Programmed Fossil Fuel Phaseout

Even a robust and comprehensive carbon price, linked to the social cost of carbon, will not guarantee full decarbonisation of the power sector by 2035. An administratively determined programme of unabated fossil fuel phase out can be valuable here in providing clarity to investors and generators. The programme also assists system operators for mid-term planning of required reserves and other measures as well as to develop generation investments in time and by location, if market prices reflect the location (locational marginal pricing, nodal pricing). The simplest way to programme the phaseout of fossil fuel may be with a clear schedule setting out the journey to zero generation, set for instance as an obligation on retailers.

Should obstacles impede such an approach, a second-best approach may be auctions for exit. Germany, for example, set up a coal commission in 2019 to develop a road map for phasing out coal-fired power generation. In addition to a precise date, which otherwise can only be determined with a certain degree of uncertainty through market mechanisms, this intervention also aims to create a framework that should provide clarity on the transformation and thus minimise disruption. Drawing on the commission’s advice, the annual capacity to be phased out, as well as state investment plans, have already been captured in law.

Another relevant goal of the coal commission and the follow-up auctioning was the social consensus on an early definition of complementary investments in the coal regions in infrastructure, settlement of authorities and research as well as retraining. This is another advantage of a programmed phaseout versus a market-driven one or more abrupt changes.

Consideration should be given to drawbacks of an early decarbonisation programme which carries the risk of providing legal certainty but compensating above a market price level at a later stage or even hindering an earlier market-driven phaseout.