Coal phaseout concept: a power plant transforming into a green landscape.

Coal's Curtain Call: How Auctions Can Power a Cleaner Energy Future

Nico Varela in Climate & Environment September 2025 • 5 min read.

"Discover the economics of coal phaseouts and how innovative auction policies can drive the energy transition, ensuring a sustainable and equitable shift away from fossil fuels."

The world's reliance on coal, a major source of pollution, must be significantly reduced to keep global temperature increases well below 2°C. While carbon pricing is a frequently used tool, it often falls short due to low prices and inflexible markets. This has led to exploring alternative solutions, such as compensating companies for the early closure of coal-fired power plants.

One promising approach involves using competitive auctions to determine fair compensation for shutting down coal plants. Unlike direct negotiations, which can lead to inflated costs due to unequal information, auctions encourage companies to bid competitively, revealing the true cost of closure. Germany is the only country that has implemented coal phaseout auctions. This makes their experiences invaluable in understanding the policy's strengths and weaknesses.

This article examines the potential of coal phaseout auctions as a tool for a sustainable energy transition. We'll explore the key considerations for designing effective auctions, drawing lessons from Germany's experience and comparing it with other countries that have phased out coal through different methods. From ensuring fair competition to addressing potential challenges, we'll delve into the complexities of this innovative policy approach.

Why Auctions? Unveiling the Benefits of a Competitive Approach

Coal phaseout concept: a power plant transforming into a green landscape.

Closing coal-fired power plants involves a variety of costs, including severance packages, contract termination fees, and environmental rehabilitation. In cases where closure isn't driven by market forces, companies need compensation to reflect the lost opportunity for future profits. These opportunity costs can vary widely depending on the plant's location, its role in the energy grid, its efficiency, and the competitive landscape.

It's challenging for policymakers to determine the true cost of closure upfront. This is where auctions can be particularly valuable. Coal plant owners have an incentive to overstate their costs, while governments want to ensure cost-effective closures for taxpayers. Auctions create a competitive environment that encourages companies to reveal their true costs. If an owner overestimates, they risk losing the auction. Underestimating carries similar risks.

Reduced Reliance on Long-Term Contracts: In many regions, long-term contracts protect coal-fired generation from competition, hindering the decline of coal.
"Pay-to-Break" Compensation: Compensating companies for early closure can be a politically viable alternative to "polluter-pays" approaches like carbon pricing.
Efficient and Transparent Payments: Competitive auctions provide a transparent way to determine compensation for early coal closure, overcoming the information gaps that can plague direct negotiations.
Ensuring Sufficient Participation: Careful auction design can encourage enough companies to participate, leading to accurate cost discovery.
Potential Fiscal Savings: Shutting down coal-fired plants can free up funds in countries that provide capacity payments to support coal-fired generation.

A successful coal phaseout hinges on understanding when it makes economic sense. A phaseout is rational when the social costs of coal, like pollution and health problems, far outweigh the private profits. While addressing each of these negative impacts separately would be ideal, it's often difficult to implement and enforce these measures effectively. Therefore, phasing out coal altogether becomes a practical solution.

The Road Ahead: Policy Recommendations

Coal is a highly polluting energy source and carefully managing its combustion is vital for reaching climate goals. Because the credibility of the carbon offset market is questionable, a cut in coal combustion is needed. This means no new coal development and the early retirement of existing coal-fired power plants. Compensation for early closure may be useful. The owners of coal-fired power plants represent a highly mobilised political group that can block progress unless carefully managed. A coal phaseout scheme should earmark funds for workers and coal-dependent regions to help in reskilling, re-development, and the rehabilitation of polluted lands.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1080/14693062.2024.2358114,

Title: The Economics Of Coal Phaseouts: Auctions As A Novel Policy Instrument For The Energy Transition

Subject: econ.gn q-fin.ec

Authors: Sugandha Srivastav, Michael Zaehringer

Published: 20-06-2024

Everything You Need To Know

What are coal phaseout auctions, and how do they work in the context of the energy transition?

Coal phaseout auctions are a novel approach to accelerate the energy transition by compensating companies for the early closure of coal-fired power plants. Unlike direct negotiations, auctions create a competitive environment where companies bid to determine the fair compensation. Germany is the only country that has implemented coal phaseout auctions, which creates invaluable experiences in understanding the policy's strengths and weaknesses. These auctions encourage companies to reveal the true cost of closure, leading to efficient and transparent payments. This method addresses costs like severance packages, contract termination fees, environmental rehabilitation, and lost profits, promoting a sustainable shift away from fossil fuels.

Why are competitive auctions considered a better approach than direct negotiations when phasing out coal plants?

Competitive auctions offer several advantages over direct negotiations. Direct negotiations can lead to inflated costs due to unequal information and the incentive for plant owners to overstate closure costs. Auctions, on the other hand, encourage companies to bid competitively, revealing the true cost of closure. If an owner overestimates their costs, they risk losing the auction; underestimating carries similar risks. This process ensures efficient and transparent payments and helps overcome the information gaps that can plague direct negotiations, ultimately leading to better cost-effectiveness for governments and taxpayers.

What are the key benefits of using coal phaseout auctions, and how do they contribute to a cleaner energy future?

Coal phaseout auctions offer several key benefits, including efficient and transparent payments for early coal closure, reduced reliance on long-term contracts that hinder the decline of coal, and potential fiscal savings. Auctions help overcome the challenges associated with determining the true cost of closure, encouraging enough companies to participate to ensure accurate cost discovery. This approach directly addresses the financial aspects of shutting down coal plants, like severance packages and environmental rehabilitation. By facilitating a smoother and more cost-effective transition away from coal, these auctions play a crucial role in reducing pollution, mitigating climate change, and fostering a cleaner, more sustainable energy future.

What are some real-world examples or case studies of countries that have implemented coal phaseout auctions?

Currently, Germany is the only country that has implemented coal phaseout auctions. This makes their experiences invaluable in understanding the policy's strengths and weaknesses. By examining Germany's approach, we can draw valuable lessons for designing effective auctions and understanding the complexities of this innovative policy approach. While the article does not provide specific details about other countries using similar methods, it emphasizes the importance of learning from Germany's experience and comparing it with other strategies for coal phaseout, offering insights for a cleaner, more sustainable energy future.

Besides auctions, what other policy recommendations are suggested to facilitate a successful coal phaseout, and why are they important?

Besides auctions, several other policy recommendations are crucial for a successful coal phaseout. These include earmarking funds for workers and coal-dependent regions to support reskilling, redevelopment, and the rehabilitation of polluted lands. This is vital because the owners of coal-fired power plants often form a highly mobilized political group. Careful management is needed to prevent them from blocking progress. Phasing out coal altogether becomes a practical solution to minimize the environmental and health impacts. Reducing reliance on long-term contracts and compensating companies for early closure are also key, providing a politically viable alternative to carbon pricing and creating a transparent way to determine compensation.