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This morning, an early draft of the long-awaited report commissioned by Eurelectric was leaked to Politico.  The report is written to fight against Commission proposals to restrict capacity payment subsidies to coal plants. This is not a surprise, it is Eurelectric’s main sore point of the Commission’s whole Clean Energy Package. Sandbag supports the Commission’s proposals.

 

Eurelectric’s report goes further: its vision of coal is so scary that it will surely give the Commission more confidence to progress with safeguards on capacity payments.

 

Eurelectric’s report says capacity payments should be used to invest into coal plants, to extend their design-life from 40 years to 60 years.  They assume that it would take €300m to extend the life of a coal plant to 60 years old, see graphic.  These payments will invest into coal throughout the 2030’s, keeping 1980’s coal plants open until the late 2040’s.

They envisage this happening across Europe, not just countries with a high dependency on coal.  In total, the report models one fifth (29GW) of today’s coal fleet will receive capacity payment subsidies to invest to extend their life beyond 40 years. This is split 19 GW of coal plants in western Europe and 10 GW of coal plants in eastern Europe.

 

The report is commissioned by the same consultancy as the report that justified Poland’s proposed capacity mechanism, released a few weeks earlier.  The conclusions between the Polish and the European studies are similar: capacity payment subsidies are needed to invest into extending the lives of coal plants throughout the 2020’s and probably the 2030’s, rather than funding new investment to modernise the electricity system.  It feels like Eurelectric want to copy-paste the proposed the Polish model across the whole of Europe.

 

So, will your electric car be charged with a 60-year old coal power plant?  Yes, that is the report’s intention, with rising electricity demand cited as a reason needed for the investment into coal.

 

Is it reasonable to invest billions of euros of public money in old, dirty coal plants throughout the next 10-20 years?  The report doesn’t even consider how crazy this idea actually sounds.

 

Coal power plants were built to last 40 years. Investing to extend their lives to 50 or 60 years fails every common sense test there is going, whether that test is on climate change, air pollution, reliability and flexibility of the electricity system, or electricity bills. Any public subsidies after 2020 should be used to help modernise and clean up the electricity system, and not to invest to extend the lives of old, dirty coal plants.

 

Here, we analyse some of the critical flaws that the report makes, which led them to thinking investing into coal might be a good idea:

 

  • The report underestimates the potential of renewables, storage, and demand response, giving the impression the only choice is between coal and gas.
    • It overestimates the costs of alternatives to coal by two-three times. The UK and Ireland are the only countries in Europe with market-wide capacity mechanisms, and can therefore provide some insight into real world prices of alternatives to coal. In last year’s UK auction, three technologies all undercut coal: new batteries, new peaking gas, and demand-response. The auction price paid was €26/kW, which is significantly lower than the study’s cost assumptions for these technologies:
      • Battery prices = €85/kW in 2020, €70/kW in 2030, €50/kW in 2040.
      • Peaking gas prices = €55/kW
      • Demand response = €35-€50/kW
    • It underestimates the potential of renewables.  It assumes they contribute zero to security of supply, including even biomass. In the last 12 months, the price of renewables has dropped so much that onshore wind, offshore wind and solar are already being built in Europe without subsidies, meaning that renewables are likely to contribute much more than is forecast.
    • It underestimates the potential of demand response. It assumes demand response rises from 20 GW to 25 GW by 2040. This compares to a Commission document which says “the potential is 100 GW, and up to 40GW could be economically activated”.

 

  • The report denies the reality of climate change action in Europe.
    • The study falsely states that keeping coal plants open longer as a result of capacity payments would not raise overall CO2 emissions, claiming that the ETS’s annual CO2 cap would cause other sectors to reduce their emissions, thereby offsetting the increased emissions in the power sector.  However, the supply of CO2 permits in the ETS is no longer fixed – the supply is adjusted through the market stability reserve. Therefore, the offsetting between the power sector and industry will be limited.
    • The International Energy Agency’s Paris-compliant scenario (“beyond 2 degrees”) shows that unabated EU coal generation must be completely phased out by 2030.  The EURELECTRIC study allows investment into coal life extension throughout the 2030s, which is in strong contrast to what is needed to stay under 2 degrees.
    • The study uses very low carbon price projections. It uses CO2 prices taken  from the IEA’s New Policy scenario, rather than from the IEA 450 scenario (for 2 degrees), whose CO2 prices are 3 times higher by 2040.
    • The study tries to ignore the progressive decline of the coal power sector . Twelve EU countries are already coal-free or are on a path to becoming coal free by 2030 at the very latest (these include France, the UK, Finland, Portugal and Belgium), and more national coal phaseout pledges are expected, as governments work to reduce their national CO2 and air pollution.

 

  • The report denies the political reality around the future of capacity markets. The study bases all its projections on scenarios assuming that all EU countries would have market-wide capacity mechanisms. However, only two countries – the UK and Ireland – have a market-wide capacity mechanism.  Many others (Denmark, Germany, Austria, the Czech Republic, Finland, Luxembourg, the Netherlands, Sweden and Norway) have stated clearly that capacity markets should be a last resort and that strategic reserves are preferable.  Wholesale power market reforms, including allowing scarcity pricing, enabling demand response and improving interconnection, will make capacity markets redundant.

 

  • The report ignores the externalities of extending the lifetime of old coal plants. Firstly, the costs of air pollution from coal plants extend into billions of euros in healthcare costs. Secondly, old coal plants are inflexible and unreliable, slowing down the transition to a modern, flexible, reliable electricity system.

 

We think Eurelectric’s ridiculous vision of capacity payments will give the Commission more confidence to go ahead with its reforms, and ensure a 550gCO2/kWh limit is placed on European capacity payments.