Coal-to-gas switching in the power sector in Germany and the UK : assessment of key drivers and projection of future scenarios based on the EU ETS reforms

Abstract

The power sector represents 30% of total greenhouse gas (GHG) emissions in the European Union (EU). Market concentration and use of available technologies combined with a carbon price could trigger drastic GHG emission reductions. In light of this, the EU introduced in 2005 the Emissions Trading Scheme (ETS), a market driven mechanism that sets a price on carbon. Nevertheless, the EU ETS has performed below expectations in generating an effective price signal. Coal represents the main emitting fuel source with about 39% of all EU-ETS emissions resulting from coal power generation. It is undeniable that today fuel combustion plants are needed to maintain a stable power system due to the intermittency of renewable power sources. However, fuel switching from coal to natural gas (referred as “gas” from now on), a less carbon-intensive fuel source, represents a feasible solution to drastically reduce emissions. In this context, the EU roadmap towards 2050 aims for progressive emission reductions as renewable energy gains relevance in the energy mix. This can only be achieved through a progressive transition from coal to gas technologies. Over the last years, the diverging coal and gas economics, have made necessary the role of a carbon price to increase gas competitiveness and allow for a so-called coal-to-gas switch. The German and United Kingdom (UK) power sectors combined represent approximately 30% of the total GHG emissions in the EU. Moreover, their coal-to-gas switching strategies differ considerably. While Germany is a loyal advocate of free-markets, the UK has numerous occasions favoured market intervention. The UK has introduced a carbon price floor and announced a coal-phase out by 2025, while Germany has taken a more passive position letting the EU ETS define the optimum carbon price signal conditions through socioeconomic arguments. Recently approved adjustments to the EU ETS may increase the carbon price significantly in the next decade, which could support Germany´s strategy thereby avoiding the social and economic burden of market intervention. On the other hand, if the carbon price signal is not strong enough, Germany would be obliged to introduce stringent policy measures to limit coal power generation. The question over which is a better strategy to support an effective coal-to-gas switch is a topic of debate among the EU member states. This thesis evaluates the key drivers behind the coal-to-gas switching process, compares the situation of Germany and the UK, and analyses different carbon price scenarios up to 2030 in order to project possible coal-to-gas switching outcomes. This will aid in judging which strategy is the most appropriate to accomplish an efficient coal-to-gas switching process, which is crucial for the realization of the 2030 emission reduction targets.