The Powering Past Coal Alliance, unveiled at the recently concluded COP23 climate talks in Germany, includes Austria, Belgium, Denmark, Finland, France, Italy, Luxembourg, the Netherlands, Portugal and Switzerland. Alliance members aim to phase out coal from electricity generation by 2030. France is now targeting the closure of all 4.6GW of its coal-fired capacity by 2021 (previously 2022), while Portugal has announced that it will remove tax exemptions for coal-fired generation by 2018 and will close at least 1.8GW of coal plant as soon as possible.
The Commission’s State aid investigation against Spain, opened in November 2017, reinforces our sense that political pressure against the continued use of coal-fired capacity may be mounting. The Commission is concerned about Spain’s environmental incentive for coal power plants, amounting to €440m since 2007. This has supported the installation of sulphur oxide filters that were mandatory under EU environmental standards. If the concern is found to be valid, recipients of the incentive could be liable to repay what they received.
2. The role of carbon pricing
The EU emissions trading system (EU ETS) remains the world’s most ambitious scheme to promote decarbonization. But the carbon prices that it generates are still significantly below what is needed to change operational decisions by utilities.
The Market Stability Reserve, expected to come into effect in 2019, is designed to remove surplus carbon allowances over a period of four to five years, thereby providing price support to the EU ETS.
Considerable skepticism remains as to whether this will make enough of a difference to the market price for carbon. However, the UK, which unilaterally introduced a minimum price of £18 per ton of carbon dioxide (CO2) through March 2021, has demonstrated that a higher carbon price can successfully drive coal-to-gas switching.
3. The move away from kWH-only markets
The economics of conventional power generation in Europe are continuing to shift, from maximizing production of electricity to providing adequate backup for fluctuating levels of renewables output, especially as renewables continue to make up a larger proportion of generation.
Typically, renewables are characterized by a predominantly fixed cost base and production that is more dependent on weather than on variable costs. This translates into lower average but more volatile electricity prices, as conventional generation plants seek to recover costs over a falling number of operating hours in the year.
The so-called “Winter Package,” presented by the Commission in November 2016, contained a range of proposals designed to deal with these challenges.
Measures include guidelines for EU countries seeking to introduce capacity markets in which power plant operators receive payments for making capacity available, since this contributes to security of supply. The Commission proposed that only power plants with emissions not exceeding 550 grams of CO2 per kilowatt hour should be able to participate in capacity markets. Initially, this threshold will only apply to new plants, but will be extended to all plants after 2025. Crucially, if adopted, coal-fired power stations will be excluded from capacity markets in the EU.
The Winter Package still needs ratification by the European Parliament and Member States, meaning that any reform measures will probably only take effect from 2020. The direction of travel, however, remains clear: revenue streams for conventional power plants are moving toward market-oriented capacity premiums for security of supply.