After The Coal Rush: Assessing Policy Options For Coal-fired Electricity Generation

WWW.IPPR.ORG

AftertheCoalRush: Assessingpolicyoptionsforcoal-fired electricitygeneration byMatthewLockwood June2008 ©ippr2008

InstituteforPublicPolicyResearch Challengingideas– Changingpolicy

2

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Contents Aboutippr ........................................................................................................................................... 3 Abouttheauthor ................................................................................................................................ 3 Acknowledgements.............................................................................................................................. 3 Abbreviationsandacronyms ................................................................................................................ 4

Executivesummary .............................................................................................................................. 5 Introduction ...................................................................................................................................... 10 1.Coal-firedpowergenerationintheUK:anoverview .................................................................... 12 2.Whyenergycompanieswanttobuildnewcoal-firedpowerstations........................................... 15 3.Theroleofcarbonpricing............................................................................................................. 24 4.Theroleofthe2020renewableenergytarget.............................................................................. 31 5.ImplicationsofnewcoalplantsfortheClimateChangeBillemissionstargets ........................... 36 6.Prospectsforcarboncaptureandstorage..................................................................................... 42 7.AssessingtheUKpolicydebateoncoal....................................................................................... 49 8.AwiderperspectiveoncoalandtheEUemissionstradingscheme ............................................ 56 9.Policycredibility:addressingconcernsaboutcost,securityofsupplyandplanning................... 63 Conclusionandrecommendations .................................................................................................... 72

AnnexA.Listofinterviewees ........................................................................................................... 76 AnnexB.Netpresentvalueandrisk ................................................................................................ 77 AnnexC.Coalemissionsallowances:anumericalexample.............................................................. 79 References.......................................................................................................................................... 81

3

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Aboutippr TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank,producing cutting-edgeresearchandinnovativepolicyideasforajust,democraticandsustainableworld. Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakingintheUK.Through ourindependentresearchandanalysiswedefinenewagendasforchangeandprovidepractical solutionstochallengesacrossthefullrangeofpublicpolicyissues. WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedaspossible, whileourinternationalandmigrationteamsandclimatechangeprogrammeextendourpartnerships andinfluencebeyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch. ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:[email protected] www.ippr.org.RegisteredCharityNo.800065 ThispaperwasfirstpublishedinJune2008.©ippr2008

Abouttheauthor MatthewLockwoodisaSeniorResearchFellowintheclimatechangeteamatippr.Heisco-authorof severalrecentipprreports,including2050Vision,onachievingan80percentreductionincarbon emissionsintheUK,andPositiveEnergy,onbehaviourchangeandenergyuse.Priortojoiningippr, MatthewactedasanadvisertothedeputymayorofLondon,andtotheLondonClimateChange Agency.HehasalsoheldseniorpolicypositionsinseveralinternationaldevelopmentNGOs,and workedasanacademic.

Acknowledgements Thisresearchprojectonthefutureofcoal-firedpowergenerationwasfundedbytheEuropean ClimateFoundation(ECF).MattPhillipsfromtheECFplayedakeyroleintheearlystagesofthe developmentoftheproject,aswellasprovidingusefulinformationandcomments. Theauthorwouldliketothankallthosewhoagreedtobeinterviewedforthisproject(listedinAnnex A),someofwhomalsogavevaluablefeedbackonearlierdrafts. ThisreportisbasedinpartonbackgroundanalysiscommissionedfromWillBlythofOxfordEnergy Associates,availableasaseparatereportontheipprwebsite(seeBlyth2008inReferences).Healso madevaluablecontributionsthroughouttheproject.NicolaKircupattheEnergyMarketsteamat BERRkindlyprovidedinformationoneffectivecapacitymargins. Theanalysisalsobenefitedfromcommentsbyparticipantsatanippreventontheframeworkfor investmentinlow-carbonelectricityheldinJanuary2008,andanipprseminaronthefutureofcoalfiredpowergenerationinMay2008. Inaddition,theauthorwouldliketothankSimonRetallack,HowardReed,DannySriskandarajah,Lisa Harker,MattJackson,MiguelCastroCoelho,GeorginaKyriacou,KellyO’Sullivanandothercolleagues atipprfortheircomments. However,noneoftheaboveshouldbearresponsibilityfortheviewsexpressedinthisreport,which aresolelythoseoftheauthor.

4

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Abbreviationsandacronyms ASC

advancedsupercriticalcoal

BAT

bestavailabletechnology

BERR

DepartmentforBusiness,EnterpriseandRegulatoryReform

CBI

ConfederationofBritishIndustry

CCGT

combinedcyclegasturbine

CCS

carboncaptureandstorage

CDM

CleanDevelopmentMechanism

CEA

coalemissionsallowance

CHP

combinedheatandpower

CO2

carbondioxide

DEFRA

DepartmentforEnvironment,FoodandRuralAffairs

EC

EuropeanCommission

EOR

enhancedoilrecovery

EPS

emissionsperformancestandard

ETS

emissionstradingscheme

EU

EuropeanUnion

EUAs

EUallowances

FGD

fluegasdesulphurisation

GW

gigawatt

GWe

gigawattelectrical

GWh

gigawatthour

IGCC

integratedgasificationcombinedcycle

JI

JointImplementation

kWh

kilowatthour

LCPD

LargeCombustionPlantDirective

LNG

liquefiednaturalgas

MEP

MemberoftheEuropeanParliament

MtCO2

milliontonnesofcarbondioxide

MtCO2e

milliontonnesofcarbondioxideequivalent

Mtoe

milliontonnesofoilequivalent

MW

megawatt

MWe

megawattelectrical

MWh

megawatthour

NERP

NationalEmissionsReductionPlan

NPV

netpresentvalue

RO

RenewablesObligation

SRMC

short-runmarginalcost

tCO2

tonneofcarbondioxide

TUC

TradesUnionCongress

TWh

terrawatthour

UKERC

UKEnergyResearchCentre

5

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Executivesummary InearlyJanuary2008,MedwayCouncilgaveapprovaltoaplanningapplicationfromenergycompany E.ONtobuildanewcoal-firedpowerstationonthesiteofanexistingplantatKingsnorth.Thiswould bethefirstmajorcoal-firedpowerstationbuiltintheUKsincethe1970s. TheKingsnorthapplicationhasprovokedamajornewdebateoncoal,energypolicyandclimate policyintheUK.Thisis,inpart,becauseitisthefirstrealtestofboththeClimateChangeBillpassing throughParliament,andthewiderconsensusacrossGovernment,businessandcivilsocietythatmore radicalactionmustbetakentoreducecarbonemissions. Inthisreport,weprovideacomprehensiveexaminationoftheissuesatstake.Todecidewhatshould bedoneaboutKingsnorthandotherproposednewplants,wearguethatitisessentialtounderstand thewidercontextofenergymarketsandenergypolicy,bothwithintheUKandatEuropeanlevel. Muchoftheargumentaboutnewcoalischaracterisedbyahighdegreeofuncertainty,asarefuture electricitygenerationandinvestment. AchievingtheGovernment’sambitiousrenewableenergytargetsalsohasimplicationsforcoal–the moreelectricitywegetfromwindandotherrenewablesources,thelesswewillneedfromcoal. Ifwecouldapplytheemergingtechnologyofcarboncaptureandstorage(CCS)tocoal,thenmuchof theproblemwouldbesolved.However,boththetimingandeconomicsofCCSareuncertain,with littleprospectthatitwillmakeadifferencebefore2020. Thus,underthecurrentpolicyframeworkforcoalasafuelinelectricitygeneration,thereareno guaranteesonfutureemissions,and,asaresult,thereisariskthattheClimateChangeBilltargetsfor domesticemissionsreductionwillnotbemet.Thisisaseriousconcern,andhasledtoanumberof proposalstoclosedownthisrisk,forexamplenewregulationsonplant-levelemissions,adopted recentlyinCalifornia,oramoratoriumonnewcoalbuilduntilCCShasbeenfullydeveloped. TheGovernmentandenergycompaniesareresistanttosuchideas.Thisispartlybecausetheysee themasraisingrisksinotherareas–thatsecurityofsupplywillbemademorevulnerable,andthat energypricesmayrisetopoliticallyunsustainablelevels.Thesearerealconcernsamongthepublic, andanypolicytoreduceemissionsmustaddressthemconvincinglytoestablishcredibilitywith investors. Thereisalsoresistancebecauseproposalsforadditionalmeasuresarearguedtoundermineandcut acrossthepolicyattheheartofthecurrentframework–theEuropeanUnionemissionstrading scheme(ETS).ThecredibilityoftheEUETSasamechanismtoguideinvestmentisjustbeing established,anditsproponentsseefurthermeasuresasathreat. However,majordecisionsonpowersectorinvestmentacrossEuropehavetobetakeninthenext threeyears.Withcompaniesandtradersdiscountingthecarbonpricebecauseofuncertaintyabout thefutureofthescheme,thereisadangerthatalargeamountofinvestmentinnewcoalplantswill goahead,whichwouldnothavehappenedinafullycrediblemarket. Insuchascenariothereisariskthatitwillnotbepoliticallyfeasibletokeepthecaponemissionsin thescheme,especiallyfrom2015whenmanyofthenewplantswouldcomeonstream.Maintaining thecapinsuchcircumstanceswouldmeanlarge-scaledeploymentofcarboncapture,withmajor concomitantincreasesinthepriceofelectricity.Someformoftemporarylimitationofnewcoalbuild acrossEuropewould,therefore,helptostrengthenthecredibilityoftheEUETS.

Thecontext Debateonthefutureofcoalhasbeensparkedbytheapplicationforanewpowerstationat Kingsnorth.However,severalotherenergycompanieshaveindicatedthattheywillalsoputforward planningproposalsfornewcoalplants. Coalburningforpowergenerationmattersforclimatepolicybecauseitisthesinglemostimportant sourceofcarbondioxide.In2006,emissionsfrompowerstationswereestimatedtohavebeen

6

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

responsiblefor32percentoftotalUKcarbonemissions.Overthe1990s,emissionsfellsharplyas energycompaniesbuiltgas-firedpowerstations.However,since1999thetrendhasreversedandUK carbonemissionshavedriftedupwards,withtheresultthattheGovernment’sowntargetsforcarbon reductionby2010willnotbemet. Concernsaboutnewcoalhavebeenexpressedbyawiderangeoforganisationsandindividuals, includingGreenpeace,Oxfam,theRoyalSocietyandtheworld-renownedclimatescientistJim Hansen,whohaswrittentothePrimeMinisterpleadingforabanonnewcoalplants. Thefearisthatanexpandedfutureforcoal-firedpowergenerationiscompletelyincompatiblewitha movetoalow-carbonworld.NewcoalintheUKisseenasthreateningthe2020emissionsreduction targetinthedraftClimateChangeBill,andunderminingUKclaimstointernationalclimateleadership, atatimewhenmovestopreventthebuildingofnewcoalpowerstationsaretakingplaceinother countries,includingNewZealand,DenmarkandCanada,andintheAmericanstateofCalifornia.

Whycompanieswanttobuildnewcoalplants Thedecisiontoinvestinnewcoalplantscurrentlylieswithcompanies,ratherthangovernment.The majorenergysuppliersareallexpectingashortfallingeneratingcapacityinthenextdecade,and, therefore,higherelectricityprices.Thisisdrivingageneralinterestininvestinginnewcapacity. Interestinnewcoalplantshasbeensparkedbyrelativelylowcoalpricesoverthelastfiveyears, makingthemmoreprofitablethangasplants.However,thestrongestdriverfornewcoalisthedesire bycompaniestomaintainaportfolioofgeneratingcapacitythatincludesarangeoffuels,tohedge againstmarket,securityofsupplyorpolicyrisk.Assomecompaniesarelosingasignificantamountof coalcapacityfrom2015onwards,theyareverykeentoreplaceit.

Theroleofcarbonpricing Alongwiththepricesofcoalandgas,thepriceofcarbonisbecomingarelevantfactorinenergy investments.ApriceforcarbonemissionshasbeencreatedbytheEuropeanUnion’semissionstrading scheme(EUETS).Becausecoal-firedpowergenerationismorecarbonintensivethangas-fired generation,carbonpricingmakesitlessattractivecommercially. InJanuary2008,theEuropeanCommissionmadeproposalsforastrongerEUETS,withatighter, single,EU-widecap,andlongertimeframes.Marketanalystspredictthat,onthebasisofsuchan approach,carbonpriceswouldreacharound40pertonneofcarbondioxideby2020,intoday’s prices.Analystsexpectthatovertheperiodto2020,thiscarbonpricewilldrivecompaniestoclose downcoal-firedplantsandswitchtogasonamajorscale,sincethisisthecheapestwayofreducing emissionsonalargescaleand,thereby,ofstayingunderthecap. However,someuncertaintystillhangsoverthefutureoftheETS.ThefinalshapeofPhase3ofthe EUETSisyettobedeterminedbypoliticalnegotiations,withheavylobbyingfromindustryfora looserscheme.Agreementmaynotcomeuntilmid-2009,orpossiblyevenlater.Buteventhen, energycompaniesmaynotbeconvincedthatastrongcarbonpolicyispoliticallysustainableuntila globaldealinvolvingtheUSAandChinaisreached.Thismeansthattheydiscountcarbonpriceswhen planninginvestments,andaremorelikelytodecidetobuildnewcoal.

