Vattenfall’s recent sale of its German mines and power plants has highlighted uncertainty over the future role of lignite, the most carbon-intensive fuel, in a country with some of the world’s most ambitious targets to tackle climate change, the Institute for Energy Economics and Financial Analysis (IEEFA) concluded in a report published on Thursday.
EU regulators cleared on Thursday Swedish utility Vattenfall’s sale of German lignite power plants and mines in the Lausitz region of eastern Germany, to a Czech-based consortium, Energetický a Průmyslový Holding (EPH) and PPF Investments Limited.
Lignite is still the single biggest source of power generation in Germany, at one quarter of the total. But the country is targeting a more than halving of greenhouse gas emissions by 2030, and wants to achieve an “almost entirely” zero-carbon electric grid by mid-century.
Uncertainty over key aspects of coal and lignite policy – including a phase-out timeline, how to meet mine rehabilitation costs, and future coal power subsidies – has contributed to very different perceptions between the seller and buyer of the lignite business in Lausitz. The seller, Vattenfall said that it was having a “tough time”, with growing headwinds, and was willing to give it away, along with €1 billion in cash to “stabilize” the business. But the Czech buyers saw an opportunity.
The Institute for Energy Economics and Financial Analysis (IEEFA) analysed these different perceptions through a hypothetical phase-out date of 2030, for the Lausitz mines and power plants, focusing on the ability of the power plants to pay for the clean-up, or rehabilitation, of the mines. These rehabilitation costs will include landscaping, eliminating pollution and restoring groundwater levels.
IEEFA calculated that in the absence of much higher carbon prices, the Lausitz lignite power plants would continue to generate cash through the next decade and a half. Using various assumptions for costs, power prices and heating revenues, we calculated discounted cash flows of €3.1 billion through 2030.
Regarding the cost of mine rehabilitation, Vattenfall had made a provision to date of €1.4 billion. IEEFA calculated an alternative, higher figure of €2.6 billion, based on the actual cost of the clean-up of German lignite mines in recent decades, in the wake of German reunification in 1990. We stressed uncertainties in this calculation: we use an upper estimate for the area of Lausitz mines; and acknowledge that it is a big approximation, to apply average clean-up costs from the past to mining areas today, given different starting points for rehabilitation, and different clean-up tasks.
These uncertainties underscore an urgency for the German government to commission its own, official estimate for lignite mine clean-up costs, as it did last year, from the auditors Warth & Klein Grant Thornton AG, for waste disposal from nuclear power, which revealed a much higher nuclear clean-up estimate than industry provisions to date.
In the case of the Lausitz mines, regardless of the exact rehabilitation costs, these appear to place a big burden on the power plants. IEEFA therefore proposed a combination of rehabilitation funding sources. These comprised, first, a levy of up to €3 per megawatt hour of power generation, raising around €1.5 billion; and second, an allocation of some of the windfalls that the buyers received with the asset, including some of the €1 billion they received in cash, plus future capacity payments.
These funds could be allocated to a Foundation, wholly owned by EPH and PPF Investments, which would invest cautiously over time, to assure that the rehabilitation costs were met.
IEEFA concludes that such a proposal would avoid any prospect of a German taxpayer-funded lignite bailout; lay a sustainable path for Germany to meet its climate goals; and allow the asset owners to operate their power plants profitably through the proposed phase-out period, to 2030.
Equally importantly, by laying a clear, long-term, phase-out process and timeline, it would increase transparency for investors, and so reduce the risk of losses associated with stranded assets in future, and help local communities prepare for a post-lignite transition.