A Coal-Free Europe Could Be Sooner Than You Think

generation declines across Europe. Today we'll be speaking with Katherine Poseidon, a member of the AMIA Energy Transition Team whose work includes coal phase out, and Andrea Skendalfo, the head of AMA Power at b NF. Today will be calling upon a series that BIENNF produces, which are titled EU Power Weeklies. As of late, there have been several of these research

notes that have touched upon the role of coal. These reports can be accessed at biennf Go, on the Bloomberg terminal at biennif dot com or on biennifs mobile app. They are titled YOU Power Weekly. Poland eyes German style Cole spinoff as well as coal industry is exposed by COVID nineteen and Poland clings to Cole Beyond B and E F does not provide investment strategy advice, and you can hear the full disclaimer at the end of the show. I'm Dana Perkins, joined by Mark Taylor and you're listening

to Switched on the bn F podcast. Let's hear from today's guests regarding Cole Faceoff. Katherine Andreas, thank you for joining us today, Thank you, thank you for having us d So today is actually a pretty important day I think in the UK when it comes to coal. We are recording on the day that for the first time, the UK has not using any coal for power generation

for two full months. This is pretty significant and maybe let's pring that back over to you guys to talk about why and a little history of last in here. Maybe we can start with the economics and why the UK. Even though it's a big mouston for the country, it's

not the first time this has happened. So the UK has taken a lot of steps to kick call out, the most important one being that they actually have their own carbon price floor and so essentially UK coal generators need to pay extra for emitting, which it comes on top of what they really need to pay under the EU carbon price SKME. Just to be clear, what is

that floor? No one really knows. It's said very vaguely by the government and they say, uh, we want to keep the whole, the entire carbon price at current levels. That's what they told us a couple of years ago, and that was around twenty five pounds per time. Uh. And so it looks like they're targeting something around twenty

five pounds per time. And the second big thing that has happened in the UK is that essentially they have a core phase out there and they were the first ones to announce um, a big one like that, uh. And they started the trend and essentially within the matter of a few years from twenty fourteen to twenty eighteen, we saw core capacity in the UK declining very very quickly and core use also the calining very very quickly.

And that coincides very well with the period when the carbon price floor was doubling, so it doubled in that period, and it also coincided with when the government announced the core phase outdate, which in retrospect looks more like they were just formalizing what utilities were later on going to do. Anyway, So that's great context regarding the UK specifically, but how about the rest of Europe. This is a European story,

is it not. It is for sure. And one of the signals that we've seen from the UK that is reflected across the continent really is the speed with which coal is starting to move out of the system. And in the UK, for example, the first full day without coal was only in seventeen and at the time it was it was a huge deal. It was followed by the first week without coal, and then this year we saw a full month and that was a record at the time, and now here we are another month after

that's still with no coal in the system. And the goal of the UK is to have no coal at all by three but we're already at a very very

low share, something like two percent of total generation. And so what we're starting to see is really a momentum behind coal phase outs across the board, where a combination of policy drivers and economics are really making it clear that a cold phase out date is not necessarily you know the reason why this is happening, And in many cases it's likely that coal is going to, if not officially closed, at least fall very dramatically, even before some

of those uh even optimistic dates of early twenties for some of the whore in whish its European country. Back, where do we start? In the UK? Roughly we presented generation if I remember while we're looking at something around twenty five coming from core. Wow, I mean, it's quite remarkable. It's it's a huge drop. Can we go into both of those drivers? So, Katie, you mentioned there's policy drivers,

there's economics drivers. Why don't we take those each in turn and go through what those drivers are to explain this drop and call across Europe. So on the one hand, we have sort of a less well known policy driver, but one that is becoming more important right now, which is the use targets to reduce emissions, but not particularly

carbon emissions in general, but actually the pollutants. And so the EU has been implementing gradually more strict limits on what kind of pollutants in what quantities power plants can emit, and just this year and next year essentially there will be much stricter limitations coming into force where a number of power plants are likely going to realized that putting an investment into making you know, the the improvements to reduce those pollutant emissions is probably just not going to

