1 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

b

BRIEFING PAPER NOVEMBER 2015

STRUCTURAL CHANGE IN LUSATIA WHAT WILL COME AFTER LIGNITE?

JULIAN SCHWARTZKOPFF AND SABRINA SCHULZ

In March 2015, Germany’s Economics and Energy Minister Sigmar Gabriel presented draft legislation for a climate levy which would have mainly fined lignite-fired power plants for emitting CO2 above a certain threshold. This was eventually dropped in favour of a compromise where some lignite plants will be moved into a capacity reserve. Nevertheless, the controversial proposal triggered an unexpected momentum in the debate on the future of lignite in Germany. The social consequences of the lignite phase-out were at the heart of this debate. It became clear that Germany's lignite mining regions are crucial to the success of the energy transition: If the energy transition can only be achieved at high social cost, the credibility of the entire project is called into question.

Lusatia, German’s second-largest lignite mining region, is at the centre of the debate on a

socially acceptable lignite phase-out. The region is considered structurally weak, with high

unemployment, low economic growth, and high levels of emigration. With the breakdown of

Eastern Germany’s heavy industry after reunification, tens of thousands of jobs disappeared

virtually overnight. The region has still not fully recovered from this blow. The political process

had been unable to stop this but, in contrast to the present situation, it did actively intervene

to mitigate the social consequences.

Today, the lignite industry provides around 15,000 jobs in Lusatia. Roughly half of those are

located in power plants and open-cast mines, while the other half is with suppliers. According

to state government projections, around half these jobs will be lost following the closure of

the Jänschwalde power plant. Brandenburg’s Energy Strategy does not envisage its closure

until 2030. However, it is questionable as to whether the power plant will still be economically

viable at that time. One third of its units are already slated for closure by 2023 as part of the

capacity reserve. The remaining units will be put under further pressure by German and Euro-

pean climate policy decisions. Within a few years, thousands of jobs could be lost in Branden-

burg’s part of Lusatia. The region is not prepared for this.

2 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

A programme is thus needed to mitigate the effects of this coming structural change on Ger-

many's lignite-mining regions. If those affected are not offered a fair deal by the federal gov-

ernment, they will be left behind by the energy transition. However, such a programme needs

to be planned well in advance. We are faced with the choice of allowing an abrupt structural

break or taking part in an orderly structural change out of lignite. And the window of opportu-

nity is already starting to close.

The political context of lignite In March 2015, Economics and Energy Minister Sigmar Gabriel presented a legislative proposal

for a climate levy. This triggered an unexpected momentum in the debate on the future of

lignite in Germany. The climate levy would have subjected power plant CO2 emissions above a

certain level to penalty payments; in practice, this would have mainly affected older lignite-

fired power plants.

In addition to the expected resistance from the energy companies RWE and Vattenfall, the

debate has also highlighted the economic and social consequences that a lignite phase-out will

entail. Trade unions, especially the IG BCE, are worried about the loss of thousands of jobs

without any accompanying social or structural policy. Regional politicians in Saxony, Saxony-

Anhalt, Brandenburg and North Rhine-Westphalia are rightly worried about possible structural

economic breaks that the closure of the lignite mines and plants would cause in their federal

states. Although the climate levy attracted support from various groups such as scientists,

environmental organizations, the parliamentary opposition, municipal utilities and even the

utility EnBW, concerns about job losses proved the deciding factor. According to a study com-

missioned by the Federal Environmental Agency1, the climate levy would have caused the loss

of 4,700 jobs, which amounts to around 22% of all employees in the lignite industry.2

Due to this narrow but intense opposition, the climate levy was finally dropped in favour of an

agreement that halves the emissions reduction burden of the electricity sector by 2020 and

ensures that lignite-fired power plants will be put into a capacity reserve, rather than having

to make punitive payments. According to a decision by the cabinet, the measure stipulates

that from 2017, lignite units would gradually be transferred to a reserve (to the extent of 2.7

GW), only to be reactivated in an emergency. They will be shut down by 2023.3 Operators of

power plants will be reimbursed annually to the tune of €230 million for providing capacity for

seven years. However, this is an interim solution at best, one that leaves many questions un-

answered. A key consequence of the controversy has been that a lignite and coal phase-out

has been seriously discussed in Germany for the first time. The issue has arrived in the public

debate.

Against this backdrop, it seems that the days of German lignite are numbered. This is not nec-

essarily due to a lack of profitability, as the electricity generation costs of lignite are generally

1 UBA (2015) Klimabeitrag für Kohlekraftwerke: Wie wirkt er auf Stromerzeugung, Arbeitsplätze und Umwelt? (The climate levy for coal fired power plants: How does it affect electricity, jobs and the environment? - translation of title) 2 Statistik der Kohlenwirtschaft (statistics of the coal industry), 2014 3 Bundesregierung (2015) Entwurf eines Gesetzes zur Weiterentwicklung des Strommarktes (Strommarktgesetz) (Federal Government (2015) Draft law on the further development of the electricity market - translation of title)

3 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

significantly lower than those of other fossil fuels.4 That, however, is looking at lignite purely

from a business perspective. Taking into account the external costs of lignite-fired power gen-

eration, such as health costs caused by air pollution and damages to the environment like

groundwater lowering or water pollution, shows that lignite mining produces a net loss for the

economy as a whole. External costs are estimated to be approximately €80 to 100 per MWh of

electricity. This is several times the power price.5

Additionally, not all lignite units are equally efficient. Forty percent of the German lignite units

are more than 35 years old.6 Estimates made on the basis of energy suppliers’ data, published

in a study on the climate levy7, show that the oldest German lignite units are at best barely

breaking even or else are uneconomical due to their low efficiency. This especially concerns

RWE’s outdated power plant fleet.8 Against this backdrop, one can understand the warning of

the climate levy’s opponents of a “domino effect” that would have led to the closure of large

parts of Germany‘s lignite fleet.9 The declining energy demand and the development of re-

newable energy with marginal costs close to zero are likely to drive down power prices even

further than their current historic low. A domino effect that could force the ailing old lignite

units into decommissioning and even affect those power plants that are currently still profit-

able is becoming ever more likely due to these market tendencies.

While the current market situation for lignite is still tenable, it will significantly deteriorate in

the future due to ongoing and planned reforms at federal and European levels. Efforts are

being made to reform the European Emissions Trading System (ETS) in order to generate

higher CO2prices by restricting the supply of emissions certificates. To this end, a market stabil-

ity reserve which will come into effect in 2019 has already been adopted.10

In addition, a re-

form proposal that would substantially constrict the supply of emissions certificates each year

from 2020 onwards is currently being discussed.

The leading information services provider Thomson Reuters recently revised its certificate

price forecasts in light of the ongoing reform efforts. The company is forecasting that the CO2

price, which is currently at approximately €8, will rise to €15 by 2020 and to €30 by 2030.11

Taken together with the data on cost structures of the older lignite power plants from the

study mentioned above12

, one can estimate electricity generation costs under higher CO2

4 Fraunhofer ISE (2013) Stromgestehungskosten – Erneuerbare Energien (Electricity generation costs - renewable energy - translation of title) 5 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84 (The exit from lignite, organisational options in the context of the energy transition, translation of title) 6 NGO Existing Coal Database 7 Lazard (2015) Potentielle Auswirkungen des “Nationalen Klimaschutzbeitrags” auf die Braunkohlewirtschaft (Potential impact of the "National Climate contribution" on the lignite industry - translation of title) 8 E3G (2015) RWE’s Lignite Liabilities: A bail-out by taxpayers? 9 RWE (2015) Die Bedeutung der Braunkohle. (The importance of lignite - translation of title) RWE had argued that by restricting or closing down individual power plant units, it would be impossible to make enough profit to pay for the remaining power plants and the system of open-cast mines and their reclamation. 10 Treibhausgasemissionen: Einrichtung einer Marktstabilitätsreserve gebilligt: press release of the European Commission of the 18 October 2015 (Greenhouse gas emissions: Establishment of a market stability reserve approved, translation of title) 11 Carbon Pulse (2015) Impact of unallocated allowances on future EUA prices negligible - analysts, 18 June 2015 12 Lazard (2015) Potentielle Auswirkungen des “Nationalen Klimaschutzbeitrags” auf die Braunkohlewirtschaft (Potential impact of the “National Climate contribution” on the lignite industry - translation of title)

4 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

higher prices. Figure 1 shows the minimum electricity generation costs of all German lignite

units over 25 years given a certificate price of €15. It shows that the revenues from the sale of

electricity would not even cover electricity generation costs in 2020, assuming the current

electricity forward price of around €3013

. If these projections prove accurate, the majority of

Germany’s lignite power plants could be making losses from a business perspective as well

within 5-10 years.

Figure 1: Electricity generation costs of the oldest German lignite units (older than 25 years)

at a CO2 price of €15

Source: E3G estimate

However, this is a very conservative estimate as fixed fuel costs (which arise, for example from

purchase of land and machinery) have not been included in the calculation. This is because a

part of these costs could not be reduced in the short term. Therefore, they are not directly

relevant to a decision on the closure or continued operation of a given power plant – they are

“sunk costs”. However, exactly what share of “fixed fuel costs” represents sunk costs is not

apparent from the study cited. We erred on the side of caution by excluding them from the

estimate but if the full fuel costs are included, electricity generation costs amount to €45-52

per MWh. These are far higher than the electricity prices expected by 2020. This should be

understood as the upper limit of the estimate, while Figure 1 only represents the lower limit.

Strengthening the ETS will hit lignite (as the most CO2-intensive energy source) much harder

than hard coal or natural gas. ETS reform will thus not only increase the cost of lignite-fired

electricity generation but also worsen its competitive position relative to other fossil fuels. If

the certificate prices increase enough, lignite could thus even fall behind gas in the merit or-

der.

13 EEX

5 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

In addition, more stringent emission limit values are expected to come into force from 2021

under the EU Industrial Emissions Directive (IED) and the German Federal Immissions Control

Act (BImSchV). Typically, expensive retrofitting with emission reduction technology will be

needed for power plants that do not meet these limits. For instance, Vattenfall calculated that

retrofitting all the boilers at the Jänschwalde power plant with more effective catalytic con-

verters for NOx would require capital costs of €20.3 m and additional operating costs of €7.2

m.14

In particular, with older lignite units that operate at borderline profitability, energy sup-

pliers will have to assess whether such retrofitting would pay off or whether closure would be

preferable from an economic standpoint.

In addition, a whole series of analyses has confirmed that Germany will only be able to meet

its climate change targets for 2020 and 2030 if there is a significant reduction in power sector

emissions.15

In December 2014, the German government therefore committed to require addi-

tional emission reductions in the electricity sector by 2020, though the additional power sector

reductions have effectively been halved under the capacity reserve. This additional contribu-

tion by the power sector can be achieved most cost-effectively through a reduction in lignite-

fired power generation. This is because lignite is by far the most emissions-intensive energy

source – it is responsible for 55% of the German power sector’s CO2 emissions but only for

26% of electricity production.16

Accordingly, Germany’s political debate will eventually have to take up the issue of a lignite

phase-out again. The compromise on the capacity reserve will at most serve to delay this de-

bate. Once 2.7 GW of lignite capacity has shut down, roughly 17 GW of lignite capacity will

remain – more than in any other European country. The lignite issue will thus continue to play

a central role in the energy and climate policy decisions made in the next few years.

