The future of coal in Europe: is this the exit from the exit?

The role of coal-fired power generation before and since the war started

If coal, be it hard coal or lignite, had to be described with one word just a few months ago, it was “not profitable”. In 2019, a Carbon Tracker study pointed out that “79% of EU coal generators are currently running at a loss and could lose €6.57 bn in 2019”. But not only was the financial perspective of coal plant operators shocking, but political leaders also gave coal energy a hard time. They had announced a complete coal phase-out even before EU institutions agreed to reduce overall emissions by 55% until 2030 compared with 1990, which in turn will reduce emissions further in the energy sector. As illustrated by Carbon Tracker, Germany agreed to phase out coal “ideally” by 2030, the Czech Republic in 2033 and also Hungary announced it was going to close its last plant – the number one CO₂ emitter of the country – by 2025. Other countries even already made the switch: Belgium shut down its last plant in 2016, Sweden followed in 2020 and Portugal became fully independent of coal in 2021.

But on 24 February 2022, the world woke up to another painful reality. With the brutal war against Ukraine and its people, Russia also launched an attack on the European economy and especially its energy system. With gas coming from Russia being reduced further and further, the EU now had and still has to find new sources to provide its people and its industry with affordable energy. With renewable energies still low in proportion, due to an unambitious energy policy throughout the last decades, EU Member States face a tough decision. With their political commitment to fill gas storages to prepare for the coming winter, several countries including Germany, France, Austria and the Netherlands have already announced they would be ramping up their coal plants again in the current energy crisis or putting them on standby.

But the rising demand for coal was not only driven by the necessity to save as much gas as possible. Rather, demand grew even further due to the dramatic drought Europe faced this summer that led to low water levels in reservoirs throughout the continent. As a consequence, the production of hydropower, as well as nuclear energy (due to a lack of cooling water), also suffered a severe setback.

The numbers at a glance

But to what extent have coal plants been reactivated again?

As a comprehensive analysis by Ember pointed out in July 2022, “14 GW of coal-fired plants have been placed on standby in Europe. Running at 65% capacity throughout 2023, they would generate 60 TWh of coal-fired electricity, which is enough to power the EU for about one week.” Further, this would “equate to 14% of 2021 EU coal electricity production and 2% of 2021 EU total electricity production.”

So far, as an assessment by Rystad Energy showed, power generation using coal has shot up over 12% in the EU in comparison with 2021.

Ember’s analysis also calculated the total amount of climate-damaging CO₂ resulting from the coal revival: “From a climate perspective, the net additional CO₂ emissions in 2023 would be approximately 30 million tonnes, representing 4% of 2021 EU power sector emissions and 1.3% of total 2021 EU CO₂ emissions”.

It is important to underline here that Ember´s analysis is based on using 65% of the reserve coal-plant capacity – an amount that can differ due to circumstances such as gas supply and winter temperatures, which again have an influence on how long the EU Member States´ gas reserves will last. This uncertainty – not only this winter but beyond that – is also backed up by official documents by the European Commission that include a “delayed phase-out and more operating hours for coal. “

Given this situation, Ole Hvalbye, an analyst at the Swedish bank SEB, told the news outlet Insider that “coal is definitely making a comeback, with skyrocketing natural gas prices and drought”.

But while that conclusion might be true in the short term, we must ask whether Hvalbye´s assessment can also be applied to the middle and long term, thereby truly verifying the “coal exit from the exit” and threatening the EU´s climate targets.

In their assessment, Ember analysts made it clear: “While it would be preferable to avoid any increase in emissions, the temporary uptick will not derail the EU’s longer-term climate goals“. Also Rystad Energy analyst Fabian Rønningen told Insider that only “[i]n the short term, we are seeing a comeback of coal. Longer term, not so much.”

This statement can also be supported by EU Member States´ plans to phase out coal in the mid- and long term. Even though in the current crisis, Austria moved its phase-out date to 2023, France to 2023 instead of 2022, and Greece to 2028 instead of 2025; the path towards decarbonization is set. Importantly, according to data collected by Europe Beyond Coal, “the number of European coal plants that are already retired or are covered by 2030 at-the-latest closure plans has risen this year [2022] to 171”. Still, on this point, Poland only agreed to phase out coal by 2049. The Czech Republic, Slovenia and Croatia insist on 2033 while Bulgaria is aiming for either 2038 or 2040. And also Germany recently brought forward its target from 2038 to 2030, but only “ideally”. According to Climate Analytics, the EU must phase out coal by 2030 at the latest to ensure that limiting the global temperature increase to 1.5°C remains at least theoretically possible.

