Assessment of the planned compensation payments for decommissioning German lignite power plants in the context of current developments

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The electricity industry in Germany and Europe is in a state of upheaval. Due to the developments on the international markets for natural gas and hard coal, the politically driven expansion of power generation from renewable energy sources, the price devel-opments for emission allowances of the European Union Emission Trading System (EU ETS) and the actively accelerated phase-out of power plant capacities, coal-fired power generation in particular is hugely decreasing at the moment and in the foreseeable future.

The trends in generation costs of lignite, hard coal and natural gas power plants is already leading to a significant shift in the production patterns of fossil electricity generation. Initially, this was primarily relevant for hard coal-fired power generation, but as CO2 prices continue to rise, older lignite-fired power plants are also increasingly affected. Much more important for lignite-fired power generation, however, is the fact that in the current and foreseeable market environment, lignite-fired power plants are increasingly only able to partially cover the fixed operating costs of power plants and the connected lignite mines (personnel, maintenance, etc.) through the revenues from the electricity market. This creates considerable incentives for decommissioning as soon as fixed operating costs can be reduced (personnel adjustments, avoidance of major maintenance investments, etc.).

In view of the current changes in the electricity and CO2 markets and in respect of the related volatilities over the last decade, the concept of non-transparent flat-rate compensation for the majority of the lignite-fired power plant units to be finally decommissioned by 31 December 2029 (as pursued in Germany’s coal phase-out legislation) does not seem appropriate. The analysis of a proposal for a rule-based (and generously designed) compensation model shows that the planned flat-rate compensation of € 2.6 billion for RWE and € 1.75 billion for LEAG under the foreseeable framework conditions is in no way (LEAG) or only under certain conditions (RWE, depending on the costs of the lignite mine adjustments) appropriate. For LEAG, the difference between the rule-based compensation and the planned flat-rate compensation amounts to approx. € 1 billion. For RWE, there is a similar difference of € 0.9 billion if the documented costs for the lignite mine adjustments amount to approx. €1 billion; if costs of € 2 billion are assumed here, compensation of approx. € 2.66 billion could be justified. The key influencing factors for the compensation calculated according to the rule-based method are thus – in addition to the conversion costs for the opencast mines in the Rhenish mining area – the revenues from the electricity market and the costs of emission allowances of the EU ETS. Corresponding sensitivity calculations show that there may be substantially larger increases in CO2 costs in the context of the European Green Deal than in electricity market revenues in the next two years, which would tend to make it necessary to decrease the compensation payments.

In view of the above, the planned flat-rate compensation for the decommissioning of German lignite-fired power plants must be regarded as a significantly misguided model, both conceptually and in terms of the levels of compensation payments envisaged, and the transition to rule-based compensation is urgently recommended.