TheroleoftheEUrenewableenergytarget TheEuropeanCommissionhasalsoproposednewambitioustargetsforrenewableenergy.The implicationsarethatupto40percentofUKelectricitydemandwouldhavetocomefromrenewable sourcesby2020(mostlyexpectedtobelarge-scalewind).Thiswouldbeamassiveincreaseonour currentrenewableoutput. IfthenewproposedEUtargetweretobemet,theremaybelittleornoneedtobuildnewfossilfuel powerstationsforconventionalbaseloadgeneration,althoughsomenewplantswillprobablybe neededforbalancingtheintermittentsupplyofpowerfromwind. However,thisscaleofexpansionofrenewableelectricitycapacityintheUKfacesseveraltechnical andpoliticalproblems,andtherearedoubtsamongenergycompaniesaboutwhetherthetargetcan

7

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

bereached.Decisiveactionbygovernmentisneededtoaddressthesedoubts,andallowanexpansion ofrenewableelectricitytoplayaroleinlimitingtheneedfornewcoal.

Implicationsforcarbonemissions Underthecurrentpolicyframework,thereisgreatuncertaintyabouthowmuchnewcoalcapacity maybebuiltintheUK,duetouncertaintyaboutfuelprices,aboutthedevelopmentoftheEUETS, andaboutfuturepolicyonrenewableelectricity. Inthisreportweassesstheimplicationsofthisuncertaintybyexploringarangeofnew-build scenariosofbetweenfourand11.6GW.Thesescenariosgiveestimatesofadditionalemissions(as againstnewgascapacity)ofbetween11and32MtCO2. However,futureemissionsfromnewplantsareonlypartofthepicture.Overallemissionsfromcoalfiredpowergenerationwilldependnotonlyonhowmuchnewcapacityisbuilt,butalsoonhow muchitisrun,whetheritreplacesoraddstoexistingcapacity,andhowmuchthatexistingcapacityis run. Thekeyfactorsindeterminingtotalemissionsarefuelprices,andcarbonpolicy.Thesefactorsare reflectedinmodellingcommissionedbytheGovernment,whichsuggeststhat,ifcarbonpolicyisnot sufficientlystrongorcredible,upto9GWofnewcoal-firedpowercouldbebuilt,andUKpower sectoremissionscouldbehigherin2020thantheyaretoday. Thecurrentframeworkforcoal-firedpowergenerationdoes,therefore,potentiallyposeaproblemfor theClimateChangeBilltargetfor2020.

Prospectsforcarboncaptureandstorage CoalwouldnotposeaproblemtoclimatepolicyiftheemergingtechnologyofCCSwereavailable todayatanaffordableprice.CCSinvolvescapturingthecarbondioxideproducedbycoal-firedpower stations,transportingitbypipeline,andsequesteringitindepletedoil-andgas-fields. Therearetwocompetingtechnologiesforcapturingcarbonfromcoal-firedpowergeneration:precombustionandpost-combustion.TheGovernmenthasshownleadershipindecidingtosupporta demonstrationprojectonpost-combustioncarboncapture.However,thereisastrongcasefortheUK runningaseconddemonstrationproject,involvingapre-combustiontechnology. Thereisalsoanurgentneedtostartplanningforthetransportationinfrastructureforcarryingcarbon dioxidecapturedinpowerstationsandotherinstallationstostoragesites. Overall,itisunlikelythatwidespreaddeploymentofCCStocoal-firedgenerationwilloccurmuch before2020.

AssessingtheUKdebateoncoal Theriskthathigheremissionsfromnewcoal(aswellasthenewplantsthemselves)mayundermine theleadershipthattheClimateChangeBillgivestheUKhasledsomegroupstoproposenew measurestopreventnewcoalbuild. Thesemeasuresareinspiredbyvariousmovestoruleoutnewcoalplantsinothercountries,including anemissionsperformancestandardthatwouldapplyatthelevelofeachnewplant,andimmediateor futurebansonnewcoalbuild. Theseproposalstendtofocusonpreventingnewcoalpowerstationsbeingbuilt.However,the relationbetweennewcoalbuildandtotalemissionsforburningcoalisnotstraightforward.Under certainconditions,banningnewcoalmightevenincreasetotalcoalemissions,asolder,lessefficient plantsarekeptopen.Analternativeapproachmight,therefore,betocapemissionsfromUKcoalfiredpowergenerationasawhole. TheGovernmentandenergycompaniesfirmlyopposesuchproposals,mainlyonthegroundsthat theyareinconsistentwith,andwouldpoliticallyundermine,theEUETS,justatthetimethatits credibilityisbeginningtobeestablished.

8

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Inturn,criticsarguethatsincetheEUETSisnotcurrentlyeffectiveinshapinginvestment,theuseof moreeffectivemeasuresshouldnotbesacrificedontheEUETSaltar.

AwiderperspectiveoncoalandtheEUemissionstradingscheme AttheheartofthisdebateliedivergentviewsoftheEUETS.However,theoneissuethatbothsides agreeonisthatconfidenceintheETSisstillnotfullyestablished. Companiesandcarbonmarkettradersarediscountingthecarbonprice,becausetherearestill uncertaintiesaboutthefutureoftheEUETS.Thisisnotsomuchaboutitsexistence,butmoreabout howrigorouslyitwillbeenforcedinthefuture. ThereisstillsomelackofclarityaboutthefinalPhase3dealthatmemberstateswillsignupto,but thebiggersourceofuncertaintyiswhetheraglobaldealinvolvingChina,theUSAandotherbig emitterswillbereached.Ifitis,thenthefutureoftheEUETSasthecoreofanewglobalcarbon marketisassured.Ifitisnot,thenthefutureislesscertain. Whileuncertaintywillremainforthenexttwotothreeyears,decisionsonalargeamountofnew powersectorinvestmenthavetobetakenoverpreciselythisperiodifthelightsaretobekepton from2015onwards.ThisisnotonlythecaseintheUK,butalsoinGermanyandothercountries. Withpresentuncertainty,morecoal-firedplantswillbebuiltthanwouldbethecaseifinvestment decisionsreflectedfullconfidenceinthePhase3cap.However,startingtobuildnewcoalplantsnow itselfrisksthefuturebreakdownoftheETS.Itmakesahugegambleonbeingabletobringforward thewidespreaddeploymentofcarboncaptureandstoragetotheperiod2015-2020.Investmentin newcoalwouldthusweakenthecurrentcredibilityoftheEUETSstillfurther. ThereisastrongcaseforatemporarymoratoriumonnewcoalinvestmentsattheEUlevel.TheUK shouldpre-commititselftosuchaninvestmentpauseaswayofengagingwithGermanyandother memberstateswithlargeenergymarkets.

Policycredibility:addressingconcernsaboutcost,securityofsupply andplanning Lesscoalwillmeangreaterdependenceongas,atleasttemporarily.Oneconcernaboutgasis short-runinterruptionsofphysicalsupply.Whilesuchepisodesarenotunknown,itisalso importanttorememberthattheUKgassystemisfairlyrobust.Themainissuesarelikelytobe domesticresiliencetoincidentslikefires,andproblemswithfreeflowofgasthroughEuropean pipelines.Bothofthesecanbeaddressedthroughappropriatepolicies,andmuchhasalready beendonetoimprovethesituation. Oncost,thebiggestdemandforgasisinspaceandwaterheating,soend-useefficiencymeasures willhavethebiggestimpactoncontaininggasdemand.Morecombinedheatandpower(CHP) generation,whichusesgasmoreefficiently,wouldalsohelp. Anotherpolicythatwillreducegaspriceswouldbethemajorexpansionofrenewablesenvisaged bytheEuropeanCommissioninitsproposalsfor2020targets.However,thispolicy,alongwitha strongEUETSpolicy,anexpandeddemonstrationprogrammeforCCS,andasupportprogramme forCHP,allimplyahighercostforelectricity.CompaniesfearthattheUK(andwiderEuropean) publicwillnotbewillingtopaythatcost,whichunderminesthecredibilityofthesepolicies.To addressthisproblemitwillbenecessarytoproduceauthoritativeestimatesofthecostsinvolved, andmakethecasefortheinvestments,partlybyalsodevelopingestimatesofbenefitsintermsof jobsandexportearnings. Finally,theexpansionofrenewables,butalso,potentially,city-centreCHPandtheestablishment ofaCCSinfrastructure,alsofaceoppositionthroughtheplanningsystem.ThenewPlanningBill maystreamlineplanningforsuchinvestments,butthiswillnotbeclearforayearortwowhether itworksontheground.Makingthepoliticalcaseforinvestmentsremainsnecessary.Ensuringthat localpeoplecanhaveastakeinonshorewindfarmsinparticularwouldhelp.

9

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Summaryofrecommendations StrengtheningtheEUemissionstradingscheme

•

AnEU-widemoratoriumoninvestmentinnewcoal-firedpowerstationsshouldbeintroduced, lastingatleastuntilmid-2010.

•

TheUKGovernmentshouldpre-commititselftosuchanapproach(whichwouldincludethe proposedplantatKingsnorth),andusethispre-commitmenttobindinothermemberstates withlargeenergymarkets,suchasGermany.

•

TheUKGovernmentshouldworkashardaspossibletoensurethattheproposalsforPhase3of theschemebytheEuropeanCommissionarenotweakenedinareassuchastheauctioningof credits,andtighterlimitsontheuseofCleanDevelopmentMechanism(CDM)credits.

Carboncaptureandstorage

•

AnewCCSDirectivespecifyingaprocessfor12demonstrationplants,shouldbeadoptedinto theenergyandclimatepackage.

•

TheUKGovernmentshouldextendthedemonstrationprogrammetoincludeasecond,precombustiondemonstration,andimmediatelystartplanningaframeworkforthecarbondioxide transportinfrastructurethatwillbeneeded.

The2020renewableenergytarget

• •

Strongerpoliciesareneededtoradicallyincreasetheconservationofelectricityuse.

•

Strategicplanningfornewtransmissionanddistributioncapacity(especiallyforoffshorewind) andguaranteedaccesstothatcapacityforrenewablesisessential.Thisisanareawhere incrementalreformwillnotbeenough–thenationalgridneedstoberebuiltfortheageof renewables.

•

Allapproachestomanagingthepenetrationofintermittentrenewablesofabove30percent needtobeexplored,includingtheuseof‘dynamicdemand’appliancesand‘vehicle-to-grid’ technologies.

•

Topersuadevotersandbusinessofthefeasibilityandaffordabilityofthisgoal,government shouldproduceanauthoritativeandtransparentcostestimateforreachingtheelectricity componentoftheproposedrenewableenergytarget,steerthroughnewplanningarrangements thatareacceptedontheground,andundertakegenuineandwideconsultation.

Thesupportpolicyforrenewableelectricitygenerationwillhavetoberevisited.Stronger incentivesforoff-shorewindarelikelytobeneeded.Thisincludesthepossibilityofsomeform ofproductionorexporttariffformicro-renewables.NewguidanceforOfgemtoensurethatit playsasuitablerolewillalsobenecessary.

Addressingcostandsecurityofsupplyconcerns

•

Effortstoimproveenergyefficiencyindomesticheatingneedtoberadicallyexpandedtoreduce gasdemand.Amoreeffectiveprogrammeofsupportforcombinedheatandpowerthatmakes moreefficientuseofgasinpowerproductionshouldbepartoftheseefforts.

•

TheGovernmentshouldalsodevelopstrategicgasstorageintheUK,andworkattheEUlevel bothtoimprovetheframeworkforenergynegotiationswithRussiaandtopreventEuropean energycompaniesusingtheircontrolofgaspipelinestodivertgassuppliestotheirown customers.

•

TheGovernmentneedstoprovideauthoritativeandwidelyacceptedestimatesofwhatthecosts ofenergyto2020areactuallylikelytobe.Effectivepoliciesareurgentlyneededtoreducethe impactofcostsonpotentiallyvulnerablegroups,especiallythefuelpoor.

•

IftheUKtakesbilateralactions,considerationofthesituationofenergy-intensiveindustries exposedtocompetitionwillalsobeneeded.

•

Finally,theGovernmentneedstomakethebenefitsofdecarbonisation,intermsoftechnological opportunitiesandjobsinrenewableenergy,CCSandotherareas,muchclearer.

