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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Germany Set To Close All Coal Fired Energy Plants By 2038

European business news recently announced the latest German government initiative to decarbonize its nation’s electric power generation by closing all coal fired generating stations by 2038. The plan received the usual mixed reception. Power generators claimed this latest initiative would cost them money while environmental groups said that the closures come too slowly. The government boasted it was getting Germany out of both nuclear and coal-fired generation at the same time having previously announced closure of the nuclear generation fleet. The government’ goal, incidentally, is for renewable resources to generate 65% of the nation’s electricity by the end of this decade.

The Germans set up a committee that talked to all sides to fashion an eminently practical means to defuse the enormous opposition to closing coal stations especially in areas that rely on mining. The government ultimately promised a €40 billion package of payments and benefits to the affected parties. The big utility, RWE, will receive €2.6 billion and €1.75 billion is designated for utilities in the former East Germany. These closures will cause economic dislocation for thousands of workers in the related industries with the balance of payments going to regions most affected.

RWE executives, diplomatically, said the government’s subsidy package was okay. But it would not cover all the corporation’s costs to comply with the new coal closure policy which they estimated will total €3.5 billion. After the announcement RW’s stock price went up. Related: Putin’s Powerplay Could Jeopardize The OPEC Deal

The significance of this policy is that a government, and more importantly one of the world’s largest economies with a coal mining tradition, is coming out strongly against coal usage as part of an evolution in its environmental policy. The German proposal may offer guidelines for another large economy with a coal mining tradition, the United States. Coal mining in Germany, like the US, is/was centered in several states. Closing down the mines and power plants disproportionately depresses the economies in the affected areas. Not wishing to impose economic blight, the German Federal government acknowledged the looming economic problem. Following discussions with all affected parties, the government offered payments to those involved in or dependent on coal. Coal interests effectively resigned themselves to the fact that the end was imminent and that it was time to stop fighting it and collect whatever subsidies were being offered. In common parlance they took the money and ran.

This coal closure deal will, no doubt, lead to much discussion of the practicality and economics of the German vision of its energy future. But the German plan for its electric utilities and soon to be former coal producing regions is significant for another reason. The government’s solution was simple. Offer subsidies to its various coal producing entities as a means of facilitating decarbonization.

The German government’s proposed subsidies has avoided the usual debates about government's role with respect to failing industries or the disproportionate influence of big business. This also quiets those making the economic argument that Germany should continue to rely on its cheapest, domestic fuel resource no matter the environmental consequences.

Industries or regions affected by economic change can exert their influence disproportionately to delay adverse policies or stop them altogether. The coal industry in the US and coal-dependent regions seem more interested in simple delay rather than looking at the potential economic inducements of environmental compliance. In sum, German utilities and others simply decided to take the government’s money and run, so to speak. Their brethren in the US are fighting decarbonization efforts with what amounts to stout denial. At some point we expect the few remaining shareholders and other stakeholders in the declining US coal industry will follow the German’s example.

By Leonard Hyman and William Tilles for Oilprice.com

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