FRANKFURT (Reuters) - Germany's green energy drive is proving surprisingly good for dirty brown coal as utilities squeezed by rival renewables and low wholesale gas prices use more of it.
East Germany was a huge user of brown coal, or lignite, and Germany remains the world's biggest producer, but its use poses a problem for Berlin's environmental plans.
Limiting brown coal use is politically difficult, however, with 20,000 mining and utilities jobs involved and any move that could raise already high energy bills for consumers a risky gambit ahead of federal elections in September.
Coal also remains important to profits at utilities such as RWE (RWEG.DE) and the German arm of Sweden's Vattenfall VATN.UL.
"Lignite load factors have remained high and gross margins held up better than for other fuels," JP Morgan analyst Vincent de Blic said.
RWE mines its own lignite and relied on it for 36 percent of its electricity production last year.
Coal helped RWE's power generation unit to a 14.1 percent rise in profits and prompted the company to add more as it started output at a 2.1 gigawatt twin-unit lignite-powered plant in Neurath near Cologne.
Despite Germany's green energy drive, which subsidises renewable wind and solar energy and aims to drop nuclear power, the country mined 5.1 percent more brown coal in 2012, industry association Debriv data showed.
Brown coal-fired plants also produced 6 percent more power, the 159 billion kilowatt hours (kWh) accounting for 25.7 percent of Germany's power production, industry figures showed.
Germany needs nuclear, coal or gas for so-called base power to ensure steady supply alongside volatile wind and solar energy.
And it is coal that is winning out because German utilities can turn a profit using it to generate electricity, something they are failing to do with gas.
"Gas-fired capacity is being crowded out by wind and solar and, paradoxically, by coal-fired capacity," E.ON Chief Executive Johannes Teyssen said last month.
E.ON, Germany's biggest utility, is less exposed to coal than RWE, however, using lignite to fire just 6 percent of its generation last year. The German arm of Vattenfall relied on it for 31 percent of its power.
While brown coal mining grows, Germany by 2018 plans to phase out mining hard black coal, which provides around 20 percent of the country's power using mostly imported supplies.
Power generators currently can earn more than 10 euros per MWh for benchmark 2014 power derived from hard coal while using gas means making a loss of almost 14 euros per MWh.
Using cheaper lignite is even more profitable at more than 20 euros per MWh, according to Morgan Stanley and JP Morgan analysts.
Current low prices for permits which utilities and manufacturers must purchase to offset their carbon output is also buying "dirty" utilities more time.
Yet Germany's environmental targets will eventually require it to rein in brown coal - which has a CO2 intensity of 1,153 grams per kWh versus 428 grams for natural gas, according to figures from the OekoInstitut, Germany's institute of applied ecology.
RWE's Neurath and Niederaussem lignite power stations are the second and third largest CO2-emitting installations in the European Union.
While Germany's carbon output held steady in 2012 helped by improved energy efficiency, its broader emissions (of gases monitored under the Kyoto Protocol) rose 1.6 percent partly due to pollution from brown coal.
Analysts say one possibility is that Germany might introduce a tax aimed at ensuring those cashing in on lignite help fund the country's 550 billion euro ($715 billion) shift to low carbon energy.
"The greatest risk following this year's elections in Germany could be an increase in the nuclear fuel tax and a new tax on lignite," said Kepler Capital Markets analyst Ingo Becker, adding such a move would likely hit the share prices of utilities such as RWE.
Editing by Jason Neely