A complete exit from lignite in Germany is thus only a matter of time. Whilst it still seemed a

few years ago as if lignite could have a future in an emission-free economy thanks to carbon

capture and storage (CCS), this is no longer the case. Currently, no such plants are in industrial

operation anywhere in the world. Vattenfall ended its CCS pilot project in Jänschwalde17

back

in 2011 and last year also withdrew from CCS research.18

The state government of Brandenburg already admits the inevitability of an end to lignite

power generation. Brandenburg’s Energy Strategy describes lignite as a “bridging technology”

on the way to an entirely renewables-based power system.19

However, the strategy does noth-

14 Vattenfall (2013) Transposition of the IED into German law - NOx ELV 100 mg/m³ for existing combustion plants 15 FÖS (2014) Klimaschutzplan lässt zu viel offen (Climate Protection Plan leaves too much open -translation of title), IZES (2015) Kraftwerks-Stilllegungen zur Emissionsreduzierung und Flexibilisierung des deutschen Kraftwerksparks: Möglich-keiten und Auswirkungen (Power plant closures to reduce emissions and increase the flexibility of German power plants: opportunities and implications - translation of title) 16 BNetzA, ETS-EUTL, as of 2014 17 Spiegel Online (2011) Klimaschutz: Vattenfall stoppt Milliardenprojekt zur CO2-Speicherung, 5.12.2011 (Climate Change: Vattenfall stops billion project for CO2 storage - translation of title) 18 Spiegel Online (2014) Rückzug: Vattenfall gibt CCS-Forschung weitgehend auf, 7.05.2014 (Retreat: Vattenfall's gives up CCS research to a large extent, translation of title) 19 See e.g. Energiestrategie 2030 des Landes Brandenburg (Energy strategy 2030 of the State of Brandenburg - translation of title); the Energie- und Klimaprogramm Sachsen 2012 (Energy and climate programme for Saxony - translation of title) on the other hand abides by the use of lignite in the medium to long-term.

6 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

ing to outline a credible and socially acceptable exit perspective. The forthcoming revision of

the Brandenburg Energy Strategy could, however, set a new course.

At the same time, the federal government doesn’t currently offer any accompanying structural

or social policy measures, although there is a quite a lot of experience to learn from. In the

cases of the collapse of hard coal mining following the 1960s, and the collapse of the Eastern

German coal industry after German reunification, various measures were taken to cushion the

social impacts. The climate levy proposed by the Federal Ministry of Economics in spring 2015

completely ignored the question of the social compatibility of the lignite phase-out – despite

political assertions to the contrary.

Politics, trade unions and energy companies refuse to have an honest coal phase-out debate,

preferring to ignore the reality of the industry’s future prospects for short-term political and

economic gain. This is doing the near 22,000 employees in the German lignite industry a great

disservice. The German lignite industry is currently heading towards a crash which will be es-

pecially devastating for its employees. Instead, the employees and regions in question need an

orderly structural change, one that renders the phase-out as socially acceptable as possible

and which creates sustainable prospects for a future beyond lignite.

Economic importance of lignite in Lusatia Lusatia spans the German-Polish border, though most of it lies in Germany (see also Figure 2

below). The German part of Lusatia stretches across Southern Brandenburg and Northern

Saxony and has about 1 million inhabitants.20

The region encompasses the administrative dis-

tricts (Landkreise) of Elbe-Elster, Spree-Neiße, Oberspreewald-Lausitz, Dahme-Spreewald,

Görlitz, Bautzen, and the city of Cottbus.

Lusatia is the second largest of the three German lignite regions. In terms of output (61.8 mil-

lion tonnes in 2014) as well as power plant capacity (currently 6.7 GW at three locations),

Lusatia lies behind the Rhineland lignite area (93.6 m tonnes; 10 GW at four locations). On the

other hand, the Mitteldeutsche mining area is far smaller.21

Within Lusatia, the lignite industry

is mainly centred on the districts of Spree-Neiße, Bautzen, Görlitz, as well as in the outskirts of

the city Cottbus.

The economic prospects for Lusatia are worrying but not hopeless. Economic growth in the

region is weak – according to projections by the Ifo-institute, economic output will decline

0.9% by 2030.22

At 9%, unemployment is above the German average of Germany (6.7%).23

However, it is slightly below the Eastern German average of 9.8% and has significantly declined

since 2004 when it was still above 20%.24

Nevertheless, this can only be partly explained by

new jobs, as ongoing migration out of Lusatia has also been contributing to this decline. Since

20 This study considers only the German section of Lusatia. 21 Though Mitteldeutsche historically meant “Central German”, it is actually in the South of present-day Eastern Germany. 22 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects - translation of title) 23 Bundesagentur für Arbeit (Federal Employment Agency), as of September 2015 24 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects - translation of title)

7 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

1995, the population has shrunk by 18% from an original 1.43 million to 1.17 million.25

This

disproportionally affects young people. Consequently, the area is suffering from a lack of

skilled employees, which will intensify even further in the future. According to projections, the

total number of people employed in Lusatia will decrease by 36% by 2030. This corresponds to

a shortage of approximately 300,000 skilled staff.26

There is also a significant weakness in local

research and development (R&D).27

Lusatia has a history in manufacturing and mining, which has shaped its economic structure to

this today. In 2010, industry accounted for almost 30% of the gross value added and for 23% of

overall employment. This was much higher than the average in Eastern Germany.28

Small and

medium-sized enterprises (SMEs) are predominant – these are particularly active in such tradi-

tional industrial sectors like the metal industry. Headquarters of major international corpora-

tions tend to be an exception in this predominantly rural area.29

On one hand, the strong de-

pendence of Lusatia on the industrial sector is a strength, as it generally has a high growth

potential. On the other hand, it is a weakness because it fluctuates with overall economic

activity. Additionally, the industrial sector typically has much higher secondary employment

effects than, for example, the services sector.30

The utility sector (encompassing energy and water supply) is particularly strong in Lusatia, with

a share of 15% of the region’s gross value added. This is well above the German national aver-

age for the sector (about 4%) and is mainly the result of lignite mining and lignite-fired power

generation.31

Calculations of the gross value added for the lignite industry alone in Lusatia are

not available. However, calculations at the state level have been made. The share of the lignite

industry in Brandenburg’s gross value added is estimated at just below 3%. In Saxony, it is

under 1%.32

Nevertheless, industry in Lusatia is far more diversified than the average in Eastern Germany.

Since reunification, the region has developed an industrial profile beyond the lignite industry.

This is mainly the effect of the food industry, chemistry and plastics, as well as the metalwork-

ing and mechanical engineering sectors, which provide 46% of the 81,757 industry job in Lusa-

tia. A further 9% of the industrial workforce is employed in the textiles, glass, and ceramics

sectors, as well as in processing non-metallic mineral products.33

These industries are propor-

tionally far more strongly represented here than on average in Eastern Germany. Due to this

25 Regionaldatenbank Deutschland (Regional database for Germany) as of: December 2013 26 Ibid. 27 BMWi (2014) Industrieatlas der Neuen Bundesländer (Industry Atlas of the New Federal States - translation of title) 28 More recent figures, specifically for Lusatia are unavailable. 29 Nevertheless, besides Vattenfall, there are other branches of large corporations in the region - for example, ArcelorMittal, BASF, Deutsche Bahn, Bombardier and Siemens. 30 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects -translation of title) 31 Ibid. 32 Prognos (2011) Bedeutung der Braunkohle in Ostdeutschland. (The significance of lignite in Eastern Germany translation of title). In this document, however, induced value-added effects are factored in, which is methodologically questionable.. 33 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven. (Lausitz industrial and economic region : stocktaking and prospects -translation of title). In comparison:9% of the industrial workers are employed directly in lignite mining and lignite power plants..

8 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

diversification, downturns in individual industries in Lusatia can be better compensated for

than in Eastern Germany as a whole.

The central significance of lignite for the economic structure of Lusatia is primarily due to its

impact on employment. According to the Ifo-institute, 7,430 people were directly employed in

the lignite industry in 2013. This number refers to Vattenfall employees in the region, which

covers the vast majority of jobs in Lusatia’s lignite industry. Around two-thirds of them work in

opencast mines the remainder in the power plants. Fifty-eight percent of these employees live

in Brandenburg, the rest in Saxony.34

While the German Lignite Industry Association (DEBRIV)

quotes a figure of 8,245 workers, this total also includes Vattenfall employees who are not

active in Lusatia as well as 685 LMBV staff who work in there.35

Because the LMBV is entirely

publically owned and exclusively engaged in the rehabilitation of the old GDR open-cast mining

areas, it should not be considered as being part of the lignite industry.

In addition to direct employment, the lignite industry also has indirect employment effects

through material expenses and investments. This creates employment in wholesale industries

that supply the lignite industry. This demand is largely met from within the region. For exam-

ple, 63% of the Brandenburg lignite industry’s expenditure is effected in Brandenburg.36

The

scale of the resulting indirect employment effect is a very controversial issue. The above-

mentioned Ifo-institute study estimates the employment multiplier of the lignite industry at

around two. In other words, each workplace in the lignite industry creates another job at a

supplier company. This is clearly above the average employment multiplier of the industrial

sector in Lusatia, which the study estimated to be 1.7. According to this calculation, 7,158 jobs

are indirectly dependent on the lignite industry in Lusatia.37

Their total effect on employment

(direct and indirect) would thus amount to 14,588 jobs, corresponding to about 4% of regular

employment (sozialversicherungspflichtige Arbeitsplätze) in Lusatia.38

However, there are also much higher estimates. For example, a study commissioned by Vat-

tenfall calculated an employment multiplier of three for the entire Eastern German lignite

industry.39

This figure should be judged with caution, though. Firstly, in addition to the indirect

employment effect, “induced jobs effects” were calculated; these arise from consumer spend-

ing by employees in the lignite industry. To attribute the job of a miner’s baker or barber to

the lignite industry is, however, highly questionable from a methodological perspective. Over-

all, the study calculates that 33,505 jobs are created by the lignite industry in the whole of

Eastern Germany.

34 Grüne Liga (2015) Arbeitsplatzeffekte der Lausitzer Braunkohlewirtschaft. Version of 2004. (Employment effects of Lusatia lignite industry - translation of title) . 35 Ibid. 36 Prognos (2011) Bedeutung der Braunkohle in Ostdeutschland (significance of lignite in Eastern Germany - translation of title) 37 This, in turn, only relates to Vattenfall employees in the region.. 38 This relates to workers in the districts of Cottbus, Elbe-Elster, Spree-Neisse, Oberspreewald-Lausitz, Dahme-Spreewald, Görlitz and Bautzen, according to the Bundesagentur für Arbeit (Federal Employment Agency) Bundesagentur für Arbeit. Details: December 2014. 39 Prognos (2011) Bedeutung der Braunkohle in Ostdeutschland (see footnote 35)

9 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

An earlier study by Prognos AG for the same client and asking the same question reached a

figure of only 23,569 jobs in 2005.40

This implies an increase of 10,000 lignite industry jobs

within six years, which is very far from the actual employment trend in the sector. Since this

supposed employment increase is not explained anywhere in the more recent study by Prog-

nos, it does seem very likely that the calculation was made generously on behalf of the client.41

The results of the 2011 Prognos study have been put to questionable use in the context of the

coal phase-out debate in 2015. For example, both Brandenburg's Economics Minister Gerber42

and Prime Minister Woidke43

referred to the study, arguing that over 30,000 jobs in Lusatia

depended on lignite – even though the figures include the Mitteldeutsche mining area and are

methodologically questionable.

Nevertheless, the indirect employment effect of lignite is high, and it is an important pillar

Lusatia’s economy. However, it does not follow that these jobs will automatically disappear in

the course of the lignite industry’s long-term decline. Indirect employment effects are a purely

statistical calculation, not a causal relationship. According to Prognos (2011), 43% of jobs indi-

rectly created are spread among the construction (23%), mechanical engineering (15%) and

metals (5%) sectors. These industries also provide inputs for growing clean technology sectors

like renewable energy and energy efficiency of buildings. It is thus foreseeable that at least

some of these indirectly created jobs can be retained as the energy transition continues. A

further 39% are made up of industry-specific services, for example, in the banking and insur-

ance industries or in the trade and transport services sectors. However, many service provid-

ers – especially credit and insurance institutions – are broadly based, so that jobs are not

automatically lost if the lignite industry’s order volume declines. The biggest job losses are to

be expected in supplier companies that receive their orders from the lignite industry alone.

