity over fired plants and to 8GW for hard coal-fired units by 2030, that period, although it is uncertain whether these projects which would force the closure of another 6GW and 7GW, could be completed by 2022, according to the WSB. respectively, in 2023-30, the WSB recommends. Added to this, local utility Steag’s Bexbach and Weiher 3 Compensation payments would be higher the earlier coal-fired units, with total capacity of 1.4GW, could return to plants shut down over that period, although this applies only the market at the start of the next decade. Steag had planned to to plants with a life span of 25 years or more. mothball the units but they have been declared system relevant For lignite closures, Berlin should enter bilateral talks on and, as a result, have been part of the grid reserve since 2017. compensation payments. If these talks fail to conclude by the And hard coal-fired plant operators have signalled plans to end of June 2020, the government should set compensation close 2GW of capacity in 2020-22, but could withdraw plans for within the framework of what is legally required. shutdowns, the WSB added. This means that coal-fired capacity For hard coal-fired plants, the government should available to the market could rise by up to 1.4GW in 2020-22, if introduce an auction scheme where plant owners could bid the Steag units return and there are no additional shutdowns. for a shutdown premium. If tenders are oversubscribed, the But the WSB’s base-case scenario sees market-based coal-fired premium would be awarded to the plants with the highest capacity little changed in 2022 against 2020, at 19.3-20.3GW. CO2 emissions. There would be no tender in years where The WSB recommends no longer issuing permits for new commercial coal-fired plant closures are sufficient to lower lignite and coal-fired plants, and that the 2.3GW of hard coal- CO2 emissions to meet the target for that year. fired capacity in the grid reserve be replaced by gas-fired units. The WSB wants power sector GHG emissions to fall steadily Compensation for plant closures in 2018-22 should be in 2023-30 so that they reach 175mn-183mn t of CO2e by 2030.

Utility reactions to the WSB recommendations German utility RWE said the 2038 end date for a coal phase- The firm’s business plan, which includes mining beyond out and the scope of plant closures recommended by the 2040 in the Lausitzer territory, would be negatively affected WSB is ambitious, especially as Germany is phasing out if the WSB recommendations go ahead with a 2038 deadline. nuclear energy by the end of 2022. The firm pointed out that German utility EnBW expressed hope that the government its lignite-fired business would be severely affected, and will pay particular attention to criteria such as emissions said it is open to discussions with the government regarding intensity and the importance of power plants for security the WSB recommendations. of supply in some regions when determining a shutdown The WSB’s wish to preserve the Hambach forest will sequence. “EnBW power stations are comparatively low in have a big impact on RWE’s opencast mine planning, emissions and system relevant,” the company said. technical operations and costs, the firm said. Its Neurath and And Swedish-state owned Vattenfall said its Moorburg Niederaussem plants are supplied by the Hambach mine. RWE coal-fired plant is one of the “newest and most efficient will shut 1.5GW of lignite-fired capacity by 2023 as part of the power plants” and so should run as long as legally possible. lignite reserve agreement with the then government in 2015, German utility Uniper said it is open to discussions with 1.2GW of which is already in the existing lignite reserve. And the government on addressing the future of its 1.1GW Datteln the firm assumes that its 1.8GW Weisweiler coal-fired plant 4 coal-fired plant, following the WSB recommendation that will close by 2030, based on the WSB recommendations. talks should be held to prevent any new units from coming Czech-owned Leag expects the government to carry out on line. “In view of the huge investments and contractual an “extensive and responsible” review of the final report obligations arising from this project, this requires and the 2038 end date, taking into consideration security substantial discussion, also with our customers of this of supply and the competitiveness of the German lignite power plant,” chief operating officer Eckhardt Rummler said. industry. “An even greater danger would be a more advanced The government will have to overcome financial and legal exit date in 2035,” Leag chief executive Helmar Rendez said. hurdles to prevent Datteln 4 coming on line, Uniper said.

