Coal phase out auctions are a transparent and cost-effective way to reduce fossil fuel use – Oxford study

  • Coal is the most polluting form of energy in the world and many countries have committed to phasing it out
  • Yet many coal-fired power plants have lifetimes that extend well beyond 2050
  • Germany is the only country in the world that has used auctions to prematurely retire coal-fired power plants
  • Oxford research finds that auctions for early retirement offer a transparent and potentially cost-effective way to shut down coal-fired power plants

A new study led by Dr Sugandha Srivastav of the Oxford Smith School & Institute for New Economic Thinking, published in Climate Policy, analyses the world’s first coal phaseout auction (conducted in Germany) and finds that it is a transparent and potentially cost-effective way for the early retirement of coal-fired power plants.

In coal phaseout auctions, plant operators place blind bids for compensation from the government to close their operations, and the government can then select the best value bid. A number of auctions are held, with the maximum compensation reducing over time, so plant operators are incentivised to make the winning bid early.

Coal combustion accounts for 40% of yearly emissions from energy and industry. A growing number of countries have set targets to phase out coal within the coming decades to curb climate change and improve local environmental conditions.

Many coal-fired power plants are backed by long-term contracts. This means that even if renewable energy is cheaper, market forces are unable to push coal out of the system fast enough. To exit these coal contracts prematurely, compensation is a legal requirement.

Yet, simply asking the owners of coal-fired power plants how much compensation they need is unlikely to yield good value for taxpayers. Instead, auctions can create competition for scarce compensation between the owners of coal-fired power plants, which in turn, can reveal the true cost of early closure.

Dr Sugandha Srivastav, a Senior Research Fellow at INET Oxford, said that the research showed that “coal phaseout auctions were an innovative policy that took into account the reality that coal is oftentimes insulated from the market by rigid long-term contracts.”

She underscored how “shutting down coal-fired power plants would lead to important fiscal savings by allowing consumers to get access to the cheapest electricity”.

Yet using auctions everywhere is not appropriate. “In very concentrated markets where we think there is a high likelihood that coal-plant owners may collude, other policies will be better suited, such as strengthened incentives for scrappage or repurposing of coal assets,” adds Dr Srivastav.

Co-author, Michael Zaehringer of Frontier Economics said that he hoped to see the other countries adopt the German model, along with the recommended design adjustments suggested in the paper.

“In markets where there is private ownership and enough diversity in coal plant ownership, auctions can be used to close down coal-fired power plants.

“Australia, United States and India stand out as examples where such a policy could be considered. Our research points these countries in the right policy direction as the energy transition unfolds” he added.

The authors hope to see their research used in the design of coal phaseout schemes such as the Asian Development Bank’s Energy Transition Mechanism, which seeks to retire coal across Southeast Asia.

ENDS


FACTFILE: Coal phaseout targets & auctions

  • The German Coal Exit Act of 2020 allowed hard coal plants to voluntarily exit between 2020 and 2026 and compete in auctions for compensation payments.
  • It stated that from 2027 decommissioning could be mandated without compensation, thereby incentivising participation - and by 2038 all coal plants needed to retire.

Coal phase out timeline
When will countries phase out coal power? Source: Our World in Data