Furthermore, lignite production is closely linked to the plaster and cement industry, which (as

a downstream sector) uses the calcium sulphate produced during the desulphurisation of coal-

fired power plants.44

Gypsum processing plants have thus been established near power plant

sites in Lusatia and have become important regional employers. However, it is not the case

that these companies are currently dependent on the continued operation of lignite power

plants. Since 1995, extensive stocks of gypsum have been built up – enough to guarantee the

production of plaster and cement for years to come.45

Since the lignite phase-out will not oc-

cur overnight, the next few years will offer the opportunity to increase these stocks even fur-

ther.

When distinguishing between directly and indirectly created jobs in the lignite industry, the

quality of these jobs also needs to be examined. Employment in the lignite industry is often

referred to as “good work”. This is indeed the case where direct employment is concerned. In 40 Prognos (2005) Energie- und regionalwirtschaftliche Bedeutung der Braunkohle in Ostdeutschland (Energetic and regional economic importance of lignite in Eastern Germany - translation of title) 41 Grüne Liga (2015) Arbeitsplatzeffekte der Lausitzer Braunkohlewirtschaft (Employment effects of Lusatia lignite industry, translation of title) 42 RBB aktuell (2015) Braunkohle-Arbeitsplätze in der Lausitz - Gerbers Zahlenspiele, 26.03.2015 (TV report) 43 Görlitzer Anzeiger (2015) Unisono: Tillich und Woidke für Abbaggerung, 14.10.2014 (newspaper article) 44 Prognos (2011) Bedeutung der Braunkohle in Ostdeutschland (significance of lignite in Eastern Germany - translation of title) 45 Grüne Liga (2015) Arbeitsplatzeffekte der Lausitzer Braunkohlewirtschaft (Employment effects of Lusatia lignite industry, translation of title)

1 0 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

2013, the mean gross annual salary of a worker in the energy sector amounted to €47,716 in

Brandenburg and €49,820 in Saxony. This is well above the national average across all sectors,

which amounted to €31,578 in 2013 and it is largely due to the relatively high wages paid in

the lignite industry.

However, the situation does look rather different when it comes to indirectly created jobs,

because the lignite industry exerts strong cost pressure on its suppliers. Thus in 2013, the

German metal workers’ trade union IG Metall reported with respect to suppliers in the metal

and electrical industry, “that only just under a third of the workforce was paid according to

collectively bargained wage agreements or in line with agreements based on them.”46

The

report added that the use of subcontractors and temporary workers was forcing wages down

even further. Vattenfall supplier Emis Elektrics, for example, an electronics services provider

specialising in power plants, paid its more than 400 employees an average of €30,625 (gross)

in 2011. This is far below the industry rate of €35,200.

Nevertheless, because of the lignite phase-out, which is unavoidable in the long term, Lusatia

will lose an important industry and many jobs. However, this will play out in slow motion,

unlike the collapse of the Eastern German coal industry following reunification. At that time,

almost 60,000 jobs disappeared unexpectedly and within a mere five years.47

On the other

hand, in the present situation, industry and political decision-makers do now have the chance

to initiate an orderly structural change over a longer period, which mitigate social and eco-

nomic disruption as much as possible.

A possible phase-out scenario Calculations by the German Institute for Economic Research (DIW) based on the 2012 grid

development plan assume that lignite mining in Lusatia will come to an end in 25 years’ time

at the latest.48

This is in line with the political and scientific debate, where a phase-out by 2040

is being seriously discussed.49

In April 2014, the German Federal Government’s Advisory Coun-

cil on the Environment (SRU) spoke out in favour of a phase-out by 2040.50

However, it is still

completely unclear when specific individual lignite power plants in Lusatia could be shut down.

Nevertheless, a recent report drawn up by the DIW does at least give an impression of a possi-

ble shutdown sequence and its associated impact on lignite mining.

Accordingly, the two oldest power plant units in Lusatia at the Boxberg site (where there are

currently still four units) are expected to be the first to cease operations. The DIW has ear-

marked 2019 and 2020 for this, which is seems realistic given the projected development of

the price of ETS certificates predicted by Thompson Reuters. This will lead to the first job

losses. However, these would be relatively limited, as the site will be kept going with two re-

46 Lausitzer Rundschau (2013) IG Metall: Vattenfall-Dienstleister zahlen zu wenig, 28. Juni 2013 (newspaper article) 47 Statistik der Kohlenwirtschaft (statistics of the coal industry) 48 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84 (The exit from lignite, organisational options in the context of the energy transition, translation of title) 49 IZES (2015) Kraftwerks-Stilllegungen zur Emissionsreduzierung und Flexibilisierung des deutschen Kraftwerksparks: Möglichkeiten und Auswirkungen (Power plant closures to reduce emissions and increase the flexibility of German power plants: opportunities and implications - translation of title) 50 SRU (2015) 10 Thesen zur Zukunft der Kohle bis 2040 (10 theses on the future of coal until 2040 - translation of title)

1 1 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

maining units, while the open-cast Nochten and Reichwalde mines which supply it will still

have enough customers.

The closure of the power plant in Jänschwalde will have a much greater impact.51

As the oldest

lignite-fired power plant in Lusatia with the most inefficient units (after Boxberg N and P), as

well as acute profitability problems, it is nearing the end of its economic life. The energy strat-

egy of the state of Brandenburg originally foresaw the closure of the plant by 2030 and its

replacement by a CCS power plant. A new plant without CCS was ruled out. Although the 2030

energy strategy is due to be revised next year, the prospects for the Jänschwalde power plant

are not expected to improve.

Fig. 2: Lausitz lignite mining area with power plants (KW), open-cast mines (TB) and expan-

sion projects

Source: Figure from the DIW

Despite the failure of CCS technology, there may still be efforts to keep the Jänschwalde power

plant in operation beyond 2030. However, there are also economic barriers in the way. Firstly,

two units of the Jänschwalde power plant will be closed down for good in 2022 and 2023 due

to the capacity reserve, representing a third of the plant’s capacity. The substantial fixed costs

of lignite mining and power generation from lignite combustion will thus be spread over fewer

units, which will adversely affect the power plant’s economic efficiency.

51 Prognos (2012) Untersuchung der energiestrategischen und regionalwirtschaftlichen Auswirkungen der im Rahmen der systematischen Weiterentwicklung der Energiestrategie des Landes Brandenburg untersuchten Szenarien in zwei Leistungspaketen, (Study of the energy-strategic and regional economic effects in Brandenburg… translation of title), on behalf of the Brandenburg Ministry of Economics and European Affairs

1 2 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Furthermore, a gradual increase in CO2 certificate prices can be expected, and this is set to

make power generation at the Jänschwalde location unprofitable in the medium term. Thomp-

son Reuters has predicted that the current certificate price would more than double by 2020

(to €19 per tonne CO2). It would even rise to €30 per tonne CO2 by 2030. If the trading price of

electricity does not increase significantly, the actual date when the plant becomes inefficient

would be well before 2030, as Figure 1 shows.

Regardless of this, the Jänschwalde open-cast mines will be depleted of lignite very soon. The

Cottbus-Nord open-cast mine will close as early as the end of 2015.52

The open-cast mine in

Jänschwalde is expected to be phased out between 2023 and 2025, depending on the exploita-

tion rate. The Jänschwalde power plant, however, could be supplied with lignite from the Wel-

zow-Süd open-cast mine by the coal transport rail link until the plant’s closure at little addi-

tional cost. The 2,500 jobs (including indirect jobs) created by lignite extraction in these two

mines will largely be lost.53

The recultivation measures needed after the closure of open-cast

mines will only be able to provide employment for a small proportion of the existing work-

force. New employment perspectives for the originally planned open-cast mine Jänschwalde-

Nord can no longer be expected, as the approval process has been put on hold since 2011.54

The closure of the Jänschwalde power plant can thus be expected by no later than 2030.55

According to a report on the Energy Strategy of the state of Brandenburg, a total of 7,480 jobs

will be lost following the closure of the Jänschwalde power plant, with 4,380 of them directly

in the lignite industry.56

This is more than half of all the people employed in Lusatia’s lignite

industry. Most of these job losses can no longer be avoided by energy policy measures: The

above-mentioned report included a scenario with a new CCS power plant at the Jänschwalde

site. Building a new CCS-equipped lignite power plant is the most optimistic scenario under

consideration. Yet even in this scenario, employment in lignite will fall by about 40% by 2030.

However, large sections of the workforce at Jänschwalde will lose their jobs already before

2030. The capacity reserve, which will include two units at Jänschwalde, envisages a warning

period of ten days to account for the time the units need to begin supplying electricity57

and it

is not expected that the capacity reserve will have to be activated very often. This suggests

that no permanent personnel will be necessary to operate the units. The 2,500 open-cast min-

ing workers are also expected to lose their jobs well before 2030 in line with the closures of

the Cottbus-Nord and Jänschwalde mines.

52 In the DIW’s expert report on the need for the Nochten II and Welzow-Süd II open-cast mines, the closure of the Jänschwalde open-cast mine in 2023 is assumed. The Prognoseforum report on the same issue assumes depletion by 2025. 53 Verordnung über den Braunkohleplan Tagebau Jänschwalde, 5 December 2002 (Regulation concerning the lignite plan of the Jänschwalde open-cast mine - translation of title) 54 http://www.kein-tagebau.de/index.php/de/drohende-tagebaue/jaenschwalde-nord 55 The DIW assumes that the power plant will be closed down gradually by 2023. 56 Prognos (2012) Untersuchung der energiestrategischen und regionalwirtschaftlichen Auswirkungen der im Rahmen der systematischen Weiterentwicklung der Energiestrategie des Landes Brandenburg untersuchten Szenarien in zwei Leistungspaketen, im Auftrag des brandenburgischen Ministeriums für Wirtschaft und Europaangelegenheiten (Study of the energy-strategic and regional economic effects in Brandenburg… translation of title), on behalf of the Brandenburg Ministry of Economics and European Affairs 57 The ten-day deadline shows that lignite power plants are unsuitable as reserve capacity, since they need much more time to be ready to operate than gas-fired plants, for example.

1 3 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Following the closure of Jänschwalde, there will still be two power plants in Lusatia, at the

Boxberg (Saxony) and Schwarze Pumpe (Brandenburg) locations, supplied from the open-cast

mines in Reichwalde, Welzow-Süd and Nochten. Since the units at those sites are all less than

20 years old and relatively efficient, the DIW assumes that they could be operated profitably

until the early 2040s. However, it is expected that falling electricity prices will further restrict

the profitability of these power plants due to the increased share of renewable energy

sources, as well as the increase in CO2 certificate prices from 2019 and 2020, all of which will

reduce full load hours overall. This, in turn, will have implications for jobs in the connected

mines as mining employment fluctuates with the actual amount of coal mined.

Seen against this background, the development of the Welzow-Süd II and Nochten 2 open-cast

mines is highly questionable even if the state governments in Brandenburg and Saxony have

already decided on corresponding plans for lignite mining. Vattenfall has now also put the

expansion of open-cast mining in question against the background of the “uncertain energy

policy framework for lignite mining and the generation of electricity from lignite in Ger-

many”.58

In addition, the expansion of open-cast mining makes little economic sense, as the

remaining power plants could be supplied from the existing mines for decades to come.59

Besides this, those affected by the expansion plans are willing to challenge them through the

courts.60

There are good prospects that the expansion of open-cast mining could be prevented

by the courts as the Federal Constitutional Court strengthened the rights of the people affect-

edin a 2013 decision on the Garzweiler open-cast mine.61

In summary, it can be said that the effects of the lignite phase-out will be felt particularly hard

in Brandenburg. Here, thousands of jobs could be lost within the next five to ten years.62

The

job losses in the Saxon part of Lusatia will be less abrupt. After the anticipated closure of the

two oldest Boxberg units, only relatively new power plants will remain, which will have the

potential to keep operating until the early 2040s. However, a progressive decline in full load

hours and lignite production can be expected, and this itself will lead to a gradual decrease in

employment.