be worth it in the end, it's going to make sense to actually close. But the other major policy driver is really just the the e use move to a greener economy. And of course we've heard a lot about the Green Deal and now the Green Recovery Package, but even before that, the EU had twenty targets to reach

a certain share of renewables in energy consumption overall. And did we reach those numbers by this year, Well, we won't know for sure until sometime next year, but it is looking like we are going to definitely reach the EU level target. And then each country has had to adopt its own overall target and then also granular targets

for power, transport and for heat. And one thing that is pretty important is that the electricity sector targets tend to be a lot easier because usually it's a case of retiring some coal plants adding for renewables, and the share of renewables in the mix increases pretty rapidly. So that has been sort of one of the easier ways

for countries to reach their overall targets. And so we're seeing, you know, more and more renewables are competing with coal, and if we're talking about the economics and can say more about why coal is becoming less and less competitive. But the EU now is in a very much sort of one directional path towards a greener economy overall, and it's becoming very clear that the role that coal has to play in a greener futures minimal and falling fast.

So there is coal and then there are renewables, but actually between the two there's something that's actually a lot cheaper than coal that maybe a little bit easier to mix in, which is gas. And economics for gas have actually come down dramatically very recently, making it very competitive in number of contexts in locations, can you guys address gas And it's into the future of coal in Europe. The reason why the UTS was initially set up, so

the carbon pricing scheme for Europe. The first goal was to actually at some point make coal expensive enough so that it can no longer compete with gas, and we achieved that about two years ago when we saw the economics of coal around Europe turning a combination of cheap gas coming from the US and carbon price modifications in policy. So that they actually reduced the over supply of carbon emissions that we had as a hangover from the two

thous financial crisis. The combination of these two essentially suddenly made gas plants really competitive with coal. We were right there at that point where running a gas plant and running a coal plant was one and the same. Before that, running a coal plant was dirty. Now with the COVID crisis, in fact, we have a new status where gas prices

in Europe have collapsed to record levels. I think we're talking about something like four euros per megawuath tour in the Netherlands compared to like sixty euros per megat are about a year ago. And what this is essentially doing, it's saying that we don't need call for everything. And one thing you need to keep in mind is that many gas fleets around Europe have been sized to actually be able to take over code for most of the time.

So what ends up happening is coal plants are now asked to service the eight am to eight p m and that area that like eight am to eight pm because of COVID is lower because people are staying at home, they're not going to work, and so cord plants are not saying, well, no, we can't do that, like we can't turn on for three or four hours and then go away. So economics combined with the fact that these assets are not built to service a few hours in the day. They're built to run flat out like a

coal plant hates to turn on and off. The combination of these two things has essentially completely pushed them out of generation in countries like not just the UK, but it is Spain. Wherever we have a large gas feat you see this happening in Greece, a country that was in love with lignite, and lignite was the beginning and end all of everything. Now it's like we there is speculation that has been like lignite three days or or days when lignite contributed so little to the generation, it's that,

you know, it wasn't heard of. Is anyone still in love with lignite? Are there countries that are are still really resisting this, either for economic or political reasons? Definitely, and I think the political sort of pushback is one of the main reasons why a call plays out in those words, is still not in discussion in several European countries. It's just become a political kind of hot potato than

that nobody really wants to touch. One of the reasons for that is, you know that lignite and hardcore power production and especially in Eastern Europe still is linked to the mining sector. So unfortunately the economic impact is being felt very heavily in those places and countries such as Poland, Czech Republic, Romania, Bulgaria, even Greece, where the government still

may not want to discuss col phase outs increase. They have it has been announced, but the utilities in those areas still need to come up with some kind of option going forward, because although those regions may rely on jobs, as Andreas said, the economics are putting more and more pressure on that industry to the point where whether there's political will or not, the industry is really struggling. I actually used to live next to a giant coal plant

in Romania. The air quality from from for me personally, was not that good, so I I personally, I think I would welcome this change. The air quality is a really interesting point because that is sort of the one area where governments are starting to be able to gain traction to discuss cold phase out. You know, just talking about closing coal is very unpopular. But once you start to actually speak with people and you know, they realize that the reason the air quality is for is because

of cold power generation. That's been one of the sort of main factors, especially in Eastern Europe, that is driving the conversation towards moving beyond. I thought EU Power Weekly was really interesting. And in terms of company strategy that PGE. What is that Poland's utility? Is that right? I think it is the biggest utility in Poland? Yea, right, Okay,

So they have a strategy. They have an answered the strategy to to phase out coal over the next twenty five years, but also they're starting to entertain a strategy of divesting or spinning off their coal assets into a separate company to make PG itself more investable. Can you describe some of the longer term utility strategies here? I guess it's air quality, but it's also just utility strategy. Yeah.

