In 2020, Germany's previous government agreed to shut coal-fired power plants by 2038 as part of Berlin's ambitions to become climate neutral by 2045. It agreed with LEAG on the compensation amount, pending EU approval.
LEAG currently supplies 7 gigawatts of lignite-fired power, or around 10% of the total in Germany.
But the transition, and efforts to accelerate it, have received a mixed welcome in the eastern mining region of Lusatia, where people remain sceptical about the social and ecological impact of such an exit and its technical challenges.
"This is an important step, especially for the people of the region," Economy Minister Robert Habeck said in a statement.
The Commission had concerns about approving the state payment and in 2021 opened an investigation to determine whether it distorted free competition in the EU's internal market.
Some 1.2 billion euros of the compensation is meant for social costs of the exit and for repurposing opencast mines in the region, the economy ministry said.
Around 550 million euros are set aside as compensation for LEAG's forgone earnings due to the 2038 exit, subject to later adjustments based on the market situation, carbon prices and the final phase-out date.
"This is an essential building block for our continued successful transformation into a green powerhouse," LEAG CEO Thorsten Kramer said in a statement.
LEAG's lignite coal mines will be among the last still operating in Germany, after Berlin struck a 2.6 billion euro deal with energy firm RWE (RWEG.DE), opens new tab in the western state of North Rhine-Westphalia in 2022, agreeing to a phase-out by 2030 instead of 2038.
Berlin is not aiming for a similar deal with LEAG that would bring the exit date forward. Instead, the government is hoping that market conditions, including cheap renewable energy expansion, and higher carbon prices, would push the company out of the coal business earlier than planned.
LEAG, owned by Czech investor EPH, has ambitions to bring 7 GW of solar and wind output facilities online by 2030, part of a plan to invest 1 billion euros in renewables annually for the rest of this decade.
