Phasing out coal seen costing Germany billions of euros

London

FOR Europe's biggest economy, phasing out coal will be a very expensive affair.

Utilities from RWE AG to Uniper SE will seek compensation to shut down lignite and hard-coal plants before the end of their lives, while the states where they are located are demanding tens of billions in compensation. And in a triple whammy, the nation may also lose more than 5.2 billion euros (S$8 billion) in cancelled carbon permit-sales as demand from those plants will decline.

That's the estimate of Jahn Olsen, an analyst in London at BloombergNEF, and based on futures prices that tripled last year. The actual size of the loss will depend on how Germany interprets new European Commission rules governing the market from 2021 and the nation's willingness to shore up a trading system that only just is starting to make a real impact on emissions.

While Germany has said it will cancel allowances, it hasn't provided any details. Since the nation recently flagged some of its draft plans for closing coal plants through 2038, carbon permits are headed for their worst week since September as traders anticipate lower demand in the future.

The new rules say that member states can withdraw certificates to bolster prices and limit damage from overlapping measures to the market, the region's main tool for reducing harmful emissions. That's after a decade of slumping prices that did little to encourage utilities to switch to cleaner behaviour.

The emission-permit prices slumped partly because Germany spent billions subsidising solar and wind generation, which reduced the need for the allowances.

Under the new regulations, Germany could reduce its sold carbon allowances by 197 million tons over the 10 years to 2030, cutting government revenue by the 5.2 billion euro figure at forecast prices, according to Mr Olsen.

Germany's coal commission said in a report last week that it backs "exploitation of this possibility" on a scale that's equal to the reduction in emissions from the plants that will shut. Exactly which stations will be decommissioned and when will be negotiated between the utilities and the government.

The nation could also decide to cut that reduction by about half because a portion of the coal power will be replaced with cleaner-burning natural gas plants that still need some allowances, Mr Olsen said. There's also a possibility that Germany may decide against reducing its carbon sales volumes - since the cancellation plan is voluntary.

What the German government decides will be crucial for the emissions market, the world's biggest by traded volume, he said. "Whatever they choose, it will impact the price of carbon during the next decade or so." The phase-out is already looking super costly in a number of ways, with workers and utilities holding out for compensation and assistance. While German states were seeking 60 billion euros to manage the process, the coal commission recommended that part of the bill would be at least 40 billion euros.

"At stake is both the size of the economic assistance package and the timing of that assistance, which in turn affects the timing of the power plant closures and the associated mines," said Trevor Sikorski, an analyst at Energy Aspects Ltd in London, which advises industry. BLOOMBERG