I think on the one hand, utilities are feeling the economic pressure that at this point, in many cases, if we're looking for, you know, a new source of power generation, it makes a lot more sense to build new renewables plants rather than new fossil fuel plants, but we're also at a point now where new renewables are even more

competitive with existing fossil assets. So replacing some of the oldest and dirtiest, you know, coal powered plants, especially in places like Poland, with renewables is actually makes just good

sense from an economics point of view. At the same time, the EU level targets are making it clear that the future is going to be with renewable and so utilities are starting to realize that, you know, if if they're looking to expand, renewables are going to be the place to look, especially in Poland, is starting to investigate offshore

wind um. They're looking at more stable source of generation that's still renewable, but also as a way to generate jobs and you know a little bit more I on my activity in the areas that are bordering to see trying to bring more activity back to courts to Utilities are trying to basically if they can't get away from those costly assets that are really pulling them down, and they're sending signals across the board that they're looking at,

you more sustainable options there. They've understood where the wind is blowing and it's their pockets ultimately that are taking the hit from from costly coal generation. I do sometimes hear though from proponents of coal, and they point out that we need baseload power and that's essentially what coal provides. So maybe this is a question for you andres from an economic standpoint and just from a general grid mix standpoint, is everything else all added together? Is that going to

be consistent enough? And when we all start back at work, we are physically going to the office, is there going to be some sort of a rebound or a yoyo effect that is going to put us exactly back where we were regarding coal and everything else in the generation mix. So I want to start by clarifying a thing that I think a lot of people in the industry no, but the people who work in coal often don't distinguish.

And you said, oh, coal is base load power. Also is gas and if cause it's cheaper like it is in the US, why should code be base or power. So yes, coal is baseload power, but it's not the only technology. And you look at the country like France

and your career is basedload power. So from that point of view, I want to make that distinction that the fact that core can do baseload power to me is actually UH deficiency because if you ask me, well, core gas can do both baseload and peak, so um, that is a that is like the first thing to keep in mind as far as the rebound for coal, if you ask me, I struggled to see how core could rebound. In Europe. Demand will rebound and UH probably will start burning more gas, but we need to clear up the

gas over supply. It is clear that at the carbon price will keep call out and I think increasingly utilities are like well, policies against us, right, Like, it's pretty clear we have called phaseouts in most of europe economics. Whether they are against us or in our favor, it's probably more against us than in our favor. And so you see companies saying, well, let's call it quits, let's you know, why have this bleeding wound running just like

cut it off and and and and throw away. Like I'm sorry to be so so dramatic, but but that's how they see it. And you know, we've been talking about the UK, but we haven't touched, for example, in Germany where there's like a cold phase out there going on and right now in the crisis, lignite, right, a fuel that costs nothing, is essentially still more expensive to run than gas because of low gas prices and the carbon price. You go to Italy and l announced early

closure of one of its plans. You go to Portugal, sorry Spain e DP announced uh the early closure of another coal plant there. The PPC in Greece has been asking the government to shut down the core plants, and the government's the one that's saying, hey, how about we take this step easier than what you want to do because it's you know, okay, we agree to a phase out,

but it's still political. So I think that there is not going to be there's there might be an apparent rebound, but the trend is set, is like this thing is going away and it's going away fast. Are the same companies that are shutting down co plants? Are those the same ones that own the gas and renewable plants that are that are taking in their place? Or they are winners and losers here? Is it all just kind of hera No, I wouldn't say there are winners and losers.

