Climate Reserve Agreement on Closing 2.7 GW of German Lignite Fired Power Stations – Expected Closure Costs EUR 1.61 Billion

The Federal Ministry of Economic Affairs and Energy (BMWi) said that an agreement has been reached with the lignite power station operators Mibrag, RWE and Vattenfall on putting 2.7 GW first into a special reserve and then later close the plants down. Minister Gabriel considers this to be important for reaching Germany’s climate targets.

1. BMWi Information

According to yesterday’s press release, a draft bill on closing 2.7 GW of Mibrag, RWE and Vattenfall lignite power plants shall be decided by the Federal Cabinet in November. The reserve and closure concept is said to have been developed together with the affected companies. The bill has supposedly been discussed extensively with the European Commission.  BMWi is therefore confident that the measure is compliant with European state aid law and shall be cleared by the Commission as part of a current formal review procedure.

Lignite plants from Mibrag, RWE and Vattenfall with a total capacity of 2.7 GW shall be taken out of the market in steps, starting 2016. For four years they shall be used as last reserve (“letzte Absicherung”) for power supply. Afterwards, the plants shall be closed for good. Operators of affected plants shall receive a remuneration for keeping the units available as reserve and for closing them down. Total costs are expected in the range of EUR 230 million per year over seven years, i.e. EUR 1.61 billion in total. This shall translate into an increase in grid fees of 0.05 ct/kWh.

Taking 2.7 GW of lignite generation capacity out of the market shall lead to a CO2 reduction of 11 to 12.5 million tonnes per year. This reduction is considered necessary to reach a German national climate target. Remaining reductions shall be contributed by combined heat and power (CHP) plants and energy efficiency measures. The exact development of emission reduction shall be evaluated in 2018. Should it become apparent that the target reduction amount of 12.5 million tonnes CO2 shall not be achieved, the operators of the plants shall propose suitable additional measures.

2. Background

With the reported agreement, it looks like the government has made an important step in implementing its controversial (and legally doubtful) lignite power plant closure agenda. In December 2014, the government had adopted its “Action Programme on Climate Protection 2020″ (Climate Programme 2020). As part of it, the German power plant fleet was to contribute an extra 22 million tonnes in CO2 savings. Originally, it remained unclear how this was to be achieved. In March BMWi came up with a climate levy proposal. In our view, the climate levy proposal was both in violation of German and European law. In early July the Federal Ministry for Economic Affairs and Energy (BMWi) scrapped the (unlawful) climate levy project and presented new key points for CO2 reduction measures. This included the proposal to gradually transfer some of the oldest coal-fired plants with a capacity of 2.7 GW to a capacity reserve (for which a cost-based remuneration would be paid) and close down the plants four years thereafter. On this proposal, the department of European Affairs that advises Parliament (Bundestag) expressed doubt about the compatibility of the plans with EU law. Regardless, the 2.7 GW climate reserve plus later closure model made it into the ministerial draft for the new Electricity Market Act (Strommarktgesetz). It now looks like the government has agreed with Mibrag, RWE and Vattenfall which plants shall constitute the 2.7 GW lignite climate reserve and closure fleet.

Details of the concept remain to be disclosed. One interesting issue to follow will be why the closure of German lignite plants will actually lead to a CO2 reduction on the European or even worldwide level. All affected German lignite plants are currently covered by the EU Emissions Trading Scheme (EU ETS). As such, German emissions from the affected lignite plants are part of the European cap. Closing the German plants as such will not affect the overall cap, but would provide additional room for emissions elsewhere. While not emitting CO2 from German lignite plants will reduce German CO2 emissions, it remains to be seen whether these reductions in Germany will indeed allow increased emissions in other EU ETS countries.

Another question will be the commercial effect of taking 2.7 GW in generation capacity out of production. This will depend on where these plants a located in the merit order curve. Depending on where they are, taking them out may increase the market price. While this may be commercially beneficial for the remaining conventional generation fleet, costs will have to be borne by the consumers.

The proposed payments to the lignite power plant operators are likely to create further political controversy. However, it should be noted that the affected lignite power plants are fully permitted under German and European immission control law, have a CO2 emissions permit, and have the necessary EU ETS emission allowances. The operating permits under German law are also not limited in time. In such a situation, there are severe constitutional law restrictions for any government to force operators to close their fully permitted, commercially operating plants. The rule of law allows governments to stop permitted commercial operations only in a limited number of cases, taking due account of proportionality requirements. If the government wants to take something away from someone for the common good, it usually has to pay compensation. Such compensation would not be state aid, but necessary to make the forced closure lawful in the first place. I expect further discussions on this not only in the political arena, but also when it comes to European state aid law discussions.

Source: BMWi

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