Minews - Lifeline for German coal to be costly for public, markets

(Minews) - German utilities hope the government will drop a plan to slap carbon levies on coal-fired power plants on Wednesday, but compensating the companies to move aging capacity to a reserve scheme instead would create new problems.

Analysts warn that safeguarding the utilities' income stream could drive up climate protection costs and hurt consumers, and prevent the depressed power market from shedding overcapacity.

The government had announced a target to cut emissions from the coal sector by an additional 22 million tonnes, to achieve a national CO2 curb of 40 percent by 2020, but mass protests against the plan as states, unions and the utility companies fretted about the demise of brown coal mining and power generation and resulting job losses, prompted a rethink.

Economy minister Sigmar Gabriel has said that in coalition talks on Wednesday he will consider an alternative.

"There will probably be a solution centred around the idling of brown coal plants against compensation," said Roland Vetter, head of research at energy risk management firm CF Partners.

"It may make sense politically, but it is not economic and not the best solution for climate policy," he said.

Unconfirmed media reports say the utilities may now be allowed to move 2.7 gigawatts (GW) of old coal-fired capacity into a reserve scheme in the coming years, netting a few hundred million euros in the process.

The plan would involve plants owned by RWE, Vattenfall Europe and Saxony-based Mibrag.

The utility companies have been lobbying hard against the levy and demand compensation for the alternative reserve option. All three firms declined comment on specifics of their demands and of the assets in question.

"For RWE ... it (the reserve scheme) is a much more favourable scenario than the original proposal of a carbon levy," said Citi Research in a note.

Vattenfall would stand a much better chance of selling its German brown coal plants under the new scenario than under the coal levy plan, which had scared off investors.

Gabriel has suggested that for Germany to meet its climate goals without the coal levy it would need to find additional CO2 savings via a possible tripling of subsidies for environmentally friendly combined heat and power (CHP) plants to 1.5 billion euros ($1.68 billion) a year, borne by consumers.

CHP plants running on gas could gradually replace those run on more polluting coal. Gas producers like Norway's Statoil have welcomed Germany's plans to phase out coal as positive for gas but chances for weak gas demand to recover significantly would be limited, analysts say.

Gabriel might also launch a "cash for conkers"-style system to swap old heating systems in homes and buildings, but at huge cost to state coffers.

A government paper seen by Reuters said the plan alone might cost 5 billion euros from the budget up to 2020, not counting additional levies on the electricity price.

For utility companies, shifting 2.7 GW of thermal capacity into a reserve scheme would only remove 1.5 percent of Germany's total nominal capacity. So utilities are unlikely to see a sharp rebound in wholesale power prices, which are half their levels in 2011, held down by oversupply, slack demand and competition from renewables.