Brown Coal

Dirty Energy on the Path to Clean Power

How do those windmills and solar panels look now? A brown coal strip mine in Germany. Source: DPA
Those windmills and solar panels don't look so bad now. A brown coal strip mine in Germany.
  • Why it matters

    Why it matters

    Germany’s switch to renewable energy sources could make dirty brown coal a necessary evil for electricity production for Europe’s largest economy.

  • Facts

    Facts

    • Germany is phasing out nuclear energy while ramping up renewables like wind and solar.
    • Mr. Kretinsky hopes brown coal, or lignite, will be used to bridge the transition to cleaner energy.
    • The Czech billionaire already owns Mibrag, which is one of three producers of brown coal in Germany.
  • Audio

    Audio

  • Pdf

Coal-fired plants have been given a bad name in Germany these days. Call it the next phase in the country’s aggressive transition to renewable energy. First it was nuclear energy, which, in 2012, was abandoned in the aftermath of the Fukushima plant disaster in Japan. Now the motto of environmental groups in Germany seems to be “Brown coal? No thanks.” The federal government may side with them and push for a phase-out of dirty coal, though German states that see jobs from mining are pushing back.

The Czech billionaire Daniel Kretinsky hasn’t been scared away just yet. In fact, the head of the energy firm EPH is expanding in Germany, having bought the Mitteldeutsche Braunkohlegesellschaft, or MIBRAG, a key exploiter of brown coal in the country. Now, Mr. Kretinsky said he has his eye on the German subsidiary of Swedish utility Vattenfall. If he buys this one too, the only brown-coal competitor left in Germany will be RWE.

Perhaps he’s on to something. While Germany may have fallen out of love with coal (see graphic below), the fossil fuel is still ripe for export. Coal will also still be needed until Germany completes its transition to renewable energy. In an exclusive interview with Handelsblatt, Mr. Kretinsky explains his own reasons for remaining in love with the dirty fuel.

Handelsblatt: Mr. Kretinsky, as a Czech power sector manager, what’s your opinion of Germany’s switch to renewable energy sources?

Daniel Kretinsky: If the Germans want to switch their energy supply to renewable energy, that’s their prerogative. It’s a decision that the German government and German voters made. It’s not my place to criticize that.

Well, your company is investing in Germany – but not in renewable energy. Your firm EPH owns the eastern German company MIBRAG, which is still producing dirty brown coal, or lignite, on a grand scale. It doesn’t really appear as if you believe the switch to renewables will be successful.

If Germany wants to switch its power supply to wind and solar, then it will take some time and money. As an investor, I’m less interested in the goal than the way in which Germany wants to achieve that. I’m convinced that brown coal can play an important role in the energy transition, especially considering its considerable contribution towards heating cities and towns, as well as for industry.

Excuse me? Surely brown coal’s days are numbered.

I don’t dispute that brown coal’s lifespan is limited. In the year 2050, when Germany wants to produce 80 percent of its power with renewable energy, current mining areas will be exhausted. And it’s hard to imagine that new areas beyond what’s already planned will be opened up. That’s not attractive even for an investor. By 2040 at the latest, and mining and electricity generation with brown coal will be dramatically reduced. We estimate that this process will begin soon. The phase-out will happen by itself, but step by step.

Do you really think Germany will still be producing electricity with brown coal in three decades?

Brown coal is the perfect transition technology. Germany cannot make its electricity solely from renewable energy. It needs reserve capacity, because wind and solar energy aren’t reliable. That makes brown coal a good solution when you keep all four goals in mind: competitiveness, environmental protection, a secure supply and jobs.

You’ll have to explain that.

If you look at the variable cost per megawatt-hour, renewable energy is the cheapest. However, renewables don’t have to seek financing on the market. Sometimes they produce a lot of power, sometimes almost none. Next comes brown coal, assuming you take into account the fuel-element taxes on nuclear power. But the phase-out of nuclear energy has already been decided. The costs can be clearly calculated when it comes to turning brown coal into electricity, because it’s still subsidized here. At the moment, the variable costs are around €15, or $16.3 per megawatt-hour. Black coal is around €25. But it used to be €40. It has to be imported and the market price fluctuates strongly. Gas at the moment is €45.

 

Brown Coal Produced but not Consumed-01

 

But brown coal also happens to be the dirtiest energy source.