Despite these discrepancies, one thing is clear: in the middle of the climate crisis, every tonne of CO₂ emitted into the atmosphere is harmful. For this reason, it is important to take a closer look and put the emissions that will be caused by the short-term revival of coal plants into a broader context, by highlighting three aspects.

1. RePowerEU plan

In an interview for Insider, Rystad Energy analyst Fabian Rønningen made it clear: pushed by the current crisis, the EU will accelerate its development of renewable energy, and that will lead to a drop in coal use in Europe by 2024 at the latest.

To become independent from Russia, but also from fossil energy in general and especially high fossil-energy prices, the EU Commission presented its REPowerEU plan on 18 May 2022. The plan put a focus on diversifying the EU energy supply, saving energy, accelerating the deployment of renewable energy and intensifying the investments in the energy transition.

As one example, solar and wind energy projects will be rolled out rapidly as they are in the “overriding public interest”, while the instalment of solar panels on public, commercial and residential buildings is supposed to become mandatory, as laid out in the European Solar Rooftops Initiative. And the EU Commission has already delivered. As announced in May, for the first time an EU-wide hydrogen project was approved this summer. Never has Europe seen such a dynamic towards the massive deployment of renewables. 

All the detailed measures of REPowerEU, as also highlighted in our FES Just Climate assessment, are together intended to deliver on an updated 2030 target for renewable energy supply (i.e. not only electricity, but also other sectors such as heating), from currently 40% to 45%.

But as we have seen in the months since Russia launched its war on Ukraine, it is not only the European Commission that is pushing for a quicker renewable rollout. Already, as analysed by an Ember Report, 19 Member States have announced their decision to accelerate their decarbonisation in response to the current situation. As the authors point out, “[l]atest policies show an expected 63% share of electricity from renewables in 2030, up from 55% under the previous national strategies that were published in 2019. REPowerEU will lead to a further increase to 69%”.

2. Energy savings

What was a bad presentiment for many citizens in recent months is now coming true with the next energy bill - energy prices have risen dramatically and are causing major problems for households. Helping especially small- and middle-income households in a targeted way should therefore be the priority of any government. But also companies in almost every sector face great challenges to maintain their business model due to high energy prices. They are having to find ways to save energy, e.g. by reducing production or – in the worst case – stopping production temporarily or even permanently. That is not a desired development, because only with a strong and sustainable industry as well as high-paid jobs, can the reconstruction of national economies towards climate neutrality become a success.

But in order to lower energy prices, make ourselves independent from fossil fuels, and contribute our fair share to fulfil the Paris Agreement, energy efficiency and therefore energy savings have also gained new momentum.

As a consequence, as part of REPowerEU, the EU Commission also proposed to raise the 2030 energy savings target from 9% to 13%. On 14 September 2022, the European Parliament proposed a target of 14.5% (CAN Europe). Now, the Parliament, Commission and Member States will negotiate the final agreement in trilogues. Finding common ground will be a challenging exercise as the Member States stand firm on the 9% target they agreed to just recently in July.

3. Carbon pricing

No thorough assessment can be made without considering the EU Emissions Trading System (ETS). Described as the “cornerstone of EU climate policy”, this instrument has proven highly effective in recent years to mainly decarbonize the EU´s energy and heat production, as well as energy-intensive industry sectors such as oil refineries and steel works. In total, the ETS covers about 40% of the EU’s greenhouse gas (GHG) emissions.

Central to the ETS is the cap-and-trade system. Not only is a yearly emissions cap set, but businesses can also trade emission allowances with each other, which they previously either bought or received for free. This way, emission reductions are achieved where it is most economically efficient.

Over time, the cap is reduced to ensure that overall emissions fall as much as needed to reach the EU´s climate targets. In doing so, sectors covered by the ETS reduced their emissions by about 35% between 2005 and 2019. And with the EU´s new target to reduce its emissions by 55% by 2030 compared with 1990, the current ETS reform is also high on the agenda of EU lawmakers. 

