German fossil fuel power plants emitted 33 percent less CO2 in June 2019 compared to the same month last year due to a market-driven “fuel switch” from coal to gas, according to solar energy research institute Fraunhofer ISE. The switch was caused by low gas prices combined with a rise in the cost of CO2 allowances in the EU Emissions Trading System (ETS) and lower exchange electricity prices caused by a boom in renewables, among other factors. Simply put, generating electricity from lignite became more expensive than the alternative, gas. Some market analysts said the switch may continue in the coming months.

“Since January, we have seen the high carbon price really making the perfect market for gas,” said Yan Qin, lead carbon analyst at Refinitiv, on the developments in Germany. “We really see an interesting phenomenon: in the daily German power market, a high carbon price and very low gas price is really pushing gas in front of lignite,” she told Clean Energy Wire.

Over the last year, the average cost of CO2 allowances in the EU Emissions Trading System have risen by 65 percent – from an average of 15 euros per tonne of CO2 in June 2018 to 25 euros per tonne in June 2019. According to Qin, the price hike is a result of the newly implemented Market Stability Reserve, a mechanism which cuts oversupply of CO2 allowances on the market. This has had further effects. “Participants in the EU ETS – power companies and industrials – are becoming more aware of the high carbon cost,” says Qin. “They are becoming more active in carbon risk management and in buying allowances.”

The fuel switch from coal to gas comes at a time when the German government is in negotiations with coal mining and power generation operators such as RWE about shutting down power plants in line with the recommendations of the coal exit commission. The commission had proposed to end coal-fired power production in Germany by 2038 at the latest, and the government must now decide on the recommendation’s implementation. Negotiations also include the possibility of compensation payments to operators once their facilities are taken off the grid in the framework of Germany’s coal exit plan.