Modern power plants come out on top

The Coal Phase-out Act adopted on 3 July 2020 provides for the gradual phase-out of coal-fired electricity generation in Germany by 2038 at the latest. The operators of lignite-fired power plants receive compensation payments for early decommissioning, which are fixed by law.

Compensation payments for hard coal-fired power stations, on the other hand, are to be determined in annual tenders (pay-as-bid auction with sealed bids).

The first tender was  conducted by the Federal Network Agency in September 2020. Today, the Federal Network Agency announced the results:

• A total of eleven hard coal-fired power plants with a total capacity of almost 4,800 MW were awarded a tender. These plants are due to be taken off the grid by the end of the year, subject to a review by the transmission system operators.
• More than two thirds of the capacity awarded went to modern, efficient hard coal-fired power plants without heat output, which only came into operation or were extensively modernised in the 2010s.
• According to the Federal Network Agency, the tender was significantly oversubscribed. The volume-weighted average award bid is € 66,259 per MW, which is well below the highest bid of € 165,000/MW.

From an economic point of view, it would have made much more sense to shut down older, less efficient hard coal-fired power plants first. However, the reason for decommissioning three of the most modern power plant units is the questionable award rule:

• Price bids are submitted by power plant operators in Euro per megawatt capacity (€/MW) - this equals the compensation payment for winning bids (pay-as-bid).
• For the award decision, however, the bids were not - as is usually the case - ranked directly but the bids were converted into €/tonne of CO2, based on the average annual CO2 emissions per block over the last three years.
• As more modern power plant units are operated more frequently due to higher efficiencies (and thus lower CO2 emissions per megawatt hour of electricity generated), their bids are divided by a higher total amount of CO2 which moves them up the bid ranking compared to older units.

Frontier has advised the German Energy and Water Industry Association (BDEW) on auction design during the consultation of the Coal Phase-out Act. At the time, we  advised that  CO2 adjustment of bids could lead to inefficient early closure of modern power plant units and results in higher compensation payments.  

Frontier regularly advises public and private sector clients on auction design, bidding strategies and energy and climate policy issues.