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EU power market reform deal would phase out coal plant capacity payments

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EU power market reform deal would phase out coal plant capacity payments

Many of the most polluting power plants in Europe will be barred from getting paid for providing backup electricity from 2025 as part of sweeping new rules that aim to make the EU's power market fit for the future.

Lawmakers in the European Parliament and ministers from the bloc's member states reached a compromise deal on the last files of the clean energy package, a host of updated legislation first proposed in 2016, early on Dec. 18, ending months of disagreement over the future of so-called capacity mechanisms, national schemes that pay electricity generators to keep their coal, gas and nuclear plants on standby in case of a supply crunch.

"Capacity mechanisms will not be used as a backdoor subsidy of high-polluting fossil fuels," Miguel Arias Cañete, the EU commissioner for climate action and energy, announced in a statement after the negotiating session.

Most power plants with CO2 emissions above certain limits will not be able to participate in capacity markets from mid-2025 under the agreement, but a clause included in the final text of the legislation exempts any capacity contracts signed before the end of 2019 from the stricter rules — a caveat included to appease some of the most ardent defenders of coal, including Poland.

That loophole could mean some payments will continue well into the 2030s. Polish utilities are busy building new coal plants, including a 1-GW station in Ostroleka that will come online in 2023 and is banking on a 15-year contract under the country's capacity scheme.

SNL ImageA modern lignite-fired power plant in eastern Germany.
Source: LEAG

Although the compromise fell short of the climate action needed to effectively limit global warming, it will increase the pressure on both energy companies and governments to phase out coal generation more quickly, said Wendel Trio, director of Climate Action Network Europe, an environmental group.

"The noose is getting tighter," he said.

The package also updates rules for the dispatch and curtailment of renewables, makes a majority of capacity on cross-border power lines available for trading, sets out a regulatory framework for transmission and distribution operators and establishes rules for self-generating electricity and participating in demand-response schemes.

Regulated prices, which the European Commission wanted to phase out, will stay temporarily but undergo a review by 2025.

Of all the issues on the table, capacity schemes — which are in place in some form in France, Germany, Poland, the U.K., Ireland, Greece, Belgium and Italy— were the most controversial.

Under the provisional agreement, which still needs to be ratified by the parliament and the EU's Council of Ministers, newly commissioned power stations that emit more than 550 grams of CO2 per kWh will no longer qualify for state aid as soon as the regulation comes into force, likely sometime next year. Existing power plants that fall over that limit, or emit more than 350 kg CO2 on average per year per installed kW, will be barred from capacity schemes from July 2025, according to the council.

Some national governments, most prominently coal-favoring Poland, had pushed for less stringent rules and succeeded in pushing through a clause that excludes any capacity contracts signed before the end of 2019 from the new regulations. That provision, derided as a loophole by critics, is vital to protect investments in new power plants, Polish officials have said.

The European Commission, the bloc's executive, introduced the package in late 2016 to prepare energy markets for more renewables, enshrine consumer protections and manage energy flows across the EU. The piece on market reform rewrites and introduces dozens of laws through an EU regulation, including the rules on capacity mechanisms, that will enter into force once the co-legislators endorse and publish it, and a directive, which member states will have to transpose into national law by the end of 2020.

"The new market will be more flexible and facilitate the integration of a greater share of renewable energy," Cañete said.

As part of the package, the EU this year also agreed to a more ambitious target of 32% renewable energy at EU level for 2030, as well as a target to improve energy efficiency across the bloc by at least 32.5%.