Germany can meet its climate goals for the energy sector if it introduces a CO2-price floor of between €50 and €75 per ton, write Fabian Huneke, Carlos Perez Linkenheil and Simon Göß from the Berlin-based independent energy market specialist Energy Brainpool. However, if neighbouring countries don’t take similar measures, more than half of the reduced CO2– emissions will be shifted abroad, note the authors. As long as power markets are interconnected, European measures make more sense than national ones.
The Climate Action Plan 2050, adopted by the German government on 14 November 2016, translates into an emission reduction target for the energy sector of 61-62% by 2030 compared to 1990. The emissions of the public power and heat supply stood at 466 Mt CO2 in 1990. This means emissions must be reduced by 291 Mt CO2 down to 175 Mt CO2. According to the climate protection plan[1], emissions of the energy sector have already decreased by 23.2% and stood at 358 Mt CO2 in 2014. Therefore the target for the remaining one and a half decades is set as well: a further reduction of emissions of 37.8 to 38.8%, or 173-183 Mt CO2.
In the discussion on how to achieve this target the EU Emissions Trading System (ETS) plays a central role. The trading system assigns a market price for the emission of one ton CO2 – the higher the price for one emission allowance, the higher the incentive for low-emission technologies. The extended period of low prices for these allowances (currently at around €5 per ton of CO2) increases short-term marginal costs for the generation of electricity in an average hard coal-fired power plant from about €22/MWh by roughly 22% to about €27/MWh[2]. This is still less expensive than the generation of electricity in an average combined cycle gas turbine with a marginal cost currently of about €35/MWh[3]. This means that coal to gas switching, which would reduce emissions, is not economical.
The climate target for the energy sector will be missed given current framework conditions and market prices
In the UK a Carbon Price Floor of £18[4] was introduced to support the guiding effect of CO2-prices. France, according to the first multi-year programme planning for energy, will also introduce a national price floor (composante carbone) for CO2. It is envisaged to rise from €56 to €100 per ton of CO2 from 2020 to 2030[5].
In this analysis we have looked at what the effects would be of a national minimum price floor of CO2 in Germany on the emissions of the country’s power plant fleet, bearing in mind the interconnected European power markets. We have looked at two price floor scenarios (€50 and €75t CO2) to see what effects those would have on the achievement of the climate goals in the energy sector.
Emissions of the German power plant fleet depending on the CO2-price
Due to the large installed capacities of CO2-intensive power plants (coal and gas) in Germany, the effect of a German minimum price on the CO2-intensity of power generation varies considerably. In order to quantify effects and analyse interdependencies, we compared three scenarios:
- Scenario 1 “CO2-market price EU €27.6” is the reference scenario and extrapolates today’s market environment: this follows the price level projected in the “New Policies” scenario of the IEA’s World Energy Outlook, which arrives at €27.6/t CO2 in 2030[6].
- Scenario 2 “CO2-price floor €50“ assumes Germany adopts a CO2-price floor of €50/t CO2 in 2030. The rest of Europe follows the prices for CO2-emission allowances according to scenario 1, other market prices also stay the same.
- Scenario 3 „CO2-price floor €75“ assumes Germany has a CO2-price floor of €75/t CO2 in 2030. All further assumptions correspond to the ones of scenario 1 and 2.
The calculations have been conducted with the fundamental energy market model Power2Sim[7], developed by Energy Brainpool. The assumptions for the scenario calculations have been obtained from public sources. Amongst others, the expansion of cross-border capacity, as well as country-specific expansion pathways of installed capacities and demand have been taken into account[8].
The results of the investigation are depicted in figure 1 and show:
- that the climate target for the energy sector will be missed given current framework conditions and market prices and
- that the instrument of a national carbon floor price allows for a significant reduction of German emissions up to the achievement of the climate targets for 2030. Further analysis however also reveals that about 60% of the reduced emissions that took place in Germany will still be emitted in the neighbouring markets due to German power imports.
When the current price path in the “New Policies“-scenario[9] of the International Energy Agency is taken as a basis, Germany’s emission reduction of 37.6% will miss the target (61 to 62%) by 23.4 to 24.4 percentage points.
The CO2-emissions in scenario 2 (€50/t CO2) are reduced by 51% compared to 1990 levels and emission reduction is thus 14 percentage points higher than in scenario 1. A CO2-price floor of €75/t CO2 in scenario 3 lowers emission by 31 percentage points below the achievements of scenario 1, while compared to 1990 emissions are reduced by roughly 69%. Thus, scenario 3 surpasses the 62% target as formulated by the federal government in its climate protection plan.
In scenario 3 Germany generates about 150 TWh less electricity in CO2-intensive power plants, such as lignite, hard coal and gas. In order to cover demand, most of the missing quantities will be imported. Thus, in this scenario, Germany, historically mainly a net electricity exporter, evolves into a net importer.
