Germany’s flawed assumptions behind €4.4bn lignite compensation

Executive summary

Flawed assumptions inflate compensation payments

In December 2020, the German government approved a contract to compensate owners of lignite power plants for the closure of their assets. Under this agreement, RWE and LEAG will receive €2.6 billion and €1.75 billion to shut down some of their plants and mines before 2030.

Ember has obtained the formula used for Germany’s lignite compensation payments from Greenpeace, through an information request it made to Germany’s Ministry of Economics (BMWi). For the first time, it has been possible to examine how the German government calculated the proposed compensation.

Our assessment of the formula is that it contains three key assumptions that lead to a systematic overvaluation of the compensation payments.

Any three of our proposed adjustments, when considered individually, would approximately halve the compensation amount. If combined together, they would reduce the compensation from €4.4 billion to just €343 million.

Problematic BMWi assumptions

What issues came to light in the government’s formula?

Applying arbitrary power and CO2 prices

The BMWi calculation takes average forward power and CO2 prices from Jan-17 to Dec-19. We feel using forward prices from Jan-20 to Dec-20 is fairer, as this more closely corresponds to expected utility hedging strategies for 2021-2023. Compensation would be almost halved to €2.6 billion instead of €4.4 billion.

Assuming no fixed costs can be saved through early closure

A proportion of future fixed costs are avoided when a plant and mine are closed. We feel Oeko Institut’s assumption of partial fixed costs savings is fair. This would halve compensation to €2.1 billion instead of €4.4 billion.

Assuming 4 to 5 years of compensation

Oeko Institut proposes that the period of compensation for accelerating shutdowns should be three years. We feel this is a fair assumption – and may even be generous as company plans suggest assets were forecast to close earlier. Three years would reduce compensation to €2.8 billion instead of €4.4 billion.

Conclusion

Compensation calculations need further scrutiny

We are not alone in our concerns regarding the compensation calculations. In March, the European Commission launched an investigation to assess the validity of the compensation under EU State aid rules. The Commission published their findings in a letter on 21 April, expressing genuine doubts about the assumptions the German government has made in determining the payment amounts.

The issue of compensation for the closure of lignite plants has become increasingly contentious with the German government’s new proposed emissions reduction target of 65% by 2030 and carbon prices exceeding €55/tonne.