10

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Introduction InearlyJanuary2008,MedwayCouncil,Kent,gaveapprovaltoaplanningapplicationfromenergy companyE.ONtobuildanewcoal-firedpowerstationonthesiteofanexistingplantatKingsnorth. Thiswouldbethefirstmajorcoal-firedpowerstationbuiltintheUKsincethe1970s.Severalother energycompanieshaveindicatedthattheywillalsoputforwardplanningproposalsfornewcoal plants. Theseproposalsforanewgenerationofcoal-firedpowerstationsintheUKarehighlycontroversial. Whileotherissues,suchasaviation,havetendedtooccupymuchofthedebateonclimatepolicy, burningcoaltoproduceelectricityis,inreality,thesinglemostsignificantsourceofcarbonemissions intheUK(asitisaroundtheworld).Thepolicyframeworkforinvestmentinelectricitygenerationis, therefore,attheheartofclimatepolicy. TheGovernment’spositionisthatsuchinvestmentsareallowablewithintheliberalisedframeworkof theenergymarket,andthatenvironmentalconsiderationsshouldbeaddressedbytheEUemissions tradingscheme(EUETS). However,environmentalandinternationaldevelopmentcampaigngroupsarestronglyopposedtoany newcoalpowerstationsgoingaheadatall,unlesstheyhaveworkingcarboncaptureandstorage (CCS)technology. InOctober2007,E.ON’sKingsnorthplantwasscaledbyGreenpeaceprotestors,and,morerecently,in January2008,activistsfromtheStopKingsnorthcampaignsetupbytheWorldDevelopment MovementtargetedE.ON’sLondonoffice(WorldDevelopmentMovement2008a).Thesegroupshave thesupportofawiderrangeofcivilsocietyorganisations,includingtheRSPB,Oxfam,WWFandthe NationalFederationofWomen’sInstitutes. Theworld-renownedUSclimatescientistJimHansenwrotetotheUK’sPrimeMinister,inDecember 2007,callingonhimtohaltthebuildingofnewcoalplantsthatdonothaveCCS(Connor2007),as hasthePresidentoftheRoyalSociety(Adam2008).Hansenhassubsequentlyarguedthatthe phasingoutofcoalgloballyisnecessarytoavertdangerousclimatechange.TheConservativesand LiberalDemocratsarealsoopposedtonewcoalbuildwithoutCCS. CriticsoftheGovernment’sframeworkpointtothefactthatothercountriesintheOrganisationfor EconomicCooperationandDevelopment(OECD)aretakingmoredirectmeasuresonnewcoalbuild. TheUSstateofCaliforniahasintroducedanemissionsperformancestandardforallnewpower stations,setatalevelthatrulesoutcoalintheabsenceofCCSorcombinedheatandpower(CHP). NewZealandisintroducinga10-yearmoratoriumonnewfossilfuelpowerstations,whileDenmark broughtinabanonnewcoalplantsasearlyas1990.EvenwithintheG8,Canadaisnowintroducing arequirementfornewcoal-firedpowerstationstohaveCCSfrom2018. Thisreportexploresthenatureoftheproblem,andassessesthedifferentapproachestopolicy.Itis basedonaseriesofinterviewswithsomeofthekeyactors,includinggovernment,environmental organisations,energycompanies,theTradesUnionCongress,theConfederationofBritishIndustry andacademicexperts.Intotal,weconducted26interviewsovertheperiodDecember2007toMarch 2008(seeAnnexA).

Structureofthereport InChapter1,theimportanceofemissionsfromcoal-firedpowergenerationisestablished,anddetails ofenergycompanyproposalsfornewcoalinvestmentsaregiven. Thefollowingthreechapters,whicharemainlydescriptive,thenexaminethecurrentframeworkfor investmentdecisions:Chapter2investigatesthekeydriversfornewcoalfromtheperspectiveofthe energycompanies;Chapter3looksattheroleofcarbonpricingthroughtheEUETS;andChapter4 considershownewtargetsfortheexpansionofrenewableenergymayaffectinvestmentdecisions. Thereis,infact,agreatdealofuncertaintyabouthowmanyoftheenergycompanyproposalswillbe realised,andhowmuchnewcoal-firedpowercapacitywillbebuilt.Investigatingtheemissions

11

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

implicationsofnewcoalplants,therefore,involveslookingatarangeofscenarios.Thisisexploredin Chapter5,whichlooks,inparticular,attheimplicationsforemissionsreductionstargetsfor2020and 2050intheClimateChangeBillcurrentlybeforeParliament. Arangeoforganisations,fromtheIntergovernmentalPanelonClimateChangetotheTUC,and includingtheGovernmentandtheenergyindustry,anticipatethatemissionsfromcoal-firedpower generationcanbereducedthroughCCStechnologies.TheprospectsforCCSarereviewedinChapter6. Itisclearthatalthoughthereisuncertaintyaboutnewcoalinvestment,thereisapotentialemissions problemandthatCCScannotaddressmuchbefore2020attheearliest.Muchhingesonthestrength oftheclimateandenergypackagecurrentlybeingdebatedbytheEuropeanParliamentandCouncil. Chapter7assessthedebateonoptionsforfurtheractionwithintheUK. However,togetacompletepictureofthepolicyproblemwithcoal,wealsoneedtolookattheissue attheEuropeanlevel,andinparticularhowpotentialnewcoalbuildandtheEuropeanUnion emissionstradingschemeinteract.Chapter8providesananalysisofthisdynamic,alongwithpolicy recommendations. Allproposalstocontainrisksofhighemissionsfromcoal-firedpowergenerationhavetoaddress concernsaboutsecurityofsupply(especiallyinrelationtogas),thecostsofelectricitygeneration, andplanning.TheproblemofestablishingcrediblepolicyistackledinChapter8. Afinalsectionconcludesandsummarisestherecommendationsofthereport.

12

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

1.Coal-firedpowergenerationintheUK:anoverview Untilthe1980s,mostelectricitygeneratedintheUKcamefromburningcoal,andcoalminingand powergenerationwerecloselyrelatedasstrategicindustries,bothundernationalisedcontrol. Thispicturehassincechangeddramatically.Theelectricityindustrywasprivatisedin1989,andcheap gaspricesledtoawaveofinvestmentincombinedcyclegasturbines(CCGT),knownasthe‘dashfor gas’.Thismarkedamajorshiftawayfromcoal(Figure1.1),and,alongwithnuclearpower,ledtoa diversificationoffuelsforelectricitygeneration.Atthesametime,followingtheminers’strikeof 1984-85andsubsequentprivatisation,theUKminingindustrycontinueditsdeclineinproductionand employment.Importsofcoalnowmakeuparound70percentofsupply.

Theimportanceofcoal-firedpowergenerationforhistoricalemissions Thedashforgashadimplicationsforcarbonemissions.Becauseelectricityfromgasisaround2.4 timeslesscarbon-intensivethanthatfromcoal,thefuelshiftofthe1990sledtoamajorreductionin emissionsthroughtotheendofthatdecade,fallingfromaround240milliontonnesofcarbondioxide (MtCO2)peryeardowntoaround180milliontonnesperyearby1999(Figure1.1).

595

50

Mtoe

Source:BERR2007a, DEFRA2007

60

575

40

555

30

535

20

515

10

495

0

475 1990 Coal

1995 Gas

2000

MtCO 2

Figure1.1.Coal andgasusein,and carbondioxide emissionsfrom, electricity generation

2005

Total UK CO 2 emissions

However,since2000,oilandgaspriceshaveincreasedsignificantly(seeFigure2.1below).Thishas ledtoaresurgenceoftheuseofcoalforpowergeneration,andpowersectoremissionshave increasedtoover180MtCO2 peryearagain(seealsoIPA2006). Emissionsfromelectricitygenerationingeneralaremuchlargerthanthosefromanyothersource, includingroadtransport.In2006,emissionsfrompowerstationswereestimatedtohavebeen responsiblefor32percentoftotalUKcarbonemissions(BERR2007a).Thedominanceofemissions fromelectricitygenerationcanbeillustratedbythefactthattotalUKcarbonemissionshavetracked emissionsfromelectricitycloselysince1990(Figure1.2,nextpage).TheriseintotalUKcarbon emissionssince1999islargelyattributabletogreatercoalburningforpowergeneration.

Anewwaveofcoal-firedpowerstations? EnergycompaniesintheUKarenowconsideringbuildinganumberofnewcoal-firedpowerstations (seeTable1.1).Thefirstoftheseis1.6GW1 ofnewcapacityproposedbyE.ONforthesiteofan

1.Agigawattofpoweris1,000megawatts(MW).Amegawattis,inturn,1,000kilowatts(kW).Thefull capacityofmostfossilfuelpowerstationsisintherange800-2,400MW.

13

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

existingplantatKingsnorth,inMedway,Kent.Thiswouldbethefirstmajornewcoal-firedpower stationtobebuiltintheUKfor33years. Plansforotherapplications,includingatTilburyinEastLondon,FerrybridgeinYorkshire,andBlythin Northumbria,areatanadvancedstage.Itisnotnecessarilythecasethatalltheseplantswillbebuilt. However,iftheyare,then11.5GWofnewcoal-firedpowerplantswillbeaddedtoUKgenerating capacity. Atthesametime,8.2GWofexistingcoal-firedpowerplantswillhavetoclosebytheendof2015, undertheEULargeCombustionPlantDirective(LCPD)(legislationaimedatcuttingsulphurandother localpollution)(BERR2007b).Itisalsopossiblethatsomeadditionalcoal-firedplantswillalsoclose by2020,orberunningonarestrictedbasisbecauseoffurtherLCPDrequirements. Thenewplantsbeingproposedwillallbe‘supercritical’coalpowerstations,socalledbecauseofthe highoperatingpressuresinthesteamturbines.Asupercriticalcoalplanthasahigherefficiencythan previousdesigns(around45percentratherthan35percent),andsoproducesslightlylowercarbon emissionsperunitofelectricitygenerated(around15-20percentlower).However,electricity generatedbysuchplantswillstillproduceemissionsatarateofaround0.7-0.75kg/kWh,almost

600

200

590

190

580

180

570

170

560

160

550

150

540

140

530

130

520

Total emissions

210

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

Source:DEFRA2007

Notethatbothaxescoverthesamerange(80MtCO2)

Electricity emissions

Figure1.2.Carbon dioxideemissions fromenergy industries,and totalUKcarbon dioxideemissions (MtCO2)

Power stations

Table1.1.PotentialnewUKcoalplants Location Company Kingsnorth E.ON

Capacity 1.6GW

Total

StatusatJanuary2008 ApprovedbyMedwayCouncil,withBERRfor Section36*approval HighMarnham E.ON 1.6GW n/a Tilbury RWEnpower 1.6GW Scopingreportsubmitted.S36application imminent Blyth RWEnpower 2.4GW Scopingreportsubmitted.S36application imminent Ferrybridge ScottishandSouthern 800MW Scopingstudiesunderway.S36 Energy applicationshortly Longannet ScottishPower 2.3GW Feasibilitystudyannounced Cockenzie ScottishPower 1.15GW Feasibilitystudyannounced *Section36referstoapprovalrequiredforalllargepowerplantsfromtheSecretaryofState Source:ENDSReport 396(January2008),andinterviewswithenergycompanies

14

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

twicethatofamoderncombined-cyclegasturbine(CCGT)plant,whichisseenintheindustryasthe defaulttechnology. Someenergycompaniesalsohaveplansforintegratedgasificationcombinedcycle(IGCC)coal-fired plantstodemonstratepre-combustioncarboncaptureandstorage.However,sincetheGovernment hasdecidednottosupportthistechnology(seeChapter3),theseplantswillprobablynotbe constructed,asIGCCisnotcurrentlycompetitivewithsupercriticalcoal. TheseinvestmentplansobviouslyposemajorpotentialchallengestoUKemissionstargets,including themid-term2020targetsinthedraftClimateChangeBill. Tounderstandwhatproposednewcoalbuildmightmeanforemissionsto2020andbeyond,andfor renewables,itisfirstnecessarytolookathowinvestmentandoperationaldecisionsintheelectricity sectorwork.