On the one hand, this illustrates the urgent need for a debate on a managed and fair transi-

tion. On the other hand, it shows the need for solidarity within Germany. The impacts of the

lignite phase-out will be felt very differently in the various regions. This calls for specific fund-

ing by the Federal Government at the focal points concerned. Nevertheless, this phase-out

perspective seems much less daunting a challenge than the collapse of the lignite industry in

Eastern Germany that occurred immediately after reunification.

58 RBB online (2015) Vattenfall stoppt Umsiedlungsvorbereitungen, 25 June 2015 (Vattenfall stops resettlement arrangements - translation of title) 59 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84 (The exit from lignite, organisational options in the context of the energy transition, translation of title) 60 http://www.kein-tagebau.de/index.php/de/drohende-tagebaue/welzow-sued-ii 61 Ruling of the Federal Constitutional Court BvR 3139/08; and corresponding press release 62 This will also have a fiscal impact. According to Prognos (2012), a decline of about €30 million in tax revenues can be expected. However, this amounts to less than 1% of the total income of the state of Brandenburg.

1 4 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

The historical experience The Eastern German lignite industry suffered a collapse of unprecedented proportions follow-

ing German reunification in 1990. After the collapse of the German Democratic Republic

(GDR), the catastrophic conditions within the industry came to light. Production processes did

not meet Western German technological standards. Working conditions were also hazardous

and the levels of environmental pollution were extreme. Bringing the industry up to Western

standards entailed a drastic consolidation, which led to the immediate closure of numerous

plants and open-cast mines. The result was a rapid fall in employment.

Nearly 80,000 workers were still employed in Lusatia lignite industry in 1990. In 1995, only

around 20,000 remained. In 2000, employment in lignite had bottomed out at just 7,000. Since

then, it has remained relatively stable (see Figure 3). This all represents a decline of over 90%

in just ten years. The fact that lignite extraction “only” fell by about two-thirds following reuni-

fication serves to illustrate the productivity gains that have been achieved.

Fig. 3: Employment (direct) in Lusatian lignite industry

Source: Coal industry statistics

The same fate befell the uranium, metal and chemical industries in the former GDR, all of

which were regionally concentrated, and all of which collapsed practically at the same time.

Before reunification, the Südraum (Southern Area) was one of the most industrialised regions

in the GDR. After the collapse of the GDR, it became one of the least developed regions in

reunited Germany. A highly contaminated industrial and mining region (though with a pre-

dominantly rural character) was left behind as a legacy of the GDR, with enterprises that were

largely no longer competitive.63

63 Geißler (2008) Die Sozialstruktur Deutschlands: Zur gesellschaftlichen Entwicklung mit einer Bilanz zur Vereinigung, 5. Auflage, Kapitel 16 (The social structure of Germany – on social development with a balance sheet of reunification translation of title) 5th edition, chapter 16

1 5 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

This had catastrophic social effects and set back the economic development of the entire re-

gion. Political decisions could not stop this trend, but policy-makers did actively work to cush-

ion the impact. First, the LMBV was established in 1991 to decontaminate the former open-

cast mines and clean up environmental damages. The LMBV initially had around 20,000 em-

ployees and so, as a job-creation scheme, compensated for part of the region’s job

losses.64

It was financed by the federal German government, which provided three-quarters of

its funding, with one-quarter of the money coming from the federal states.

Additionally, a number of measures were taken to cushion the social impact of the structural

breakdown of the lignite industry. A wide-ranging early retirement scheme was offered to

employees over the age of 55, with many of them taking it up. Furthermore, a social plan for

job cuts was drawn up together with the lignite companies. This included, among other things,

short-time working arrangements as an interim solution, with many employees allowed to

gradually leave their existing employment, whilst at the same time looking for a new job. Be-

sides this, training opportunities were also provided for people working in the technology and

management sectors, to make it easier to move to new industries and jobs. Overall, the work-

ers were therefore granted a high level of social security, given the circumstances.65

In addition, the federal and state governments made active efforts both to keep operating as

many companies as possible in the region that had been facing bankruptcy, as well as to accel-

erate the creation of new ones. The takeover of the Vereinigte Energiewerke (VEAG) energy

utility and the Lausitzer Braunkohle (LAUBAG) lignite company in the early 2000s by Vattenfall

was also facilitated by political decision-makers through this targeted incentive scheme.66

This

strategy was not always marked by success, but overall, it did make an important contribution

to the diversification and strengthening of the local economic structure.

In comparison to this experience, the current lignite phase-out is playing out in slow motion

and its effects are limited. During the collapse of the lignite industry after 1990, the federal

government gave a helping hand to the Eastern German lignite mining regions. The current

conditions seem well suited for a forward-looking structural policy which cushions the lignite

phase-out in a socially acceptable way and which, at the same time, provides opportunities for

new industrial sectors. Lamentably though, such a policy is not seriously being discussed at the

federal or at state levels.

64 Wikipedia: Lausitzer- und Mitteldeutsche Bergbau-Verwaltungsgesellschaft, LMBV (2009) Zwei Jahrzehnte Braunkohlesanierung – Eine Zwischenbilanz - no equivalent English page 65 Hoffmann & Dieter (1993) Die Kohlearbeiter von Espenhain (The coal miners of Espenhain - translation of title) 66 DIW (2014) Risks of Vattenfall's German Lignite Mining and Power Operations: Technical, Economic, and Legal Considera-tions; Policy Report on Behalf of Greenpeace Germany

1 6 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Economic opportunities after lignite What chance does Lusatia have of excelling with a new economic profile following a lignite

phase-out? This question is difficult to answer because there is still a lack of studies and plans

for broadening the region’s economic profile. This was also the main finding of a study com-

missioned by the LINKE left-wing party in Saxony on the state of research into the future de-

velopment of Lusatia.67

Seen against this backdrop, the establishment of the “Innovationsre-

gion Lausitz GmbH” should be welcomed, since it has explicitly committed itself to exploring

these issues.68

It involves initiatives from a variety of business associations, as well as from the

Cottbus-Senftenberg Technical University in the state of Brandenburg, which is set to open in

2016.69

Accordingly, the section below is not aimed at providing an exhaustive analysis of the eco-

nomic prospects of Lusatia region, but is instead an attempt to summarise the most important

aspects of the debate and provide an initial assessment of a variety of options.

First, it should be stated that Lusatia will have great difficulty in regaining its former economic

strength in the future. The ongoing migration out of Lusatia and the consequent shortage of

skilled workers, as well as location factors that are in need of improvement do not serve to

make the region interesting for investors. As the Ifo-institute notes, “it is not to be expected

that many companies will open new sites and offices in Lusatia”.70

Although there are some

innovative approaches, for example in the field of tourism, with former industrial sites being

used for cultural projects or as business incubators for start-ups, these alone will hardly be

sufficient to put Lusatia back on its economic feet.

The material processing of lignite (its liquefaction, gasification and degassing) is also often

cited as a potential economic opportunity. The main application is to provide raw material

inputs for the chemical industry. The advantage of these techniques is that they protect the

chemical industry from oil price fluctuations by providing an alternative to crude oil imports,

while strengthening the local economy. In Germany, the Chemiedreieck (chemical triangle)

Halle/Leipzig-Bitterfeld-Merseburg is the main hub for the material use of lignite.71

However, high levels of investment would be needed in order to establish large-scale material

use in Lusatia. This is unlikely to happen, given the considerable financial risk arising from the

current low crude oil prices and the high clean-up costs that the procedure demands, as well

as a foreseeable rise in the cost of CO2 certificates.72

Due to these many obstacles, the material

67 Kutzner (2014) Analyse des Forschungs- und Konzeptstandes zur zukünftigen Entwicklung der Lausitz mit und ohne Braunkohleausstiegspfad (Analysis of the level of research and concepts for the future development of Lusatia with and without an lignite exit strategy - translation of title) 68 Lausitzer Rundschau (2015) Pläne für "Innovationsregion Lausitz", 5.10.2015 ; (newspaper article) IHK Cottbus (2015) Letter of Intent für Innovationsregion Lausitz GmbH unterzeichnet (Letter of Intent signed for Innovationsregion Lausitz GmbH), press release of 2 October 2015 69 The new company has so far had a strong entrepreneurial focus. Greater involvement by civil society organisations working on structural change would be welcome here. This has also been explicitly requested by the organisers. 70 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects -translation of title) 71 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84 (The exit from lignite, organisational options in the context of the energy transition, translation of title) 72 Bimboes (2015) Braunkohlevergasung ohne Zukunft (No future for lignite gasification - translation of title)

1 7 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

use of lignite in Germany only plays a minor role; a mere 2% of the carbon-based products of

the chemical industry are made from it.73

The employment potential is also quite low.

Throughout Germany, the potential direct employment resulting from material use is esti-

mated to be 1,000 jobs, with a growth potential of only 250-300 jobs.74

The potential for the tourism sector is much more pronounced, however. Both the lake envi-

ronment formed by reclaiming, recultivation and flooding the former GDR open-cast mines, as

well as the industrial heritage museums and sights are important pull factors for tourists. At

the same time, the Spreewald forest and lake area was already popular tourist destination

before reunification. Overall, the tourism and hospitality industries have already created about

13,800 jobs in Lusatia and are thus significant economic contributors.75

Yet, 42% of these jobs

are low paid. Moreover, the tourism sector’s growth potential is unclear. In particular, an ef-

fective tourist marketing of the region is an important prerequisite for future success.

However, the central marketing of Lusatia as a tourist and health resort is hindered by the

bewildering array of tourist industry associations, which frequently overlap and compete with

each other. There are, for example, separate tourism organizations for Upper and Lower Lusa-

tia, the Dahme lakes, the Spreewald area and the Upper Lusatia/Lower Silesia region. In the

view of many in Lusatia, this is a problem for the continued development of the tourism sec-

tor.76

In 2012, Lausitzer Seenland, a tourist association covering Saxony and Brandenburg, was

founded. On the one hand, setting up yet another association without any fundamental reor-

ganization of the tourism marketing in Lusatia region will not help create clarity. On the other

hand, the cross-border nature of the organisation should certainly be viewed positively. With

this in mind, joint tourism marketing with the Polish section of Lusatia could also be profitable.

Moreover, the future of tourism in Lusatia mainly depends on the region’s accessibility. Just as

in the case of other industries, a good transport infrastructure is a key location factor and it is

particularly essential for the local economic structure given the high number of commuters

who live in Lusatia. Even though the Ifo-institute does attest to Lusatia’s fundamentally good

transport links, there is certainly a need for expansion.77

Better rail links with Poland would be

particularly welcome. However, there is no talk of expanding the rail network – on the con-

trary. It is extremely worrying that four stations on the Regional Express line 2 between

Cottbus and Berlin will be closed down.78

For many employees, that would make access to

their places of work much more difficult on top of affecting the prospects for tourism.

Given this generally rather bleak economic forecast, it is unlikely that Lusatia will turn into a

comprehensively thriving economy over the next 25 years. However, it is now essential to

73 DGMK; Dechema (2009): Positionspapier Kohlenveredlung (position paper on coal refinement -translation of title) 74 Brezinski, Horst (2009): Volkswirtschaftliche Auswirkungen einer erweiterten stofflichen Nutzung von Braunkohle (Economic impact of an expanded material use of lignite - translation of title) 75 This relates to workers in the districts of Cottbus, Elbe-Elster, Spree-Neisse, Oberspreewald-Lausitz, Dahme-Spreewald, Görlitz and Bautzen, according to the Bundesagentur für Arbeit. (Federal Employment Agency) Version: December 2014. 76 Schimdt (2012) ECF Voruntersuchung: Plan A für die Lausitz (ECF Preliminary investigation: Plan A for Lusatia - translation of title) 77 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven

(Lausitz industrial and economic region : stocktaking and prospects -translation of title) 78 Lausitzer Rundschau (2015) Der RE2 soll Haltestellen für vier Minuten opfern, 11.03.2015 (newspaper article)

1 8 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

develop the existing regional priorities and expand existing strengths. To this end, a suitable

framework needs to be established to safeguard existing industrial areas, for example in the

sectors of foodstuffs, chemicals and plastics, as well as in metal, mechanical engineering, glass

and ceramics. In order to achieve this, the key location factors that attract workers and inves-

tors need to be strengthened. In the case of Lusatia, it is necessary to bolster the education

system and research capacities. High-quality infrastructure, such as in the health, education

and leisure sectors needs to be safeguarded, whilst the preservation of the relatively good

transport links is also vital.

