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The German Climate Protection Programme 2030 (II): CO2-price and the energy sector

The issue of an additional CO2-pricing scheme and the measures for the energy sector are discussed in the second part of the analysis of the German Climate Protection Programme 2030.

CO2-pricing „light“

In recent months, many studies on the subject of additional CO2-pricing schemes have been carried out on behalf of the government and its ministries. The Climate Cabinet has now agreed to establish a national emissions trading system (nEHS) in 2021. It covers emissions from the combustion of fossil fuels (heating oil, liquefied petroleum gas, natural gas, coal, petrol and diesel) in heat generation of the building sector and the energy and industrial plants, which are not part of the EU ETS. Emissions from fossil fuel combustion in the transport sector (excluding aviation) will also be subject to the nEHS.

The allowances will have to be purchased by trading companies or suppliers of fuels. However, the German government has agreed on a fixed-price system, with the issuance price of allowances rising from 10 EUR/ton in 2021 to 35 EUR/ton in 2025, as shown in Figure 1. The price proposals from scientific studies in the run-up to the climate package are also shown (source: MCC). Obviously, the proposals of the climate protection programme 2030 remain far below the prices for CO2-emissions necessary to achieve the climate targets by 2030, according to scientific calculations. It remains to be seen whether politicians will adjust prices upwards due to societal pressure.

Figure 1: Additional CO2-pricing in the transport and heating sector according to Climate Package 2030 and scientific necessity (source: Energy Brainpool)

Figure 1: Additional CO2-pricing in the transport and heating sector according to Climate Package 2030 and scientific necessity (source: Energy Brainpool)

Since no upper limit has been set for the number of certificates to be issued until 2026, it may be possible that emissions in the heating and transport sectors are higher than Germany’s emission allocations within the EU. In this case, Germany would have to buy the certificates from other member states. The fixed-price system without a binding upper limit can be regarded as a test instrument for the establishment and preparation of a Europe-wide trading system in the non-ETS sectors. The reduction of German emissions in the affected sectors is however hardly encouraged.

Transition system in 2026

From 2026 onwards, a maximum number of certificates is to be set. This number will decrease over the years. The amount of CO2-certificates that will be auctioned is calculated from the objectives of the Climate Action Plan 2050 and the emission budgets for the German non-ETS sectors under EU law (read more about that here). For 2026, a minimum and maximum price of 35 and 60 EUR/ton, respectively, applies. The type of price formation from the year 2027 and whether a minimum or maximum price is necessary will only be determined in 2025.

The proposed CO2-pricing until 2025 will increase the price of diesel fuel by 3 ct/litre in 2021 and by 10 ct/litre in 2025. The switch to electric vehicles is unlikely to be stimulated by this moderate increase. This is not only stated by the scientific community, but also by the German Economic Institute (IW), generally an employer-friendly organisation. “No changes in behaviour are to be expected from the entry-level price of ten euros; the focus here was apparently on avoiding hard burdens.” IW managing director Bardt commented (source: Handelsblatt).

Low reductions in electricity prices

The revenues of the nEHS will be used to gradually finance levies and taxes on electricity and thus reduce the price of electricity for households and the industry. From 2021 the renewable energy levy (EEG-levy) will decrease by 0.25 ct/kWh, in 2022 the reduction will be 0.5 ct/kWh and in 2023 0.625 ct/kWh. If the income from the CO2-pricing scheme increases, the electricity price will be reduced even further. With an EEG-levy of about six to seven ct/kWh, the reduction by 2023 reduces the levy by about 10 percent. The electrification of the transport and heating sectors will thus be promoted marginally at best.

Measures in the energy sector

Greenhouse gas emissions in the energy sector are to be reduced to around 175 million tonnes of CO2-equivalents by 2030. This is to be achieved primarily by phasing out coal fired-generation and expanding renewables. As things stand at present, the capacities of German coal-fired power plants will be reduced from over 40 GW to 17 GW by 2030. In its climate protection programme for 2030, the German government has iterated the target of 65 percent for the share of renewable energies in electricity consumption. Figure 2 shows the target and the overarching measures for the energy sector (source: German Federal Government).

Figure 2: Emission target in the energy sector and overarching measures in the Climate Package 2030 (source: Federal Government)

Figure 2: Emission target in the energy sector and overarching measures in the Climate Package 2030 (source: German Federal Government)

The measures in the package are intended to increase the acceptance of the expansion of renewables. Below the provisions in the energy sector are explained in detail.

Photovoltaics

The cap on PV is gone. This means that even if total PV capacity in Germany tops 52 GW, new systems up to 750 kW will still be supported by the EEG. If the cap remained, no remuneration would be paid to small-scale PV installations. However, the remuneration is linked to how much total PV capacity is being added and is therefore likely to fall. The conditions for PV-for-tenants will also to be improved, however no details are known as of now.

Offshore wind

The target for the expansion of offshore wind energy increases from 15 GW to 20 GW in 2030, but is subject to binding agreements with coastal federal states and the transmission system operators.

Onshore Wind

A minimum distance of 1000 metres from residential areas and villages should apply nationwide to wind onshore. The minimum distance regulation for wind turbines applies both to new turbines and to repowering of old ones. The new distance rules also apply to existing and future spatial plans, but not to plans that became legally binding from 1 January 2015 until the legal regulation from the climate package 2030 are set in law. As a consequence the area in spatial plans designated for wind turbines might be lower soon.

In March 2019, the Federal Environment Agency carried out a study on the effect of a minimum distance of 1000 metres. The result: the currently available area for onshore wind energy would be reduced by 20 to 50 percent if such a minimum distance is in place. Without additional new priority areas, the expansion of onshore wind energy would at best be limited to 63 GW (source: UBA). The target of 65 percent renewable energies in electricity consumption in 2030 thus remains a distant prospect.

However, the climate protection programme 2030 also allows federal states to opt out of the minimum distance rule. Within 18 months after the new rule came into force, smaller distances can be set at the federal state level. Municipalities can agree on smaller minimum distances for an unlimited period of time. The draft of the Land Tax Reform Act also aims for a financial participation of municipalities in the operation of wind turbines. The federal government thus hands over the decision for the further expansion of onshore wind energy to the federal states and municipalities. A regionalisation bonus, which has not yet been defined more precisely, is intended to distribute the expansion of wind turbines throughout Germany in a more balanced way.

Further changes

Concrete measures to stimulate sector coupling are not to be found in the climate package. Storage facilities are to be exempted from existing levies and given end-consumer status. These two facts are however partly mutually exclusive, as end-consumers generally have to pay all existing levies. Combined heat and power (CHP) generation is to be further expanded. The support system for CHP will be adjusted and extended until 2030. The research projects in the so-called “laboratories of the energy system transformation” will receive stronger support in order to investigate the transformation of the energy system on the field.

The proposals and measures for CO2-pricing and expansion of renewable energies in the Climate Package 2030 give little cause for optimism for climate protection and the energy system transformation in Germany. For Andreas Kuhlmann, Managing Director of the German Energy Agency, the agreement is “very likely not yet enough to achieve the climate targets for 2030” (source: dena). CO2-prices which are too low will hardly have a steering effect on households and companies, especially if a fixed-price system without an emission limit applies until 2025. The supporting changes for photovoltaics and offshore wind energy will probably not be able to compensate for the low number of new installations for wind energy. How to achieve the 65 per cent target is not clear as of now.

Here you can read the first article of the analysis: The German Climate Protection Programme 2030 (I): Objectives and measures of the climate package.

This is an article originally published at Energy BrainBlog.

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