15

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

2.Whyenergycompanieswanttobuildnewcoal-firedpowerstations Inthischapterweexaminethekeydriversfornewcoalplantsfromtheperspectiveoftheenergy companies,giventhecurrentpolicyframework.Itisimportanttounderstandwhycompaniesmight wanttobuildnewcoalplants,bothinordertoassesswhattheenvironmentalimplicationsare,and alsotoassessthepotentialeffectsofproposedpolicies. Investinginanewcoal-firedpowerstation,withcapitalcoststypicallywellinexcessof£1billion,isa majorfinancialundertaking.Forexample,inearly2008,E.ON’sestimateforthecapitalcostsofthe newKingsnorthplantwas£1.7billion.Forcompaniesconsideringsuchaninvestment,thereisalways ariskthatelectricitypricesmayfallonceitisbuilt,orthatgaspricesmayfall,leavingcoalexposedin costterms.Sincethecapitalcostsofcoalplantsaresignificantlyhigherthanthoseofnewgasplants, coalisariskierproposition.Nevertheless,asnotedinChapter1,applicationstobuildnewcoalplants arebeginningtocomethroughtheplanningsystem. Likeallprivatesectorinvestments,thedecisiontoinvestinacoal-firedpowerstationcanbeseenin termsofatrade-offbetweenriskandexpectedreturnontheproject.Bothrevenueandriskwillbe judgedagainstalternativeusesofthecapital.Understandingwhyseveralenergycompaniescurrently wanttoinvestinnewcoal,thereforeinvolveslookingatalloftheseelements. InthischapterwelookatsomeofthecurrentmaindriversforbuildingcoalplantsintheUK.These includetherecentmovementofgasandcoalprices,ananticipatedshortfallinelectricitygenerating capacityexpectedinthemiddleofthenextdecade,andstrategicconsiderations. However,thepolicylandscapeforinvestmentdecisionsischangingrapidly,andboththefutureofthe EUETSandtheproposed2020renewableenergytargetshaveimplicationsforpotentialnewcoal build.TheseareexaminedinChapters3and4respectively.

TheUKelectricitymarket Sincetheprivatisationoftheelectricityindustryin1989,decisionsaboutinvestmentinnewpower stationshavebeentakennotbytheGovernmentbutbytheprivatesector.Overtime,theindustry hasbecomeverticallyintegrated,sothatthecompaniesthatsupplyelectricitytohomesand businessesalsoownpowerstations.Themarketisnowdominatedbysixlarge,verticallyintegrated companies.Havingtheirowngenerationportfolioprotectssuppliers,tosomeextent,againstrisk,as theywouldotherwisehavetosourcealltheelectricitytheysellfromothercompanies. Theideaoftheliberalisedmarketisthatallkindsofgenerationcompeteonpricetoprovidethe cheapestpossibleelectricityprices(oneoftheGovernment’senergypolicyobjectives[HMGovernment 2007]).However,withinthisframework,somesourcesofelectricityreceivespecialtreatment. TheRenewablesObligation(RO)supportsinvestmentinrenewableelectricitybyrequiringelectricity supplierstosourceagrowingproportionofthepowertheysellfromrenewablegenerators(orpaya penaltybuy-outfee).Thiscreatesanartificialdemandforrenewableelectricity,andraisesitsprice.So far,thismechanismhasmainlysupportedonshorewindprojects,buttheROwillshortlybereformedto givemoresupporttoothertechnologies,withoffshorewindandbiomassexpectedtogainthemost. Withinawiderliberalisedmarket,theROhastheeffectofpartitioningelectricitygeneration.TheRO hasbeencriticisedforbeingbothexpensiveandineffectivecomparedwithalternativepoliciesadopted widelyelsewhereinEurope(Greenpeace2008b,FriendsoftheEarth2007,Ofgem2006,Grossetal 2007,DepartmentofTradeandIndustry2004),andactualrenewablegenerationhaslaggedbehind targets.However,theROhassucceededin‘forcing’acertainamountofrenewableelectricityintothe market,withtheproportionofelectricitygeneratedbyrenewablesgrowingeveryyear.Thisportionof themarketis,effectively,partiallyprotectedfromcompetitionbyothersourcesofgeneration.2

2.Theexistenceofthepenaltybuy-outmeansthatactualbuildlagsbehindtargets,sothatrenewables areonlypartlyguaranteedashareofthemarket(seeChapter4).However,thislagismainlyascribedto planningbarriers,ratherthanalackofprojectproposals.

16

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Existingnuclearpowergenerationhasalsobeenprotected,bysubsidyfromtheNon-FossilFuel Obligationupto1998,and,sincethen,byfinancialaidpackagesforBritishEnergy.Newnuclearbuild isnowsupposedtocompetedirectlywithcoalandgas,butwillalmostcertainlynotbeoperational untilafter2020,soisignoredhere. Thisleavestherestofthe‘mainstream’market,wherecoalandgashavetocompetewithone another.3 Companiesinvestinginnewcoalplantswill,therefore,lookfirstatexpectedrenewables buildundertheRO,andthencomparetheeconomicsofcoal-firedgenerationwiththatofgas-fired generation. AfinalpointtonoteabouttheUKelectricitypolicyframeworkisthatithasevolvedintheabsenceof aheatpolicy.Thisisimportantbecausecoal-andgas-firedpowerstations(alongwithnuclearplants) producehugeamountsofheat,whichisnotutilised.Theconsequentlowlevelsofefficiencyof conversionofprimaryenergyintoelectricityisoftencontrastedwithcountrieslikeDenmarkand Finland,wheremostelectricityisgeneratedinCHPplants,inwhichwasteheatfrompowergeneration isusedinhomesorindustry. ThereasonswhymajorenergysuppliersdonotinvestmoreinCHPplantsarediscussedinmoredetail inChapter8below,buttheyareessentiallyacombinationoftheabsenceofaheatpolicy,andlimited opportunitiesforasufficientreturnoncapitalwithinthecompanies’currentbusinessmodel.

Theeconomicsoftheelectricitymarket Electricityisasystem,ratherthanafuel,andso,atanyonetime,theamountusedinhomesand businessesmustbebalancedbytheamountgeneratedinpowerstations.Generatorsmakeoffersto supplyelectricityathalf-hourlyperiodsthroughthedayandnight.Theymakethedecisiontooffer powerinlightoftheexpectedpriceofelectricity,asagainstthecostofoperatingtheirplantoverthe periodoftimetheyrunit.Thiscost(calledtheshort-runmarginalcost,orSRMC)isheavilyaffected bythepriceoffuelusedtogeneratetheelectricity. Thus,fordeterminingwhatkindofpowerstationsactuallyrunatanyonepointintime,akeyvariable isthedifferencebetweenwholesaleelectricitypricesandthepricesoftherelevantfuels–inother words,gasorcoal–paidbygenerators.Upuntilaround2000,coalandgaspriceswereclose together,andbothwerelow(seeFigure2.1). Othercosts,includingthecostofcapital,meantthatgas-firedpowerstationshadtheedgeovercoal, so,inanygivenperiodoftime,ownersofCCGTpowerstationswouldbethefirsttoofferpower supplytotheNationalGridCompany,whichisresponsibleforkeepingthesystemrunning.Newer plantstendtobemoreefficient,andsopoweroutputfromtheseisofferedfirst.Thismeansthat, throughthe1990s,alltheavailableCCGTplantswouldberunningatfullcapacityformostofthe time.Thisarrangementisknownasbaseload operation. Onlyonceallthegasplantshadputintheirlow-costofferswouldownersofcoalplantsstarttobid in,athigherprices.Someoftheleastefficient,andthereforehighestcost,coalplants(alongwiththe fewoil-firedpowerstations)mightonlyoffertorunintimesofpeakdemand(knownaspeakload operation).Oneimportantconsequenceofthisisthatthepriceofwholesaleelectricityinthespot market(whichchangeseveryhalfanhour)atanyonetimereflectsthecostsofthemarginal,most expensiveplantinoperation. However,since2001,changestoelectricitytradingarrangementsmeanthatthespotwholesale marketonlyhandlesasmallpartofelectricitytraded.Mostgeneratingcompaniesselltheirelectricity directlytotheirsupplyarmsviabilateralcontracts.Competitionforcustomersonpriceis,therefore, relateddirectlytotheefficiencyandfuelcostsofeachcompany’sgeneratingportfolio.

3.Inthepast,coalhasalsoreceivedspecialtreatment,mostnotablyhelpedbyamoratoriumonnew gas-firedplantsattheendofthe1990s(Helm2003).However,coal-firedelectricitygenerationdoesnot nowreceiveanydirectsubsidy.

17

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Driversofcosts Coalversusgasprices Oneimportantfactordrivingaresurgenceofinterestincoal-firedpowergenerationisthat,incontrast tothe1990s,overthelastfewyearsithas,attimes,beenhighlycompetitivewithgas-fired generation.From2000,risinggaspricesbegantochangethecostrelationshipbetweencoal-and gas-firedpowergeneration.Especiallyinwinter,coal-firedplantsstartedtolookcheap,andbeganto runbaseload,whilegasmovedtowardsmoreperiodicuse. Intheory,investmentdecisionsshouldbebasedonalong-termandcomprehensiveviewofcosts, includingnotjustfuelcosts,butalsooperatingandmaintenancecostsandthecostofcapital.These areknownas‘levelised’costestimates,expressedinrelationtotheamountofelectricityexpectedto beproducedbyaplantoveritslifetime.Estimatescanvaryappreciablyduetodiffering methodologies(seeGrossetal 2007forfurtherdetails),buthistoricallythelevelisedcostsof generatingelectricityfromcoalandgaslieveryclosetogether.Inarecentreviewof1,200cost estimates,themediancostofcoalwas£31.90/MWhcomparedwith£30.50/MWhforgas(Grossetal 2007). However,inpractice,itispossiblethatinvestmentsentimentmaybeswayedbymorecurrentprice movements.Overthe1990s,gaspriceswererelativelylowandstable(Figure2.1),andthelower capitalcostsofgasplantsmadeitthebuildofchoice.Butstartingaround2002,gaspricesfor electricitygeneratorsstartedtorisesharply,especiallyinwinterperiods,whenthedemandforgasfor heatingalsogoesup.FortheUK,thisrisecoincidedwiththeshiftfrombeinganetexporterof naturalgasfromtheNorthSea,tobeginningtoimportgas. TheUKwillbecomeincreasinglyexposedtotheregionalEuropeangasmarket.Companiesexpress concernsbothabouttheflowofgasthroughContinentalpipelines,andaboutgassupply,whichis dominatedbyRussia(Helm2007,Stern2006).Thenatureofgassecurityofsupplyissuesisassessed indetailinChapter8. Figure2.1.Gasand coalpricesforUK electricity producers

1.4 1.2

Source:BERR2007b p/kWh

1 0.8 0.6 0.4 0.2

Coal

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

Natural gas

Theriseingaspriceshasshiftedgasfrombeingmainlyabaseloadfueltoapeakloadone.IntheUK market,wholesaleelectricitypricesaresetbytheshort-runoperatingcostsofthemarginalplant(see above).Sincetheearly2000s,themarginalfuelhasoftenbeengas,especiallyinwinter,soaverage electricitypriceshavemovedupwithgasprices,fromaround3p/kWhin2004toover5p/kWhin 2006.Coalpriceshave,bycontrast,beenrelativelystableuntil2007,meaningthatgenerating electricityfromcoalhasbeenaveryprofitableactivityovermuchofthedecade.

18

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Thissituationisnowchanging.Inthelastsixmonths,coalpriceshavealsomovedupsharply,from aboutUS$70/tonnetoapeakofUS$140/tonneinDecember2007(Lekanderetal 2008b).Withhigh demandfromAsiasettocontinue,andsomesupplyproblems,coalpricesareexpectedtoremainhigh forthenexttwotothreeyears.However,gasprices,whicharetiedtooilpricesinEuropeanmarkets, arealsorisingsharply. Fuelpricesandmodellingofinvestment Inmodellingoffutureexpectedinvestmentinnewcoalplants,fuelpricesusuallyplayanimportant role.Forexample,scenariosdevelopedbytheGovernmentforthe2007EnergyWhitePaperarebased onarangeofgasandcoalpriceprojections(Table2.1).TheyalsoassumeanEUETScarbonpriceof 20/tCO2 from2010and25/tCO2 from2015-2020(seeChapter3). Table2.1.EnergyWhitePaper2007,gasandcoalpriceprojections Gas(pence/therm,2006prices) Coal(£/tonne,2006prices) Low Central High Low Central High 2010 32 42 50 28 30 38 2015 18 38 53 20 31 41 2020 21 40 53 20 32 45 Note:Theseprojectionsare,ofcourse,dependentonthefullrangeofassumptionsunderlyingthe modelling,andarepresentedhereforillustrativepurposesonly. Source:BERR2007e ThesefuelpricesarethemainfactorindeterminingtheprofileofnewcoalbuildintheEnergyWhite Paper(EWP)modelling(Figure2.2).Inthe‘low’fuelpricescenario,coalisnotcompetitivewithgas, which,alongwithrenewables,dominatesprojectednewbuild.However,withhigherpricescenarios, coalbecomesmorecompetitive.Thecentralfuelpriceprojectionswouldleadtoaround4GWofnew coalbuild.Ifpricesarehighintheperiodto2020,theGovernmentanticipatesthataround7GW morecoal-firedcapacitywouldbebuiltby2020. Figure2.2. Additionsto capacityby2020 underdifferent scenarios

