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By Bloomberg

A plan by Angela Merkel’s government to cut emissions may force Germany’s biggest utilities EON SE and RWE AG to shut coal-fed power plants, potentially boosting prices.

The chancellor’s cabinet agreed yesterday to cut emissions by as much as 78 million metric tons of carbon-dioxide equivalent by 2020, including 22 million tons from the power sector. While a reduction in supply could lead to 2017 power prices rising as much as 24 percent, the policy may damp the price of carbon permits within the Emissions Trading System, according to Pira Energy Group, a researcher in New York.

“This policy initiative is bullish for the German power forward curve, but we still need to have more details on how and when the plan will be implemented,” Bruno Brunetti, a senior director of electricity at Pira, said by e-mail. “It’s bearish for the carbon price because this policy initiative undermines the role of the EU ETS as the main instrument to deliver the required emission cuts.”

Germany seeks to meet a national climate target of a reduction in carbon emissions of 40 percent from 1990 levels by 2020. While the nation has expanded renewable energy sources such as solar and wind, it used coal to generate 45 percent of its power last year, its highest level since 2007, to help replace atomic reactors shut after the Fukushima nuclear disaster in Japan in 2011.

German next-year power, a benchmark contract in Europe, gained for the past six weeks, the longest weekly rising streak since May 2010. The contract declined 0.2 percent to 35.05 euros ($43.14) a megawatt-hour at 1:20 p.m. Berlin time, according to broker data compiled by Bloomberg. The price of the 2017 contract, which traded at 33.90 euros today, may rise as much as 8 euros, Brunetti said.

Weather Impact

The nation has unprofitable fossil-fuelled plants with combined capacity of about 18 gigawatts, or 10 percent of its total installed capacity, that have been pushed out of the market by low-cost renewable generation, according to Sanford C. Bernstein & Co. Merkel’s plan may lead to 10 gigawatts of coal units shutting, Brunetti said.

German utilities boosted the use of efficient coal-fed plants as low carbon prices made them more profitable than cleaner gas. The European Union seeks to cut a surplus of emission permits through a temporary policy known as backloading and the creation of a reserve to remove future oversupply.

In a European context, the impact of weather would be more important than Germany’s 22 million ton cut, Marcus Bokermann, head of market strategy at Vattenfall AB’s asset optimization and trading business, said by e-mail today.

Germany is poised for its warmest year on record, according to Andreas Gassner, a meteorologist at MeteoGroup in Appenzell, Switzerland. Only a significantly colder than normal December would prevent a record, he said on Nov. 28.

Germany’s emissions can be as much as 15 million tons lower than normal during a mild winter and Europe can save 60 million tons in warmer weather, according to Bokermann.