Record Carbon Not Enough to Curb Germany’s Dirtiest Power Plants

(Bloomberg) -- Electricity generated in Germany from lignite, one of the most carbon-heavy fuels, has increased during 2021 spurred by higher power prices.

Even a rally in carbon emission permit prices to record levels hasn’t been enough to curb output from the dirtiest fossil fuel. Electricity generated by lignite plants in Germany has increased by 35% so far this year, compared with same period in 2020, according to data compiled by research institute Fraunhofer ISE.

The profitability of lignite plants takes account of the cost of mining the fuel and buying carbon permits in relation to the market price for the power sold. Because lignite is so cheap to produce, as long as prices for electricity are higher than for carbon then stations using the fuel will be in the money, according to Fraunhofer.

Every megawatt-hour of power produced from lignite causes about 1.1 metric tons of carbon dioxide emissions, according to Bruno Burger, a professor at Fraunhofer.

With average day-ahead power prices 77% higher this year compared with 2020, the spread over carbon has widened in 2021, keeping lignite profitable.

Coal accounts for about a third of all generation in Germany. The nation has a road map to close scores of plants by 2038 under a phase-out plan that will cost taxpayers at least $55 billion, including direct compensation to utilities.

Big lignite operators such as RWE AG and LEAG sell forward most of their their power output and buy carbon permits years in advance. RWE expects its lignite operations to be cash-flow positive on average from 2023 onwards, according to an investor presentation on March 16.

Lignite generation has been needed to fill the supply gap left after four gigawatts of hard coal capacity was phased out at the start of the year and calm weather cut output from wind turbines.

Wind generation has averaged about 16 gigawatts a day so far this year down from 23 gigawatts in 2020, according to S&P Global Platts.

Generation from cleaner-burning natural gas is also up by more than a third this year, Fraunhofer data show. Carbon prices above 40 euros ($47.60) a ton have helped gas plants push out hard coal, lignite’s more-expensive cousin, in the power generation merit order. While lignite still remains the cheapest fossil fuel source, natural gas will be a key influence on power prices.

“Variable power generation mainly leads to volatile prices but the absolute price level is determined by the margin cost for thermal power, mainly gas generation,” Arne Bergvik, chief analyst at Swedish utility Jamtkraft AB, said.

Marginal costs for a gas-fired plant in Germany with 50% efficiency have risen to 52 euros a megawatt-hour on average in the first quarter compared with about 30 euros in 2020, according to S&P Global Platts. Carbon costs have made up nearly 15 euros of these costs this quarter compared with 9 euros in 2020.

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