
Breadcrumbs
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.
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.
Senior Electricity Transition Analyst, Ember
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.

Germany’s coal exit
Slow and expensive
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
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
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.
Supporting Material
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.