German coal and lignite plant emissions

Total Emissions (mn t) 13 22 76 244

Schleswig-Holstein Lignite Coal

Mecklenburg-Vorpommern Hamburg

Bremen Brandenburg

Niedersachsen Berlin

Nordrhein-Westfalen Sachsen-Anhalt

Sachsen Thüringen Hessen

Rheinland-Pfalz

Saarland

Bayern

Baden-Württemberg

End date electrification of other sectors such as transport and heating The WSB proposes 2038 as the end date for coal and lignite- and the development of technologies such as power-to-x fired generation. In 2032, there should be a review of whether storage facilities. this could be moved forward to 2035, subject to negotiations The WSB also recommends a number of measures to with plant operators. But experts would also review in 2032 reduce the impact on households and energy-intensive whether a complete phase-out in 2038 remains realistic. industries of rising wholesale power prices caused by falling coal and lignite-fired generation capacity. These measures CHP, gas plants include lowering grid fees for all consumers and extending the The WSB recommends extending subsidies for new gas- compensation to energy-intensive industries for the CO2 price fired CHP units from 2023 now to 2030, in an attempt to component in electricity prices to 2030 from 2020, subject to spur investments in new gas-fired units. This could provide approval from the European Commission. additional support for German power sector gas burn on top of Chancellor Angela Merkel’s CDU-CSU union and the SPD the expected rise in running hours for existing gas-fired units party agreed in their coalition treaty, signed in March 2018, as coal and lignite-fired capacity falls. to set up a commission tasked with drawing up a plan for the The coal-to-gas fuel switch bonus — paid out when new gradual exit from hard coal and lignite-fired generation. The gas-fired CHP plants replace existing coal and lignite-fired treaty also includes a pledge to pass a climate protection bill in units at the same site — should be made “more attractive” 2019 that will embed into law the national GHG reduction target from 2026, and innovative projects compatible with running for 2030 — a cut of at least 55pc against a 1990 base line. on green gas should receive government support, the WSB Crucially, the planned climate protection law will include recommends. The fuel-switch bonus in the CHP law is €6/MWh. legally binding 2030 targets for individual sectors, including The WSB also recommends a review of whether the the energy sector, which the previous coalition between the permitting procedure for new gas-fired plants — CHP or non- CDU-CSU and the SPD set as part of their 2050 climate action CHP — could be accelerated, especially for projects to be roadmap in 2016. And the coalition agreement set a target located at the site of old coal-fired units. that renewable energy meet 65pc of gross demand by 2030, compared with the previous target of a 55-60pc share by 2035. EU ETS The government agreed on the exact set-up of the The German government should reduce the number of WSB in June 2018. The WSB’s mandate was to provide EU emissions trading system (ETS) certificates it offers in recommendations on three key areas — how to close the auctions by the amount of emissions cuts resulting from the gap to Germany’s target of reducing its GHG emissions by coal and lignite-fired plant closures, the WSB recommends. 40pc in 2020 against 1990 levels, how to gradually exit coal and lignite-fired power generation — including end dates for Checkpoints both, with a view to comfortably meeting the energy sector An expert panel should review the proposed WSB measures target for 2030 — and how to help lignite mining regions in 2023, 2026 and 2029 to evaluate security of supply, manage structural changes in their economies. emissions cuts and the development of electricity prices. Members of the WSB come from a wide spectrum, ranging from environmental groups to trade unions representing lignite Other measures miners. The aim was to come up with recommendations that The WSB recommends that the government review the would find public and cross-party support and allow the setting introduction of CO2 pricing in non-EU ETS sectors to aid the of stable framework conditions, amid concern that future

German lignite capacity under WSB plan GW German hard coal capacity under WSB plan GW