But what does that mean for assessing the impact of increased emissions through coal plants?

In short: in terms of the overall amount of emissions regulated by the ETS, it does not matter how the EU´s energy is produced or that coal plants have been reactivated again.

A cap is a cap. As Clean Energy Wire also wrote, referring to a statement by the German Federal Government, “emissions from the power sector will not increase over the limit allowed by the EU’s emission reduction targets”.

The future of the ETS in the energy and climate crisis

The ETS is a good example to observe how several crises come together. On the one hand, Europe finds itself in the midst of an energy crisis; on the other hand, the ETS has to deliver on the European Green Deal to tackle the climate crisis. And for some political actors, those two do not mix well.

This is where the Market Stability Reserve (MSR) comes in. Introduced in 2019, the MSR stores all those emission certificates that were not used in previous years. A significant surplus of allowances has been built up, mostly because of the financial crisis and a sharp drop in demand of certificates. According to strict rules, the MSR either takes allowances off the market or releases them in order to address the current surplus of allowances and improve the system's resilience to major shocks by adjusting the supply of allowances to be auctioned – thereby influencing the price.

Importantly, the allowances stored in the MSR do not count towards this year´s emission cap, as they simply were not used in previous years. Therefore, releasing those allowances can lead to overall higher emissions in the sectors covered by the ETS.

Recently, the Polish government and its Prime Minister Mateusz Morawiecki made a push to temporarily suspend the ETS, presenting the CO₂ price as the main driver of high energy prices. This was despite the fact that Frans Timmermans, Executive Vice-President of the EU Commission and Commissioner for Climate Action, had already made it clear in November 2021 that the ETS was responsible for about one fifth of the price increase. EU Commission President Ursula von der Leyen also recently stressed that the ETS contributes only 6% to the price of electricity; the main problem was rather the enormous increase in the price of gas (Euractiv). Nevertheless, in response to Poland’s initiative, the Czech Council Presidency announced that “issuing additional emission allowances from the Market Stability Reserve could be part of the solution” (Europe.Table # 269 / 12 September 2022).

Moreover, there is a growing dispute on the EU Commission´s proposal to sell 220-250 million allowances from the MSR to raise 20 billion euros and invest the money in the implementation of REPowerEU. Again, this would lead to higher emissions. Additionally, carbon prices could drop and lead “to a lower overall amount of funding available at EU and Member State level for the transition away from fossil fuels” (as stated by the Netherlands). Denmark therefore proposes to use funds from the Innovation Fund, which promotes sustainable technologies and is itself financed by ETS revenues (Euractiv). The Netherlands additionally introduced the idea of auctioning allowances today that were supposed to be sold in the coming years, leading “to similar financial flows as through MSR auctioning, as it shifts auction volume over time while avoiding an undesired precedent and the risk of increasing emissions” (The Netherlands). Recently, this idea was also backed by a deal negotiated within the EU Parliament´s Environment Committee.

Neither the search for solutions to lower energy prices and thereby support households and businesses, nor the search for funding for REPowerEU is objectionable. But as Sabine Frank, Executive Director of Carbon Market Watch, points out, “[t]inkering with the carbon price in the EU ETS review, which is meant to serve the climate until 2030, isn´t the right solution to the current energy crunch. Energy-market problems have to be solved through energy-market regulation”. And CAN Europestates that “[t]he decision to politically interfere into the market with the primary objective to generate extra funding would set a dangerous precedent and fundamentally undermine the credibility of the carbon market”.

Conclusion

In terms of the current comeback of coal, no general “exit from the exit” can be observed. Even though some EU Member States have postponed their coal phase-out date, the path towards climate neutrality is set. As a matter of fact, the EU is substantially accelerating its deployment of renewable energy and the promotion of energy efficiency through REPowerEU and Member States´ national strategies.

As discussed, with regard to the ETS, it is irrelevant how the energy is produced: the overall cap of emissions allowed in one year stands firm.

But as this briefing has shown, the upcoming negotiations on the future of the ETS and the financing of REPowerEU are in part a clash of very different ideas. The next few months will show how the EU will protect the integrity of the ETS and finally say goodbye to coal energy in the medium term.