How will Germany’s coal phase-out affect the power market?
Germany has embarked on a challenging transformation of its energy sector. The government last year commissioned a report on how the country can end its reliance on coal for power generation while retaining its competitiveness and ensuring a sustainable transition to a low-carbon economy.
Germany is not the first country to commit to an exit from coal, but it is the largest: There are currently more than 70 coal-fired power plants operating in the country, providing 38% of its electricity.
Other EU member states including Italy, France, the UK and Netherlands have also committed to quitting coal between 2021 and 2029. Germany’s longer trajectory reflects the country’s twin targets of leaving coal and nuclear power, as well as the challenge of ending centuries of domestic coal mining.
Germany’s job is also made tougher by the fact that it is more dependent on coal than its European peers. Coal power provided 20% of all EU electricity in 2017, according to calculations by the Sandbag environmental group. In comparison 30% was generated from renewable sources, 25% from nuclear and 19% from natural gas.
According to the German commission’s proposals, the phase-out would take place from 2018 to 2038. Hard coal and lignite generation would be cut to 15GW each of capacity between 2018 and 2022, to 8GW and 9GW respectively by 2030, and to zero by 2038.
The proposals are not detailed to a plant level, and of course the government is not bound to follow the recommendations, though it has indicated it agrees with the overall goal.
So how would a coal phase-out impact power prices?
As Germany is Europe’s leading market, prices elsewhere take their lead from what is happening in the German market. Furthermore, Germany is a major exporter of power, helping countries like France compensate for nuclear outages and poor hydro availability. So it’s likely that whatever happens to German prices will have a knock-on effect elsewhere.
The first impact is likely to be a shift in trade balance, making Germany a net importer of power from around 2024, analysts say. This will help boost power prices as the German market recalibrates to ensure domestic supply, but another major impact will be the price of carbon permits, which are expected to reach around €40/tonne by 2023.
Some forecasts see German baseload year-ahead power rising to as much as €62/MWh by 2023, and nearly €65/MWh by 2025, from its current level of €47/MWh. Importing neighbouring countries would also see a corresponding uptick in prices.
Of course, these are initial predictions that make assumptions on fuel and carbon prices, as well as the pace of the phase-out. As the government develops its strategy to implement the commission’s recommendations, a clearer picture will emerge.
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