POLICY PRIMER

EU to decide whether to kill payments to coal-fired plants

A Commission proposal on capacity payments will see the European Parliament and Council clashing this year.

The EU’s plan to kick its coal habit will be tested this year with a battle over power plant subsidies.

The issue is whether the government should continue sending public money to coal-fired plants so they can be on standby in case of an electricity shortage.

Despite coal’s dirty reputation, ending the practice won’t be easy.

“Any decision on this issue has huge social, financial and also political repercussions,” said Latvian MEP Krišjānis Kariņš from the European People’s Party, the lead negotiator on the file in the European Parliament.

Some countries, such as coal-reliant Poland, are outraged over the idea. Utilities with coal assets also worry about losing public funding.

In the other camp, green groups and EU countries keen on cutting emissions want to accelerate the green energy transition, and gas companies hope to make a killing by knocking off coal, which would lead to an increase in the use of natural gas-fired power plants.

“It’s counterintuitive to give state subsidies to very polluting power plants,” said Florian Ermacora from the Commission’s energy department, speaking at a recent conference.

The fight is tightly linked to the growing amount of renewable power being generated in the EU. Because solar and wind power generation ebbs and flows with the weather and seasons, utilities need to turn to traditional power plants to make up any shortfalls. For such standby power to make economic sense, conventional plants need to be subsidized through capacity payments so that they are ready to send power into the grid when needed.  

The problem is that many of those plants are coal-fired, so the increasing reliance on renewables has — somewhat paradoxically — led to an upswing in the use of coal-based generation. The Commission decided to tackle that issue in its electricity market design proposals, suggesting introducing emissions limits on capacity payments.

Cutting coal

Brussels would like to limit payments only to generators emitting fewer than 550 grams of carbon dioxide per kilowatt hour — a standard that eliminates coal plants from the mix but leaves the door open for gas.

The proposal has split EU countries, and sparked a frenzied lobbying campaign in Brussels. The PR war pits the electricity industry group Eurelectric — which has several powerful coal-reliant utilities as members — against major gas and renewable energy-focused companies and associations that would benefit from the 550 rule. They are grouped together under the “Make Power Clean” label.

A Eurelectric-commissioned report in September claimed that the early retirement of coal plants and investments in new gas-fired power plants as a result of the 550 rule would actually lead to additional costs of around €50 billion over the next two decades. NGOs disagreed with how the research was carried out.

“The industry is clearly showing that further restrictions on the capacity mechanism would raise the cost of the capacity and then would raise the cost of electricity,” said Polish Deputy Energy Minister Michał Kurtyka. “So it is simply not good for the European consumer.”

Supporters of the current system accuse Brussels of mixing up energy policies with climate goals.

“If you want a coal phase-out, please say that,” Rolf Martin Schmitz, CEO of the German utility RWE, said at a conference. “This is a hidden way to do that.”

But proponents say the new rule is the right way to advance the bloc’s decarbonization plans and its commitments under the Paris climate deal.

“Subsidizing coal plants’ life extensions through capacity mechanisms means throwing down the drain billions of euros of citizens’ money and hampering the clean-energy transition,” said Joanna Flisowska, coal policy coordinator at Climate Action Network Europe, an NGO.

Coal-fired friction

The file is being considered by both the European Parliament and the Council, which have to find common ground on the issue this year.

The negotiations “will be tough, especially given the strong position against the 550 [rule] from certain member states,” said Martina Werner, a German MEP in charge of the electricity market design file for the Socialists and Democrats. “Nevertheless, with more and more member states pledging to phase out coal over the course of the next decade we hope we will be able to achieve a good agreement.”

In Parliament, Kariņš kept the Commission’s 550-gram limit in his proposal.

“My goal is to find a workable solution that allows us to stick to our climate goals while minimizing any negative social and financial effects,” he said. “I am looking for a win-win, which [is] a huge challenge for all.”

But Kariņš faces a fight. Some MEPs from coal-reliant countries want the line deleted, while others are pressing for an even more ambitious limit.

There is also disagreement over when the emission standard should kick in. The Commission’s original proposal called for it to apply immediately to new power plants and five years later for existing plants.

The S&D, the Parliament’s second-largest group, would like the proposed rule to kick in immediately for all plants.

“We cannot say that we need to decarbonize our economy and at the same time allow the most polluting sources of energy to continue receiving public subsidies,” Werner said.

The likeliest outcome is that Parliament will keep the Commission’s 550 proposal, parliamentary officials said. However, political groups might also vote to exclude some specific types of capacity payments from the rule, such as strategic reserve systems used in Germany.

The Council is also divided.

Last year’s Estonian Council presidency proposed scrapping emissions limits on existing plants altogether, while pushing back the start date under which new plants would have to comply to the beginning of 2026. That proposed compromise comes as a result of pressure from countries like Poland.

Eurelectric, which has been a staunch opponent of the new rule, appears to favor this approach too, saying at the end of November that it could support setting emissions limits on new plants only.

Critics blasted the Estonian proposal, saying it would weaken the Commission’s proposals so much that its climate benefits would be meaningless. On top of that, countries such as France, the U.K., the Netherlands and Finland plan to end coal-fired power by then altogether.

But there’s also a recognition that a political compromise will have to be made to try to get Warsaw on board.

Eleven EU countries use capacity payments, according to the Commission: Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden. However, Eurelectric said that 24 out of 28 EU countries use some form of capacity guarantee, through capacity payments, strategic reserves or other systems.

This article is part of the spring policy primer.