It is well to be noted that the upward trend in the carbon price since 2015 has already witnessed coal generation dip quite significantly. Apparently, in 2023, the total generation was a little more than 100 TWh, and as a matter of fact, it was 263 TWh in 2003.
The fact is that coal is most likely to be phased out of the German electricity mix by the end of 2038, at the latest. The last coalition, which happened to be led by Chancellor Angela Merkel, had already agreed to this fact. If the present coalition government has its way, the coal phase-out will go on to ideally be completed by 2030.
What role does coal, which was once regarded as the most important energy source in the German electricity mix, goes on to play today?
The recent history of coal
If one takes a look at the amount of electricity that has been generated from lignite and hard coal since 2002, there is a clear trend, at least in the recent past: coal is indeed running out of steam. In 2003, almost 263.6 TWh happened to be produced from lignite as well as hard coal. As of December, last year, just 106.7 TWh had been produced. Notably, that does not include the last few weeks of the year.
Nontheless, one can already say that it is just going to be a fraction of the former coal volumes. The quick downward trend began in 2015, with just the gas crisis years of 2021 and 2022 giving the coal a short renaissance. It is well to be noted that now the gas markets have calmed down pretty significantly, and all this has set coal back again. It is indeed significant to take into consideration that the decline in coal-fired power generation to an extent exclusively affected hard coal. Lignite, on the other hand, went on to lose much less of its share. But how can one go on to explain such trends?
EU emission allowances- EUAs
As always within the energy market, there are many elements at work here. Fundamentally, these happen to include dipping energy consumption, cooling gas costs, as well as a flood of cheap renewable energy. But there happens to be yet another decisive factor that is putting coal under severe increasing pressure, and that’s EU emission allowances- EUAs. In the period between 2010 and 2017, the certificate price happened to be below 10 euros per tonne of CO2. In the years that followed, the rising trend went on to intensify further and then balanced at around EUR 100 at the end of February last year. Since then, the price has since then cooled down again a bit. It does remain at a pretty high level, but what effects do such prices have in practice?
CO2 cost in practice
If one wants to allocate the certificate prices to the production costs of the numerous fossil fuels, one can go on to do this in a simple calculation, for instance. To forecast the intensity of the emissions and therefore also the certificate costs, one can take the figures that are published by the Federal Environment Agency on primary energy sources(1) as well as the average efficiency of the German power plant fleet(2). Together along with the current fuel prices, one can then roughly forecast how much a megawatt hour costs to develop.
It should not come as a surprise, but coal is hit much harder by certificate prices rather than lower-emission gas because of its higher emissions intensity as well as the comparatively low efficiency of power plants. Coal still goes on to get the benefits of comparatively lower fuel costs. They are almost 37 EUR per MWh for hard coal and 8 EUR per MWh when it comes to lignite. In spite of this, emissions costs of almost EUR 63 per MWh for hard coal as well as EUR 84 per MWh for lignite get added to this, assuming EUR 85 as the certificate price.
Lignite has dipped less than hard coal
Under such assumptions, the overall electricity generation due to lignite happens to be even cheaper than that from hard coal because of the cheap fuel. Even if the latter happens to be more affected due to the price development of certificates because of higher emissions intensity. This competitive benefit does explain why lignite-based electricity generation has been less affected by the dip in the recent years than hard coal.
Gas as well as steam power plants happen to be among the choices available for generating electricity from gas. These happen to have the benefit that they are majorly more efficient as compared to coal-fired power plants and make use of a fuel having lower emissions. This happens to make them direct competitors to coal when it comes to the merit order. The expenditures here amount to 25 euros per MWh for emissions as well as 70 euros per MWh for the fuel.
Though natural gas happens to be more expensive as a fuel, the additional costs are around completely offset by way of lower emission costs in the calculation example. As one keeps using average values here, individual power plants that happen to be new or especially efficient may as well have higher efficiencies. In individual cases, this can go on to lead to CCGT power plants outperforming certain coal-fired power plants in the merit order.
Does one need to phase out coal?
It is worth noting that the numbers game should go on to make one thing clear: in the future, certificate price is most likely to growingly determine if coal-fired power plants go on to run or not. If the certificate price happens to rise permanently over the 100-euro threshold, things will go on to become very tight when it comes to coal under absolutely identical scenarios. At the same time, one also needs to have a significant amount of acceleration when it comes to the expansion of renewables.
Sources-
[1] Federal Environment Agency (2022). CO2 emission factors for fossil fuels.
[2] Federal Environment Agency (2023) based on AG Energiebilanzen: “Evaluation tables”, table “Electricity generation by energy source”.