30.0 25.0

Source:Blyth2008

Other

20.0 GW

Renewables 15.0

Gas CCS coal

10.0

non-CCS coal

5.0 0.0 EWP low prices

EWP central prices

EWP high prices

Company plans for coal

Note:EnergyWhitePaperprojectionsareallforcentralpolicyimpactscenario

19

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Notethathighercoalpricesdonotworkagainstbuildingnewcoal,aslongasgaspricesalsoholdup. Thisisbecausewhennewcoalplantsarebuilttheyhavetocompetenotonlyagainstgas-firedplants, butalsoagainstexistingcoalplants.Theseareallatleast30yearsold,andhavelongsinceamortized theircapital.Bycontrast,tobeworthbuilding,newcoal-firedplantsdohavetopayofftheircapital costs,whichareconsiderable. Thereasonwhynewsupercriticalcoalpowerstationsmightbeabletodothisisthat,asnotedin Chapter1,theyareconsiderablymoreefficientthancoalplantsbuiltinthepast.However,this efficiencyadvantageisgreatestwhencoalpricesarehigh.Ifcoalpricesfallverylow,thenthe efficiencygainisworthless,andnewcoalwouldbeariskierproposition.4 Theroleofnewnuclearbuild Afinalfactortonoteistheroleofpossiblenewnuclearbuild.Asnotedabove,unlikeinthepast, nuclearpowershouldnowbeseenaspartofthecompetitiveelectricitymarket.TheGovernmenthas recentlysignalledthatitnowwishestoseenewnuclearplantsbuiltintheUK.Someenergy companiesareshowingsomeinterestinpursuingnewnuclearbuild.RWEandEDFareconsidering takeoverbidsfornucleargeneratorBritishEnergy,whichwouldgivethesecompaniesoptionsonlikely nuclearsites(PagnamentaandKennedy2008). Itistooearlytosaywhether,andhowsoon,applicationswillcomeforward,ascompaniesarealso waitingforfurthergovernmentactiononpre-licensingarrangements,andthepassageofthePlanning Bill,bothofwhichareseenasrequirementsbyindustryforinvestinginnuclear.However,giventhat theGovernmenthasrepeatedlymaintainedthattherewillbenorepeatofpastsubsidiesfornuclear,5 themostimportantfactoriscostandcompetitiveness.Costestimatesofnuclearpowervary substantiallyaccordingtomethodology,anditispossiblethatnoapplicationswillbeforthcoming unlessthereissomeformofsupport(themostlikelybeingafloorpriceforcarbon). Planningandbuildingnewnuclearpowerplants,evenwithstreamlinedprocedures,willtakealong time,andeventhemostoptimisticestimatesarethattherewillbenocapacityoperatingbefore2018. Ifithappens,newnuclearcapacitywillstarttoentertheUKelectricitymarketinamajorwayonly fromtheearly2020sonwards. However,sinceallpowerplantsarelong-lived,expectationsaboutnuclearnewbuildinfluenceboth coalandgasplans,andviceversa.Atthesametime,sincegas-firedplantsremainthedefault investment,andgaspricestendtodetermineelectricityprices,bothcoalandnuclearremainthe riskierinvestments:notonlymorecapital-intensivethangas,butalsoexposedbothtomarketprice andpolicyrisks(seeAnnexBformoredetails).

Thegenerationgap Costsandcostriskdomatterforinvestmentdecisions,but,asGrossetal (2007)haverecently pointedout,whilepolicyonelectricitygenerationhastendedtobeinformedbycostestimates,actual investmentdecisionsareprobablydrivenmorebyexpectedrevenueandrisksassociatedwithrevenue. Lookingaheadoverthenext10-15years,expectationsaboutfutureelectricityrevenuesare dominatedbytheanticipationofa‘generationgap’inthelatterpartofthenextdecade.TheUK currentlyhasabout76GWofgenerationcapacity,andawinterpeakdemandofaround63GW, givinga‘capacitymargin’ofaround21percentofpeakdemand.Acapacitymarginofmorethan15 percentisconsidereddesirableinordertomaintaintheresilienceoftheelectricitysystemtoshocks, suchasseveralnormallyoperatingplantsgoingdownatthesametime.

4.TheauthorisgratefultoWillBlythforthisobservation.Theefficiencygainwouldalsobeless(ornonexistent)ifnewplantwerebuiltwithCCS,asthisinvolvesanenergypenalty(seeChapter6). 5.Thereisalevel,ifimplicit,subsidyinlimitstotheinsuranceliabilitythatnuclearoperatingcompanies havetotakeon.

20

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

However,somenuclearandcoalplantsarecertaintoclosedownovertheperiodto2020,andfurther plantsmaywelldoso.TheGovernmentpredictsthat22.5GWofcapacity–almost30percent–will belostby2020(HMGovernment2007). Figure2.3showsanindicativeprojectionofthecapacitymargininGW,takingintoaccountonly currentcapacity,plannedretirementsandnewprojectswithplanningapproval.Itshowsasteepfall offincapacityfromaround2012asnuclearplantsclosedown,andthenanotherfallfrom2016as coalplantsarephasedoutundertheLargeCombustionPlantDirective.TheGovernmenttakesthe viewthat20-25GWofnewcapacitywillbeneededby2020,withpossiblyanother10GWby2030 (HMGovernment2007). Figure2.3. Capacitymargin withoutnew investment

25

20

Source:BERR2007c 15

10

GW

5

0 2005

2010

2015

2020

-5

-10

-15

Projectionsofcapacitymarginsandgenerationgapsdependheavilyonassumptions.Theprojectionin Figure2.3isveryconservative,inthatitignorescapacityintheplanningpipelineandtheimpactof possiblefuturepolicies.Infact,notonlyaresomenewgas-firedplantsalreadybeingbuilt,butalso moreareatapplicationstage,withsome16GWinthepipeline.Thereisalso9GWofwind-power awaitingapproval(BWEA2008).6 TheGovernmentalsoexpectstheretobesomenewnuclearcapacityby2020,andpotentiallyalot moreafterthatdate,andtheEuropeanCommission’sproposedtargetsforrenewableenergywillalso havesignificantimplicationsforthegenerationgapifadopted(seeChapter4). Projectionsofmarginsalsomakeassumptionsaboutthedemandforelectricity.Figure2.3isbasedon theGovernment’sforwardanalysisofmarkets,whichassumesanincreaseinpeakdemandoverthe periodbyabouteightpercent.Iffutureelectricitydemandislower,duetoconservationmeasures andthesmoothingofdemand,thenthegenerationgapwouldalsobesmaller,although,evenon optimisticviewsofthepotentialforreducingdemand,agapwillstillexist. Themajorgeneratingcompanies,whichallhavetheirownsimilarversionsofthisgenerationgap analysis,expectthattherewillbeasignificantgenerationgap,andconsequentlythatelectricityprices couldstarttorisefromearlyinthenextdecade(Blyth2005).Allthemajorcompaniesarenow

6.Notethateffectivecapacityfromthesesourceswillbelessthantheheadlinefigures,especiallyinthe caseofwindwherethecapacityfactorisintheregionof0.3,becausethewinddoesnotalwaysblowat thespeedrequiredfortheratedcapacity.

21

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

proposingorconsideringawaveofnewinvestmentsonthebasisofthemarketbecomingincreasingly tight. Thedynamicsofpricemovementsandinvestmenttimingarealsoimportant.AsWhite(2005)points out,inacompetitivearenaliketheUKwholesaleelectricitymarket,thepricespikesassociatedwitha shortageofcapacitycanbeshort-lived,andcompanieshavetotimetheirinvestmentsjustright.If theyareslightlybehindothermarketplayers,theyriskbringingnewcapacityonstreamjustasthe generationgapdisappears,andpricesdroptolevelswheretheyfindithardrecovertheircapitalcosts. Thisisparticularlyaproblemforcoal,ascoal-firedpowerstationstakelongertobuildandaremore expensivethangas-firedplants.

Strategicconsiderations Giventheirexpectationofelectricityrevenues,basedontheiranalysisofthegenerationgap,andof costs,companieswillmakedecisionsaboutdevelopingproposalsforinvestmentinnewcoal,gas, windorothergenerationaccordingly.Futurerevenuesandcostsarediscountedatagivenrate,and thensummedtogiveanetpresentvalue(NPV)fortheproject.Companiesappraiseinvestmentson thebasisofthespreadofNPVsofprojectsunderdifferentpriceassumptions,andtheprojectrisks involved(seeAnnexBforafullerexplanationofNPVandanestimateofspreadsforgasandcoal projects). OnaconventionalNPVbasis,underarangeofcostassumptions,gasstilllookslikethelowestrisk investment,and,therefore,thedefaultinvestmentchoice.Thisisbecause,whilegasisatthemargin, electricitypriceswilltendtomovewithgasprices,therebyreducingrevenueriskforgas,butnotfor coal.Coalcanbringbigrewards,butismoreofarisk. However,inadditiontocalculationsmadepurelyonthebasisofplanteconomics,investment decisionswillalsobeaffectedbystrategicconsiderations.Oneoftheseishavingadiversegeneration portfolio,tohedgeagainsttheriskthatanyonefuelortechnologymaybecomeveryexpensive becauseofmarket,securityofsupplyorpolicyfactors(Grossetal 2007). Fiveoutofsixofthemajorenergycompaniescurrentlyhavecoalcapacityintheirportfolios(Figure 2.4),oftenalongwithgasandsomerenewables.However,undertheLCPD,E.ONwillhavetoclose3 GWofcoalplantsby2016,RWEnpowerwillhavetoclose3.2GW,andScottishPower1.2GW.More coalcapacitymayclosesubsequently,orhavetorunatreducedloadunderfurtherLCPDprovisions. Figure2.4. Portfolioofthe majorsuppliersin 2007

12,000

Source:BERR2007a

10,000 Other

8,000 MW

Renewables 6,000

Coal CCGT

4,000

Oil/OCGT

2,000 0 Centrica

RWE npower

E.ON

EDF

SSE

Scottish Power

22

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Itisimportanttorealisethatthephase-outofcoalplantscanhaveanevenbiggerimpactonthe generatingcapacityofindividualcompaniesthanonthecountryasawhole.By2015,E.ON,for example,willhavelostaround45percentofitstotalcapacity,and60percentofitscoalplants, whileRWEwilllose80percentofitsexistingcoalcapacity.Becausethelossofcoalcapacityunder theLCPDallhappensby2016,andtheplanningandbuildingofanewcoalplanttakesfivetosix years,allthemajorcompaniesthathaveopted-outcoalplantsarethinkingaboutnewcoalnow. Thus,plansforinvestmentinnewcoalarebeingdriven,atleastpartlyifnotmainly,byadesireto holdontoaportfoliothatwillbelargeenoughtomaintain(or,forsome,increase)marketshare,and whichalsoincludesasignificantamountofcoal.Companiesregardhavingtoolargeaproportionof gascapacityintheirgenerationmixasexposingthemselvestoacostrisk.Theytalkintermsof‘replanting’,inotherwordsreplacingcapacitythatiscomingtotheendofitslifewithnewplantsthat usethesamefuel.7 Animplicationofthisisthatnewcoalplantinvestmentsareseenasgivinganadditionalriskreduction benefit,aboveandbeyondtheconventionalinvestmentappraisal.Thispremiummakesitmorelikely thattheywillbebuilt.Againstthisisthecarbonpricerisktowhichcoalisparticularlyexposed,and whichisdiscussedinthenextchapter. Afinalpointtonoteisthatenergycompaniesarealsoproposingorseriouslyconsideringnewcoal buildelsewhereintheEU(Table2.2).AccordingtoananalysisbyGreenpeaceInternationalin2007, basedoninformationfromtheenergydatafirmPlatts,atotalof68newcoal-firedorlignite-fired8 powerstationsarebeingconsideredacrosstheEU27,withatotalcapacityof64GW(Greenpeace International2007).ThelargestnumberofprojectsisbeingproposedinGermany. SomecompaniesintheUKmarket–specificallyE.ONandRWE–operateacrosstheEU,with headquartersinGermany.Forthesecompanies,theplanningofnewcoalcapacityintheUKmight thereforealsobeseenaspartofawiderEuropeanportfoliodiversificationstrategy.However,itshould benotedthatthefutureoftheseproposalsdepends,inpart,onthefinalshapeofPhase3oftheEU ETS.Thisisdiscussedfurtherinthenextchapter. Table2.2.PlannedcoalpowerplantsinEurope Country Proposednewcapacity(MW) Germany 33,435 Italy 5,890 Poland 3,526 Netherlands 6,200 Hungary 1,600 Bulgaria 750 France 700 Greece 600 Austria 800 Slovenia 885 Spain 1,200 Total 64,026 Source:GreenpeaceInternational(2007)

Numberofprojects 33 6 6 5 2 1 1 1 1 1 1 68

7.Centricaistheonlyenergymajornottoowncoal-firedcapacity,buthassaidthatitwillnotinvestin non-CCScoalplant,ongroundsofcorporateenvironmentalresponsibilityandcarbonpolicyrisk. 8.Lignite,alsoknownasbrowncoal,isasoftcoalwithahighmoisturecontentusedextensivelyin Germany,butnotintheUK.Ithasahighercarbondioxidecontentthanhardcoal.

