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The end of coal – Germany needs to get real on ambition

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Photo by Jacqueline Day on Unsplah

The first reports emerged of Germany’s embattled Coal Commission reaching an agreement after twenty-two hours of final negotiations over the weekend. If the government follows the recommendations of the twenty-eight-member Commission, Germany will phase out of coal by 2038, replacing its 42GW of coal generated power in the coming two decades.

What’s the good, what’s the bad news?

The good news is a broad set of actors identified an end date for coal, agreed upon by all major stakeholders in the country – an unthinkable consensus only two years ago. Action is set to happen soon. In addition to planned closures and shifts of some plants to the country’s lignite reserve, an additional 7 GW of coal capacity will go off line by 2022. In total, a reduction of more than 12 GW by 2022. The Hambach Forest, prominent symbol of the broad and popular civil society movement to end coal, will not be logged. More uncertainty persists regarding communities threatened by expanding coal mines, however, as the Commission failed to reach agreement on the future of those villages.

The bad news is the trajectory to shut down the remaining 30GW after 2022 (17GW in 2030) is too slow for Germany to achieve its international climate commitments. Even if the exit date is moved from 2038 to 2035 at a later stage, as suggested by the Coal Commission’s final report, this would not be in line with the Paris Agreement. Germany would not contribute its fair share to keeping global warming to 1.5 degrees. Details of the phase out trajectory between 2023 and 2030 will be negotiated in the upcoming phase out law.

Most of the existing coal capacities will need to be replaced with renewables. In its coalition treaty, the German government promised to increase the share of renewables to 65% by 2030. However, the report emphasizes the need to replace coal capacity with existing and new gas infrastructure, in particular as back up plants on former coal sites. Focusing on existing gas infrastructure and energy efficiency is, however, key for most viable decarbonization pathways.

The federal government will invest a total of €40 billion in transition measures in German coal regions over a 20-year period. Due to the phase out, estimated costs of compensating energy users (private and industry) for increases in energy bills are €2 billion per year. Electricity price increases are debatable however. Recent studies suggest prices could even decrease due to the integration of larger shares of cheap renewables – a fact recognized by Economy Minister Altmaier shortly after the Commission delivered its results. The costs and conditions for compensating utilities are unknown as these will be subject to negotiations with the government, despite legal advice for the German Parliament arguing in most cases there is no need for compensations.

In its 2016 annual review of the energy transition, think tank Agora Energiewende assumed continuing the 2016 capacity reductions, Germany would close its last plant by 2038. This end date under a business-as-usual scenario is now backed by large investments in the regions and generous compensations for utilities. An earlier phase out date was widely expected as part of such an attractive financial package for regions and industry. A lack of ambition in the long-term trajectory, combined with compensation payments, makes this a good deal for coal utilities such as RWE.

Reactions in Germany

A particularly insightful comment came from one of the Commission’s co-chairs, Ronald Pofalla, arguing the outcome is a 'conciliation between society and the Energiewende' and 'supporting social peace'. In other words, Mr Pofalla aimed at a compromise between stakeholders invested in high-carbon industries and the necessities of addressing climate change. The broadly positive reactions by state governments, trade unions and industry associations confirm this conciliation. First reactions from activist groups like Ende Gelände or the immediate occupation of a coal terminal in the port of Hamburg suggest, however, this is not the end of the story. Activist groups, environmental NGOs, and the Green Party made it clear that 2038 is not an acceptable exit date. They consider this agreement as a start of a phase out process to be sped up, aiming to bring the exit date up to 2030.

Domestic media reactions ranged from too fast and expensive on the one end to way too slow on the other. It was, however, widely recognized that more ambitious outcomes were difficult given the setup and mandate of a consensus-seeking Commission. A tool regularly used in German political decision-making. If this is the best possible outcome, it leaves us with another question: Are Commissions a suitable instrument to negotiate goals and instruments of climate policies? Fact is, this Commission did not reach what would be required under the Paris Agreement – a coal phase out which contributes to putting Germany on a 1.5-degree trajectory. Contrarily, preventing the worst impacts of climate change and addressing climate security concerns was highlighted by Foreign Minister Heiko Maas as a priority in a speech at the United Nations only recently.