There are emerging strategies everywhere right. There are the ones who bet on compensation for having to close core plants are because that's a thing, right like, and so they say, let's take the core assets and probably will get paid to do that. A very good example is e p H from the Czech Republic. They've been buying up all coal plants and all glass plants for very cheap prices, hoping that either they get used or they get paid

for that. R W to a certain extent, also bet on that when it essentially decided to take all of all of the coal generation and and and keep it on its books. And then you have the companies who say, look, I want nothing to do with code. Ian was well inside, I want nothing to do with generation in general. But maybe we can think of like Vatonfel that a few years ago essentially paid e p H to take to

lignite plants away from its books. And then you have the companies that like an L or e DP, very large European utilities that have a mix, have a very low call in their mix, and essentially they're saying, look, we're looking to phase it out. We're looking to free up money to then invest in new technologies. If you ask me, obviously, anyone who's like massively exposed to code

today's suffering. But even you know, there are counter examples to that, like the Greek formerly state owned utility, the public Park Court. Now it's created. Everyone was betting that we're going to have a very bad first quarter and because of the coronavirus crisis and a second quarter, and in fact, for some iraculous reason, you managed to post a profit. If I'm not wrong, Katic and correct me there.

And it was because of their grids division. So there are surprises everywhere, and and and I think this is a period where companies like our w or PPC or others that are heavily exposed to CODE are discovering new profit making sectors of their business. This is definitely involves a lot of economic signals, but I want to know at the end of the line emissions targets, how much of that success or failure of hitting those targets it

has to do with coal? How big is it as a part of the whole when it comes to emissions, coal is going to play a key role in whether or not the EU is able to meet its twenty thirty target. And then it's it's ultimate goal of economy

wide net zero emissions. So cole in the power sector accounts for about two thirds of total power sector emissions in the EU now, and so if if the Block is really serious about reducing you know, that that chunk of emissions, it's going to have to take a very serious step towards reducing emissions from cold But as they mentioned earlier as well, the electricity sector is one of the more straightforward sectors of the economy to de carbonized.

And so the EU, if they want to meet net zero, is going to have to do quite a lot of work in buildings and heating and transport, and that's gonna be harder. So it's gonna make a lot more sense to try and take bigger, more straightforward steps in decarbonizing

the power sector. Um, the you has put you know, this green recovery really front and center in its post COVID stimulus plans UM and especially it has set out this mechanism that is really designed to help bring the countries and regions that are going to have, you know, a much steeper path towards decarbonization on board. So the Just Transition mechanism was set up as part of the

Green Deal announced at the end of twenty nineteen. But from seven and a half billion euros that were meant to go towards that fund in the Green Deal, the new recovery package has increased that by more than four times, so it's now forty billion euros that will go to making sure that you know, no, no regions or or

areas are left behind from the transition. One of the key points though, is that no funding will be available unless those regions produce a just transition plan, so they'll have to actually, you know, lay out targets concrete steps on how to de carbonize, and it's very unlikely that they'll be receiving funds if they don't acknowledge at least it needs to move past cold and start taking steps

concrete steps in that direction. Andreas, you mentioned you had a sum up thought can you bring us on home? So yeah, like, I think what we're seeing here is that call is on the way out in Europe. What what we're essentially seeing is, you know, low gas prices, high carbon prices are making the economics of coal plants unbearable. However, as we've seen in the past, gas prices do not need to stay low and carbon prices do not need to stay high. And I think this is where European

policy comes in. European policies essentially the continents insurance to say, no matter what the economics do, we are kicking this thing out. And I think this period right now gave a future vision. The COVID period gave a vision of the future to call operators. But there are still the ones let's say, well, well, maybe things change for us, And that's where European policy comes in and says, even if they do, don't hope on it, don't go out

investing in these things. And I think that's the key difference between now and let's say European policy ten or fifteen years ago that essentially wasn't clear enough, and you see new code, we would see new coal blensing countries like German, countries like the UK, you would see updates and retrofits. And I think that's really important to keep in mind that there's been this shift and probably that's you know, we we saw an acceleration of the shift

during the COVID nineteen crisis. Thank you so much for providing the perspective both from the economics and the policy landscape for the future of coal Katie and Andreas great having you with Mark and I here today. Thank you for having us. Bloomberg an app is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as in austment advice, investment recommendations, or a recommendation as to an investment or

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