23

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Summary Underthecurrentliberalisedelectricitypolicyframework,thedecisiontoinvestinnewcoallieswith companiesratherthangovernment.Companieswillinvestinnewcoaliftheythinkitwillbemore profitablethanalternatives,andgiventherequirementsimposedbytheRenewablesObligation. Themajorenergysuppliersareallexpectingashortfallingeneratingcapacityinthenextdecade,and, therefore,higherelectricityprices,andthisisdrivingageneralinterestininvestinginnewcapacity. Interestinnewcoalinparticularhasbeensparkedbyrelativelylowcoalpricesoverthelastfiveyears. However,itisperhapsmoststronglydrivenbythedesiretomaintainaportfolioofgenerating capacitythatincludesarangeoffuels,tohedgeagainstmarket,securityofsupplyorpolicyrisk.As somecompaniesarelosingasignificantamountofcoalcapacityfrom2015onwards,theyare interestedinreplacingit.

24

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

3.Theroleofcarbonpricing Cost,revenueexpectationsandstrategicconsiderationsareallfactorsdrivingthenewinterestincoal. However,since2005,anewdevelopmenthascomeintotheinvestmentequationintheformof carbonpricingthroughtheEUemissionstradingscheme(EUETS). Carbonpricingworksagainstnewcoalinvestmentbecauseburningcoalemitsatleasttwiceasmuch carbonperkWhgeneratedthanburninggas.Theadditionalcostsfromcarbonpricingwill,thus,be higherforcoal-firedgeneratingplantsthanforgas-firedplants.

TheEUemissionstradingscheme TheEUETScoversboththepowersectorandheavyindustry.UnderPhases1and2oftheEUETS, covering2005to2012,mostemissionsallocationsaredeterminedatthelevelofinstallation(for example,powerstation,factory),basedontheinstallation’semissionsoverthepreviousfiveyears (‘grandfathering’).Thisprocesswashandledundernationalallocationplans(NAPs)developedby eachmemberstate,whichwerethenassembledintoatotalEUcarbonmarket.Installationownerscan also,uptoacertainlimit(forexample,sevenpercentforpowerstations)meettheirobligationsby buyingcreditsfromprojectscreatedundertheCleanDevelopmentMechanism(CDM)andtheJoint Implementation(JI)schemeoftheKyotoProtocol. InPhase1,NAPswereovergenerous,and,inApril2006,whenitbecameclearthatallowanceswere largerthanactualemissions,thecarbonpricecollapsed.OnlywithatightercapinPhase2from January2008hascarbonstartedtobeeffectivelypriced(intherange20-25/tCO2 inMarch2008) (seewww.pointcarbon.com). InJanuary2008,theEuropeanCommissionputforwardproposalsforPhase3(torunfrom2013to 2020).Theseproposalsrepresentafurthertighteningofthecap,andarediscussedinmoredetail below.

Carbonprices,fuelswitchingandbanking Intheory,thepriceofcarbonontheEUETSisultimatelydeterminedbythetotalcaponemissionsset byEuropeangovernments,relativetotheemissionsthatwouldotherwisebecreatedbyelectricity generationandheavyindustry,takingintoaccounttheamountofCDMandJIcreditthatcanbeused. ThepriceofcarboninfuturephasesoftheEUETSwilldependonhowfarandfastgovernments wanttopushemissionsreductions,whichis,inturn,ultimatelyapoliticaldecision.Thecarbonmarket, therefore,exposeselectricitygeneratorsto policyrisk,inadditiontothecommercialriskstheyface becauseofvolatilecoalandgasprices(althoughgaspricesinfacthaveacertainelementofpolitical riskalsocontainedwithinthem). Theviewofcarbonmarketanalystsisthat,onceacapisbiting,thenthepriceofcarbonshouldtend towardsthecheapestwayofreducingemissionsatthatlevelofthecap.Asthecapistightenedover time,thecarbonpricecanbeexpectedtoincrease,asthecheapestwaysofreducingemissionsare exhaustedandmoreexpensivetechnologieshavetobeapplied.Thisisreferredtoasthemarginal abatementcostcurve. Thecheapestformoflarge-scaleabatementavailabletoinstallationsistobuyincreditsfromCDM/JI schemes.Thisisanimportantissueforfuturephasesoftheschemebecausethemorescheme participantsareallowedtobuyinCDM/JIcredits,thegreaterthedownwardpressureoncarbon prices. Oncethisavenueisexhausted,thenextcheapestthingtodoistoswitchfrommoretolesscarbonintensivefuelsinelectricitygeneration(White2006,Lekanderetal 2008a,Lewis2008,Lewisand Curien2008).Ifcarbonpricesexceedthecostofswitchingfuels,itismoreprofitableforthe electricityplantatthemargintoreduceoutputandselltheircarbonallowances.Ifcarbonpricesare lowerthanthislevel,itismoreprofitableforthemarginalplanttobuyallowancesandproduce electricity.

25

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Themostcarbon-intensivefuelusedinEuropeanpowergenerationislignite,orbrowncoal,witha carbonfactorof0.9-1.3kgCO2/kWh,comparedtoconventional,hardcoal,withacarbonfactorof 0.7-0.95kgCO2/kWh.Therangesrelatetohowefficienttheplantis,withmoremodernsupercritical powerstationshavinghigherefficienciesandlowercarbonfactors.Thus,onewouldexpectthefirst powerstationstoreduceoutputorclosedowntobeold,inefficientlignite-firedplantsinGermanyor centralandeasternEurope. Thereissomescopeforfuelswitchingfromlignitetohardcoalorgas.Thereissome60GWof lignite-firedcapacityand130GWofhardcoalcapacityintheEU(RWE2007).InGermany,one quarterofpowergenerationisfromlignite,representingaround130TWhayear.Althoughtheir marketsaresmallerthanGermany’s,theproportioninsomeofthenewmemberstatesintheeastof Europeismuchhigher.Furthermore,someofthehardcoalplantsinEuropeareolderandmore inefficientthanthoseintheUK. Fuelswitchingdrivenbycarbonpricingis,therefore,unlikelytohappendirectlyintheUKforawhile. (Adeclineinoutputfromcoal-firedgenerationismorelikelytobedrivenbyclosuresundertheLarge CombustionPlantDirective.)LewisandCurien(2008)estimatethatthecarbonpricewillhaveto reach55/tCO2 forlarge-scalefuel-switchingfromcoaltogasintheUK.Thismayhappenlaterin Phase3(2013-2020)iftheEuropeanCommission’sproposalsareaccepted(seebelow). Thisrelationshipbetweenthecarbonpriceandfuelswitchingmeanstwothings:first,thecarbonprice willtendtomove,soastokeeptheshort-runmarginalcosts(SRMC)ofgenerationofthetwofuels thesame.Initially,thiswillbeligniteandhardcoal,orligniteandgas.However,inthelongerrun,the carbonpriceshouldequalisetheSRMCsofhardcoal-andgas-firedpowergeneration.Aconsequence ofthisisthatthe‘meritorder’ofplantsintheUKwouldthenbedictatedmorebyefficiencythanby fuelcosts.Moreefficientnewerplants(forexample,supercriticalcoal)wouldrunbaseload,whileolder plantswouldbepushedtopeakloadorreserve. Asecondconsequenceofthisrelationshipisthatthecarbonpricewillmoveinstepwiththepriceof thelesscarbon-intensivefuel.Considerthecaseofcoalandgasagain.Supposethepriceofgasfalls, whilethecostofcoalstaysthesame.Thismakesthecostofswitchingfromcoaltogaslower,andso thepriceofcarboncanfalltoaccommodatethisshift.Thereversehappensifthecostofgasrises relativetocoal. Afinalpointaboutpointaboutcarbonpricesrelatestotheintroductionof‘banking’.Inthemove fromPhase1toPhase2oftheEUETS,oneimportantchangeisthatparticipantsareallowedto ‘bank’allowances.Thismeansthattheycanbuytheminoneyear,say2008,andthensurrenderor selltheminalateryear,say2012.TheproposalsforPhase3arethatparticipantswillbeabletobank allowancesbetweenPhases2and3,thatis,forwardallthewayto2020. Theimplicationofthisisthatthecarbonprice,intheory,shouldstarttorisequicklytothecostof abatementexpectedattheendoftheperiod(2020)(Lewis2008,LewisandCurien2008).Ifa participantbuysanallocationin2020tocoveremissions,then,ontheanalysisabove,thepricethey willpaywillreflectthecostofabatementin2020.Sincethecapwillbetighterthen,thiscostwillbe higherupthemarginalcostcurvethanthecostofabatementin,say,2008.Itwould,therefore,make senseforparticipantstostartbuyingallowancesin2008,bankthem,andsurrenderthemin2020. Thiscreatesademandfor2008allowancesthatdrivesuptheirpricetothe2020abatementcostlevel, discountedforinflation.

Carbonpricesandinvestmentincoal Carbonpriceswillhaveabearingonthedecisiononwhetherornottoinvestinnewcoal-firedpower stationsintheUK,althoughhowmuchtheymatterdependsonhowmuchcertaintycompanies ascribetothefutureshapeoftheEUETS.Weexaminethisinmoredetailbelow. Forinvestmentdecisions,whatmattersisthedifferencethatcarbonpricesmaketoexpectedfuture costs,overthelifetimeoftheinvestment.Thepreciserelationshipdependsonestimatesofthose costs,whichdovarybetweensources,andalsoovertime.Figure3.1givesoneillustration,basedon underlyingtechnologycoststakenfrombackgroundanalysiscommissionedforthe2007EnergyWhite

26

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Paper(RedpointEnergyStrategies2007).Theexactlocationofthelinesmayvarywithdifferentcost estimates,butthebasicshapeofthediagramremainscommon.

Source:Blyth2008

Offshore Wind Onshore Wind Nuclear

125

Carbon Price (€/tCO2)

Figure3.1. Preferred technologyfor investment,based oncentralEnergy WhitePapercoal prices

Coal + CCS

100 75 Gas (CCGT) 50

Coal (ASC)

25 0

0

20

40

60

80 Gas Price p/therm

Thediagramillustrateshowtechnologychoiceisrelatedtogasandcarbonprices,foragivencoal price(inthisexample,around£30/tonne–thecentralprojectionforcoalpricesinthe2007Energy WhitePaper).Ahighercoalpricewouldshiftthelinesonthephasediagramtotheright. Inthiscase,withazeropriceforcarbon,gas-firedplantistheinvestmentofchoiceforgaspricesof lessthan30p/therm.Inthe1990s,gaspricesforelectricitygeneratorswereaslowas18p/therm,and therewasnocarbonprice,asituationthatclearlyexplainsthe‘dashforgas’.Inrecentyears,however, gaspriceshavemovedupintothe30-50p/thermrange.Intheabsenceofacarbonprice,thismakes coalplants(or,rather,advancedsupercriticalcoalplants)alotmoreattractive. However,acarbonpriceworksagainstcoal,infavourofgas.Ifgaspricesareat,say,40p/therm,then atlowcarbonpricesuptoabout20/tCO2,coalwouldstillbethepreferredinvestment.But,ata highercarbonprice,theadditionalpenaltypaidbycoalstartstotakeeffect.So,evenwithagasprice of50p/therm,ifcarbonpricesstarttoexceedabout40/tCO2,gasmaybethemorecost-effective technology.9 However,asdiscussedabove,thecarbonpriceisexpectedtoberelatedtofuelpricesviathefuel switchingrelationship.IntheearlyphasesofaproperlyworkingEUETS(whichreallyonlydatesfrom early2008),thefuelswitchisbetweenligniteandhardcoalorgas.However,asthecapcomesdown andfuelswitchingmovestohardcoaltogas,thecarbonpricewilltendtowardsequalisingtheSRMCs ofgasandcoal,movingupanddownwiththerelativepriceofgas.Thissuggests,forexample,at BERR’scentralcoalpriceprojectionfor2020(£23/tonne),andthehighgaspriceprojectionof 42p/therm,thecarbonpricewouldbearound40/tCO2.Thisisconsistentwithprojectionsofcarbon pricesin2020underthePhase3proposalsfortheEUETS(seebelow). SinceSRMCsarelowerthanlevelisedcosts,thisrelationshipwilltendtofavourgasasaninvestment. Essentially,effectivecarbonpricingwillactinsuchawayastopreventthereturnstonewcoal investmentcoveringfixedcosts,andespeciallythecostofcapital.

9.Notethattheattractivenessofinvestmentinothertechnologies,includingnuclear,onshoreandoffshore wind,andcoalwithcarboncaptureandstorage(CCS),isalsoinfluencedbygasandcarbonprices.

