At the end of 2021, Portugal became coal-free after shutting down its 628MW Pego coal-fired power plant, privately owned by utility Tejo Energia. Pego’s closure came just ten months after the shutdown of the 1,250MW Sines coal plant, owned by national utility EDP.

Portugal effectively phased out coal eight years ahead of schedule. At a time when some European countries are wondering whether to delay their own coal exits in the wake of the Ukraine war – think Germany – Portugal’s example offers lessons on how to manage a transition, what role carbon pricing and renewable investments can play, and how utilities have to be involved in the development of just transition plans.

The Iberian nation is “the perfect example of how once a country commits to quitting coal, the pace of the phase-out inevitably accelerates”, said Kathrin Gutmann, Europe Beyond Coal campaign director, on the day the Pego coal plant was shut down.

The town of Pinhao, Portugal, where the coal train is preserved intact. (Photo by Jhonny Ortiz 7 via Shutterstock)

Even as natural gas prices climb to new heights and coal displaces gas in some countries, the Portuguese government has declined any chance to bring its coal plants online again. “This would be total nonsense,” Portugal’s Environment Minister João Pedro Matos Fernandes told national media early in March.

Portugal committed to shut down its two coal-fired power plants in Pego and Sines by 2030 at the COP23 UN climate conference in Bonn, Germany, in 2017. Only two years later, however, Prime Minister António Costa announced the intention to bring the closure of Pego forward to 2021 and Sines to 2023, following the advice of several environmental groups.

“Public pressure from environmental NGOs was an important factor,” says Francisco Ferreira, president of Portuguese environmental NGO ZERO. “For many years we have been showing that it didn’t make sense to continue to use such an inefficient fuel with such a big environmental impact, and proposing these [same] dates [for a phase-out].”

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Carbon pricing further accelerated the closure of plants as coal became unprofitable compared with cheaper renewable sources.

The EU’s objective to reduce greenhouse gas emissions by at least 55% below 1990 levels by 2030 pushed prices in the EU’s emissions trading system (ETS) to an all-time high of nearly €97 per tonne in early February 2022, compared with an average of €25 per tonne only two years earlier. The Portuguese government also decided in 2018 to end public subsidies for coal.

“There has been a combination of carbon pricing measures and an increase of renewable energy investments that have harmed the economic viability of coal,” says Artur Patuleia, senior associate at think tank E3G. “The economics deteriorated in such a way the utilities themselves decided to shut down the plants earlier,” he told Energy Monitor.

Renewables boost

Portugal has seen major investments in renewables, bringing their share of the power mix to 61% in 2021, up from 39% in 2017.

“What we see is that it is mainly renewables that have absorbed what used to be coal-fired electricity generation," says Patuleia. "The conclusion is countries that invest in renewables can cope with the end of coal."

Hydropower makes up the lion’s share of renewable energies in Portugal, with 7GW of capacity installed, reports Portugal’s Association for Renewable Energies (APREN). The country started the development of large-scale hydro power plants in the 1950s, and it became Portugal’s main source of power generation in the 1970s – with coal gaining prominence only in the 1980s.

Portugal’s energy market faced a wave of liberalisation in the 1980s and 1990s and opened up to independent power producers, which developed small-scale hydro plants and later introduced wind and solar capacity. “The aim was to reduce the external energy dependency of the country and, soon after, of course, to fight climate change, since its impacts in Portugal were well observed since the 1990s,” says Pedro Amaral Jorge, CEO at APREN.

“The high endogenous resources availability and public policy strategy have been the main drivers to achieve a high share of renewables in the electricity mix and final energy consumption,” he adds.

However, as the country faced a severe drought at the start of 2022, wind energy has taken the lead in supplying electricity. In January 2022, gas made up approximately 30% of the country's power mix.

“We are seeing new renewable capacity, but at the same time Portugal keeps gas capacity [for back-up],” says Ferreira.

“Therefore, it is not entirely true that we are replacing coal with renewables, because due to the ongoing drought conditions, we are partially replacing coal with new renewables, but also using natural gas,” he explains.

Decarbonising the power sector

Portugal aims to achieve an 80% share of renewables in its power mix by 2030, and could even reach this goal four years earlier than scheduled, in 2026, Fernandes told national news agency Lusa at the end of 2021. Its largest utility, EDP, wants to provide 100% renewables-based electricity by the end of the decade.

APREN’s Amaral Jorge says decarbonising Portugal’s entire power system by 2035 would require “an enormous effort”. However, “this is a plausible scenario given the necessity to […] comply with the [EU’s] ‘Fit for 55’ goals, and also the expected role of green hydrogen [made from renewable electricity] in Portugal, to assure stability in a power system with a high share of variable renewables,” he adds.

