Auctions could be a relatively inexpensive way to exit coal, but there might be negative effects during the ongoing energy crisis, a new study by Centre for Sustainability and MCC researchers finds.
For the first time, energy economists have determined the concrete costs of Germany’s exit from coal-fired power plants. In their study “Auctions to phase out coal power: Lessons learned from Germany” published in the March 2023 volume of the journal Energy Policy, Silvana Tiedemann, PhD researcher at the Centre for Sustainability, Hertie School, and researcher Dr Finn Müller-Hansen, Mercator Research Institute on Global Commons and Climate Change (MCC), conclude that, despite disadvantages, decommissioning auctions could be the cheapest way to phase out coal.
Almost all EU member states have adopted national phase-out paths for coal-fired power plants. Germany put its plan to action in a series of auctions that shut down plants by compensating energy companies with taxpayer money. Since August 2020, the Federal Network Agency has invited bids on compensation for shutting down a hard coal or small lignite-fired plant, allowing for power plants with high CO2 emissions to be taken off the grid at the lowest possible cost.
How auctions can help Germany phase out coal at lower costs
According to Tiedemann and Müller-Hansen, the first five auctions, which took place between 2020 and 2022, cost Germany’s federal budget around 700 million euros to compensate energy companies for the decommissioning of coal-fired power plants – a cheaper alternative to individual negotiations with energy companies. The auctions have helped Germany decommission and compensate companies for a total of 10 gigawatts, more than 40% of the country’s hard coal and small lignite resources.
The authors estimate that replacing energy produced by coal-fired power plants with Germany’s current mix of power sources could help reduce its CO2 emissions by about 300 million tonnes. The success of the coal phase-out auctions indicates that they could be used more often than previously thought to control a country's mix of energy sources, the researchers say, not only to promote renewable energies, but also eventually to shut down obsolete coal and gas-fired power plants as well. Because Germany was the first country in the European Union to test coal phase-out auctions, Tiedemann and Müller-Hansen’s findings could serve as a practical example for other countries.
The catch: In an energy crisis, auctions can increase emissions
Though coal phase-out costs have been low, Tiedemann and Müller-Hansen point out a problem, particularly in light of Europe’s energy crisis following Russia’s invasion of Ukraine in 2022. The decommissioning auctions have also been shutting down newer, more efficient power plants, while older plants have remained active. During the energy crisis against previous plans, Germany needed to run them in larger capacity again, resulting in a 2% increase in the carbon intensity of plants still in use. If Germany depends more on coal to generate electricity, as was the case in 2022 with the country’s efforts to reduce dependency on Russian gas, emissions will rise disproportionately and further damage the climate, the researchers say.
Still, Tiedemann and Müller-Hansen emphasise the generally positive impact of phase-out auctions on the climate, which are ensured via the cancellation of emission allowances in the world’s largest carbon market, the EU Emissions Trading System (EU ETS).
Read the full article in Energy Policy.
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