The economic competitiveness of domestic conventional power plants, above all of lignite and hard coal-fired power plants, is heavily compromised when CO2 prices are high
A high price for CO2-emission allowances in Germany leads above all to the reduction of electricity generation from hard coal and lignite. Higher emission factors, as well as lower efficiencies of these power plants compared to gas turbines and combined cycle gas turbines, are the main cause.
On the one hand, the competitiveness of low-emission gas-fired power plants increases. On the other hand, the increase of marginal cost of generation of German coal-fired power plants leads to a strong increase of power imports. As CO2-prices in neighbouring countries remain at a lower level in scenario 2 and 3 and relatively low-cost electricity from nuclear power plants is available, this effect is reinforced. In many hours power import even displaces the generation in highly efficient gas-fired power plants.
Looking at European emissions for the different scenarios shows that about 60% of emission cuts in Germany from scenario 2 and 3 are shifted abroad. The emission reductions across Europe are therefore lower, as compared to an isolated view on Germany. Consequently, a national price floor for emissions is only effective at the national level. A pan-European increase of CO2-prices would be more efficient in reducing emissions in Europe, where the effectiveness of such an instrument should be analyzed in respect to the achievement of national targets.
Conclusion and outlook
Currently a variety of studies investigate the necessity and possible pathways for a coal exit in Germany. Amongst others, the Green party has called for an immediate stop of the 20 most polluting German coal power plants[10]. Similarly, the Federal Environmental Agency of Germany has outlined four options allowing for reducing the electricity output from coal by more than 50% by 2030[11]. Also WWF has published a study in which a coal exit scenario starts by reducing the generating capacity of coal in 2019 by half, so by more than 23 GW[12].
In an interconnected power market, as it exists in Europe, national actions might be opposed to European goals
This paper shows that in an isolated view of Germany the implementation of a CO2-price floor allows for the achievement of the government’s climate target in respect to the emission reduction by 61 to 62% compared to 1990. With a minimum price for emission allowances anchored between €50/t CO2 and €75/t CO2 the climate target can be achieved. A considerable part, namely 60%, of the CO2-emitting electricity generation will then however be shifted abroad, thus lowering the effect from a European perspective.
The economic competitiveness of domestic conventional power plants, above all of lignite and hard coal-fired power plants, is heavily compromised when CO2 prices are high. In a national comparison, the competitiveness of gas-fired power plants is strengthened, while on the European level, a price floor causes a disadvantage for them as well. Their generation will be frequently displaced by power imports. In an interconnected power market, as it exists in Europe, national actions might thus be opposed to European goals. This calls for an integral and European approach for decarbonizing the energy sector.
Editor’s Note
The authors are expert analysts at Energy Brainpool, an independent market specialist in Berlin focusing on electricity and energy trading in Europe. The expertise of Energy Brainpool encompasses the analysis, forecasting and simulation of energy markets and prices, researched and scenario-based studies, and providing individual consulting services as well as training and expert seminars for the energy sector.
This article is based on the White Paper “The Effect of a -Price Floor on the Emissions of the German Power Plant Fleet” by Energy Brainpool. Contact: simon.goess@energybrainpool.com; fabian.huneke@energybrainpool.com
Sources:
Beschluss Bundeskabinett, 2016. Klimaschutzplan 2050 – Klimaschutzpolitische Grundsätze und Ziele der Bundesregierung. [Online]
Available at: www.bmub.bund.de/themen/klima-energie/klimaschutz/nationale-klimapolitik/klimaschutzplan-2050/
[Accessed on 15 12 2016].
Deutsch-Französisches Büro für die Energiewende, 2016. Die mehrjährige Programmplanung für Energie (PPE). [Online]
Available at: http://enr-ee.com/de/systeme-maerkte/nachrichten/leser/memo-ueber-die-verordnung-zur-mehrjaehrigen-programmplanung-fuer-energie-2016-2023.html
[Accessed on 15 12 2016].
Elia, 2015. Plan de Développement fédéral du réseau de transport. [Online]
Available at: http://www.elia.be/fr/grid-data/grid-development/plans-d-investissements/federal-development-plan-2015-2025
[Accessed on 13 12 2016].
ENTSO-E, 2014. 10-Year Network Development Plan. [Online]
Available at: https://www.entsoe.eu/major-projects/ten-year-network-development-plan/tyndp-2014/Pages/default.aspx
[Accessed on 13 12 2016].
Europäische Kommission, 2016. Comission Staff Working Document – Impact Assassment. [Online]
Available at: https://ec.europa.eu/energy/en/news/commission-proposes-new-rules-consumer-centred-clean-energy-transition
[Accessed on 15 12 2016].
