New German Government Adopts Coal Phase-Out in All But Name
- Feb 6, 2018 7:00 pm GMT
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The coalition accord between Angela Merkel and Martin Schulz includes an increase in the renewables target in the electricity mix from 50% to 65% by 2030. Jon Berntsen and Anders Nordeng of Thomson Reuters Point Carbon have analysed how this will impact the German energy sector and conclude that it is a coal phaseout policy in all but name.
On 12 January, Angela Merkel’s CDU/CSU party and Martin Schulz’ SPD announced they had reached a provisional agreement on several key elements of German energy and climate policy for the years to come.
The provisional deal explicitly admits that the self-imposed 2020 target of 40 percent greenhouse gas (GHG) emission reduction compared to 1990 levels is not realistic and will not be met. Hardly a surprise (it was a well known secret that the target would not be achieved), the acknowledgement by the country’s two top politicians nevertheless caused angry reactions from environmentalist NGOs.
Germany had cut 27 percent already by 2015, but the remaining 13 percentage points seem harder to achieve. According to forecasts by Agora Energiwende, a think tank, Germany is on track to achieve a 30 percent reduction by 2020.
However, Merkel and Schulz did stress their determination to stick to the 2030 goal of cutting 55 percent on 1990-levels. They intend to table a legislative proposal to that effect in 2019.
It will require tough political decisions to enable and finance the deployment of additional renewable generation capacity and the significant upgrades of the transmission network to integrate the increased renewables capacity
What is more, they also want to accelerate the deployment of new renewable energy, by raising the target for the share of renewables to 65 percent in 2030. The current target for that year is a 50 percent share. They explained that a market-oriented expansion of renewables is a “precondition for a successful climate policy”.
Furthermore, the two confirmed the mission of the special commission foreseen in the German Climate Action Plan 2050 that was passed by the previous CDU/SPD coalition in late 2016. It stipulates that a commission is to be set up, to present a draft proposal for the phasing out of coal (including a timeline and the types of regional development that should be put in place as compensation).
Merkel and Schulz now reiterated the promise that the commission will present a timeline before the end of 2018. That means the commission members will need to be designated shortly.
Without too much reading between the lines it seems reasonable to conclude that the discussion on coal phase-out in the years to come, both within the coal commission and the ensuing political debate, will revolve around a) the timeline (how fast/ambitious) and b) the support schemes to be put in place to compensate coal regions and to train/re-educate miners to change to different professions.
In this analysis we look into how the more ambitious RES (renewable energy sources) target for 2030 will imply a more rapid phase-out of coal, how this will affect power sector emissions over the next decade, and how this could impact carbon prices.
More renewables squeezing coal out of the electricity mix
Some 216 TWh of electricity was generated from renewable sources in Germany in 2017 according to AGEB Energiebalanzen. That equals a share of 33 percent of the total generation of 654 TWh in 2017, and more than twice the production in 2010 when the share stood at 16 percent.
Raising the 2030 target from 50 to 65 percent would mean another doubling from 2017, to 420 TWh in 2030, assuming constant electricity demand. It will require tough political decisions to enable and finance the deployment of additional renewable generation capacity and the significant upgrades of the transmission network to integrate the increased renewables capacity.
While clearly a challenge, in the following we assume these policies are followed through and that any technical and economical hurdles to reach the target are overcome.
A speedier phase-out of coal in Germany will have a dampening effect on the price for carbon allowances
We have looked at the electricity mix in 2030 under a 50 and a 65 percent renewables scenario, under the following common assumptions:
- Nuclear power generation is phased out by 2022
- Wind- and solar energy will take the majority of the renewables share in both scenarios due to low costs and short project lead times
- Biomass and hydro will have smaller shares, while geothermal will be insignificant
- Gas is in the money compared to coal, due to a combination of tougher EU-level emissions standards for coal, rising carbon prices and fuel price levels leading to favourable economic terms for electricity production from gas. Consequently, we assume that current gas capacity will run close to maximum capacity with no new capacity coming online
- Total electricity demand is steady over the forecast period.
Figures 1 and 2 show the estimated electricity mix in Germany under a 50 percent and a 65 percent renewables target.
Assuming constant electricity demand around 650 TWh in both scenarios, Germany will have to produce 100 TWh more electricity from renewable sources in 2030 if the target is increased to 65 percent RES share by 2030. What will have to give?
As nuclear power generation disappears by 2022, electricity production from natural gas will play an important transitional role in Germany in order to fill the gap left open from the closing of nuclear capacity.