25 25

20 20

15 15

10 10

5 5

0 0 2017 2019 2020 2022 2017 2019 2020 2020 Datteln 2022

German nuclear capacity by year end GW But the WSB recommends putting the 2023, 2026 and 2029 checkpoints in place to review the impact of the phase- 10 out. This provides a certain amount of flexibility and leaves 9 the door open for future governments to amend the exit path. 8 7 Next steps The government will review the WSB recommendations 6 intensely and swiftly, German economy and energy minister 5 Peter Altmaier said on 25 January. It will then have to discuss 4 with members of the lower house of parliament (Bundestag) 3 which laws need to be passed to implement the measures 2 that Berlin wants to pursue, and in which order. The latter 1 will depend on which measures are deemed to be of the 0 highest priority. 2017 2018 2019 2020 2021 2022 The German government has to enter negotiations with power plant operators on shutdowns and compensation administrations would otherwise revisit the debate and change payments, as well as with the European Commission because the path for the exit from power sector lignite and coal burn. some of the proposed measures will require state aid approval.

THE Potential impact on the Power and Gas markets

German power gas burn ‘could double by 2023’ market conditions, compared with 216TWh in 2017 and German power sector gas burn could more than double by 205TWh in 2018. 2023 if Berlin implements the lignite and coal-fired plant closures recommended by the WSB. Renewables The WSB plan would take an additional 3.2GW of lignite- Renewables are likely to replace nuclear output and lower fired capacity and around 4.5-5.5GW of hard coal-fired power sector coal and lignite burn to some extent in 2023. capacity off line by 2022. Germany had nearly 53GW of onshore wind capacity at the If the government follows the recommendations it will have end of 2018. Wind power association BWE expects 2GW to be to negotiate with affected plant owners to determine when added in 2019 — below the government’s 2.5 GW/yr target — and units come off line and any compensation due. Lignite and slower growth to continue into 2020. It expects additions to coal-fired shutdowns are expected to accelerate in 2021-22 to recover from 2021 as additional auction volumes take effect. This allow time for the political process and talks with operators. could put onshore capacity at 64-65GW by the start of 2023. Meanwhile, Germany’s nuclear phase-out law requires the Offshore wind capacity is on track to reach 7.7GW by 2020. remaining 9.5GW to come off line in three steps — 1.3GW this Projects earmarked to start operations in 2021-25 are likely to year, 4.1GW by the end of 2021 and 4.1GW by the end of 2022. come on line towards the end of that period, leaving capacity by the start of 2023 at around 7.7GW. Nuclear, coal, lignite Solar photovoltaic (PV) additions last year are likely to have If the WSB plan on near-term closures is fully implemented, met the 2.5 GW/yr target for the first time since 2013. Assuming Germany will close 22.2GW of nuclear, lignite and hard coal- growth in 2019-20 in line with the target and slightly higher fired capacity between the end of 2017 and the start of 2023. additions in 2021-22 thanks to extra auctions, capacity could The market will lose 70-72TWh of nuclear power in 2023 be close to 58GW by the start of 2023, against 45.5GW now. compared with current levels, assuming a load factor of Assuming that output from hydro, biomass and other just above 90pc. Germany’s nuclear power plants produced renewables in 2023 is in line with the 2014-18 average, and around 72TWh last year, at a 94pc load factor. that average load factors for onshore and offshore wind and At prevailing EU ETS prices of around €25/t of CO2e, lignite- solar PV are the same as for the past 24 months, renewable fired plants would continue to be embedded in the merit order generation could be around 267TWh in 2023, against 210TWh at the start of the next decade and run at high load factors. And in 2017 and 220TWh in 2018. hard coal-fired plants in 2023 would probably run at slightly higher load factors than in recent years — load factors for power Minding the gap sector hard coal burn averaged 49pc in 2015, but fell to 42pc If Germany’s lignite and coal-fired plant closures take place last year as renewables output rose on nuclear closures. at the same time as its nuclear exit, its net power exports are Output from the remaining 30GW of coal and lignite-fired likely to fall sharply. Research institute Aurora Energy says the capacity could be around 170TWh by 2023, assuming today’s country’s net exports could stand at around 3TWh in 2023, if

