German State Awards €317 Million To Loss-Making Coal Plants

Ember reveals that Germany's auction, intended to accelerate the coal exit, instead bolsters its unviable coal sector.

Sarah Brown

Europe Programme Lead

8 December 2020 | 7 min read

About

Ember analysed the results of the first auction of hard coal plants in Germany, which were published on 1st December 2020. For the coal plants awarded compensation to close, Ember analysed their load factor and profitability in recent years.

Executive summary

Loss-Making Coal Plants Awarded €317m

Auction intended to accelerate coal exit instead bolsters unviable coal sector.

Eleven hard coal plants will receive almost €317 million in compensation to retire in 2021 in the first national coal phase-out auction, yet a new Ember analysis of the seven largest plants (over 300MW) reveals they have run at a loss totalling more than €200 million in the last two years.

Key findings

The German government has just spent €317 million to close loss-making plants.
Collectively the seven largest plants have lost over €200 million in the last two years.
They have generated very little electricity this year, running at less than an eighth of their capacity during January to October 2020 (12%).
These plants are not outliers. Our analysis shows that nearly all (93%) of the German hard coal fleet has been running at a loss since the end of 2018, collectively losing over €1 billion.
German hard coal plants are utilised less every year, running at just a fifth of their maximum capacity in 2020 so far (20%) compared to 29% in 2019.
Hard coal power generation is no longer economically viable. Half of the capacity selected for closure is less than six years old.
Germany’s phase-out model is fundamentally flawed and should not be replicated by other countries.

Hard coal generation is not economically viable and even brand new plants are competing for a final payout. A market-driven coal exit is already underway and the capacity limits in these auctions may actually delay coal’s inevitable demise. Germany can stop burning coal by 2030 and meet its Paris Agreement targets, but it must urgently overhaul its phase-out strategy to avoid paying millions to polluting companies and prolonging the lifespan of uneconomic plants. Germany’s model is flawed and should not be replicated by other countries.
Sarah Brown Senior Electricity Transition Analyst, Ember

Germany’s coal exit

Slow and expensive

Germany plans to phase out coal by 2038, far overshooting the 2030 phase-out that would align with the EU’s commitments and the Paris Agreement. A recent Ember analysis showed that by 2030 Germany will still be the EU’s top power sector polluter, responsible for around 30% of the EU’s power sector emissions and one-third of the remaining electricity generation from coal.

The coal phase-out law, Kohleausstiegsgesetz (KAG), was passed by the German parliament on 3 July 2020 and came into force on 14 August 2020. This includes an auction process from 1 September 2020 until 2026 in which hard coal plants and small lignite plants can bid to be paid to shut down their assets prior to 2027. The law did include a further auction in 2027 but this was cancelled by the European Commission when they gave their State aid approval on 25th November 2020.

Tender Year	Auction price cap (EUR/MW)
2020	165,000
2021	155,000
2022	155,000
2023	116,000
2024	107,000
2025	98,000
2026	89,000

The first auction opened on 1 September 2020 for an anticipated phase-out of 4GW. While it cannot be predicted how many GW will be shut down in each of the auctions from 2021 onwards, the German government intends to phase-out 13GW through this process and the recent auction was oversubscribed.

Status of German hard coal

Declining profitability

Installed capacity

Of the analysed installed capacity, Combined Heat and Power (CHP) plants represent 71% and Conventional plants represent 29%. Over 50% of the units were commissioned at least 30 years ago.

Load factors

The electricity generation by German hard coal-fired plants has dramatically decreased in recent years. Average load factor has halved since 2018 (Figure 2).

Average load factors by year:

2018 = 40%
2019 = 29%
2020 = 20% (January to October only)

Unprofitable

Most (93%) of the hard coal units have been running at a loss since the end of 2018, collectively losing over €1 billion.

Annual net loss figures:

2018 = €124 million
2019 = €430 million
2020 = €489 million (January to October only)

Our analysis demonstrates that the oldest plants are the most financially stressed but even the newest hard coal plants have been loss-making since early 2019.

Due to the fact that CHP and Conventional plants operate differently, we conducted some separate analysis on them. The load factors of CHP units are much less responsive to decreases in the power prices when compared with conventional units. This is due to the requirement to produce heat to meet contractual obligations.