We estimate the share of natural gas to grow from 13 percent today, to 20 percent by 2025, and maintained at this level throughout the period until 2030. This would translate to a total production from gas of around 130 TWh, a level we estimate to be close to Germany’s maximum potential given current 30 GW of nameplate gas capacity. As illustrated by the figures, the role of gas is the same – at its maximum – in both scenarios.
As a consequence, we estimate that increased renewable energy production will take shares only from coal. In our 65 percent RES scenario, coal produces 100 TWh of electricity in 2030; down from current levels at 250 TWh and down from 200 TWh in our 50 percent RES scenario. The figures illustrate how renewable sources replace coal in electricity production, which shrinks from 30 to 16 percent across the scenarios, while gas remains relatively constant.
Figure 1: German electricity mix with 50 percent renewable energy – coal at 30 percent in 2030
Figure 2: German electricity mix with 65 percent renewable energy – coal at 16 percent in 2030
What implications for Germany’s emissions and climate ambition?
Assuming a switch of 100 TWh from coal to renewable energy by 2030, we estimate that Germany’s emissions will be reduced by around 550 Mt CO2eq over the total forecast period. This is equal to more than two years of emissions from coal power burning in Germany (which was roughly 250 Mt in 2016). –
In order to quantify the isolated effect of an increased RES target, we keep other variables constant. This is obviously a debatable assumption as one could for instance argue that a more rapid growth in renewable energy could allow for less energy efficiency gains and growing demand for electricity, or perhaps a prolonging of the coal industry at the cost of natural gas.
Germany will overshoot its abatement target by 85 Mt in 2030, reaching a 62 percent reduction instead of the 55 percent that is decided politically
Fewer emissions from increasing renewable sources in the electricity sector could also allow for increased emissions in other sectors like transportation.
Germany’s current GHG target is to reduce emissions by at least 55 percent by 2030. This target has remained unchanged in the government coalition talks. Figure 3 shows that in 2015, emissions were 27 percent lower than in 1990.
Factoring in the emissions reductions from the more ambitious 65 percent RES target, we find that Germany will in fact achieve 62 percent emissions reductions in 2030 compared to 1990, 7 percentage points beyond the current 55 percent reduction target, and a substantial overachievement of Germany’s 2030 climate ambition.
Figure 3: 65 percent RES will tighten Germany’s emissions target for 2030
Carbon market effect
A speedier phase-out of coal in Germany will have a dampening effect on the price for carbon allowances. Using our long term carbon price model, we have modelled the carbon price trajectory until 2030. We find that the additional emission reductions from the 65 percent RES target in Germany will leave the carbon price €4/t lower in 2030; down from €25/t.
Over the entire forecast period, we estimate that carbon prices will on average be €1.4/t lower compared to our base case which has 50 percent RES in the German electricity mix.
Figure 4: 65 percent RES in German power sector will lower the price for carbon allowances
Both the 50 percent and the 65 percent RES scenarios will be bad for coal. From a current level of 250 TWh per year, we expect coal power generation to drop to respectively 200 TWh and 100 TWh in the two scenarios.
In terms of GHG emissions, the effect will be significant. The German coal power plants let out around 250 Mt of CO2e in 2016. In our scenario, the remaining coal plants in 2030 are expected to emit 165 Mt. This means that Germany will overshoot its abatement target by 85 Mt in 2030, reaching a 62 percent reduction instead of the 55 percent that is decided politically.
For German politicians it is clearly easier to say that yes to more renewables that to say no to coal
If that happens, it will no doubt be used as an argument by those who claim that Germany’s climate ambitions are already too high. On the other hand, cynics might question whether the ambitious targets will really be met. Merkel and Schulz recently decided to ditch Germany’s ambitious 2020 emission target that had been set last decade. If it is so easy for the government to simply say that targets will not be met, then what will keep it from saying e.g. in 2028 that the 2030 RES target was never realistic and will not be achieved?
In either case, it becomes clear that if Germany, in the years to come, pursues the 65 percent RES target, this will de facto mean a substantial cut in coal’s share of power generation. While not officially recognised as a coal phase-out plan, the effect will be the same. For German politicians it is clearly easier to say that yes to more renewables that to say no to coal.
Jon Berntsen (firstname.lastname@example.org) and Anders Nordeng (email@example.com) are senior carbon market analysts on Thomson Reuters Point Carbon Commodities Research & Forecasts team (@TRPC_Climate).