German clean dark, spark spreads 2020, 2022 €/MWh erlands’ Groningen field, boosting northwest European gas import demand from 2022-23 and potentially increasing the 6 CSS 2020 55% CSS 2022 55% incentive to build new infrastructure such as LNG terminals. CDS 2020 40% CDS 2022 40% German gas-fired generation could more than double 5 by 2023 from current levels if the government implements 4 the WSB recommendations in full, assuming electricity 3 demand is broadly stable and depending on the development of renewable capacity. This could broadly coincide with 2 substantial cuts in Groningen production, which are being 1 implemented to help reduce seismic activity in the region. 0 Dutch gas system operator GTS said in December that it could be possible to bring Groningen output below 5bn m³ in -1 the 2022-23 gas year, even if temperatures are lower than the -2 long-term average. This would be down from 20.1bn m³ in the 2 Jan 8 Jan 14 Jan 20 Jan 26 Jan 1 Feb 2017-18 gas year and 24bn m³ in October 2016-September 2017. Some reductions may be possible next year and in 2021, but the sharpest fall could occur in 2022 when a new quality combined coal and lignite-fired capacity falls to 28GW by the conversion facility is expected on line. The conversion of the start of 2023, slightly lower than the WSB’s 30GW proposal. Netherlands’ nine largest industrial users of low-calorie gas to Commercial net exports peaked at 60.2TWh in 2017 and high-calorie supply is also due to be completed by 2022. were 52.1TWh last year. German consumption hit 557TWh in Any cuts at Groningen would have to be almost entirely 2018 and is expected to remain stable in the years ahead. offset by higher high-calorie supply. And output from Dutch Even higher renewable generation and lower net exports small fields as well as German output have been in long-term would not fully replace the loss of nuclear and reduced lignite decline and are expected to fall further in the coming years, and coal-fired output, leaving gas-fired plants to plug the gap. which may further cut into northwest European supply. Assuming net exports of 3-5TWh and stable domestic demand, gas-fired generation could be about 100TWh in 2023, Russian gas deliveries to rise up from 49.06TWh in 2017 and 43.8TWh last year. A greater Quicker deliveries from Russia’s state-controlled Gazprom call on gas is already being priced into the market for 2022. could cover a substantial share of northwest Europe’s stronger Base-load clean spark spreads for 2022 delivery gas import demand. surpassed €5/MWh on 28 January for 55pc-efficient plants, Gazprom’s sales to Europe, excluding the Baltic States, up from €3.06/MWh on 21 January, before the WSB draft and Turkey reached a record 201bn m³ in 2018, up from proposal emerged, Argus data show. Clean spark spreads 194.4bn m³ a year earlier, partly driven by strong deliveries to for 2022 delivery are also well above 2020, at €3.61/MWh Germany, the Netherlands and France. And the firm expects and €1.78/MWh, respectively, for 55pc-efficient plants on 1 sales to increase until at least 2025. It is discussing selling February, reflecting additional nuclear closures at the end of up to 50bn m³/yr of additional gas to European buyers under 2021 and the expected acceleration of lignite and coal-fired medium and long-term contracts. plant closures in 2021-22. Its planned 55bn m³/yr Nord Stream 2 and 31.5bn m³/yr And clean dark spreads for the most modern coal-fired Turkish Stream pipelines could lift its capacity to supply the plants, with 46pc efficiency, for delivery in 2022 ended 1 region. Both are targeted for completion at the end of 2019. February at €7.84/MWh, against €5.53/MWh on 21 January. This But Norwegian deliveries to northwest Europe could be reflects the fact that the remaining coal-fired units are expected slightly slower early in the next decade than in recent years. to be called on more frequently if the WSB plan is implemented. The Norwegian Petroleum Directorate expects its annual sales Gas-fired capacity available to the market stands in 2019-23 to not surpass the 2017 peak of 122bn m³. Sales at 24.4GW. Several smaller-scale CHP plants are under edged lower last year to 121.7bn m³. construction and some will replace older units. Gas-fired Stronger consumption and weaker domestic production in capacity is likely to be around 25GW by the end of this year. northwest Europe could also result in the region relying on the But firmer clean spreads could draw units such as the highly southern part of the continent for additional supply, especially efficient Irsching 4 and 5 combined-cycle gas turbines (CCGTs) in periods of strong demand. Southern Europe’s supply could back into the market. The units, with combined capacity of rise early in the next decade as gas from the second phase of 1.4GW, are in the grid reserve, with utility Uniper and partners Azerbaijan’s Shakh Deniz field is delivered to Italy through the planned Trans-Adriatic Pipeline (Tap). German coal closures to boost NWE gas import demand Tap is expected to come on line in 2020 with initial The bulk of Germany’s short-term coal-fired plant closures capacity of 10bn m³/yr, but could later expand to 20bn m³/ could coincide with sharp cuts to gas output from the Neth- yr. Reverse flow capacity from Italy to Germany and France

