€6.3 billion in coal subsides undermine innovation needed for energy transition

Ten countries, responsible for 84 per cent of EU energy emissions hand over at least €6.3 billion in subsidies to coal every year, despite repeated promises to phase-out the fuel and transition to clean energy, finds UK thinktank Overseas Development Institute (ODI).

The ODI report, Cutting Europe’s Lifelines to Coal, suggests that Germany, the most transparent in subsidies data, accounts for almost half of the total subsidies looked at, including handing over €2bn in subsidies to coal mining. Italy, the Netherlands, France and Greece have between just two and four subsidies, meaning there is significant potential for them to be coal subsidy-free. Others, including the UK, scored poorly on transparency of coal subsidy reporting.

Head of the Climate and Energy Programme at ODI, Shelagh Whitley, spoke to us about how such practice is undermining renewables investment and innovation in managing energy demand.

Why is a climate ambitious country like Germany still handing out subsidies to coal?

SW: The high number doesn’t necessarily indicate that Germany has the highest subsidies, though it’s likely that they are among the countries with the highest coal subsidies, but because they are so much more transparent than other countries. For instance, Poland may have much higher subsidies than we were able to estimate. Why are governments doing this? You do need to use subsidies for economic transition.

What we would expect is that any coal subsidy should be going to support workers in communities to transition away from coal, but what we found in Europe, is that’s only 14 per cent of the total amount [of coal subsidy] we identified. Governments have, not surprisingly, a vested interest in coal mining and coal-fired power sectors which are, we would argue, demanding unreasonable amounts of support through the transition. [The German government, however, has committed to ending these by 2018, the first in this group of ten European nations.]

The question really is should German taxpayers be paying for that or could the coal companies themselves have been managing the phase out without government support? On coal-fired power you have new subsidies [the report finds six of the ten had introduced €875 million a year in new subsidies since the Paris Agreement] and again, those are often falsely justified because there’s a need for creation of perception of demand for energy that is actually not realistic. This is a call for a need of backup supply when renewables are intermittent, which often is not actually needed.

What is the impact of coal subsidies on renewables development?

SW: What the government should be doing in all cases with these new subsidies meant to deal with the intermittency of renewables, is first look at what the real demand is going to be and if there is enough supply and ability to balance demand to address the challenges. Governments first need to do that assessment properly and that’s not happening. In the UK and other countries there are overestimates of demand. In the UK, the Supplemental Balancing Reserve [the national grid’s string of reserve power stations] paid out £180 million last year [€213 million] to plants that were never even used.

They were being paid because there is an overestimation of the need for them. In Germany there’s an inquiry into a new capacity mechanism right now, specifically on this topic. The commission is saying you don’t need this capacity mechanism because you don’t have proper evidence that this demand is there. We know energy efficiency is accelerating at a really fast pace, which means demand forecasts have to keep up with that. Governments instead are focusing on supply. They’re not focusing where they should be — on demand.

You can deal with a lot of this problem, by having storage, by having efficiencies — demand side management where you power down at times of high demand in other areas. We’re going to need these responsive smart grids and flexible systems as we move to 100 per cent renewables. Rather than investing in that system, they’re investing just in the supply side — and just in the high carbon supply side. It’s not just undermining renewables and clean energy, it’s undermining development and investment in the system that we need to properly manage renewables going forward.

The UK’s capacity mechanism did have an option to give money to demand-side management but it only did that using one-year contracts, whereas coal-fired power plants were given 15-year contracts. If you were a business and you were trying to invest, why would you invest in a demand side management business if you can’t get certainty in revenue, but coal can. It’s not that it just undermines renewables, it undermines the whole energy transition. There are so many different technologies we need on the supply side, the demand side, on the responsiveness of the grid, and on storage.

You’ve talked a bit about how the money could be spent better on demand side energy innovation. Are there any other roles that innovation could play?

SW: It’s about leveling of the playing field. With the grid managers, it’s in their interests to not just pay for supply, but also to pay for reduced demand. There are business models that can be created off the back of that, but what you’re getting is still so much support to these centuries old technologies on the supply side. There needs to be regulatory certainty and long term contracts for the demand side. There’s a lot of focus on wind and solar — supply side renewables but there’s still so much system change that has to happen. There’s so much potential: managing energy demand from your phone, everything becoming digitised; all this needs to happen and that’s what governments need to focus on, rather than supply side technologies.  

With just three years left to meet the EU commitment to end harmful subsidies by 2020, the ODI report recommends European countries end their support for coal under the EU’s Emissions Trading Scheme, capacity mechanisms, and in subsidies to biomass power generation. Countries should ensure remaining subsidies are focused on supporting the transition to low-carbon and efficient energy, and support for workers and communities. They should also commit to greater transparency and accountability by undertaking consistent annual reporting of subsidies to coal and fossil fuels. You can read the full report ‘Cutting Europe’s lifelines to coal: tracking subsidies in ten countries’ on the ODI website.