Germany Relies More On Russian Gas As It Turns Away From Coal

Posted: November 3, 2014 in Econ 101, Technology and Energy



Germany’s Turn Against Coal Risks More Reliance on Russia
Photographer: Krisztian Bocsi/Bloomberg

Germany is turning against coal as a fuel for generating electricity, a move that will boost the nation’s reliance on natural gas from Russia.

Alarmed that curtailing nuclear power has prompted utilities to burn the most coal in six years, Chancellor Angela Merkel’s government is working on a plan to reinforce Germany’s commitment to reduce fossil-fuel emissions. The Economy Ministry on Oct. 31 published a paper laying the groundwork for the most strict steps yet to limit coal in Europe.

The shift, if implemented, would force Germany to tap Russia for additional supplies, to import power from neighbors and to further subsidize renewables such as solar and wind. That would swell the country’s 100 billion-euro ($126 billion) annual fuel import bill and may raise the cost of electricity paid by consumers, already the second-highest in the European Union.

It would also run counter to efforts by the U.S. and EU to isolate Russia economically.

“The importance of gas, and with that the dependence on Russia, will increase,” said Guido Hoymann, an analyst at B. Metzler Seel Sohn & Co. KGaA. Cross-border exchanges of electricity also would rise, helping the nuclear plants just outside Germany’s border, he said.

Photographer: Michele Tantussi/Bloomberg
Gazprom Benefits

Scaling back coal would help OAO Gazprom (OGZD), the state-controlled Russian producer that accounts for about a third of Germany’s gas imports. It would hurt utilities such as RWE AG and Vattenfall AB that operate coal-fired plants.

Germany currently gets about 45 percent of its electricity from coal and 11 percent from natural gas. Another 15 percent comes from nuclear reactors that Merkel has pledged to close by 2022. About 24 percent comes from renewables such as solar and wind, a portion the government intends to increase to as much as 45 percent by 2025 under a program known as the Energiewende.

Signs of the change in policy started emerging on Oct. 9, when Environment Minister Barbara Hendricks told the parliament in Berlin that the government will stop financing new coal plants and “critically review” utility plans to build them. While an immediate exit would be “irresponsible,” she said, coal should be restrained “step by step.”

The Economy Ministry’s Oct. 31 paper also presented the shortcomings of Germany’s current power market, saying policies need to be updated to reflect a growing share of renewables and ensure supply is secure and cost-efficient.

Policy Paper

The paper said too many fossil-fired power plants are in the system and overcapacities “have to be cut” to help meet climate targets though it didn’t single out coal. The paper is meant to spur discussions both inside government and industry that will culminate with formal proposals next year.

The ministry said it’s talking to utilities about the changes. Officials are looking for ways to reduce the share of coal in the energy mix, according to a person familiar with the government’s thinking who asked not to be named because the discussions are confidential and no decision has been made.

“The German energy market in its current form is not providing enough incentives to reduce carbon emissions so that we can reach our climate targets,” Nina Scheer, a lawmaker for the Social Democrats, Merkel’s junior partner in government, said in an interview. “We need a new energy mix with less lignite and hard coal.”

Government Leverage

Exactly what the government would do to limit coal isn’t yet being discussed in public. It may place curbs on carbon emissions from coal plants, ban the dirtiest of them from bidding for support under a payment system to support generating capacity or mandate a “coal exit” like the one in place for nuclear, said Claudia Kemfert, who heads the energy unit at the DIW economic institute, a Berlin-based research group.

Whatever it does, the rules applied in Germany would send ripples through European energy markets because they’d apply to the region’s biggest energy consumer in the heartland of the coal mining industry. That would take capacity out of the generating system and stabilize power prices that have softened along with the economic stagnation in the past year.

“No big European nation has mandatory coal exit laws,” said Patrick Hummel, an analyst at UBS AG. (UBSN) “There are only guidelines regarding the emissions.”

Recasting Germany’s fuel mix requires Merkel to balance the goal of reducing carbon-dioxide emissions, which rose 1.5 percent last year, against the need to limit electricity bills. German household consumers on average paid the equivalent of $0.41 per kilowatt-hour in the second quarter, almost twice the price in Japan and more than three times the cost in the U.S., according to International Energy Agency data.

Costly Decision

Exiting coal could become “very expensive” because gas, the obvious replacement, costs more, said Hoymann, the analyst at Metzler Seel Sohn. “Power production from lignite will be increasingly difficult,” he said. “These plants emit a lot of CO2 and we’re doing the contrary to what our targets say.”

The government’s official remarks about its plans indicate the difficulty of getting that balance right. It “is not possible in a strongly industrialized country such as Germany” to scrap both nuclear and coal power at once, the Economy Ministry said in a response to questions. “It’s clear, however, that also conventional power plants will have to adopt to the requirements of the Energiewende.”

“Because we exit nuclear power, coal becomes even more important for an affordable energy supply” and Germany will depend on it for decades to come, Michael Vassiliadis, who heads the IG BCE mining and utilities union, said today.

“We are against all plans to shut down power plants short-term and short-sightedly,” he said in a speech.

Brussels Work

In Brussels, Merkel led the drive for more ambitious EU climate targets that ministers backed on Oct. 24. EU leaders agreed to accelerate the pace of emissions reductions by the 28-nation bloc to 40 percent by 2030. That compares with the current target to cut 20 percent by 2020 from 1990 levels.

At home, the German government has sought to keep down electricity costs, with utilities scrambling to replace reactor output. That has encouraged traditional coal plants, especially ones that burn lignite, since their fuel is cheaper than gas.

“German politicians have realized that they have unwantedly promoted CO2-heavy power plants and damaged gas plants,” said Sven Diermeier, an analyst at Independent Research GmbH in Frankfurt, who covers both RWE and EON SE. (EOAN)

Environment Minister Hendricks and Research Minister Johanna Wanka see Germany “in a central role in fighting climate change,” they said in a joint statement today, commenting on the report from the UN’s Intergovernmental Panel on Climate Change, which “underlines that we must reduce coal-fired power generation.”

Companies Respond

Companies are responding to the change in tone from the government by signaling they will cut back on coal, starting with lignite.

Vattenfall on Oct. 30 said its board is reviewing whether to get rid of its lignite mines. The utility, owned by the Swedish state, said it wants to stop expanding its mines and focus more on renewables to cut its carbon footprint, which is Europe’s second-biggest behind RWE.

RWE, which last year generated more than half of its power in Germany from lignite, seeks to keep up those volumes in the the years ahead, according to a presentation it made to investors last month. It has extensive mines in western Germany that in past decades have led to the removal of entire villages, and local authorities in the North Rhine-Westphalia’s state in March moved to limit digging there.

“We remain committed to lignite,” Manfred Lang, an RWE spokesman, said by phone from Essen.

RWE Falls

RWE fell 1.5 percent, the most in two weeks, to 27.83 euros today in Frankfurt.

Closing the country’s two biggest lignite plants could save 50 million tons of carbon emissions a year, according to Agora Energiewende, a researcher owned by Mercator Foundation and European Climate Foundation. That’s almost 6 percent of Germany’s annual carbon emissions from energy.

Even so, getting rid of lignite will be difficult and costly, said Norbert Schwieters, Global Energy Leader at consultants PricewaterhouseCoopers AG.

“Any attempt by the government to do to coal what was done to nuclear power will leverage our dependency on imported gas — including Russian gas,” said Ulrich Freese, a Social Democrat lawmaker whose district in Brandenburg is home to Vattenfall’s lignite mine. “Do we want that? The answer is no.”


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