The projected shortage of skilled workers is certainly a key problem for businesses in the re-

gion. In particular, it will be difficult for many companies to recruit skilled professionals from

the region itself in future, given the continuing population drift away from the area. It can

therefore not be ruled out that some companies, which had previously been based in the re-

gion, will close down their production facilities in Lusatia. This makes it especially important to

strengthen the local educational system. It is not only necessary to preserve and, where possi-

ble, expand the educational infrastructure but also to improve the quality of education in gen-

eral. Starting points here would be activities to reduce drop-out rates through better supervi-

sion, support courses, and by improving science and language skills, as well as through intern-

ships, all of which strengthen school-leavers’ professional orientation.79

As far as higher education policy is concerned, a stronger focus on the needs of the local econ-

omy may counteract the skills shortage. Cooperation with local companies represents a prom-

ising approach, especially for universities of applied sciences. In this context, the range of dual

degree programmes, which are not widely offered in Brandenburg and Saxony, needs to be

expanded.80

In addition, a stronger focus on R&D would be promising for Lusatia. Here, the region’s high

level of industrialisation provides a real opportunity because industry typically generates more

technological innovation than other sectors. However, small and medium-sized companies in

particular often lack the capacity to carry out research on their own. That is why it is important

to both strengthen the universities and research institutes in the region and on the other

hand, to promote technology transfer and cooperation between research and industry. This

would improve the region’s technological competitiveness, which is extremely important when

it comes to taking full advantage of such future-oriented sectors as renewable energy and

smart technologies.

Generally Lusatia needs to develop a research profile that builds on the specific strengths of

the region. Seen against the backdrop of the historical experience and the future challenge of

the lignite phase-out, this could, for example, include the establishment of a “post-mining”

research network. This should re-establish and pool research that deals with all aspects related

to the cessation of mining in the region. It would deal with geological, water management and

engineering questions, as well as issues of urban development and landscape planning, archi-

tecture, sociology, public health, demography, as well as industrial and labour economics.

79 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects -translation of title) 80 Ibid.

1 9 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Since large parts of Eastern Europe will also have to deal with the forthcoming end of the coal-

mining industry, this could represent a real chance to establish Lusatian expertise in this field.

More high-quality training opportunities are also urgently needed. Training courses for people

already in the labour force will help them adapt their skills to the changing economic and

technological environment. They would also increase the employability of the jobless and they

are key to making it possible for workers in the lignite industry to move into other professional

fields. For SMEs in particular, continuous personnel training is essential to achieving a produc-

tivity benefit from new technologies and production processes, opening up new fields of busi-

ness, and generally retaining the ability to innovate.

It will still be necessary to improve the attractiveness of Lusatia as a place of work and resi-

dence, in order to keep and draw skilled workers. Leisure facilities, child care services and

health infrastructure are particularly important here. Environmental and health aspects are

also relevant. From this perspective, the lignite phase-out could have a positive long-term

effect. However, in view of the precarious budgetary situation of the federal states and local

authorities, enormous challenges do exist. Following the end of the lignite industry, munici-

palities such as Spremberg or Weißwasser in particular, which receive a large part of their

revenues from Vattenfall's business tax payments, will have difficulties in raising the funds to

make the investments needed to preserve the local infrastructure, let alone to expand it.

Carbon-neutral technologies, a future-oriented sector In Lusatia, tangible growth can only be expected in a few economic sectors in the medium

term. Increasing added value and employment can be expected in Lusatia in the fields of re-

newable energy, energy efficiency and low-carbon technologies that are being promoted

throughout Germany. An honest discussion of the structural advantages and disadvantages of

these sectors is necessary in order to realistically assess these opportunities. While it is

unlikely that the “green sector” in Lusatia will be able to replace the economic role of lignite,

the region cannot afford to ignore the potential for growth that these sectors offer.

This potential for Lusatia has so far been rarely analysed and is still poorly understood. Regard-

ing the potential employment and value creation effects of developing renewable energy, an

estimate has been produced by the Institute for Ecological Economy Research (IÖW).81

How-

ever, the potentials in the fields of energy efficiency, as well as in the broad range of new

products and services that are needed in a low-carbon economy, have not yet been investi-

gated. That is why further analysis is limited to the field of renewable energies in this section.

As this sector clearly shows, the potentials are quite ambivalent and their actual realisation is

always far more difficult than in a computational model. However, renewable energy generally

represents a growing sector essential in a low-carbon economy, one which is already creating

twice as many jobs in Saxony and Brandenburg as the lignite industry does. According to re-

81 IÖW (2015) Vattenfalls Chance – Ein Zukunft für die Lausitz ohne Braunkohle (Vattenfall's Chance - A Future for Lusatia without lignite - translation of title)

2 0 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

cent figures, the sector has created 17,580 jobs in Brandenburg and 16,400 in Saxony.82

This

calculation includes both direct and indirect jobs.

These figures are considerable since renewables are considered to have a typically lower po-

tential for local job creation than the lignite industry.83

In Brandenburg, per capita employ-

ment in the renewable energy sector (at 18.8 per 1000 employees) is approximately twice as

high as in Saxony, where the figure is only 9.3. However, a majority of these jobs are no lo-

cated in Lusatia. Looking only at the regions, employment in the lignite industry almost cer-

tainly exceeds employment in renewable energies.84

According to a recent study by the IÖW, commissioned by Greenpeace, it would be possible to

create roughly 3,900 new jobs in Brandenburg and Saxony by expanding renewable energies

by 2030. However, this calculation only includes direct employment, thus excluding the indi-

rect employment effect through supplier industries. The employment multiplier for the expan-

sion of renewable energies is estimated at roughly two on the federal level (compared to 1.7

for lignite).85

Admittedly, it should not be assumed that the total indirect employment effect

will be felt in Lusatia itself. The Ifo-institute study referred to earlier provides a more realistic

value for estimating the regional gross impact on employment. They have calculated an em-

ployment multiplier of 1.5 for Lusatia-based wind turbine manufacturer Vestas.86

Including indirect jobs, the total employment effect from the renewable expansion assumed in

the IÖW-study can be estimated to be roughly 5,900 jobs by 2030.87

It must also be considered

that the employment effects of energy efficiency (which are roughly comparable with those

from renewable energies in Germany as a whole)88

and new energy technologies such as smart

grids, demand side solutions and energy storage are not included in the estimate. The real job

creation potential from green technologies for Brandenburg and Saxony is thus likely to be

substantially higher. Lusatia will benefit from this, but it is not yet clear to what extent jobs

would be created in the region itself.

Thanks to possessing extensive open spaces with faster than average wind speeds, Lusatia has

a high growth potential in renewables, especially in the wind energy sector.89

Here, consider-

able success has already been achieved. Taken together, the wind farms currently installed in

82 GWS (2014) Erneuerbar beschäftigt in den Bundesländern: Bericht zur aktualisierten Abschätzung der Bruttobeschäftigung 2013 in den Bundesländern (Jobs in renewables in the federal states: Report on the updated estimate of gross employment in 2013 in the federal states - translation of title) 83 For example, the Ifo-Institute (2013) estimated the employment multiplier of the wind turbine manufacturer Vestas in Lusatia as 1.5, and of the lignite industry as 2. 84 No exact figures on employment in renewables in Lusatia are available. 85 BMU (2006) Erneuerbare Energien: Arbeitsplatzeffekte. (Renewable Energy: Employment Effects – translation of title) The previously cited recent BMWi (Federal Ministry for Economic Affairs and Energy) study on the gross employment through renewable energy unfortunately does not offer a clear division into direct and indirect jobs.. 86 Ifo-Institut (2013) Industrie- und Wirtschaftsregion Lausitz: Bestandsaufnahme und Perspektiven (Lausitz industrial and economic region : stocktaking and prospects -translation of title) 87 Since the majority of employment potential calculated by Greenpeace arises in connection with wind power, the use of the employment multiplier of a wind power company is justified. However, it is by no means a scientific projection.. 88 UBA (2012) Gesamtwirtschaftliche Effekte energie- und klimapolitischer Maßnahmen der Jahre 1995 bis 2011 (Macroeco-nomic effects and climate policies of the years 1995-2011 - translation of title) 89 Regionale Planungsgemeinschaft Lausitz-Spreewald (2013) Regionales Energiekonzept Lausitz-Spreewald (Lausitz-Spreewald Regional Planning Authority (2013) Regional Energy Plan for Lausitz-Spreewald - translation of title)

2 1 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Lusatia have a total capacity of 1,010 MW. This equals approx. 60% of the total installed wind

power capacity of 1,618 MW in Saxony, and almost one-fifth of Brandenburg’s total capacity of

5,672 MW.90

Given these dimensions, it is clear that Lusatia has already benefited considerably

from the renewable energy boom of recent years. Future rehabilitated mining areas could also

to be harnessed for solar and wind energy purposes going forward.91

This all suggests that the region does have economic perspectives. Of course, the qualifications

of those employed in the conventional energy source sector and in renewables and other

green technology sectors are fundamentally different. However, lignite industry employees,

especially in the fields of engineering and management, may certainly have the potential to be

employed in the renewable energies sector, given appropriate training. It is just another indus-

try within the energy sector, after all. At the same time, though, the growth in job numbers

projected by the IÖW does make it clear that it will be difficult for renewable energy to sup-

plant the lignite industry’s employment effect. In particular, it cannot be expected that all the

3,900 or more jobs will be created directly in Lusatia, despite the potential that exists there.

Furthermore, job security and working conditions in the renewables sector are often criticised

and contrasted with the previously safe and well-paid jobs that the lignite industry has pro-

vided. According to a recent study by the trade union IG Metall, the quality of work in the

renewable energy sector does, in fact, leave a great deal to be desired. The average gross

annual salary of €31,800 is well below lignite industry levels. Overtime is the rule and extra

hours are rarely rewarded financially.92

Furthermore, there is criticism that many companies

are sceptical about instituting works councils in the industry and that they try to evade collec-

tive wage agreements.

Nevertheless, things are changing here as well. Over the last three years, 50 works council

committees have been established, so that now all the major companies involved in the wind

power industry have works councils, including Lusatia-based Vestas. Collective agreements

have also been signed with an increasing number of enterprises. Certainly, there is still some

room for improvement, but as the IG Metall union puts it: “Good employment for every em-

ployee in the renewable energy sector is increasingly becoming a tangible reality.”

In view of the German lignite industry’s highly uncertain future, the question of job security

must be considered in a differentiated way. The frequently cited insecurity of jobs in renew-

ables is chiefly due to the central role played by new installations, the driving force behind the

high overall level of employment in the sector. According to a recent study by the BMWi (Fed-

eral Ministry for Economic Affairs and Energy), almost 64% of renewable employment can be

attributed to new installations while around 21% of jobs are in maintenance and operation.93

This dependence of employment on expanding generating capacity has its advantages and

disadvantages.