International reactions

Remarkably, while many international outlets recognized the agreement as a good step, other reactions have been more critical. The Financial Times reports on international disappointment at the late end date. Large hedge funds are already betting against coal, putting the German plans on “very shaky foundations. The market could end up making the decision for Germany”. On the other hand, Bloomberg cited an analyst at the private bank Metzler who added German coal utility RWE to a list of top ten German stocks: “We believe that clarity, compensation payments, and a relatively long phase-out period should trigger a re-rating for the company’s conventional power generation.” And think tank Climate Analytics argued Germany was creating a dangerous precedent by setting a phase out date later than 2030. The only EU country to do so. Outside Europe, a 2038 deal raises important questions. Why would countries like China and India work hard to phase out of coal between 2040 and 2050 if one of the richest, most innovative and most developed nations needs twenty years and tens of billions of euros?

Are the stars aligning for more ambition?

The combination of an expensive price tag and a late phase out date will create vulnerabilities for the deal and add pressure to deliver a better outcome at lower cost. In the run up to the deal, Bavarian Prime Minister Markus Söder, Germany’s largest net payer into the federal budget, already warned about the overall costs. Given large public support for more climate action, recent successes of the Greens in state elections, large-scale protests, and a streak of extreme weather events in 2018, climate change is back on the agenda. German taxpayers will certainly be watching how much is spent to bailout unsustainable business models such as EPH-owned LEAG in Lusatia or to fill overdue investment gaps in public infrastructure and the low-carbon economy. Litigation will also play an increasing role in the coal debate and many players in civil society will begin to step up efforts.

Future changes in government might also influence the trajectory and phase out date. While the current Grand Coalition of Conservatives and Social Democrats has been shaken by repeated crises and a structural issue to initiate transformative change, a future government could put climate back in the headlines. While concerns about the rise of the AfD in three upcoming elections in Eastern German states and the European elections dominate many debates, Greens are currently polling around 20% on the federal level. Even the current government might revisit some looming policy issues which could have significant impacts on the coal debate, such as the discussion about more effective carbon pricing mechanisms both in the ETS and non-ETS sectors. The 2019 Climate Law and the implementation of the Coal Commission’s recommendations will be the next opportunity to push for more progressive positioning in the energy sector. All this means many of the reasons why Germany was unable to find consensus on an earlier end date are temporal.

The way forward: Germany needs to get real on climate ambition

The insulated character of the German coal debate, being largely unimpacted by international dynamics and expectations, could soon come to an end. In addition to policy and domestic politics, diplomacy will play an increasing role in conversations about decarbonization, with the Powering Past Coal Alliance having set a 2030 benchmark for the phase out of coal for all OECD countries. Peer pressure and considerations about the competitiveness of economies due to cheap renewables and decreasing prices of storage technology will add to this dynamic. Developments, for example in the US market, show renewables combined with storage are already replacing some gas capacity. But also in Germany, innovative approaches are already winning bids, for example to deliver stability services through virtual powerplants consisting of home batteries.

These broader dynamics also mean the Commission’s call for investments in new gas infrastructure is questionable: Germany’s current gas infrastructure is sufficient to handle an uptake in demand from phasing out coal. In the medium term, energy efficiency, cheap renewables and electrification will erode gas demand, putting these new investments at risk of becoming stranded assets for investors.

The landmark coal phase out decision will need to be sharpened in the coming years, and ambition must be accelerated if Germany is to once more become a credible player on the international stage. Creating a stable deal, with a Paris-aligned end date and trajectory will allow the German government to provide planning security for a just transition to its industry and communities. It will furthermore create a safe regulatory environment for low carbon investments and a competitive, innovative German economy in the second half of the 21st century.