Europäische Kommission, 2016. EU Energy, Transport and GHG Emissions Trends to 2050 – Reference Scenario 2016. [Online]
Available at: https://ec.europa.eu/energy/en/news/reference-scenario-energy
[Accessed on 13 12 2016].
HM Revenue & Customs, 2014. Carbon price floor: reform and other technical amendments. [Online]
Available at: https://www.gov.uk/government/publications/carbon-price-floor-reform
[Accessed on 15 12 2016].
International Energy Agency, 2016. World Energy Outlook, Paris: IEA Publications.
National Grid, 2015. Future Energy Scenarios. [Online]
Available at: http://www2.nationalgrid.com/UK/Industry-information/Future-of-Energy/FES/Documents-archive/
[Accessed on 13 12 2016].
Öko-Institut, Prognos, 2017. Zukunft Stromsystem: Kohleausstieg 2035: Vom Ziel her denken , Berlin: WWF.
Parliamentary group of the Green Party, 2017. Fahrplan Kohleausstieg. [Online]
Available at: http://www.bitzka.de/uploads/media/Fraktionsbeschluss_Fahrplan_Kohleausstieg_Weimar17-1.pdf
[Accessed on 19 01 2017].
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[Accessed on 13 12 2016].
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Notes:
[1] (Beschluss Bundeskabinett, 2016, p. 26).
[2] Own calculation with an efficiency of 35 % and an emission factor of 0.34 t CO2 per MWhth,.
[3] Own calculation with an efficiency of 50 % and an emission factor of 0.2 t CO2 per MWhth.
[4] (HM Revenue & Customs, 2014).
[5] (Deutsch-Französisches Büro für die Energiewende, 2016, p. 5).
[6] (International Energy Agency, 2016), Exception: Carbon Price Floor in Great Britain.
[7] A description of the European fundamental energy market model Power2Sim is available at http://www.energybrainpool.com/en/analysis/fundamental-model-power2sim.html.
[8] (ENTSO-E, 2014), (Elia, 2015), (Europäische Kommission, 2016), (International Energy Agency, 2016), (National Grid, 2015) und (Réseau de transport d’électricité, 2015).
[9] (International Energy Agency, 2016).
[10] (Parliamentary group resolution of the Green party, 2017)
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Niall Williams says
Perhaps it would be possible to design a mechanism to price in the emissions of imported electricity in a situation where a carbon price floor is pushing generation out of Germany. Perhaps the price could be based on the average emissions of the exporting country unless there is a power purchase agreement from a specific generator. This is obviously a blunt instrument and could likely be refined.
It is also likely that the German government would work to accelerate renewable deployment if it was not concerned about protecting domestic lignite miners and generators, which would reduce the need for imports.
Nigel West says
The answer to the lignite emissions problem is to build CCGTs. They can be built with boilers designed for district heating to takeover from lignite stations that currently supply heat. Why hasn’t Germany done this which would halve CO2 emissions? Perhaps because Merkel wishes to protect jobs in the east, or because German electricity supplies would then depend too much on Gazprom. Accelerating renewables deployment would not displace much lignite fired generation because coal-fired generation and renewables are complementary in Germany.
Jeffrey Michel says
Before 1990, East Germany was the world’s largest lignite producer at over 300 Mt/a. That figure has since dropped to around 80 Mt/a, because domestic heating and industry are no longer dependent on lignite briquettes as a source of heat, while chemical plants have been converted to natural gas. However, terminating lignite usage completely would both destabilize local economies and leave tremendous landscape recultivation expenses for taxpayers to bear. The operators of gas power plants and solar and wind farms cannot be expected to assume these obligations.
Bas says
Nigel,
“Why hasn’t Germany done this which would halve CO2 emissions?”
Because almost everybody in Germany consider nuclear to be far more dangerous than the threat of climate change.
So first before all else; all nuclear out (done in 2023).
CO2 is a global problem. It makes little sense to spend lot of money while USA, the biggest polluter pp by far (70% more than Germany), even has no Emission Trading System, etc. Worse, even doesn’t have intentions regarding emissions.
Nigel West says
The nuclear phase out in Germany is politically motivated due to pressure from the Green party, not because it is dangerous. If German nukes were dangerous they would be closed immediately. German voter opinion on nuclear swings around over the years as shown in surveys.
A change of Government in Germany could delay the 2023 closure date. German nukes are well engineered and amongst the safest plants in the world.
Bas says
Such emission price floor in Germany alone causes a disadvantage for German generators compared to e.g. the Polish generators, who emit more… Hence those will export more to Germany.
Hence it delivers no solution.
Solving the problem with e.g. extra tax on imported electricity, implies moving away from the one open EU market. Ending the fundament on which the EU and nearly all its measures (e.g. free movement of people) are based.
The best policy is to increase the depreciation speed of the ETS rights further (recently increased to 2.2%/a), as those will gradually increase the emission costs allowing companies time to adapt.