As far as CO2 emissions go, atomic energy would be the best backup. But that’s out of the question. Taking transport emissions into consideration, black and brown have a similar CO2 profile. But modern, highly efficient plants have greatly reduced them for brown coal. And gas isn’t totally clean. Natural gas plants have around half the CO2 per megawatt-hour that coal plants do — but not zero, and not even 20 percent. You have to find a balance between environmental protection and costs. If you want to look at the subject from the security of supply aspect, then it looks quite different. If we only have gas-fired power plants, then we’d have to double our natural gas use – and unlike brown coal we’d have to import that gas mostly from Russia. From the perspective of energy security then, brown coal is the best solution.

If you add the cost of CO2 certificates, the calculation looks different.

Even then, brown coal is unbeatably cheap. Right now especially with the low CO2 prices. But even if the price per ton for CO2 rises to €20, a megawatt-hour of electricity from brown coal would cost €35. But the cost for a gas power plant would also rise to €55.

That all sounds logical. But do the Germans want to hear it?

It seems to me that this debate is a very emotional one here. But the energy sector shouldn’t only be shaped by emotions. The energy transition has been decided, nobody questions that, but the way and the methods for it should be discussed rationally. It would be a shame if we let ourselves be controlled by emotions – not just for the electricity market, but also for the whole country. In the end, the politicians have to prioritize various goals.

After the nuclear phase-out, environmental groups are now pushing for an end to brown coal.

That will undoubtedly happen. It’s merely about how to achieve the transition to renewable energy. Producing and using brown coal will recede on its own and without any administrative intrusions.

But only in the long-term. Do you really believe the Germans are that patient? Aren’t they keen to say “no thanks” to brown coal?

Of course, there’s immense pressure. But on the other hand, it’s clear what would happen if Germany phased out brown coal right now. The price of electricity would rise. Not just electricity producers would suffer. So, too, would other industries. More than a hundred thousand people would lose their jobs. Germany would be completely dependent on gas imports without any security.

Your competitor Vattenfall is more pessimistic and wants to sell off its brown coal facilities. And you hope to acquire them?

Yes. We are very interested in the brown coal division of Vattenfall. When the process starts, we will make a bid. We have a strong interest, but it’s not unconditional.

Why are you interested in a unit that another company is trying to dump?

We believe that brown coal is a good product – even when we know that its importance will shrink. We would be a good partner for the Vattenfall business. Our partner MIBRAG is already working near Vattenfall. Of course, MIBRAG is smaller, around a third as big, but the work is the same. We understand the business. We know what we’d be getting into. We know the opportunities and disadvantages. We are certain that we would do it well. We are very self-confident.

What are your conditions?

More than anything, we want to know what the mission would be. We can imagine doing many things – but before we sign a contract, we need clarity from the politicians, in regards to their plans for brown coal. Naturally we could say that we’d invest €2 billion, but then we’d need to keep Vattenfall’s brown coal operations at the current level until 2050. Every investor wants to develop their business and create jobs, but is it also possible to keep production constant for three, four years and then reduce it in stages.

And the politicians need to decide that?

Yes, we need a clear statement from the government.

That means, the sale process is only meaningful when the government and trade unions are involved?

Absolutely. The sale hasn’t even started officially. We will not get involved – and no investor would do that – if the unions and state governments are fighting for large investment while the federal government pushes to reduce production quickly.

And what does it look like? Are you optimistic or are you skeptical?

It’s too early to say. Naturally the understanding of brown coal is larger with regional politicians. They know that a power plant is right next to the mining operations. And they know that the costs are low. In these regions we sense a lot of support, even if everyone there knows that it’s merely a transition technology.

But it’s different with Germany’s federal government?

We’ll have to wait and see.

Is it possible to take over Vattenfall’s operations even if the federal government decides to force the phase-out of brown coal?

It’s conceivable, we just have to know that. When we know that production in so many years needs to be reduced by so many percent, then we can make a sober assessment.

Would EPH be able to finance such a deal and guarantee production?

That’s not a problem. We’ve never had a transaction fail due to money.

 

This interview was conducted by Jürgen Flauger and Hans-Peter Siebenhaar. To contact them: flauger@handelsblatt.com and siebenhaar@handelsblatt.com

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