90 http://www.foederal-erneuerbar.de/tl_files/aee/Jahresreport%202015/AEE_Jahresreport_FE_2015_BB.pdf 91 IÖW (2015) Vattenfalls Chance – Ein Zukunft für die Lausitz ohne Braunkohle (Vattenfall's Chance - A Future for Lusatia without lignite - translation of title) 92 IG Metall (2014) Nachhaltig – aber auch sozial? Arbeitsbedingungen und Einkommen in den Erneuerbaren Energien (Sustainable - but is it also social? Working conditions and incomes in renewable energies - translation of title) 93 The remaining 15% is in the biomass sector, which is dealt with separately in the study mentioned.

2 2 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

On the one hand, the expansion of renewable energies as extensive infrastructure project can

achieve major employment effects and do so within a short space of time. However, this can

only be maintained with a continuously high level of new installations. This leads to a certain

level of volatility: if the expansion slows, then the employment effect will also decrease. The

slump in the solar energy industry in recent years has made this painfully clear. Following a

significant reduction of feed-in tariffs for photovoltaic systems, the number of new installa-

tions fell significantly after 2011. This was accompanied by a rapid loss of jobs in the solar

power sector. In 2011, the solar industry in Brandenburg still provided as many as 9,000 jobs.

In 2013, the figure was only around 2,710. This represented a decrease by roughly two thirds.

Over the same period, the solar industry in Saxony lost around half of its workforce: the num-

ber of people employed fell from 9,340 to 4,970.94

It should be borne in mind, however, that

employment in wind power in Brandenburg rose from 4,530 to 6,120 whilst it increased from

4,220 to almost 4,700 in Saxony over the same period.

Employment in maintenance and operation of renewable energy plants, however, generates

an employment effect over the entire life of the plant. As such, jobs in this area have proved

far more resilient to change. While the employment effect of producing and installing a plant is

non-recurring, maintenance and operation are becoming ever more important due to the

growing number of plants in existence. In addition, operation and maintenance almost always

have local value-added and employment effects, since they are mostly provided on the spot as

local services.

Despite its volatility, the area of new installations is crucial for employment for two reasons:

On the one hand, it determines the extent of the initial temporary employment effect, while

on the other, it determines the level of permanent employment in maintenance and opera-

tions over the long term. The volatility of jobs involved in installing new capacities is therefore

not an argument against the continued expansion of renewables.

Another argument that is often used against renewables is that their expansion is too expen-

sive. The above-mentioned study by the IÖW estimated the investment needs in Brandenburg

and Saxony to be approx. €16 billion over the next 15 years. It is clear that this is a substantial

amount of money. However, Germany has proved itself quite capable of funnelling massive

amounts of money into renewable energies in the past. At the federal level, over €16 billion

was invested in renewable energy in 2013 alone.95

As Table 1 shows, this amounted to ap-

proximately €1.08 billion in Brandenburg and Saxony together. If this level of investment were

merely maintained over the next 15 years, the additional investment required to achieve the

level of job creation calculated by the IÖW would be met by 2030.

94 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84 (The exit from lignite, organisational options in the context of the energy transition, translation of title); GWS (2014) Erneuerbar beschäftigt in den Bundesländern: Bericht zur aktualisierten Abschätzung der Bruttobeschäftigung 2013 in den Bundesländern, (Jobs in renewables in the federal states: Report on the updated estimate of gross employment in 2013 in the federal states - translation of title) study commissioned by the BMWi (Federal Ministry for Economic Affairs and Energy) 95 In 2011, the volume of investment still amounted to €23 billion. The major cutback in the development of photovoltaics is responsible for this slump..

2 3 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Table 1: Investment in renewable energy in Brandenburg and Saxony in 2013 (€ million)

Brandenburg Saxony

Photovoltaics 236.17 191.65

Wind power 564.8 79.78

Total 800.97 271.43

Source: Calculations based on 2015 figures from BAFA (the Federal Office for Economic Affairs and Export Control),

the Bundesnetzagentur (Federal Network Agency) and GWS (Institute of Economic Structures Research)

However, Brandenburg has been much more successful than Saxony in attracting renewable

energy investments. The level of expansion furthermore fluctuates quite significantly over

time. While new wind power installations rose to record levels in 2014, they continued to fall

in the photovoltaics sector.

In the near future, the growth of renewable energies will continue to be funded by the feed-in

tariff. This provides a relatively secure legal framework for further expansion, which is in sharp

contrast to the no longer existent planning security for lignite. However, this is precisely where

policy-makers at the state level must set the right course in order to take full advantage of the

opportunities offered by the energy transition.

In this context, Brandenburg has distinguished itself with a successful location strategy for

attracting renewables, as well as huge efforts towards system integration. The state has won

the Guiding Star (Leitstern) award for renewable energy three times in the last few years.96

In

Saxony, however, there is still a need to do some catching up. Overall, the expansion of wind

power remains far behind what is possible – not least because the state government has failed

to remove important barriers to new installations. For example, new wind turbines have to be

built at a minimum distance from residential areas, equivalent to at least 10 times the height

of the turbine (similar to the “10H” regulation recently adopted in Bavaria).97

Last year Saxony

also adopted an amendment to the state law on road building, which imposes a minimum

distance between wind turbines and roads.98

Since the continued growth in renewables will necessitate the construction of further decen-

tralised renewables installations and power lines, the support of the population is crucial.

Otherwise, the future expansion of renewables, which Lusatia also needs from an economic

perspective, could stall. As recent polls have shown, the acceptance of these projects in

Saxony and Brandenburg is comparatively low.99

The energy transition often has negative

connotations. People in Lusatia criticise both the “giant sticks of asparagus” (wind turbines)

that “blot the landscape”, as well as the inadequate popular consultation on such projects.100

Attempts are being made to counteract this in both Brandenburg and Saxony, for example

96 Brandenburger Hattrick: Zum dritten Mal „Leitstern“, (Brandenburg hat-trick: “guiding light” for the third time translation of title) - State of Brandenburg press release 97 AEE (2014) Bundesländer-Vergleichsstudie zu Erneuerbaren Energien 2014 (comparative study on renewable energy in the federal states in 2014 - translation of title) 98 Straßengesetz für den Freistaat Sachsen (Saxony law on road-planning) 99 AEE (2014) Bundesländer-Vergleichsstudie zu Erneuerbaren Energien 2014 (comparative study on renewable energy in the federal states in 2014 - translation of title) 100 Schimdt (2012) ECF Voruntersuchung: Plan A für die Lausitz (ECF Preliminary investigation: Plan A for Lusatia - translation of title)

2 4 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

through public campaigns and the concrete participation of citizens and communities in the

expansion of renewable energies.

A fair deal for lignite industry employees and for Lusatia As a result of the direction of energy and climate policy set at German national and EU levels,

the Lusatian lignite industry will cease to exist. As a result, a region that in any case has been

struggling with structural economic problems will be faced with an additional burden. The

lignite areas in the Rhineland and Mitteldeutschland are facing similar challenges, despite their

differences.

Faced with this situation, support from the central government is essential in order to make

the transition to an economy without lignite in a fair and socially responsible manner. No such

measures were proposed alongside the climate levy or the climate reserve. While policy-

makers seem ready to support energy suppliers in return for shutting down power plants,

financial support for the affected workers and regions has not once been seriously discussed.

To ensure an orderly structural change, public funding based on carefully drawn up transition

plans is necessary. This needs to achieve two main goals: Firstly, employees in the lignite in-

dustry must be offered a fair deal. Secondly, Lusatia – along with Germany's other lignite re-

gions – must be supported with structural funds.

To achieve the first objective, German policy-makers can rely on the tried and tested instru-

ments that have been used to cushion the collapse of the hard coal industry and in the wake of

the collapse of the Eastern German lignite industry following reunification. While many mis-

takes were certainly made and people are still struggling with the consequences of these clo-

sures in the affected regions, a number of promising approaches can still be identified. At least

policy-makers were able to act. An agreement on a similar package of measures for Lusatia

and other coal regions should be reached as early as possible, before jobs in the lignite indus-

try are lost on a large scale.

One example of a possible approach would be to pay a transitional allowance to former em-

ployees after they have left their jobs. Such rules already exist for workers in the hard coal

industry, who can apply for financial assistance for five years from the age of 50 after becom-

ing redundant in the wake of closures or rationalisation. On average, this transitional allow-

ance amounts to €13,500 per year. In total, the government paid €116 million in transitional

allowances in 2015.101

The reason given for the transitional allowance was the need to end

hard coal mining in a socially responsible way.102

Although this approach could be applied to

the lignite industry, no such provisions have been made for its workers. Yet of course, as with

the other measures listed here, the social and (in some individual cases) psychological conse-

quences of job loss cannot be compensated for. Nevertheless, this option is still preferable to

the alternative of losing one’s job without any special assistance.

101 Bundesfinanzministerium (2015) 25. Subventionsbericht (Federal Finance Ministry, 25th Subsidy Report - translation of title) 102 The bituminous coal-mining industry in Germany is no longer competitive and is only kept alive by high levels of subsidies, which run out in 2018.

2 5 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

A similar measure would be a broad early retirement plan, for instance from the age of 55 or

above, as was offered to Eastern German lignite industry employees following reunification.

Currently, around 70% of the employees in German lignite mining are older than 45 and 23%

are over 55.103

Early retirement can thus make a substantial contribution to cushioning the

expected layoffs.

This could be accompanied by social plans that would allow the remaining employees to leave

the lignite industry gradually. Short-time and part-time working solutions could, for instance,

be applied to ensure that a large proportion of the employees are gradually given less work

instead of having to leave abruptly. This is, of course, only possible with the involvement of the

company running the operation, as well as the works councils and trade unions. Since it is still

unclear who will buy Vattenfall’s lignite business in Lusatia, it is not yet possible to assess what

the chances of such an arrangement would be.

At the same time, younger lignite industry employees in particular should be given the oppor-

tunity to transfer to other occupations with the aid of high-quality training and placement

services. In any case, the range of further education and training offered needs to be improved

in order to counteract the shortage of skilled workers in Lusatia. On the one hand, the em-

ployment agencies (job centres) should be provided with appropriate funding to achieve this.

On the other hand, however, some extraordinary short-term efforts will be needed to cope

with the lignite phase-out, as site closures typically lead to serious slumps in employment. The

eventual closure of the Jänschwalde power plant in particular will cause significant regional job

losses within a short time.

While the continued migration away from Lusatia and the consequent shortage of skilled

workers do represent major problems for Lusatia as a whole, they also provide an opportunity

for lignite industry employees. The general shortage of skilled workers is creating relatively

good prospects for employees in the lignite industry who want to continue to working in Lusa-

tia after leaving the industry. Training is therefore not only needed to enable more people to

move into the renewables sector and related industries. As the above-mentioned Ifo-institute

study points out, in future it will be increasingly important to fill vacancies for managers and

professionals in other sectors to keep existing companies in the region.

Structural support funding is also needed to strengthen the economic structure in Lusatia. For

the region as a whole, improved training opportunities, sustainable economic development

funding and the improvement of locational factors are all essential in counteracting the popu-

lation drift and to strengthen tourism. However, the municipal authorities are currently facing

acute financial challenges. While the budgetary situation in most Lusatian municipalities was

still looking good in early 2015, in August 2015 the Vattenfall Group surprisingly called for all

the trade taxes it had paid in 2014 to be reimbursed, and further announced that it would

halve the amount of tax that it would be paying in 2015. The reason for this is the declining

profitability of lignite, which had led to a massive write-down in the value of Vattenfall’s lignite

division from €5b to €3b.104

The reimbursement in double-digit million amounts will come due

103 Statistik der Kohlenwirtschaft, as of 2014 (Statistics of the coal industry), 2014 104 RBB Online (2015) Vattenfall fordert Gewerbesteuer-Millionen zurück, 11 August 2015 (Vattenfall demands millions in business tax back - translation of title)

2 6 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

in 2016, while the tax revenues expected for 2015 are declining. Due to the low electricity

prices, it is not expected that this trend will reverse in the next few years.