27

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

TheEUETSsofar Theeffectofcarbonpricingoninvestmentdecisionsintherealworldwilldependbothonthe strengthofcarbonpolicy(thatis,thetightnessofthecap,whetherallocationisbyauctioningor grandfathering,andsoon),andonhowconfidentcompaniesarethatthemarketwillbethereover thelongterm,andthatgovernmentshavethepoliticalsupportforcarryingoutastrongpolicy. Sofar,theEUETShasbeentooweakamechanismtoreallyinfluencedecisionsaboutinvestmentin electricitygeneration,onbothcounts.Indeed,amajorconcernofenvironmentalorganisationsisthat, ifcompaniesarenowseriouslyconsideringbuildingnewcoal-firedpowerstations,somethingisvery wrongwithpoliciesthataresupposedtodeliveratransitiontoalow-carboneconomy. Thus,thetimeframesoftheschemehavebeenfartooshort-term,creatinguncertaintyaboutthe future.Forexample,in2005,VincentdeRivaz,chiefexecutiveofficerofEDFEnergy,commented that:‘thelongtermpriceoftradableemissionsallowancesistoouncertaintobeadriverofsystematic technologicalchangeinanindustrywhosegeneratingcapacityinvestmentsmustbeplannedover30yearperiods’(deRivaz2005;similarviewswereexpressedbySarwjitSambiofCentricaatanippr seminarinJanuary2008). AnotherproblemisthatPhase1capsweresettoogenerously,asituationthatledtothecarbonprice collapsinginthespringof2006. AfurthercriticismisthatcompaniesareallowedtousecreditsfromKyotoProtocolmechanisms–the CleanDevelopmentMechanism(CDM)andtheJointImplementation(JI)scheme–tomeetalarge partoftheiremissionsreductionrequirements.Thereisevidencethatsomeofthesecreditsdonot guaranteeadditionalityintermsofemissionsreduction(see,forexample,Schneider2007,Waraand Victor2008),andsoweakentheenvironmentaleffectivenessoftheEUETS.Thesecreditstendtobe cheaperthanthecostofabatementwithintheEU,soalsodepressthepricewhencapsare insufficientlytight. TheseissuesareaproblemforthecredibilityoftheEUETS,since,whiledrivingshort-termabatement atthemarginisuseful,thereallyimportantachievementofanemissionstradingschemewillbeto driveinvestmentinlower-carbontechnologiesovertime.Certainlythemostbasicsteponewould expectfromsuchaschemewouldbetomakeinvestmentinthemostcarbon-intensiveactivities unattractive–ofwhichburningcoaltomakeelectricityisone. TherearesignsthatEUETSpolicyisnowtighteningup.InPhase2ofthescheme,runningfromnow untiltheendof2012,capsaretighterthaninPhase1.Itisexpectedthatthiswillmeanmoredemand forcredits.Forexample,theGermanenergycompanyVattenfallhaspredictedashortfallof35.8million allowancesperyearforPhase2(www.pointcarbon.com).However,CDMorJIcreditsstillplayamajor role,asuptotwo-thirdsoftheemissionsreductioncanbemetthroughbuyingsuchcredits.

ProposalsforPhase3oftheEUETS InJanuary2008,theEuropeanCommissionmadeformalproposalsforPhase3oftheETS(EC 2008a),whichimplyastrongercarbonpolicyregime.Thispackageincludes:

• • • • •

AsingleEU-widecaponemissionsfromsectorscoveredbytheEUETS Alongerphase,runningforeightyearsfrom2013to2020 Anannualcap,declininglinearly,withanindicationoffuturedeclineforPhase4(2021-2028) (thiscapisbasedonoverallEUgreenhousegasreductiontargets,ratherthanprevious performanceofinstallations) 60percentoftotalallowancestobeauctioned,with100percentinthepowersector10 MorelimiteduseofCDM/JIcreditstomeetrequiredemissionsreductions.

10.Notethatauctioningisrelativelymorecostlyforcoal,comparedwithgrandfathering,because,while grandfatheringaccommodatesthehighercarboncontentofcoal,underauctioning,coalplantswillhaveto paymorethangasplants.

28

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

TherearetwopossibilitiesorscenariosforthecapinPhase3.Oneappliesintheabsenceofa ‘satisfactory’internationalagreementonclimatechangeandemissionsreduction.Thecapinthiscase isbasedonatargetofa21percentreductioningreenhousegasesfrom2005levelsby2020.Under thisscenario,unusedCDM/JIcreditlimitsfromPhase2canbecarriedoverintoPhase3.Forthis versionofPhase3,theSwissbankUBSpredictsanannualaverageshortfallinallowancesof440 million(Lekanderetal 2008a). However,mostobserversexpectthatthemorerelevantscenarioforPhase3isoneinwhicha ‘satisfactory’internationalagreementisdeemedtohavebeenreached.Thecapunderthisscenario involvesa31percentemissionsreductionfrom2005levels.However,inthisversionofPhase3,more CDMandJIcreditswillbeallowed,upto50percentoftheadditionalemissionsreductioneffort involved. Underbothscenarios,earlypredictionsforthecarbonpriceareoftheorderof20-25/tCO2 in2013, risingto35-40/tCO2 by2020(see,forexample,Buchan2008,Lekanderetal 2008a).Lewisand Curien(2008)offeramorecomprehensiveanalysisthatincludesbanking,andofferapredictionof 40/tCO2 for2008allowances,risingtoa2020priceof67/tCO2. WithcarbonpricingdrivingfuelswitchingawayfromcoaltogasfromPhase2,continuingtohigher levelsinPhase3andbeyond,investmentinnewcoal-firedpowerstationswouldbecomeless attractive.Indeed,therearesignsthatcompaniesarebeginningtorethinkinvestmentplansinlightof theJanuary2008EUpackage.Forexample,inaspeechfollowingtheEuropeanCommissionpackage, UlrichJobs,aboardmemberofGermanutilityRWE,saidthatplannedinvestmentswouldnotgo aheadifthepackageweretobeagreedbymemberstates(Forbes2008). UBSestimatesthatthetighteningoftheproposedcapunderPhase311 andthesubsequentdoubling oftheexpectedemissionsshortfallfromPhase2,alongwithlimitsonuseofCDMandJIcredits,will meanthataround430TWhofcoal-firedpowergeneration–43percentofoutputfromcoal (includinglignite)in2005inthe27countriesoftheEU–willhavetobeswitchedtogasby2020 (Lekanderetal 2008b). Thisorderoffuelswitchingwouldbegintoaffectcoal-firedpowerstationsintheUK.In2005,theUK producedmoreelectricityfromhardcoalthananyotherEUcountry(theotherlargecoalusersare Germany,PolandandSpain).LewisandCurien(2008)arguethat,giventherelativecarbonintensity offuelsusedandtherelativeefficiencyofplantsacrossEurope,theUKwillseeabatementofaround 10MtCO2 peryearfromfuel-switching,onlyafterSpainandGermany,andatcarbonpricesinthe rangeof36-40/tCO2. RecentanalysisbyLewisandCurien(2008)implies,however,thattheoptionsforfuel-switching acrosstheEUbasedonthecurrentgenerationportfolioarelimited,andwillnotbesufficienttoallow thecapproposedforPhase3tobemet.Theyarguethatthemostlikelyoutcomeisthatthecarbon pricewillrisetothepointthatmakesgas-firedgenerationcompetitivewithcoal(around40/tCO2 in today’sprices),toinduceamajorwaveofinvestmentingas-firedplantsofupto60GW.Theyalso estimate(alongwithsomeenergyindustryanalysts)thistobethecarbonpriceatwhichcoalwithCCS becomescommerciallyviable.

Carbonprices,bankingandexpectations Asexplainedabove,themoresophisticatedestimatesofthepriceforcarbonthatweshouldexpectto seeintheEUETS,withbankingofallowances,arearound40/tCO2 (LewisandCurien2008). Currently,however,thecarbonpriceisintherangeof20-25.Withbankingnowinplace,whyare pricesnotmovinguptothehigherrange? Thereasonisthatparticipantsinthemarket(energycompanies,butalsocarbonmarkettraders)are discountingfuturepricesbecauseofuncertaintiesaboutthefutureofthescheme.

11.TheUBSanalysistakesthe21percentreductionscenarioasitsreferencepoint,butitwouldbroadly applytothe31percentreduction.

29

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

ThefirstissueisthatthefinalshapeofPhase3oftheEUETSisnotyetdetermined,andthefinal outcomewillbetheresultofpoliticalnegotiationsbetweenmemberstatesandMEPs,heavilylobbied bytheirownindustriesandenergycompanies(someofwhichhaveapresenceinseveralEU countries).Agreementmaynotcomeuntilmid-2009,orpossiblyevenlater.Whiletheoverallcapin Phase3isalreadyagreedinprinciple,itisnotclearthattheproposalsonlimitstotheuseofCDM/JI creditsandonauctioningwillgothrough,bothofwhichwillhaveanimpactonthecarbonprice. Withinthiscontext,statementsaboutcancellingcoalinvestmentscanalsobeseenaslobbyingagainst astrongEUETSpolicy.Forexample,JohannesTeyssenofE.ONhassaidthatplansforauctioning emissionsallocationsintheECclimateandenergypackagearecreatinguncertaintyandthe cancellationofprojects,whichwill,inturn,leadtoanenergycrisis(GowandWoodward2008). ThiswillchangetosomedegreewhenfinalagreementonPhase3isreachedintheEuropean ParliamentandCouncil.However,theremaystillberemainingquestionsabouttheoverallcredibility ofEUcarbonpolicy,becausethisis,inturn,tiedtothedevelopmentofaglobalagreementonclimate change,andthespreadofcarbonmarketsbeyondtheEUETS.Thisissueisdiscussedfurtherin Chapter8below.

Effectsofpolicyuncertaintyonnewcoalinvestment Morecomplexmodelsofelectricityinvestmentintroducepolicyuncertaintyasafactorshaping decisionsaboutbuildingnewplants.Anexampleofhowthepotentialeffectsofuncertaintyabout carbonpricesondecisionsaboutinvestmentinnewcoalbuildmightworkcanbeseenindetailed modellingofthemainlandUKelectricitysystemoutto2031,commissionedbytheGovernmentasa backgroundstudyforthe2007EnergyWhitePaper(RedpointEnergyStrategies2007). Thisstudyincorporatedasophisticatedrepresentationofinvestmentdecisions,andcomparedtwo scenariosthatdemonstratethepotentialinfluenceofcarbonpolicyoncoalnew-build.Inboth scenarios,theanalysisusestheGovernment’scentralpriceprojections,asinTable2.2above. Inthefirstscenario,marketswereassumedtoworkwell,withinvestorstakingaview15yearsahead, andanticipatingcapacityshortagesinthelate2010s,liquidityinwholesaleelectricitymarkets,anda facilitativeplanningsystem.Crucially,thisscenarioalsoassumescertaintyaboutthefutureexistence ofacarbonprice.Inthebasecasethisrisesfrom22/tCO2 in2008to25/tCO2 in2013,andthento around32/tCO2 in2020,andcontinuesrisingthereafter.Allallowancesareassumedtobeauctioned from2013. Inthisscenario,around35GWofnewcapacityisbroughtonstreamby2020.Themajorityisgasand renewables.Thereis,however,about6GWofnewcoalplantsbuiltaswell. Inthesecondscenario,investorstakeashorter-termview(meaning,forexample,thatfinaldecisions onwhethertoreplaceplantsclosingundertheLCPDarenotmadeuntil2010/11),andlackof liquiditymeansconsiderableverticalintegrationinthemarket.And,althoughexpectedcarbonprices arealmostthesameasthoseinthefirstscenario,thereisuncertaintyaboutthecommitmentof policymakerstofuturecarbonpolicy,and,therefore,theexistenceofthecarbonprice.This uncertaintyreducestheriskforcoal,andinfluenceswhatispredictedfornewbuild. Inthissecondscenario,lesstotalnewcapacityisbuilt,about30GWintotal.Butmorecoalplantsare builtfrom2015onwards,witharound9GWinplaceby2020.

Summary TheEUemissionstradingscheme(EUETS)createsapriceforcarbondioxideemissions,and,because thecapfortheschemeissetthroughapoliticalprocess,itintroducesapolicyriskforenergy companies. Becausecoal-firedpowergenerationismorecarbonintensivethangas-firedgeneration,carbon pricingmakesitlessattractivecommercially.Onceasteadyandsignificantpriceforcarbonis establishedinthemarket,analystsexpectthatitwilldrivefuelswitchingfromcoal(andlignite)to gas,sincethisisthecheapestwayofreducingemissionsonalargescaleand,thereby,stayingunder thecap.

30

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Intheory,carbonpricingshoulddeterinvestmentinnewcoalplants.However,sofartheEUETShas notbeeneffectiveindrivingdownemissions,letaloneinfluencinginvestmentdecisions.Thisismainly becauseallowanceshavebeentoogenerous,andthetimeframeofeachphaseoftheschemehas beentooshort. InJanuary2008,theEuropeanCommissionmadeproposalsforastrongerETS,withatighter,single, EU-widecapandlongertimeframes.Marketanalystspredictthat,onthebasisofsuchanapproach, carbonpriceswouldreacharound40/tCO2 by2020,andthatover40percentofEU27coal-fired powergenerationwouldhavetoswitchtogas. ThefinalshapeofPhase3oftheEUETSisnotyetdetermined,andthefinaloutcomewillbethe resultofpoliticalnegotiationsbetweenmemberstatesandMEPs,heavilylobbiedbytheirown industriesandenergycompanies.Agreementmaynotcomeuntilmid-2009,orpossiblyevenlater. Eventhen,energycompaniesmaynotbeconvincedthatastrongcarbonpolicyispolitically sustainable,meaningthattheymaytendtodiscountcarbonpriceswhenplanninginvestments.

