Implications of German coal-fired power generation phase-out

The German Commission on Growth, Structural Change and Employment, better known and referred at the Coal Commission set up by the German Government to enquire into the future of the role of coal (and lignite) fired power generation in country’s low carbon energy transition strategy finally came out with its long-awaited proposals on the 25 January 2019. The main proposals of the report - a full 360 pages and not yet available in the English language - indicate that Germany will shutdown/phase-out all its coal plants by 2038, though a date of 2035 is also considered possible. 

As a practice dedicated to helping clients navigate the challenges of energy transition, while we welcome these proposals, we do believe that these proposals could have been more ambitious in timing and could have come much sooner (they were planned to be released well in time before COP24 in Katowice, but that wasn’t to be); especially as the German Energiewende programme has come in for a fair bit of criticism over the last 18-24 months; and that, despite the huge growth in renewable energy capacities in Germany, CO2 emissions in Germany have until recently remined stubbornly high. This has been largely attributed to higher coal-based generation and relatively poor utilisation levels of existing German gas fired generation capacity. 

Do the Coal Commission proposals have the potential to change this? Do the proposals absolutely guarantee that even this relatively benign low carbon energy transition path will be achieved? We explore this very briefly in this first in a series of articles.

First, the proposals do not deal with only the operational issues of the coal plant phase out but also remain focused on the wider structural changes anticipated in Germany, driven by a possible coal phase out: especially, in the four coal mining regions of Nord-Rhine Westphalia, Brandenburg, Saxony and Saxony-Anhalt- and this includes the politically sensitive issue surrounding the coal mining jobs in these four regions. 

Around €1.3bn has been committed for project based new investments in these regions over the period of the next 20 years and an additional €700m spending in non-project investments has been earmarked - these presumably relate to the social costs associated with this significant structural shakeout in these four regional economies. Importantly, how these funds are to be utilised and distributed across the regions has been left open and will not be clear until end April/early May 2019. 

These funds underpin the future economic development of these important industrial regions of Germany and reflect an ongoing political dialogue that will indicate the propinquity of this proposed energy transition initiative.

It will have to be borne in mind that the “yellow vests” protests in France, recently have also been triggered by the social upheaval caused by the proposals around energy transition and decisions related to energy policy. There is now growing realisation in EU members states that the so called climate ambitions, waxed lyrical at international climate change negotiation conferences bear a rudely expensive price tag. To be fair, the report of the Coal Commission indicates a considerable level of regional political dialogue has preceded its publication; therefore, we welcome this with a sense of quiet optimism.

Second, the proposals do not clarify the framework surrounding the identification and sequencing of the coal plant phase out though it does provide the high level milestones - of the approximately 45GW of coal and lignite fired capacity about 12.5GW is to be phased out by 2022 and of the remainder 32.5GW only 9GW is expected to be in operations beyond 2030 suggesting a nearly 24GW of plant closures in the 8 years from 2022-2030 (3GW or 3000MW per year for 8 years), finally the last of the remainder 9GW are proposed to be phased out by 2038 (with a possibility to bring the date forward to 2035) ; this certainly looks quite ambitious unless a clear plan identifying the plants (with a clearly articulated rationale) and the sequencing of the phase out is already in place.

To be sure, the UK, while launching its coal phase-out programme had a clear and transparent underlying legal framework under the Large Combustion Plant Directive (LCPD) which was translated form the Industrial Emissions Directive of the EU. In addition, the phase out programme included a 5 year opt-in procedure where opted-in plants had the assurance for guaranteed operations of 20000 hours over the five year opt-in period. No comparable procedures appear in the Coal Commission proposals.

Third, the proposals do not capture how evolving technology in the coal fired generation plant space is likely to be considered especially the High Efficiency Low Emissions (HELE) technology plants, some of which have been recently been commissioned in Germany; nor do the proposals contain how, if at all, development internationally and indeed in Germany relating to Carbon Capture Utilisation and Storage (CCUS) would be given any consideration in the plant phase out process. 

Given the likely social upheaval that has been given sufficient attention to in the report, it is curious that these technological developments that portend a possible life extension appear to have been give the short shrift. 

Finally, the proposals indicate three interim review points for the coal phase out programme over a six year period- in 2023, 2026 and in 2029 but do not indicate any terms of reference for these reviews. E.g. it is not clear if the review process would take due cognisance of the developments in HELE or CCUS technologies.

