What is the future of coal power in Europe?

Earlier this year, we looked at the current state of coal generation in Europe, following the publication of a report from The Economist Intelligence Unit.

We put it to Peter Kiernan, Lead Energy Analyst at The Economist Intelligence Unit, as he tries to answer just what is the future of coal power in Europe?

Coal was once the prime source of power generation in the European continent, but over time this source of energy has lost ground as nuclear power, natural gas and more recently renewables have expanded their share of the region’s power mix. In the early 1990s coal accounted for around 40% of EU power generation, but this has since fallen to below 24% in 2015. Due to a considerable fall, last year in coal generation in the UK, and modest falls in Germany, Spain and the Netherlands, the share of coal in Europe’s power mix will have fallen further last year. While coal generation did experience a modest uptick in the early part of the decade – due mainly to higher natural gas prices – since 2013 coal generation in Europe has been in consistent decline.

This trend is expected to continue due to a range of policy factors and market conditions that are combining to make the outlook a difficult one for coal generation in Europe. While it is unlikely that coal in Europe will be completely phased out in the short to medium term, coal producers and exporters will be increasingly relying on growing economies Asia, rather than on high income OECD economies in Western Europe and North America, for future market prospects.

EU Policies

Although the EU does not have a direct policy on coal generation, its 2020 and 2030 climate and energy targets (covering emissions, renewables and energy efficiency), its emissions trading scheme (ETS), and air quality directives are having an impact on coal usage among European utilities. EU proposals to strengthen the efficacy of the ETS, and to limit the ability of coal plants to receive state subsidies to remain operating as back up for renewable power, will force the retirement of some coal capacity in Europe. Industry compliance with air quality directives aimed at reducing pollution from industrial establishments will also have this effect.

National level policies

EU policies have set the framework for a lower emissions-intensive electricity system in Europe, but the fortunes of coal-fired power will also depend on the policies of member states towards coal generation. The UK has seen a dramatic reduction in coal generation in the last four years, mainly the result of the introduction of its own carbon price floor. Furthermore, the UK has also pledged to phase out unabated coal generation by 2025. Other countries, such as France and Finland, have also pledged to phase out coal by 2023 and 2030 respectively (although coal only comprises a small share of their power supply in both cases), while the Netherlands and Germany are also taking steps to reduce coal capacity as well. Coal capacity has been falling gradually over the last decade, and with little new capacity expected to be constructed in the region we expect total capacity to continue to fall further (especially in Western Europe).

Market conditions

In addition to policy factors the market environment for the power sector in Europe is pointing towards continued de-carbonisation. With electricity consumption remaining stagnant and growth in renewables generation continuing, coal-fired power has been edging back in the last three years. Furthermore, the collapse of oil-indexed natural gas prices has caused a rebound in gas generation since 2015, adding further competition for coal in the electricity sector. Due to stagnant demand and additional renewables generation, falling wholesale power prices have made the market environment tougher for coal plants in some cases, with one German utility, STEAG, announcing in November last year that it may have to close 5 hard coal units in Germany because of “changes to the market environment brought about by energy policy and the persistently low electricity price level.” Announcements such as this could become more frequent if European states continue to push for de-carbonisation of their power systems. Another company, Dong Energy, stated in February that it plans to cease using coal for its power stations by 2023.

Already more than half of Europe’s power generation is sourced from non-fossil fuel usage (renewables and nuclear), a share that is much higher than in the US, China, India, Japan, and Australia. This share is likely to continue to grow going forward. If coal power is to remain a significant feature of Europe’s energy system older plants will need to be retired and replaced by more efficient, less emissions intensive modern plants, and they will need to be equipped with carbon capture and storage technology. Given that the EU targets a cut in emissions by between 80 and 95% from 1990 levels by 2050, achieving this goal means that this will be the only way that coal-fired generation can maintain a role in Europe’s power mix.

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