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The UK and Germany both have ambitious climate change mitigation policies and both have intervened in electricity markets to bring forward investment in zero carbon sources and increase energy efficiency. However, both countries’ power sector carbon intensity remains stubbornly high because of a high reliance on coal, increasingly at the expense of cleaner but more expensive existing gas generation.

Together, the UK and Germany account for half of EU emissions from coal fired power generation. Action in these countries to reduce unabated coal would have a big impact on the carbon intensity of power across the Union. This is particularly true in the case of Germany where recent increases in coal burn have been export-led, causing cleaner capacity to be displaced in neighbouring countries.

The stated reasons for continuing to rely on coal in both the UK and Germany are concerns about costs and concerns about security of supply. But on closer inspection, neither of these claims stack up.

UK

In the UK, coal is not cheap because of the large fixed costs of keeping open such old power stations. However, a new expensive capacity mechanism is paying coal capacity to stay open where it otherwise would have closed (see our recent briefing), increasing bills and crowding out lower carbon investment. Also, while coal is cheaper than gas on a short-term basis, this saving is kept by the Big 6 suppliers, who set retail prices on wholesale prices, which are in turn set by the gas price.

Security of supply has been politicised this winter because of recent power station breakdowns, but a coal phase-out could be planned over a long enough time horizon to ensure security of supply. Fuel-wise, the UK imports a higher proportion of coal than gas, and currently gets more of its coal than gas from Russia.

Germany

In Germany, cost is also too narrowly defined – yes, phasing out coal will mean slightly higher wholesale prices, but the profit from RWE and Vattenfall lignite is mostly not passed through to consumers, as retail prices are more set by wholesale power prices set by hard coal. In addition, unlike in the UK there is no Carbon Floor Price, so the cost of coal doesn’t even begin to include the externalities, estimated by the European Environment Agency at between €60- €190 billion for Germany from 2008-2012.

Security of supply is also a different issue than in the UK – German exports keep growing, lignite generation is only needed to export electricity to other countries – so there is no problem for German security of supply.

Sandbag forecast that electricity exports from Germany will increase from 37TWh in 2013 to 90TWh by 2020 as Europe becomes increasingly interconnected (see figure 1, below). This will allow lignite to continue running at full load factor even before the main nuclear phase-out in 2021-22. As a result Germany is likely to be displacing even more clean generation in Italy, Netherlands, Belgium and even the UK.

Fast tracked projects

Figure 1: Fast-tracked European Commission infrastructure projects

Conclusion

Sandbag does not believe old coal is necessary to maintain security of supply or keep prices affordable. The only reason it is profitable in the short term is because the environmental and health externalities involved are not being properly priced in, as the EU carbon price is on the floor, meaning the externalities are instead being paid by Member States and the public.

As we highlighted in our report in July, the EU climate and energy package to date has failed to tackle emissions from coal, and both Germany and the UK have failed to do anything domestically to address the problem either.

But rather than relying on the EU, the best way forward may well be for the UK and Germany to begin collaborating on a shared approach that will see unabated coal phasing out before 2025. The introduction of a version of an Emissions Performance Standard on existing coal may be the model under which this could happen, or alternatively, some other incentive on the power sector to improve their carbon intensity.

Seeds have been already been sown – Germany is releasing action plan on 3rd December which is expected to force some reduced power sector emissions, and all the UK political parties have now shown a desire to see coal capacity close. In addition, international pressure is growing in the run up to Paris 2015, with the New Climate Economy report recommending all developed countries develop a coal phase-out plan.

The two countries have very different energy policies, but a shared commitment to ambitious climate action. If either country were to walk away from these it would be potentially very damaging for the other. Tackling coal has to be part of the solution or they will fail in these endeavours. It is therefore time for London and Berlin to start talking about coal.