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, which took place in Germany, and finds it to be 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.

But simply asking the owners of coal-fired 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 these plants, which in turn, can reveal the true cost of early closure.

Dr 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”.

Nonetheless 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,” added Dr Srivastav.

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

“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, the USA 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”.

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.