Norwegian gas sales bn m³ Gazprom pipeline sales to selected countries bn m³

through Switzerland became available last year, but has There are plans for LNG terminals at three locations in barely been used in recent months. northern Germany, all targeted for completion in 2022-23 — when stronger gas-fired generation could bolster import LNG could help plug supply gap demand — but it remains uncertain which will go ahead. There could be ample scope for northwest Europe to ramp Germany’s Uniper and Japanese shipping firm Mitsui OSK up LNG imports compared with recent years, when terminals Lines in December agreed to work towards establishing an across the region were used well below capacity. import terminal in Wilhelmshaven. The planned floating storage Regasification across all European LNG terminals was and regasification unit could become operational by the second around 25pc in 2017, although it may have increased slightly half of 2022 and have sendout capacity of 10bn m³/yr. Uniper last year because of strong sendout in the fourth quarter. reached a non-binding agreement with ExxonMobil in late Europe’s LNG receipts have risen considerably this winter as a January for long-term regasification capacity at the complex. result of greater global liquefaction capacity and demand for German LNG terminal — a joint venture between Dutch- new supply not keeping pace in northeast Asia, given stronger German system operator Gasunie and storage tank operators nuclear output in Japan and South Korea and mild weather. Vopak and Oiltanking — plans to develop an import facility in And liquefaction capacity is expected to rise further, Brunsbuttel with an expected 5bn m³/yr of capacity. The site driven in particular by new US terminals. This could bolster could come on line in late 2022, with the operator planning an deliveries to Europe in the next couple of years, subject to how FID by the end of 2020. German utility RWE signed a long-term quickly demand grows outside Europe, in areas such as China, deal for regasification capacity at Brunsbuttel in September. Pakistan, India and Bangladesh. And there are plans for an LNG facility in Stade, which And further growth in global LNG export capacity is could become operational in 2023. It will have initial capacity expected towards the middle of the next decade, with of 4bn m³/yr, which would double in a second stage, according Qatargas planning to expand its Ras Laffan facility to 110mn t/ to the project partners, which include chemical company Dow. yr from 77mn t/yr. A final investment decision (FID) is due at Berlin has said it has no preference on location, and that it the end of this year. Russia also plans to substantially boost is conceivable that more than one facility will be built. LNG output early next decade through projects on its Arctic coastline. Europe’s LNG supply this winter has been boosted in particular by receipts from Russia’s Yamal LNG project. New European Electricity Content And several projects in Africa could add to global Available In Argus Direct liquefaction capacity early next decade, subject to FIDs. Argus Direct subscribers can now access proprietary European electricity fundamentals data focusing on: An incentive for Germany’s LNG projects? There may be ample spare regasification capacity in other • Plant projects • Plant closures European countries, but the prospect of strong German demand • Interconnector projects because of the coal phase-out could boost the country’s • Hedged production incentive to push ahead with plans for LNG import terminals. Access new content and discover the benefits of German chancellor Angela Merkel has said that Argus Direct - [email protected] Market Reporting establishing LNG infrastructure could help with the Consulting “important” diversification of supply sources and that the illuminating the markets Events government is looking to accelerate plans to build a terminal.