In some cases, this is having serious impacts on municipal budgets. Whilst shortfalls amounting

to 3% of annual revenues are expected in Cottbus, the deficit will be as much as one-third of

the municipal budget in Spremberg.105

In the municipalities, many projects of central impor-

tance to development are now hanging in the balance, for example day care facilities and

school renovation projects, as well as sports and leisure activities.106

In addition to this, local

authority revenues from the Solidarpakt II („Solidarity Pact II”) will continue to decline because

they are designed to be degressive and expire by 2019. Revenues from national and EU-level

structural support funds are also falling. Against the backdrop of this growing gap in funding,

the existing financing instruments should first be fully made use of. Here, the joint “Improve-

ment of the regional economic structure” (GRW) scheme of the federal and state governments

does present opportunities, as does European structural funding, in particular through the

European Regional Development Fund (ERDF). In this context, both commercial projects funds

to support economic development as well as infrastructure projects to support economic ac-

tivity are being funded. For example, the growth programme for the improvement of the re-

gional economic structure of the Brandenburg Investment Bank will be financed from GRW

funds.107

The GRW and the ERDF are administered in an integrated way. Here, all of the municipalities

of Brandenburg and Saxony are classified as being particularly eligible for funding.108

This ap-

plies initially until 2020. The economic development funding is staggered, so that small and

medium-sized enterprises receive proportionally more financial aid. From 2018, however, the

rate of funding for GRW projects will fall from 35% to 30% for small businesses and from 25%

to 20% for medium-sized enterprises. The districts of Spree-Neiße, Cottbus and Görlitz, as

borderland areas, also receive a “border supplement” (Grenzzuschlag), meaning that the fund-

ing rates here are 5% higher and will not be reduced after 2018.

Nevertheless, as Figure 4 shows, structural support from the Federal Government and the EU

has fallen rapidly since the 1990s. The new (Eastern German) federal states are shown, which

received almost 90% of this funding. In total, Brandenburg has received almost €11 billion

since 1991 (18%) and Saxony €17.3 billion (28%).109

However, the per capita distribution of

these funds in the new federal states is relatively balanced.110

In 2014, Brandenburg received

an estimated €194 million in funding, and Saxony €305 million.111

105 Ibid. 106 Lausitzer Rundschau (2015) Herber Schlag durch verfehlte Energiepolitik 12.08.2015, Sächsische Zeitung (2015) Vattenfall-Kommunen müssen Gürtel enger schnallen, 13.08.2015 (newspaper articles) 107 Investitionsbank Brandenburg: GRW-G Wachstumsprogramm für kleine Unternehmen (GRW-G growth program for small businesses - translation of title) 108 BMWi Fördergebietskarte (Map of BMWi development areas - translation of title) 109 Calculations on the basis of the map of BMWi development areas 110 The exception here is Berlin, which receives a significantly lower per capita funding. 111 Calculations based on BAFA data, assuming the funding share of the federal states over the entire period since 1991 for the funding in 2014.

2 7 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Fig. 4: Approved GRW and ERDF funding for the new federal states

Source: BAFA

However, the final selection of projects and allocation of funds among the districts is made by

the state governments. The rules governing the precise allocation of funding to the individual

districts are not transparent. Nonetheless, there is a tough competition for these funds, as

numerous other districts in Brandenburg and Saxony are also considered structurally weak. In

this context, Lusatian municipalities could argue to the state governments that they are sub-

jected to an additional burden, given the necessity to phase out lignite, in order to secure a

greater share of these resources for the region.

Expert interviews have revealed that Saxony generally operates a more decentralised funding

policy, which allows the municipalities greater influence in allocating funds. In Brandenburg,

by contrast, the allocation of funds is more centralised, leading to a fragmented funding envi-

ronment with a tendency of less cooperation between local authorities and stakeholder in-

volvement.112

In order to promote local cooperation and ensure that funding is as appropriate

to local needs as possible, it would be desirable to give the Brandenburg municipalities a

greater say in the selection of economic development projects.

In addition to these funds, the Finance Minister Schäuble’s investment plan of March 2015 has

also raised the prospect of additional funding for the local authorities.113

Firstly, a one-off in-

crease of €1.5 billion in municipal budgets was decided for 2017; Lusatia will benefit propor-

tionately from this. In addition, a new municipal investment promotion fund was set up with

112 Schimdt (2012) ECF Voruntersuchung: Plan A für die Lausitz (ECF Preliminary investigation: Plan A for Lusatia - translation of title) 113 Bundesfinanzministerium (2015) Bundesregierung beschließt Eckwerte zum Bundeshaushalt 2016 und Finanzplan 2015-2019, 18.03.2015 (Federal Government decides on basic parameters of the 2016 federal budget and 2015-2019 financial plan - translation of title, 18 March 2015

2 8 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

the aim of providing €3.5 billion for municipal investments between 2015 and 2018. Of this,

€108 million is earmarked for Brandenburg and €156 million for Saxony.114

While the GRW and

ERDF funding is prioritised to promote economic and business infrastructure, the new fund is

designed to finance a variety of infrastructure projects of public interest in the fields of health,

education, transport and urban development. The municipalities in Lusatia urgently need both.

The European Fund for Strategic Investments (EFSI), set up by the European Commission under

Jean-Claude Juncker, also offers the chance of additional funding. The EFSI is set to mobilise

investments worth €315 billion throughout Europe over the next three years. It is still uncer-

tain as to whether there will be any project proposals from Lusatia. The EFSI provides funding

in the form of loans backed up by EU guarantees. What is particularly interesting about the

EFSI is that municipalities can apply directly to the European Investment Bank in the case of

infrastructure projects and to the European Investment Fund to support SMEs. It is not neces-

sary to first apply through the local state government to obtain EFSI funds. Among other

things, the Lusatia Innovation Region initiative (Innovationsregion Lausitz GmbH) intends to

develop a list of priority infrastructure projects that are to be funded in Lusatia.115

This is a

promising approach to mobilising EFSI funds to support the region.

Overall, the funds available will most certainly not suffice to offset the economic impacts that

will follow a phase-out of lignite mining. Additional funding from the federal level will be

needed to support the regional economy and infrastructure. For this reason, the plan by local

authorities in Lusatia to demand compensation payments from the federal government in view

of Vattenfall's claimed tax refunds is already sending the right signals.116

Concrete proposals to

mitigate the effects of the lignite phase-out have already been proposed by the opposition at

state level in Brandenburg and Saxony during the debate on the climate levy. For example,

Brandenburg’s Green party has proposed a Lusatia fund117

while the left-wing LINKE party in

Saxony has proposed a restructuring fund.118

It is striking, however, that these proposals are

only being made by the opposition. The ruling parties in Brandenburg (the Social Democrats

and the Left party) and Saxony (Christian Democrats and Social Democrats) do not yet seem

prepared to promote structural change by legislative means.

The currently ongoing revision of the Brandenburg energy strategy does offer an important

opportunity to restart a discussion about the policy measures needed to accompany the lignite

phase-out at a the state level. After evaluating the previous measures, the Energy Strategy

2030 is set to be submitted for consultation by the groups concerned in the second half of

2016. This should lead to a package of measures to be presented to the public by the end of

114 Bundesfinanzministerium (2015) VERWALTUNGSVEREINBARUNG zur Durchführung des Gesetzes zur Förderung von Investitionen finanzschwacher Kommunen (Federal Finance Ministry: Administrative agreement on the implementation of the law to encourage investment in financially weak municipalities - translation of title) 115 MDR Sachsen (2015) Was kommt nach Kohle? Lausitz startet gemeinsamen Strukturwandel, 3.10.2015 (TV report) 116 Lausitzer Rundschau (2015) Herber Schlag durch verfehlte Energiepolitik, 12.08.2015 (newspaper article) 117 Landesregierung muss Auslaufen der Braunkohleverstromung abfedern - Bündnisgrüne für Einrichtung eines Lausitzfonds State government must cushion the lignite phase-out – Green party for the establish of a Lausitz fund (translation of title), press release the Green group in the Brandenburg state parliament of 28 April 2015 118 LINKE mit Gesetzentwurf zum Strukturwandel (Left introduces bill on structural change – translation of title), press release of the left faction in the Saxon State Parliament of 19 May 2015

2 9 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

2016. How the strategy will approach the future of the Jänschwalde power plant will be a cru-

cial feature, as will the question of whether an orderly coal phase-out is part of the discussion.

Ideally, the federal government should also bear responsibility for cushioning the effects of the

looming economic impacts caused by the energy transition at the local level. Here, a kind of

“coal phase-out fund” could be conceivable, which would compensate the lignite-mining re-

gions for the closure of their power plants and open-cast mines. Such funding should be given

with a long-term view. For reasons of fairness, the scale of this funding should be calculated on

the basis of the economic importance of the lignite industry in terms of employment, value

added and local municipal budgets.

In all likelihood, these proposed mitigating measures for workers in the lignite industry and

Lusatia itself will be expensive. However, the German state is generating large surpluses

thanks to the currently healthy economic situation. After the first half of 2015, the federal

budget surplus already amounted to €21.1 billion.119

There was also a surplus in 2014. This

means funding opportunities are available. However, the current influx of refugees is placing

significant extra burdens on the state budget, and these could limit the possibilities for socially

cushioning the lignite phase-out.

Proceeds from the auctioning of emissions allowances from the EU Emissions Trading System

(ETS) represent another possible source of funding. In this connection, the Commission’s ETS

reform proposal, submitted in June, explicitly proposes that these funds be used for “social

policy measures to facilitate a fair and equitable transition to a low-carbon economy for com-

panies, employees and consumers.”120

However, there has not been any initiative from the

German government to ring-fence ETS funds in this way so far.

Considering that the German government has been able to pay hard coal subsidies for dec-

ades, most recently in 2014 amounting to more than €1 billion121

it should, in principle, be

possible to socially cushion the lignite phase-out as well. Enabling a Just Transition for Ger-

many’s lignite regions is therefore not a question of feasibility, but rather a question of politi-

cal will.

119 Spiegel Online (2015) Staatshaushalt: Deutschland erzielt Milliardenüberschuss, 25.08.2015 (National budget: Germany achieves surplus of billions – translation of title), 25 August 2015 120 Fragen und Antworten zum Vorschlag für eine Revision des Emissionshandelssystems der EU (EU-EHS), Pressemitteilung der Europäischen Kommission vom 15.06.2015 (Questions and answers on the proposal to revise the EU emissions trading system (EU ETS), press release of the European Commission - translation of title) 121 Bundesfinanzministerium 25. Subventionsbericht (2015) (Federal Finance Ministry, 25th Subsidy Report - translation of title)

3 0 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

Vattenfall’s plans to sell off its lignite division The Swedish state-owned company Vattenfall has to improve its CO2 footprint to meet the

obligations set by the Swedish government. 72% of the company’s total emissions originate

from its lignite business alone. From that perspective, selling it off would achieve Vattenfall’s

climate targets in one stroke.122

However, it is not yet clear what impact the sale will have on

the region. So far, according to media reports, only the Czech companies EPH/ČEZ and Czech

Coal have submitted expressions of interest.123

EPH wants to transact the business via MI-

BRAG, which it already owns. However, MIBRAG's CEO Joachim Geisler is currently under in-

vestigation because of irregularities in the 2009 purchase of MIBRAG by ČEZ and EPH. As

Geisler had been involved in negotiating the deal to a large extent, this could well hinder EPH’s

offer.124

Financial investors such as KKR or Blackstone have also had their eyes on the business,

according to the Reuters news agency.125

There had originally been talk of a purchase by the

state of Brandenburg, but this is no longer being discussed.126

On 22 September 2015, Vattenfall invited potential buyers to issue bids.127

The sale process

should be completed by the second half of 2016. Industry insiders are expecting a final pur-

chase price of €2 to €3 billion for the lignite division.128

At the same time, the buyer will ac-

quire the right to participate in the capacity reserve. Vattenfall is selling off the lignite division

together with ten hydropower plants in Eastern Germany. As the recent reduction in value of

the lignite division, this is a step to make the portfolio more attractive to potential investors.