As previously discussed, without knowing the revenue generated through heat sales, we cannot conduct robust analysis of their profitability. As CHP units with capacity below 350MW predominantly have higher heat rates, they have been excluded from this profitability analysis. The plants included in our analysis have low heat rates and operate similarly to Conventional units.

However, it should be noted that the business environment for heat production from hard coal CHPs has deteriorated significantly in recent years. Industrial and municipal consumers have adopted strategies (e.g. Hamburg’s refusal to purchase heat from Vattenfall’s Moorburg plant) or are looking to adopt strategies (e.g.the Niederrhein district not renewing a contract with STEAG for heat from the Duisburg-Walsum plant) to avoid coal-generated heat.

Profitability summary

There is a clear and significant decline in both the generation and profitability of Germany’s hard coal units.

While the effect of Covid-19 on electricity demand since March 2020 has obviously contributed to the decrease in generation and revenue, the fact that the decline has been happening over the last three years indicates that there are other factors to consider. The cost of solar and wind generation has dropped substantially as has the cost of burning fossil gas compared with coal and this has resulted in a switch to these alternative sources at scale. The hard coal units are being pushed further down the merit order and becoming increasingly uneconomical to run.

The ongoing impact of Covid-19 on Germany’s economy is unknown and the government is supporting the EU proposed target of a 55% reduction in emissions by 2030, possibly even up to 60%, which requires a coal-phase out. Both of these factors increase the risk for hard coal power plants, which are already suffering financially. The uncertainty of what the future holds makes it extremely difficult to manage their exposure to fluctuating demand and prices.

Vattenfall’s success in this phase-out auction for their Moorburg units, which were only commissioned in 2015, signals that even the most efficient plants are not economically viable. Older plants at the end of their life, with little to no likelihood of returning to profit even as other units are taken offline, cannot be viable without government subsidies such as the funding from these auctions. This is supported by our analysis.

Analysis of auction results

Loss-making coal plants awarded €317m

The results of the first auction of hard coal plants were published on 1st December. The auction was oversubscribed. 4 GW was put out to tender, 4.78 GW was allocated. Under the auction rules, the first bid to exceed the total amount tendered will be filled in its entirety, which is why more capacity has been accepted than the 4GW published maximum. This implies that it was a plant with over 700MW capacity that was the last bid accepted.

Number of successful bids = 11
Lowest bid = €6,047 / MW
Highest bid = €150,000 / MW
Weighted average price = €66,000 / MW
Maximum bid price permitted = €165,000 / MW
Total amount of compensation = €317 million

The results summary (Table 2) only includes successful units with over 300MW of installed capacity.

The price bid for each coal-fired unit is not published by the German Federal Network Agency so we cannot calculate the precise value of the hard coal surcharge for each plant and utility. However, RWE has announced that they will raise €216 million from the auction. This equates to almost €140,000 / MW and over 68% of the total amount of surcharges awarded. The other bidders have shared €101 million for 3,145 MW, representing €32,000 / MW, substantially less than that received by RWE.

50% of the capacity that will be shutdown in July 2021 as a result of this auction is from units less than 6 years old. Vattenfall’s Moorburg plant was commissioned in 2015 and RWE’s Westfalen plant in 2014. Vattenfall announced that they had submitted bids for Moorburg but it was widely believed that they would not bid aggressively enough to be successful.

The above chart indicates that 65% of the units are categorised as CHP and 35% as Conventional.

As our analysis has shown, almost all hard coal plants have seen significant declines in their load factors since 2018. The units that were successful in the auction are no different.

Average load factors by year:

2018 = 46%
2019 = 30%
2020 = 12% (January to October only)

In fact, the successful bidders’ load factor for 2020 so far is below that of the fleet average (12% v 20%).

The successful plants have lost over €200 million over the last two years. Net losses have increased by over 75% since late 2019.

Total net losses:

November 2018 to October 2019 = €73 million
November 2019 to October 2020 = €129 million

Even the modern plants have seen a decreasing trend in profitability in 2019 and 2020. The units over 30 years old (Bremen-Hafen; Duisburg-Walsum 9; Ibbenbueren and Petershagen Heyden) have not been economically viable for three years.

Conclusion

Germany must reassess its coal exit strategy

The German government has just spent €317 million to close seven plants that have collectively lost over €200 million over the past two years. These plants are not outliers as most (93%) of the units included in our analysis have been loss-making since 2018.