Despite the above lacunae, the proposals of the Coal Commission are indeed a welcome step forward in developing the low carbon transition plan for Germany. As these are, so far, only proposals, and not yet legally binding, we welcome them with cautious optimism.

The key question that now emerges is what the future electricity generation mix might look like, over the period of this transition? What are the implications for further rise in gas demand for Germany? How will the German energy sector cope with this big structural change?

Though the Coal Commission has based its proposals for up to 2038 (20 years out) we have articulated a scenario for the year 2030 as this is the milestone year that has been referred to in the coal commission report where no more than 9GW of coal capacity is expected to remain online; 2030 also happens to be the year that the German Government has announced to meet its legally binding obligations committed to under the Paris Agreement. 

For the purposes of this scenario, we also have assumed that the nuclear plant shutdown programme already announced in 2012 remains on track. The other significant assumption in this scenario is that:

• “Germany is successful in achieving its stated goal of at least 65% of all electricity generation from renewable energy sources”.
• The absolute level of production requirement for 2030 does not change and remains constant as 546 TWh- the same as that in observed in 2016. This is consistent with the observation made by  the Fraunhofer Institute- with which we agree. The Fraunhofer Institute attributes this to the energy efficiency measures initiated and changes in overall usage patterns that are already underway and continue up to 2030 and beyond. 

The slide below discusses “a scenario” developed on the basis of what is clearly articulated in German energy policy, and the again referred to in the Coal Commission proposals. 

What the scenario suggests is that by 2030, assuming the nuclear shutdown programme is implemented as planned and assuming that Germany is successful in achieving its stated renewable energy objectives, the effect of the coal plant phase out programme would require natural gas based generation to contribute an additional 68TWh of electricity generation which implies an additional gas requirement of approximately 13.5 BCM by 2030. 

Germany already has a large established gas fired CCGT capacity (which we have mentioned in the beginning of this article as hitherto significantly underutilised) already in place that can absorb this additional demand though a further growth in new CCGT is not ruled out. What is apparent in the scenario is that utilisation levels of existing (and new) CCGT plants will have to be considerably higher- i.e. CCGT technology will substitute existing nuclear and coal as the “new base load” and yet it will also have to play its now well understood role as a “back up” against renewable energy non-delivery. 

This dual future role of CCGTs providing and baseload and high ramp rate flexibility is likely to be operationally challenging and would require these new CCGT asset owner/operators to have well-structured/smart gas contracts. The picture that emerges is that of a base load gas fired power generation supply system with sufficient spare capacity to be able to effectively back up renewable energy production as and when required.

This new/uncertain load profile to be met by gas supplies whilst ensuring security of energy supply is a scenario in which the newly built NordStream pipeline system could come into its own and be able to offer the supply flexibility and security the new operating environment would demand. Gas pipeline supply is better placed to offer the flexibility and security of supply as compared to international LNG- it has to be noted that within days of this announcement of the coal phase out programme being announced, two LNG receiving terminals (Brumsbuttel and Wilhelmshaven) have been announced to be built, paving the way for a possible competing supply to the NordStream 2 to emerge. 

International LNG might yet find a way into the emerging German energy supply mix by 2030, but given the supply security and swing volumes that a post coal phase out German electricity system might demand in the absence of its historical mainstays of base load power- nuclear and coal fired generation- pipeline gas may emerge to be better suited to deliver in comparison to LNG-to-power integrated projects.

With this coal phase out, Germany would become the second country after the UK to have made structural changes to its traditional electricity generation architecture and seek to opt for a gas driven energy system. 

If one observation can be made from the experience of the UK and German decision to root out coal fired generation, it is this- such bold moves require to be anchored around mega projects that can take up the role of the new bulwark in a low carbon transition. 

While the UK has opted for a mega project in the nuclear sector (Hinckley Point C and Sizewell C and Bradwell) with French and Chinese participation the mega project in Germany that may have to do the heavy lifting appears to be NordStream-2 being built with Russian participation. A mega coal phase out programme- be it in the UK or Germany- requires not only another mega project to take on the role but possibly also foreign equity participation.

Ashutosh Shastri is Director of EnerStrat Consulting, a London based international strategic energy consulting practice focused on the ongoing global transition towards a lower carbon energy economy.