10 Nov 2022 3 min read

European coal generation: why the rebound won’t last

By Jonathan Constable , Lewis Ashworth

The energy crisis has complicated planned disposals of coal assets, but longer term we believe a phase-out remains on track and essential.


Prior to the energy crisis, Europe has seen a multi-year trend of falling coal power generation, driven primarily by policy rendering coal generation uneconomic.

The recent reversal of this trend, as coal has moved in to replace missing gas for power generation, prompts three questions: is the European coal phase-out finished or just on pause? What does this mean for climate targets? And what does it mean for investors in the utility sector?


We believe some additional scepticism is justified around certain targets for the medium-term phasing-out of coal. In particular, the German coalition government’s aspiration to bring the country’s coal exit forward to 2030 from 2038, while made more concrete by the recent agreement with energy firm *RWE, seems more challenging without Russian gas.

Despite this, the EU’s communications indicate that, looking beyond the crisis, the objective is still to eventually cease coal power generation. And even though, in a 1.5°C world, more coal now means less carbon budget available and steeper emissions cuts in the medium to long term, the bloc remains confident in delivering long-term climate targets.

What should utility companies with coal generation capacity do?

We believe there is a risk of taxes or similar policies clawing windfall profits back to insulate consumers from high energy prices, so we think asset owners should exercise caution in allocating gains in the meantime.

Looking beyond the crisis, in principle we are supportive of disposals of coal operations to responsible new owners, if that would result in equal or accelerated emission reduction pathways and a focus on investments enabling the energy transition.

The definition of ‘responsible’ here is open to debate and should be considered on a case-by-case basis. But we think the state or a closely linked body, for example, might be more likely to run the assets down responsibly, in line with national climate commitments.

We also need to be mindful of historic examples of utility demergers being blocked by the authorities. In our view it is important that any separation of activities comes with the support of the local authorities. For example, in our ongoing engagement with RWE’s senior management team we have been supportive of its board’s rebuttal of an activist investor’s attempt to accelerate a spin-off of the lignite operations prior to achieving this support.

In the case of state involvement, we have seen some progress on a plan to transfer coal generation operations to the state in Poland, and prior to the crisis there was talk of a similar plan using a ‘foundation’ in Germany. While some of these plans might be on hold for now, we think this is more of a temporary detour rather than a change in direction.

Our dynamic approach to engagement

Despite the market backdrop, we still expect Europe to exit coal in due course. And while we are applying nuance to our current conversations with companies we continue to emphasise our expectations on coal phase-out over the medium and long term – aligned with the science of a 1.5°C pathway to net-zero by 2050 – and as reflected in LGIMs Coal Policy and climate expectations.


*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Jonathan Constable

Senior Credit Analyst

Jonathan joined LGIM as a senior credit analyst in October 2013 with lead responsibility for the utilities sector. Jonathan spent nearly five years as an equity research analyst at Nomura International where he focused on UK and Italian utilities. Prior to this he worked as a consultant with Ernst & Young for over four years, including advisory roles on UK infrastructure projects in the health sector. Jonathan holds an MA in mathematics from the University of Cambridge. He is a chartered accountant and CFA charterholder.

Jonathan Constable

Lewis Ashworth

Climate Specialist, Investment / Climate

Lewis is responsible for LGIM's stewardship activities related to climate change. Lewis joined LGIM in January 2022 from the Institutional Investors Group on Climate Change (IIGCC) where he held the title of Programme Manager. Doing so, Lewis coordinated investor/company engagements across six sectors and was responsible for the management of the Climate Action 100+ (CA100+) initiative. Prior to that, he held positions at the UK Government Department for Business, Energy and Industrial Strategy and the Renewable Energy Policy Network for the 21st Century (REN21). Lewis graduated from Imperial College London and the University of Sheffield and holds an MSc in Environmental Technology and Energy Policy and a BSc in Physics.

Lewis Ashworth