Shutting down the Pego and Sines coal plants will contribute to Portugal’s decarbonisation goals. EDP announced last year it intends to transform the coal plant in Sines (150km from Lisbon) into a renewable hydrogen ‘hub’.

EDP’s board said in October 2021 it would convert Sines “into a centre of hydrogen tech excellence”, with 200MW of renewable capacity and 100MW of electrolysers by 2025 – potentially scaling beyond that at a later stage – and the creation of an R&D centre.

For this, Portugal’s largest utility has partnered with some 12 entities including power companies Galp and Engie as well as wind energy manufacturer Vestas. The ‘GreenH2Atlantic’ project has been granted a €30m grant by the European Commission via its Horizon 2020 R&D programme.

This should help Portugal achieve its goal to install 2–2.5GW of electrolyser capacity by 2030. The government announced a first auction for government support in 2022, which is likely to take the form of a carbon contract-for-difference scheme to stimulate demand for green hydrogen.

“However, to achieve [Portugal’s green hydrogen goals], Portugal must tackle important issues such as licensing and permitting procedures [for wind and solar installations], lack of grid capacity and a shortage of qualified human resources in the upcoming years,” APREN’s Amaral Jorge says.

An economic and social plan

In parallel, the Portuguese government decided to launch an auction for the conversion of the Pego plant, so power companies could submit their projects to use the plant’s grid access.

That tendering process is still ongoing at the time of writing. However, the bid submitted by Spanish utility Endesa obtained the best score, according to a preliminary government report. The proposal submitted by Endesa – 70% owned by Italy’s Enel Group – foresees a 365MW solar PV project and 246MW of wind farms, as well as battery storage infrastructure and green hydrogen electrolysers.

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The need to support coal regions and workers in the fossil fuel industry has taken centre stage in the energy transition. As Europe strives to ‘leave no one behind’ on its road to climate neutrality, Portugal’s management of its coal phase-out shows that national governments and utilities must play a major role in a just transition.

Portugal’s just transition plans have focused on coal plant workers, as Portugal has no mines. The government has ensured a strong involvement of utilities in reskilling and creating jobs, while investing in renewable energies and upgrades to its power grid.

One of the government’s most striking measures has been to include just transition aspects as bonus criteria in the project tender to reconvert the Pego coal plant.

“What is interesting about the auction for Pego’s reconversion is it combines an economic plan with a social plan, where workers can get guaranteed income support if they follow reskilling programmes,” says E3G’s Patuleia.

Fit for a phase-out

With the closures of Sines and Pego last year, Portugal became the fourth EU member state to stop burning coal, after Belgium in 2016, and Sweden and Austria in 2020.

The dire economics of coal have prompted several countries across Europe to speed up the process, including Germany, with the new federal government looking to bring forward its phase-out date to 2030, from the 2038 agreed in 2019. Hungary also announced in 2021 that it would bring forward the closure of its last-standing lignite plant by 2025, five years ahead of schedule.

However, coal will still have a limited role in the EU beyond 2030. Both the Czech Republic and Slovenia announced their coal exit by 2033 at the beginning of the year. In turn, Poland has not yet firmed up a date to stop burning coal, pledging instead to shut down its coal mines by 2049.

Nevertheless, several experts agree the EU’s 'Fit for 55’ climate and energy package could accelerate Europe’s coal phase-outs through a strong ETS, renewable energy investments and the taxation of fossil fuel products.

“It is important to have an effective emissions trading system, and it’s very important to have ambitious renewable energy targets, maybe even going beyond what the European Commission has proposed,” says E3G’s Patuleia.

The EU’s climate package is currently being negotiated by MEPs and member states, with divisions already emerging over how ambitious the EU ETS should be given recent price spikes. In turn, any reform to EU energy taxation rules will require unanimous approval from all member states, a hurdle previous efforts failed to overcome.

Increasing the interconnections in the EU’s energy market will also increase security of supply and, in turn, benefit Europe’s most coal-dependent countries. Portugal has very limited cross-border energy flows, but the solid integration of the Iberian energy market has been instrumental in Portugal and Spain balancing their systems.

“We do have the possibility of diversifying and investing in different sources of renewables, and particularly wind and solar – but at the same time, we have extremely limited interconnections, and that makes us more vulnerable to supply shortages,” says ZERO’s Ferreira.

“If Portugal can do this transition despite these constraints, definitely some other countries can do that, because they have more favourable circumstances than us,” he sums up.