EU Commission Approves State Aid for Closure of Lignite-Fired Power Plants

The European Commission has declared German plans to grant EUR 1.6 billion public financing for decommissioning and subsequently closing eight lignite-fired power plants to be in line with EU state aid rules.

The European Commission’s decision marks an important step towards the further implementation of the Electricity Market Bill and the so called security standby mode (Sicherungsbereitschaft). The security standby mode is part of the revised capacity mechanism regime to be established within the Electricity Market 2.0. In addition to the existing reserve power and network reserve scheme, a new capacity reserve shall be established, consisting of a capacity reserve part and a climate reserve part. The security standby mode shall primarily serve to reduce greenhouse gas emissions within the electricity sector. In addition, it shall ensure security of supply. It shall be part of the climate reserve regulated in § 13g-E. The climate reserve provides CO2-intensive lignite-fired plants to serve climate protection. As it covers only lignite-fired plants, it also has been called lignite reserve. It is a successor to the earlier, legally flawed proposal to introduce a climate levy to reduce CO2 emission from the electricity sector.

1. Background

In 2014 German government had adopted its Climate Action Programme 2020 to ensure that Germany achieves the goal set of cutting greenhouse gas emissions by 40% by 2020 compared with 2020. The action programme has shown that this goal can not by achieved without an additional contribution to the reduction by the electricity sector.

To nonetheless achieve this climate goal, the German government decided to save additional 11 – 12.5 million tonnes carbon dioxide on lignite-fired plants. Against this background, the German government and affected lignite power plant operators (Mibrag, RWE and Vattenfall) have reached an “understanding” (Verständigung) on the “transfer of lignite power plant units into security standby” (Überführung von Braunkohlekraftwerksblöcken in die Sicherheitsbereitschaft). Based on this, eight lignite-fired power plants shall be mothballed and later closed, with the first plant scheduled to stop operating in October 2016 and the last in October 2019. The affected power plant operators shall receive a compensation for foregone profits as they cannot continue to sell electricity on the market.

a) Principle of the Security Standby Mode

As of the winter half year 2016/2017 a security standby amounting to 2.7 gigawatt shall be established. From October 2016 onward, power plant units shall be transferred into a security standby reserve. There they shall remain in it for four years with mandatory final closure afterwards (Sec. 13g para. 1 sent. 3-E). During this period it is neither allowed to close the power plant units for good (Sec. 13g para 1 sent. 2-E) nor to produce electricity beyond the security standby mode (Sec. 13g para. 2 sent. 1-E). A way back to the electricity market is not permitted.

b) Remuneration

According to Sec. 13g para. 5-E, affected power plant operators shall receive a remuneration for the security standby mode as well as for decommissioning. The remuneration is based on the amount of revenue which affected power operators would have achieved within the electricity markets during the security security standby mode time, less short-term variable production costs (kurzfristig variable Erzeugungskosten). Total costs shall amount to EUR 230 million per year over a period of seven years (total: EUR 1.6 billion).

2. European Commission’s Decision

The full Commission’s decision is yet not available. Basend the European Commission’s press release, the Commission has found the financing scheme in line with EU state aid rules. The Commission concluded that the measure promotes EU environmental objectives, as it contributes to achieve Germany’s CO2 emission targets without unduly distorting competition in the European Single Market. The remuneration is primarily based on the foregone profits that the affected power plant operators would have earned, had they continued operating in the electricity market for four more years, which is less than the average expected lifetime of the plants. On this basis, the Commission concluded that the effects of the remuneration scheme on the electricity market are expected to be limited and that potential distortions of competition created by the remuneration are largely offset by the environmental benefits.

Source: European Commission, BMWi

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