For Lusatia, it is essential that the successor to Vattenfall is aware of the social dimension and

structural importance of the lignite industry, and behaves with corresponding responsibility. In

particular, the buyer must honour the rules of the social partnership. This is especially crucial

because a collaboration between the operator of the open-cast mines and of the power plants

is essential in order to make the lignite phase-out socially acceptable. Particularly with interna-

tional financial investors, or with the energy suppliers EPH/ČEZ and Czech Coal, there is a dan-

ger that the welfare of Lusatia will simply not be a factor in the corporate strategy.

EPH expressed interest at an early stage and is currently considered the front-runner. In 2009,

EPH (together with ČEZ) bought MIBRAG and the associated Mitteldeutsche open-cast mines

and lignite power plants.129

In 2012, EPH then acquired ČEZ’s shares. The business practices of

EPH and ČEZ gives an idea of what Lusatia could soon be facing if one of these companies buys

the lignite business.

122 Vattenfall (2013): A New Energy Landscape: Sustainability Performance Report 2012 according to GRI 123 Czech.cz (2015) Czech Coal joins suitors for Vattenfall’s German power assets, 6.11.2015 124 Mitteldeutsche Zeitung (2015) Staatsanwaltschaft Bochum ermittelt gegen Geschäftsführer Geisler, 15.10.2015 (newspaper article) 125 RP Online (2015) Steag an ostdeutscher Braunkohle interessiert, 17.02.2015 (Steag interested in Eastern German lignite - translation of title) 126 DIW (2014) Braunkohleausstieg – Gestaltungsoptionen im Rahmen der Energiewende, Politikberatung Kompakt 84

(The exit from lignite, organisational options in the context of the energy transition, translation of title) 127 Vattenfall (2015) Vattenfall kündigt nächsten Schritt im Braunkohle-Verkaufsprozess an, (Vattenfall announces the next step in the lignite sales process - translation of title), press release 22.09.2015 128 Boomberg (2015) Greenpeace says can find cash to buy Vattenfall coal assets, 6 October 2015 129 With the exception of the Lippendorf power plant, which still belongs to Vattenfall..

3 1 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

The business practices of the two companies can best be described as short-term profit maxi-

misation in the style of international financial investors. For example, since the acquisition of

MIBRAG of 2009, a total of €415 million has found its way into pockets of the parent com-

pany’s financial investors.130

This means that the original sales price of €400 million was recov-

ered within only six years. Even in 2010, when MIBRAG posted losses of €135 million, a sum of

€70 million was still paid to EPH and ČEZ.131

In 2013, the outflow of funds amounted to as

much as 19% of turnover.

EPH has promised to make no compromises in relation to follow-up costs of mining such as

cleaning up environmental contamination and other mining-related commitments.132

The

exact consequences of these extraordinarily strong outflows of capital cannot yet be estimated

but it would be extremely surprising if they had no negative impact on the economic structure

and mining area recultivation efforts in the Mitteldeutsche mining area.

Another of the Czech companies’ controversial business practices is the export of lignite from

open-cast mines in Germany to Czech power plants located hundreds of kilometres away.133

From a purely economic perspective, this is a questionable practice, since the transport of

lignite over long distances does not generally make economic sense because of its low energy

content.134

The aim of EPH is presumably to circumvent the Czech export regulations, which

prohibit the expansion of open-cast mining in the Bohemian mining area. This practice leads to

a more rapid depletion of the open-cast mine and therefore also increases the likelihood that

the existing open-cast mines could be expanded or even that the planned open-cast mine in

Lützen could be redeveloped with the support of the state governments of Saxony and Saxony-

Anhalt. This in turn would lead to further resettlements and more environmental damages.

In the event of the purchase of Vattenfall's lignite division by EPH or ČEZ, a major outflow of

funds from the region can be expected and, quite possibly, Czech lignite power plants could be

supplied by the open-cast mines in Lusatia region. The potential buyers are expected to follow

a strategy of short-term profit maximisation. Since the political environment is growing more

and more hostile towards lignite, while electricity prices in Germany keep falling, the time

window during which money can still be made from lignite is closing.

Due to the questionable profitability of many of the older units in Vattenfall’s lignite fleet, it

cannot be ruled out that a future buyer will enact some radical cost reductions. This could also

result in lay-offs or even the closure of individual units. It can be expected that, at a minimum,

social projects in the areas of education, sports and leisure, in which Vattenfall has always

been heavily involved, will be terminated.135

Savings might be made regarding recultivation

130 Schroeter (2015) Mibrags später Geschäftsbericht belegt starken Kapitalabfluss (Mibrag’s later business report confirms major capital outflow - translation of title) 131 Schroeter (2015) Mibrags fragwürdige Finanzströme (Mibrag’s questionable flows of finance - translation of title) 132 Schroeter (2015) Mibrags später Geschäftsbericht belegt starken Kapitalabfluss (Mibrag’s later annual report confirms major capital outflow - translation of title) 133 Schroeter (2015) Tschechischer Mibrag-Eigentümer bekräftigt Kohleexport-Stopp (Czech MIBRAG owner confirms coal export stop - translation of title) 134 VDI Nachrichten (2013) Tschechen setzen auf ostdeutsche Braunkohle, 20.09.2013 (Czechs depending on Eastern German lignite - translation of title) 135 See http://corporate.vattenfall.de/uber-uns/engagement-regionales/lausitz/ and Prognos (2011) Bedeutung der Braunkohle in Ostdeutschland (The significance of lignite in Eastern Germany - translation of title)

3 2 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

and environmental protection measures as well. There is no indication that a potential buyer

would be interested in socially cushioning any possible job losses.

However, it is not yet clear whether a sale will take place at all, even if a buyer is to be found.

This topic is the subject of controversial discussion in Sweden, because the company belongs

to Swedish taxpayers. Overall, Vattenfall’s lignite division emits more CO2 than the whole of

Sweden.136

That is why both the opposition left-wing party and Greenpeace have criticised

selling off the power plants to another company, with the possible effect of raising CO2 emis-

sions, as irresponsible.137

They instead demand a gradual closure of the lignite managed by

Vattenfall.

While the Social Democratic Party is pushing for the sale, the Green Party, its coalition partner,

is internally divided on the issue. The Greens had spoken out against a sale prior to becoming

involved in government. Now they are making their agreement to the sale dependent on it

providing a “concrete benefit for the climate.”138

This would not be the case if the buyer had

wanted to get the most out of the lignite sector with a minimal capital outlay. It is possible

that Vattenfall will link the sale to concrete environmental and social policy stipulations.139

It is

unclear whether the eventual buyer would accept such conditions.

If Vattenfall did sell the lignite business without making any further stipulations whatsoever,

this could, in turn, trigger a political scandal in Sweden. The same is true of selling at a very low

price. It would therefore pay for state and local politicians to exert pressure on the political

process in Sweden. Besides the letter sent in March by the state premiers Tillich (Saxony) and

Woidke (Brandenburg) to the Swedish Parliament140

, it might also be well worth making direct

contact with the opposition. For the civil society groups who want to avert the sale, it would

make sense to collaborate with Swedish environmental organisations.

Lusatia needs to find a consensus on lignite To a large extent, the fate of Lusatia is still undecided, despite the dramatic developments that

have taken place. To ensure that the exit from lignite does not occur as an abrupt and radical

structural break, the region must be offered a fair deal by the federal government. Plans for an

economy beyond lignite must be drawn up, and this must happen rather soon and with the

involvement of the affected groups.

The biggest obstacle to achieving these goals is the political division of the region into oppo-

nents and supporters of lignite. This restricts Lusatia’s influence at the federal and state levels.

The supposed conflict between economic development and environmental sustainability

seems insurmountable. Many participants regret that the discussion is being conducted in

136 National Inventory Report Sweden 137 Radio Sweden (2015) Vattenfall to sell off German coal operations, 22.09.2015; Radio Sweden (2015) Vattenfall wants to sell off brown coal operations, 9.04.2015 138 Sweden's Vattenfall starts German sales, The Local, 22.09.2015. Author’s own translation. 139 Sweden (2015) Vattenfall to sell off German coal operations, 22.09.2015 140 MDR Sachsen (2015): Tillich und Woidke schreiben neuen Bittbrief nach Schweden (Tillich and Woidke write new letter of request to Sweden –translation of title), 12 March 2015

3 3 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

such a confrontational manner.141

A respectful dialogue is desired on both sides – but the

reality is another matter. This is lamentable as the region could achieve so much more if it

spoke with one voice.

For the supporters of lignite, it is all about the economic prospects of Lusatia. They ought to

have a genuine interest in negotiating a fair deal for Lusatia with the federal government. As

soon as lignite ceases to be profitable, its advocates, including the employees, will have lost an

important bargaining chip. However, as long as lignite still yields profits, it will be possible to

negotiate policy concessions in return for cooperation in an orderly phase out. Following the

failure of the climate levy, there has been an increased interest in a managed structural

change. In one year’s time, things may look different again. If people wait until the prospects

of lignite deteriorate even more, they will be in the unfavourable situation of having to negoti-

ate from a position of weakness.

Vattenfall’s possible withdrawal as a political player shifts the balance of power in the region

and opens up a strategic opportunity for ecologically motivated groups. Whether a potential

successor company will be as influential with policy makers as Vattenfall is questionable. In

any case, Vattenfall’s political influence will be weakened as long as the company is seeking to

sell its Lusatian lignite holdings. This means that the coalition of lignite supporters in the re-

gion will be weakened, as Vattenfall has so far had a decisive influence on local and state-level

politics. In addition, Vattenfall’s claims for tax refunds have called into question the idea of

lignite as an unqualified commercial success. Under these conditions, a collaboration between

lignite opponents and supporters could be an interesting prospect.

The pressure of events is thus creating conditions favourable for a coal consensus based on

the recognition that at least the beginning of the phase-out is just around the corner. It is in

any case not apparent how a concept for the future of Lusatia can be developed that will be

broadly accepted by the population, without cooperation between these two fundamental

factions of civil society in the region.

On one hand, it will be necessary for people in Lusatia to speak with one voice. On the other

hand, there is a need to coordinate political advocacy across Germany’s lignite regions – Lusa-

tia, Mitteldeutschland and the Rhineland mining areas. They all face similar challenges as a

result of the energy transition. If they voice common concerns in the public debate and de-

mand joint solutions, they will be able to exert political influence much more successfully than

if they acted separately.

The result of the current political situation is to postpone any serious discussion about a fair

and orderly lignite phase-out. The discussion about the climate levy has shown who will bene-

fits from this: the energy utilities, which are now being paid by taxpayers to shut down power

plants that would have been taken off the grid within a few years in any case. Employees in

the sector might retain their jobs for a few more years– but they will not see a penny from the

settlement. State and local politicians will be a spared an economic hit during their time in

office, but the long-term issues will remain.

141 Schmidt (2012) ECF preliminary investigation: Plan A für die Lausitz (ECF Preliminary investigation: Plan A for Lusatia - translation of title)

3 4 P r o s p e c t s f o r L u s a t i a - w h a t w i l l c o m e a f t e r l i g n i t e ?

A consensus among the key stakeholders must be reached to provide the basis for an orderly

structural change before the next legislative proposal is made to reduce CO2 emissions from

lignite power generation. Otherwise, it is possible that no sustainable solution will be reached

and that the lignite phase-out will occur as a disorderly structural break, rather than a man-

aged transition. A consensus on lignite, which will bring together civil society groups, trade

unions, and politicians in the affected regions, can provide the impetus needed to achieve this.

Political demands are always most difficult to ignore when they are articulated by a broad

alliance of diverse stakeholders.

This work has received funding from the European Commission through a LIFE grant. The con-

tent reflects E3G’s view only. The Commission is not responsible for any use that may be made

of the information it contains.