Germany shelves climate levy for lignite reserve

OREANDA-NEWS. July 06, 2015. Germany's coalition committee has opted to close lignite-fired facilities with a combined capacity of 2.7GW and replace a number of coal-fired combined heat and power plants (CHP) with gas-fired CHPs to cut greenhouse gas (GHG) emissions in the power sector in 2017-20.

The committee — including German chancellor Angela Merkel, economy and energy minister Sigmar Gabriel and Bavarian prime minister Horst Seehofer — yesterday agreed to shelve a proposal to introduce a climate levy for older sites to reduce sectoral emissions by an additional 22mn t of CO2 equivalent (CO2e) by 2020.

Domestic utility RWE and Sweden's state-owned Vattenfall — which operate most of Germany's lignite-fired plants with a total installed capacity of 21GW — had warned that the duty would lead to the closure of the majority of the complexes.

Berlin will now implement a variety of measures to achieve the 22mn t CO2e target, a necessary step to curb total GHG emissions by 40pc by the end of this decade relative to 1990 levels.

The key component of the plan is the gradual closure of lignite-fired plants. This is expected to reduce the power sector's emissions by 11mn t CO2e in 2017-20.

The facilities will have to contribute another 1.5mn t CO2e worth of abatement after 2018. It is not yet clear how they will fulfil this.

The government will review the effectiveness of the lignite reserve in cutting emissions in 2018, it said. Utilities will not be able to include plants in the reserve that are already scheduled to close, such as RWE's 150MW Goldenberg unit.

Lignite-fired units will first enter the reserve in 2017. They will have to halt operations for four years after their introduction, meaning that the first permanent closure is eyed for 2021.

Gabriel's ministry had looked to introduce a tender for a reserve with a combined capacity of 4GW, as outlined by a green paper on power reforms published in October. The new lignite reserve will replace this programme.

Competitive tenders will not be possible owing to RWe and Vattenfall's dominance. The reserve will be operated outside of the wholesale market, so that prices are not distorted in the day-ahead auction. Berlin will pass a law banning price caps in the auction to enable allow spikes in times of short supply.

Lignite plants will be flexible enough to raise output if the wholesale power market cannot ensure security of supply, according to junior energy minister Rainer Baake.

Reserve plants will be activated to stand-by mode as soon as the auction indicates that supply will not be able to cover demand, he said. The plants will only start to generate power when the intra-day market fails to deliver supply security.

Baake and Gabriel do not expect that the reserve plants will have to generate electricity in reality. Free price formation in the wholesale market will ensure security of supply at all times, they said.

Germany will also shut a number of coal-fired CHPs as part of the new policy and replace them with gas-fired units. This will curb emissions by 4mn t CO2e.

Berlin aims to subsidise the construction of the gas-fired CHPs with €500mn/yr (\\$553mn/yr) and stop the funding of existing coal-fired facilities.

The committee deal did not disclose how many coal-fired complexes will close. But a total of 5.5mn t CO2e will be saved by further energy efficiency initiatives, it said.

Stakeholders will debate the three policies in depth over the summer recess. The German cabinet is likely to pass the legislation in the autumn.

The cost of the lignite reserve remains unclear, as it will depend on negotiations with RWE and Vattenfall — although Gabriel predicts the final total to be around €230mn-300mn/yr.

Additional financing for new gas-fired CHPs will cost €500mn/yr, while an additional €500mn/yr will be pledged to raise subsides for existing plants, he said.

The tabled efficiency measures will cost €1.16bn/yr, which the government budget will cover.

The coalition committee discussed other key issues yesterday, such as network expansion plans and the future of the southern German grid reserve.