Dec 08, 2006 -- Datamonitor

 

Brussels has reviewed the National Allocation Plans submitted by member states and has revised nine states' carbon caps. The European Commission is determined to avoid a repeat of the failure of the first round of the ETS, which appears to have a net long position due to an oversupply of emission credits. However, with proposed caps being pared down, German coal power plants may face real pain.

Germany is particularly exposed to the market for carbon for three main reasons. The first is that the German government has committed to the closure of all the country's nuclear power plants, which currently account for 28% of its installed generation capacity. Secondly, coal is available from a diverse range of both domestic and international suppliers. Germany would be reluctant to build solely gas-fired plants as this would increase its dependence upon Russian gas.

Lastly, coal power stations are typically the marginal plant in Germany. All countries have a so-called 'merit-order' of power plants that dictate when different plants will be brought online. Nuclear and renewables, with their very low fuel costs, are typically first and then gas and coal power plants follow, depending upon the relative cost of fuel and power. The very last plant to be started up to meet demand is known as the marginal plant and its operating and fuel costs tend to set the wholesale cost of power.

In the UK, this plant tends to be gas, which emits 0.4 tonnes CO2 for every MWh of output. However, as coal is on the margin in Germany, each additional MWh of power has a CO2 penalty of 0.96 tonnes. This means that the price of power in Germany is more than twice as sensitive to the price of carbon as in the UK.

The German government must encourage new power plant build to replace the ageing nuclear fleet as it retires and, to this point, their strategy has been to guarantee any new coal plants the carbon allowances that they require within their National Allocation Plan. The EC has also put a stop to this, as well as slashing Germany's allowance overall.

As the largest carbon-emitting segment of the largest emitter within the EU, German coal operators may be set to face significant financial challenges. And by steering its energy policy away from nuclear, the German government may have jumped out of the reactor, only to end up in the fire.

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