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Coronavirus crisis gives Germany early glimpse of a future without coal

With Germany's exit from coal power on the horizon, the coronavirus crisis has already shown Europe's largest economy what its electricity mix could look like without the fossil fuel and might even speed up the phaseout process. As industrial power demand plummets, driven by countrywide lockdowns, many of the nation's large fossil fuel generators have been powered down to minimal output or even shut completely.

RWE AG, in the west of the country, is one operator curbing its lignite coal-burning assets. "Especially the power-intensive sectors are requesting far less power than usual," a spokeswoman for the utility told S&P Global Market Intelligence on April 20. "The power prices are reacting accordingly. Against that backdrop we are optimizing the usage of our power stations."

East German lignite power producer and miner Lausitz Energiekraftwerke AG, or LEAG, which is owned by Czech investor Energetický a prumyslový holding a.s. and PPF Investments Ltd., has also had to reduce output at its plants as companies across sectors close their doors.

To ensure that renewables, prioritized by the grid, get to dispatch their power while maintaining the required 50-hertz frequency, some of LEAG's power plants are having to be powered down to minimum levels, or even switched off and used as reserve capacity, the company said earlier this month. Sunny weather and strong winds exacerbated the effect, it added. The company's lignite mines also saw reduced activity as a result.

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These effects brought the share of renewables in German power consumption to 52% during the first quarter of the year, according to figures from industry groups ZSW and BDEW. While this was a one-off effect, it gave the market a glimpse at what Germany's power landscape could one day look like. To achieve a lion's share of renewables on the grid year-in and year-out, investments have to be made now, renewables advocates said.

"It must be ensured that further investments are made in the expansion of renewables so that they can guarantee the energy supply of tomorrow," said Kerstin Andreae, chairwoman of the BDEW board of management.

"More investments in renewables are going to pay off, particularly in view of the economic slump caused by the corona crisis," added Frithjof Staiss, managing director of ZSW. "A far larger share of the created value remains in the country if you build wind and solar power plants rather than burn fossil fuels," which could then go on to stimulate the broader economy, he argued. "Besides, investments in renewable energy projects are low-risk and a financially rewarding option for investors deterred by the currently volatile stock market."

Coal and coronavirus: An opportunity for early retirement?

The perfect storm of high renewables contribution and lower coal generation is pushing Germany's emissions for 2020 to levels about 45% below those in 1990, said think tank Agora Energiewende. That means the country will meet its climate targets for the year. Lower emissions from transport and industry due to the lockdown are helping, too.

However, "this is not necessarily good news for climate change," said Patrick Graichen, director of Agora, adding that emissions will not only shoot back up once the crisis is over, but that the economic crash could cause trepidation among those looking to invest in renewables.

To avoid a slowdown in the expansion of green power infrastructure, the government recovery grants and loans issued to help businesses weather the storm need to benefit renewables rather than locking in old technologies for years to come. "Concepts for green investment programs need to be developed quickly now," Graichen said. This goes beyond the power market, with the transport and heating sector also prime contenders.

But depending on the duration of the demand decline, market forces alone could go a long way in pushing coal off the grid. Coal economics were already poor before the crisis began, driven particularly by strong carbon prices. "There are power plants that just don't make money at the moment," Hanns Koenig, head of commissioned projects at think-tank Aurora, said in an interview.

Koenig expects hard coal operators, who will not receive fixed compensation payments to close down under the government's phaseout plan, to be hardest hit. Operators will be taking part in closure auctions, with the lowest bidder getting the nod. "Tenders for hard coal [closures] will be lower," as operators will be content with lower compensation given the poor economics of their assets, Koenig said.

As power demand has plummeted by 10% or more in many European nations, operators with significant exposure to wholesale power prices could make the decision to move forward planned closures of unprofitable assets, said Elchin Mammadov, an analyst at Bloomberg Intelligence, in a note. Renewables, often contracted in fixed-price deals, meanwhile have lower operating costs on their side, too, which help protect margins.

"Generators may bring forward maintenance outages, mothball certain coal and gas-fired power plants and use hydropower stations to optimize power supply further, " Mammadov said.