What price King Coal's return to Europe?
"There are no taboos in this situation"
- EU climate chief, Frans Timmermans1
EU ETS emissions are estimated to have increased by 8.7% in 2021, according to a recent poll of analysts by Refinitiv. Exceptionally high natural gas prices resulted in generators switching to thermal coal, significantly increasing the carbon intensity of power generation. The share of hard coal and lignite in the EU’s power mix rose from by 3 percentage points to 16% in 2021.
Europe will need to rely on thermal coal and lignite if it is to rapidly pivot away from Russian natural gas supplies.
What was once unthinkable now becomes accepted reality. But how much extra coal capacity is there, and what are the implications for carbon prices, especially if demand is supported by government subsidies?
First off, the EU has significant amounts of spare thermal coal capacity that could potentially be used for power generation. According to the Centre for Research on Energy and Clean Air (Crea) and TransitionZero, excess thermal coal capacity across 8 EU countries plus Turkey was almost 38 GW at the end of 2019 (34 GW excl. Turkey).2
38 GW equates to approximately 14% of total fossil fuel operating capacity across the nine countries. Spain (10 GW) and Germany (8 GW) accounted for almost half of the thermal coal overcapacity. The report also estimates that these same countries retired 7.1 GW of coal capacity between 2019 and 2021, capacity that could potentially come back into service.3
If all of the identified EU ETS based spare capacity was utilised, and retired units from the past few years brought back into operation (34 GW + 7.1 GW) it would lead to 240 MMT CO2e, based on the assumption that it all thermal coal based.
However, it’s thought that much of what Germany holds in reserve is fuelled by lignite, which is roughly 50% more carbon intensive than thermal coal. Assuming all 8 GW of German spare capacity is lignite then this adds an extra 25 MMT CO2e, 265 MMT CO2e overall.
Assuming that coal and lignite generation displaces natural gas generation one for one in terms of electricity output then it would result in a net addition of around 145 MMT CO2e, given relative carbon intensities.
That’s 145 million EUAs that would have to be purchased by power generators, and not factored into industry and independent modelling of EUA demand and supply, and the hedging strategies of utilities.4
How is Europe responding?
Thermal coal and lignite burn for electricity generation across the EU during March 2022 is already over 10% higher than the same period in 2021. However, it will need a radical change to existing coal trade routes if the EU is to utilise spare capacity and retired units.
Total European coal imports in 2021 amounted to 31.1 million tonnes, an increase of 16.2% versus 2020. Russia accounts for around 70% of the coal coming into Europe, with Germany and Poland particularly reliant on Russian coal.
Other sources of supply are Colombia, US, South Africa, and Australia and Indonesia to a lower extent. Although not a completely seamless process, if India and China were to take more coal from Russia that would leave more thermal coal on the seaborne market from these five other sources, coal that could potentially be shipped to Europe.
It will come at a cost, but one that Europe seems increasingly willing to accept. Higher coal demand and more complex logistics will increase the cost of coal imports and might lead to temporary local disruptions. However, it looks like halting imports of Russian coal should still mean that spare capacity and previously retired units can be supplied.
European capitals are putting measures in place to prepare for increased thermal coal burn. The German coal importers association (Verein der Kohlenimporteure, VDKi), believes that Russian coal can be substituted with alternatives within a few months. Perhaps they would say that, but putting aside the caveats around logistics it does appear possible, albeit at a cost of higher coal prices and increased shipping costs.
The return of ‘King Coal’ to bolster Europe’s energy security is a significant departure from recent climate declarations. Germany is leading Europe’s 180 degree turn policy on coal. In last year’s coalition agreement the parties making up the government vowed to phase out coal by 203o. However, in light of Russia’s invasion of Ukraine it has pushed back on that decarbonisation timetable.
German vice-Chancellor Robert Habeck announced the creation of strategic coal reserves in a bid to cut down Germany’s reliance on Russian gas. The reserves will allow power plants to run for 30 days of winter without any deliveries. The government are reportedly putting in place measures to suspend the decommissioning of coal plants.
Other major EU economies with coal generation capacity are also recognising the need to burn more coal. Italy’s Minister for Ecological Transition recently said that the country’s two active coal-fired power plants in the country would temporarily be “brought up to full capacity” if there is “an absolute lack of energy.” In Spain, the Los Barrios thermal power plant was recently reactivated after being closed three years ago - the plant had a capacity of 567 MW in 2014.
Meanwhile, Slovenia and the Czech Republic both that they would both end coal use by 2033. According to the pledges of other European countries only Poland, Turkey, Serbia, Montenegro, Bulgaria, Bosnia and Herzegovina and Kosovo will burn coal after that date.
Elsewhere, Romania’s Minister of Environment, Water and Forests announced that his country would temporarily restart idle coal-fired power plants. Finally, the western Balkan nations have also vowed to delay the shutdown of their coal power units, pushing back on their coal phase out dates.
Demand ‘construction’
Rather than let higher energy prices do their job and incentivise consumers to become more efficient, European parliaments are under increasing pressure to cushion householders and businesses from the worst of the energy price spike.
High energy prices for citizens could result in a political backlash. Industry may need to shutdown vital parts of the supply chain (e.g. fertiliser, carbon dioxide manufacturing) should prices stay at levels that make their operations unviable.
Rather than implement policies that encourage energy efficiency (such as insultation), governments are turning to blanket, untargeted energy subsidies. Depending on the size of the subsidy this only serves to increase demand, putting all of the pressure on the supply side to respond.
Demand ‘construction’ means more pressure for retired coal plants to reopen and to max out the available capacity of existing plants. Until governments recognise the ill-thought out economic implications of these policies the demand for EUA’s from coal burning utilities is only likely to rise.
In an interview with BBC Radio Four’s Today Programme Timmermans insisted that countries looking to burn more coal in the interim could do so in line with the EU climate goals if they then move to renewables.
The report estimated fossil fuel overcapacity in nine European Union countries: Bulgaria, the Czech Republic, Germany, Italy, the Netherlands, Poland, Romania, Spain, and Turkey.
Over capacity is defined as the difference between the total firm capacity and the planning reserve. The planning reserve is the required capacity at which the electricity system can operate safely during peak demand and results from multiplying peak demand to an appropriate planning margin based on the country’s generation fleet and market structure.
Burning coal is clearly significantly more carbon intensive than natural gas: roughly double for every unit of energy produced from thermal coal compared and three times higher for lignite.