Furthermore the EU should start with emission import taxes on products from countries without a comparable emission system, such as USA.
As products from those countries become cheaper without CO2 emission rights costs, while they shift the burden of their emissions partly also towards the (citizens in the) EU…
Nigel West says
In the UK, carbon taxes applied to energy intensive industries have resulted in the near collapse of the UK steel making industry. Indeed UK energy intensive industries have suffered. Increasing carbon taxes is fine if a country doesn’t mind losing industry to India and China. Or, Government can relieve industry of the burden of green costs and load it on small consumers as has happened in Germany where electricity prices are the highest in Europe.
Nigel West says
If Germany was really concerned about its CO2 emissions their politicians wouldn’t be forcing German nuclear stations to close earlier than needed.
Bas says
Near everybody in Germany (scientists, population) consider nuclear to be more dangerous by far.
So their choice for all nuclear out first, is quite logical.
Nigel West says
New nuclear in Europe is very safe. Indeed the existing plants in Germany are very safe too. The German safety regulator RSK looked at all 17 plants in 2011 and said they were safe. They are being closed prematurely purely for political reasons.
Bas says
Nuclear calls and called it’s plants always safe.
A year ago I calculated the present official chance on a core melt down for our NPP, Borssele, back to the chance in the seventies and concluded that the chance was then once in 100-300years.
Few weeks ago we visited Borssele and had a discussion with their main engineer. He also made the calculation and concluded that the chance on a core melt down was then once in 500years…
No reason to believe present public relations.
Nigel West says
Borselle is an old plant due to close. New nukes are not comparable.
The safeguards on modern PWRs are very robust. Take the EPR, in the very unlikely event of a core meltdown there is core catcher below the RPV. The containment building is steel lined to withstand an explosion and enclosed in a double wall concrete containment dome. The design is also capable of sustaining an impact from a commercial airliner.
New nukes are very safe in all respects and the regulators would not issue design approvals if they weren’t.
Bas says
How nuclear public relations (try to) change reality.
Areva the producer, only stated that the EPR can withstand an unarmed F16 jet fighter, which weights 16ton….
Areva refused to state that it can withstand an airliner…
You may assume Areva did same simulation also with airliners. So it’s sure it cannot withstand a 200ton commercial airliner.
Despite its far better double dome, etc. which classic NPP’s don’t have.
Nigel West says
The EPR containment around the nuclear island is designed to withstand a commercial jet airliner. It needs to for obvious reasons. The design of the aircraft crash protection shell is bespoke to each site. If AREVA is not being clear on this it is because the information is security sensitive.
Nigel West says
Bas, the aircraft crash protection shell should be a feature of all new nukes, not just the EPR. The designs of the ABWR and AP1000 are currently being assessed by the UK regulator. I expect he will say they must also be built with a crash protection shell. Massive civil works are needed – one reason for higher costs.
Bas says
Nigel,
Look into the EU stress test after Fukushima. After 6 months of hot debate and delay a compromise was agreed:
“The NPP should be capable to withstand a light sports-plane flying at cruise speed.”!
After some months I tried to find the details (weight, speed, type), but found that they removed it from the Internet…
How many NPP’s were closed due to the EU stresstest??
So I wouldn’t be so optimistic.
The nuclear lobby is powerful, as many invested their (scientific) career.
Nigel West says
Existing nukes weren’t designed to cope with more than a light aircraft. New nukes are. The reason why no UK nukes were closed is because they are safe. I expect that was why in Europe too.
The stress tests after FK looked at any issues for European nukes and the UK addressed those. Mainly around ensuring power supplies are not vulnerable to flooding.
In the UK the ONR and operators have ensured any issues thrown were dealt with.
Germany tried to use the stress tests to shut down nukes for political reasons even earlier than planned but the UK took a sensible approach.
Nigel West says
The stress tests were designed to make sure that UK nukes were robust in the light of events at Fukushima. That was caused by a Tsunami, not an aircraft crash.
In any case measures taken since 9/11 means it is very unlikely a commercial aircraft could be used as a missile.
In the UK safety is regulated by the independent ONR. Nuclear lobby power is not an issue.
Bas says
So the attitude of nuclear is to wait until the unlikely (a 9/11 attack) occurs before testing and taking safety precautions.
Nuclear industry should learn from the aircraft industry.
Nigel West says
I understand it’s no longer possible for a hijacker to gain entry to the flight deck of a commercial plane – doors are reinforced.
Much of the information on the ‘missile’ risk and precautions taken is not in the public domain being security sensitive.
However we do know that military jets have been sent to intercept commercial planes and after 9/11 there were rumours of anti-aircraft missiles being sighted by nuclear power stations.
Of course this is only a problem for some existing nukes, not new nukes built with a protective shell. Some existing nukes are already very robust because they have massive biological shields like the UK’s fleet of AGRs.