These auction results confirm our findings that hard-coal electricity generation is no longer economically viable. If it is more beneficial for new plants to accept compensation now rather than continuing to operate, this highlights the significant financial risks associated with investing in these assets, in spite of the nuclear phase-out.

While the auction is ensuring that 4.78 GW of hard coal-fired power generation will be taken offline by 8th July 2021 at the latest, it is also resulting in the closure of younger, more efficient and less polluting units ahead of older ones, which contradicts the objectives of the German coal phase-out law and impacts Germany’s ability to achieve their target of a 55% reduction in emissions by 2030.

The older plants that were successful are at the end of their life cycle and Ember’s analysis shows that they have been consistently losing money. This is particularly true of Bremen-Hafen 6 and Duisburg Walsum 9. These and other units over 30 years old would be closing prior to 2030 due to economic circumstances so should not be compensated with public funds. This money could instead be invested in strategies to ensure just transitions in the communities most affected by the coal phase-out.

A market-driven coal exit is already underway that exposes Germany’s phase-out target of 2038 as unambitious and outdated. It should urgently reassess its strategy to avoid wasting millions of euros funding loss-making plants and delaying their closure. Other states should also take note that this is not a model they should be replicating.

Methodology

Scope

Ember has conducted its analysis on units with installed capacity of 350MW or above due to the higher heat production rates of Combined Heat and Power (CHP) plants with installed capacity below 350MW. Without being able to incorporate the revenue generated through heat sales, we cannot conduct robust analysis of their profitability. The exception is Bremen Hafen 6 (an auction winner with an installed capacity of 300MW) as this unit has a very low heat/power ratio and, therefore, operates similarly to a Conventional plant. The excluded plants equate to 4GW of the total 22GW of the entire German hard coal fleet (18%).

Profitability analysis

Ember has conducted profitability analysis using hourly generation data from the European Network of Transmission System Operators (ENTSO-E) and hourly day-ahead power prices from EPEX. This revenue data has then been aggregated monthly to calculate the monthly profitability by unit.

The following definitions and calculations apply to this profitability analysis:

Hourly revenue (€/MWh) = Hourly generation from ENTSO-e (MWh) x EPEX hourly prices (€/MWh)
Gross profitability (€/MWh) = Revenue – ((CO2 cost + Coal cost + Coal transportation cost + Variable Operating costs) * generation))
Net profitability (€/MWh) = Gross profitability – Fixed operating costs
Profitability calculations exclude any profit or loss due to forward hedges and heat sales

Calculations and assumptions

Load factor = generation / installed capacity

Hourly revenue (€/MWh) = Hourly generation from ENTSO-e (MWh) x EPEX hourly prices (€/MWh)

Gross profitability (€/MWh) = Hourly revenue – ((CO2 cost + Coal cost + Coal transportation cost + VOM)* hourly generation)

Gross profitability (€/MW) = Gross profitability (€/MWh) / Installed capacity (MW)

Net profitability (€/MW) = Gross profitability – Fixed operating costs (€/MW)

Fixed operating costs (FOM) range from €30/kW to €40/kW depending on age.

Annual FOM per unit = FOM (€/MW) x installed capacity (MW)

Variable operating costs (VOM) are averaged at €2/MWh for all units

Coal transportation is averaged at €1.1/MWh for all units

CO2 cost = CO2 price (€/MWh) / unit efficiency rate

Coal cost = Coal price (€/MWh / unit efficiency rate

Unit efficiency rates range from 32.5% to 47.5% depending on age

Conversion of coal price in tonnes to MWh = Coal price (€/tonne) / 6.97633

Conversion of CO2 price in tonnes to MWh = CO2 price (€/tonne) * 0.33333

Heat to power ratio = Annual heat generation (MWh) / Annual power generation (MWh)
Capital costs are excluded from all calculations

Additional information and caveats

Generation data = ENTSO-e hourly generation by unit
Coal price = daily API2 price

CO2 price = EEX EUA price

In relation to CHP plants with installed capacity below 350MW with higher heat production rates, the prices received for this heat are unknown and, therefore, they have been excluded from the profitability calculations.

Profitability calculations exclude any profit or loss due to forward hedges. Utilities sell electricity and buy carbon permits in advance, so our methodology using day-ahead prices does not include the profit or loss of these forward hedge transactions.

A small proportion of hourly generation data from ENTSO-e is unavailable at the unit level and so it has been necessary to make assumptions based on the generation in adjacent hours.