31

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

4.Theroleofthe2020renewableenergytarget TheEuropeanCommission’sproposalsforPhase3oftheEUETS,putforwardinJanuary2008, werepartofawiderpackageonclimateandenergy.Thispackagealsoincludedambitiousnew targetsforthedevelopmentofrenewableenergy(EC2008c).Thetargetshaveimplicationsfor investmentinbothcoalandgas.

Currentpolicyonrenewableelectricity CurrentlytheGovernmenthasatargetofachieving10percentofelectricitygenerationfrom renewablesourcesby2010,withanaspirationofreaching20percentby2020,fromcurrent levelsof4.4percent(HMGovernment2007).Themaininstrumentforachievingtheseincreases istheRenewablesObligation(RO),whichrequiresenergysupplierstosourceacertainproportion ofpowersuppliedeachyearfromrenewablesources,orpayapenalty. TheleveloftheROin2007/08was7.9percent,andthiswillriseto15.4percentby2015, whereitwillstayuntilthemechanismendsin2027.However,theexistenceofthepenaltybuyout,alongwithprojectsbecomingstuckintheplanningprocess,hasmeantthatactualrenewables buildhasnotfullykeptpacewithtargets. Totacklethisproblem,alongwiththefactthattheROhasfavouredasinglerenewable technology–onshorewind–theGovernmentisintroducingaPlanningBilltospeedupprojects, andareformedROthatwillgivegreaterbenefittoothertechnologies. AsnotedinChapter2above,theresultoftheRenewablesObligationisthattheelectricitymarket iseffectivelypartitioned,andthegrowthofrenewableelectricitygenerationissomewhat protectedfromcompetitionfromothersources.

The2008draftEuropeanRenewableEnergyDirective TheproposednewEU-widetargetforrenewableenergy(includingelectricity,heatandtransport) is20percentby2020.TheUK’stargetforrenewableenergywouldbe15percent.Exactlywhat thismeansforelectricitygenerationhasyettobedetermined,butitisbroadlyagreedthatthis targetisconsistentwithapproximately35-40percentofelectricitydemandbeingmetfrom renewablesourcesby2020.Giventheprojectionoftotalelectricitydemandofaround370TWha yearfor2020intheEnergyWhitePaper,thismeans130-150TWhayearofrenewableelectricity beinggeneratedbythatdate. Figure4.1.UK electricitycapacity requirements underthedraftEU 2020targetfor renewableenergy

120 100 GW

Source:Business Councilfor SustainableEnergy 2008

140

Plant margin Renewables back-up

80

Renewables 60

Coal, gas and oil

40

Nuclear

20 0 2006

2020

32

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Ifthistargetweretobemet,alotofrenewableelectricitycapacitywouldbeintroducedintotheUK wholesalemarket,throughanexpandedROorothermeansyettobedetermined.12 Anindicative pictureofwhatthismarketmightlooklikecanbeseenfromananalysisfromtheUKBusinessCouncil forSustainableEnergy(BCSE2008).TheBCSEanalysisassumesthat37percentofelectricity demandwillbemetfromrenewablesourcesinordertomeetthe2020target.Ofthis,43percentwill befromoffshorewind,and24percentfromonshorewind.Totalsystemcapacityrequirementsare showninFigure4.1,previouspage. Asidefromtheverymuchlargeramountofrenewablecapacityin2020,thetwostrikingdifferences betweenthecurrentrequirementsandthe2020pictureare:first,asignificantnewrequirementfor back-uptohandletheintermittencyofwind,andsecond,asharplyreducedrequirementfor conventionallyrun(thatis,non-back-up)coalandgascapacity,downfrom48GWin2006to31GW in2020. Thenewrequirementforstand-byraisesquitefundamentalquestionsaboutfutureinvestmentin electricitygeneratingcapacity,sincemostinvestmentismadeonthebasisthatthenewassetwillbe runasmuchaspossibleinitsfirstyearstogenerateareturnoninvestment.Buildinganewpower stationonthebasisthatitwillbeavailableforoccasionaluseisanentirelydifferentproposition.Since thistypeofinvestmentismoreaboutsystemstabilitythanaboutgeneration,andhasapublicgoods characteristicbecauseitsupportslowcarbongeneration,anewpolicyframeworkforsuchinvestment maybecalledfor. ThesecondmessageofFigure4.1isequallyradical.Totalthermal(gas,coalandoil)plantcapacityin theUKin2006-07was58.5GW,whilenuclearcapacitywasaround12GW(BERR2007c).According totheBCSEanalysis,by2020onlyaround30GWofthermalcapacity–littlemorethanhalf–willbe needed.Someofthecurrentcapacitywillcertainlyberetiredby2020.However,evenifthisisas muchas20GW,therewillstillbeamplegasandcoalcapacitytomeetconventionalgenerating demand.Inotherwords,thelightscouldbekeptonwithouttheneedforanynewfossilfuelplants. Thus,theoverallimplicationofthe2020targetisthat,comparedwithpreviousthinkingaboutthe generationgapandtheshapeoftheelectricitymarketin2020,ahugeexpansionofrenewableswill impactonthemainstreamfossilfuelpartofthemarket.Iftherenewablestargetsweretobemet,a largeamountoffossilfuelinvestmentnowwouldmeanaglutinthemarketby2020.Dependingon renewablespolicyandcarbonpricingafter2020,thisoversupplyproblemwouldalsoapplytonew nuclearbuild. Thereisstillapossibilitythatcompaniesmaybuildnewcoalplants,inordertocompetewithinthe non-renewablespartofthemarket.Whetherthishappensdependsonexpectedfuelcarbonprices, and,ifitdid,newcoalplantswouldtendtodisplaceoldcoalplants. Finally,itshouldbenotedthattheEuropeanCommission’sJanuary2008proposalsfortheEUETS andforrenewableenergyhavebeendeterminedjointly,witheachbasedontheassumptionthatthe otherwillbemet.Thismeansthat,ifthe2020renewableenergytargetisnotactuallymetattheEU level,thecarbonreductionsassociatedwiththattargetwillhavetobemetfromelsewhere.Thiswill driveuptheEUETScarbonprice,whichwilltendtodeterinvestmentinnewcoal.Conversely,if generationfromrenewablesourcesofelectricityexceedsthetarget,thecarbonpricemaycollapse.

Thepoliticsofthe2020renewableenergytarget Theproposedrenewableenergytargetisintendedtoshowstrongleadershipthroughaction,bythe EUtotherestoftheworld.TheCommissionalsopresentsthetargetasimprovingEurope’senergy securityanddevelopingitsrenewablesindustry,allatamanageablecost.

12.UnderthedraftDirective,itistechnicallypossiblefortheUKtomeetitstargetthroughcredits generatedbyrenewableenergyinotherEUcountries,oncetheyhavemettheirowntargets,butitis expectedthatthisopportunitywillbelimited.UKministersarenowsuggestingthatinvestmentsin renewablesbytheUKoutsideoftheEUshouldcounttowardsthetarget(seebelow).

33

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Fromanenvironmentalpointofview,therefore,achievingthetargetsisveryimportant.Amajor concernofcriticsofnewcoalbuildisthatitwillbe,atbest,adistractionfrom,and,atworst,athreat to,theexpansionofelectricitygenerationfromrenewablesources.AStopKingsnorthCampaign briefing,forexample,arguesthat: ‘…thehugepotentialforrenewableenergy(wind,marineandsolarpower)in theUKisbeinglargelyoverlooked,andrisksbeingsqueezedoutbynewcoalfiredpowerstations’(WorldDevelopmentMovement2008b) Allthemajorenergycompaniesarecurrentlyseekingtoinvestinrenewables,especiallywind,whichis highlyprofitableundertheRO.ManyseetheGovernment’sexistingtargetsfor2020aschallenging, butpossiblyachievable.Ifcompaniesbelievedthatthe2020renewableenergytargetwereattainable andwouldbeenforced,theywouldnotinvestinanynewcoal,or,indeed,inanynewfossilfuelplant, upto2020.(Agreatercoal-relatedthreattotherenewablestargetwouldcomefromcoalwithCCS; seebelow.)However,thetargetcurrentlyhasahugecredibilityproblemwiththeelectricityindustry, whichisscepticalthatthemoreambitiousECproposalsofJanuary2008canberealised. Certainly,meetingtheUKtargetwillbechallenging.Toputthescaleofchangerequiredinto perspective,Germanyincreaseditsshareofrenewableelectricityfrom4.8percentin1999to approximately14percentin2007(mostlywindandbiomass,withsomesolarphotovoltaics)(German FederalMinistryfortheEnvironment2007.Ifthisrateofgrowthcouldbesustained,Germanycould reach35percentofelectricityfromrenewablesourcesby2020.However,theUKhasonlynow reachedafourtofivepercentshareofrenewables,sowouldhavetohaveamuchmorerapid expansionofrenewablesoverthenext12yearsthanGermanyhasseenoverthelasteightyears. Nevertheless,amajorexpansionofrenewableelectricityistechnicallypossible.Forexample,the BritishWindEnergyAssociationforecaststhat,by2020,13GWofonshorewindand20GWof offshorewindcouldbeinplace,withanother10-13GWofwaveandtidal,hydroandbiomass(BWEA 2008b). TheGovernmentistakingstepstoreinforceconfidenceinitscommitmenttothetarget.InNovember 2007,thePrimeMinistergaveaclearstatementofintent: ‘…attheEuropeanCouncilthisyearBritainledthewaytoanagreementthat by2020one-fifthofallEurope’senergyshouldcomefromrenewables,anear threefoldincrease.TheUKworkedhardtogetagreementtothistarget,and letmemakeitabsolutelyclear,wearecompletelycommittedtomeetingour share.’(Brown2007,emphasisadded) Shortlyafterwards,theSecretaryofStateforBusinessannouncedproposalsforamajorexpansionof offshorewindofupto33GWby2020,andtherenewablesteamatBERRisbeingexpanded(Hutton 2007). InlateJune2008,theGovernmentlaunchedasubstantialanddetailedstrategyformeetingthe target(BERR2008),nowopenforconsultation,whichincludedproposalsinarangeofareas, discussedinthenextsection. However,thisstrategydoesarguethatgettingallthewaytothetargetwillbeprohibitivelyexpensive andcallsforanelementoftrade-off,suchasinvestmentinrenewableenergybytheUKabroad countingtowardsthetarget.TheseideaswerefloatedearlierintheyearbytheBusinessMinister, LadyVadera(Vidal2008),andreflectreportedconcernswithinBERRthatthetargetsface‘severe practicaldifficulties’andwouldbetooexpensive(Vidal2007).

Improvingthecredibilityofcommitmenttotherenewableenergytarget IftheGovernmentwantstoimprovethecredibilityofitscommitmenttotherenewableenergytarget withpotentialinvestors,then,otherthanbeingmoreconsistentinitsstatements,itwillhavetotake decisiveactioninanumberofareas,allofwhichwillbeexploredduringaGovernmentconsultation onthefutureofrenewableelectricitytobeheldinthesummerof2008. Thefirstistodevelopstrongerpoliciestoradicallyincreasetheconservationofelectricityuse,since

34

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

thelowerthetotaldemand,theeasieritwillbetomeetthetargetonthesupplyside. Aswellasreducingoveralldemand,measurestomatchdemandtointermittentrenewablegeneration willbeparticularlyuseful.Intheshortterm,suchmeasurescouldincludeinterruptiblesupply contractswithlargeindustrialconsumers.Inthelongerterm,theremaybepotentialfordeveloping anddeploying‘dynamicdemand’appliancesthatcanswitchthemselvesoffattimesofreduced output(BERR2007f),aswellastheuseof‘vehicle-to-grid’technologiesthatwouldallowelectric vehiclestobeusedasbalancingandstoragecapacity(see,forexample,KemptonandTomić 2005). Second,theUK’ssupportpolicyforrenewableswillhavetoberevisited.TheRenewablesObligationis toberebanded,butthewholedeploymentsupportframeworkforrenewableswillneedtobe reexaminedinlightofthetarget.Thisincludesthepossibilityofsomeformofproductionorexport tariffformicro-renewables,ifsmallerscaleinvestmentbyhouseholdsandcommunitiesistoplaya roleinreachingthetarget.Suchaformofsupportismorelikelytoinducewidespreadhousehold investmentinrenewablesthantheRO,asthehigherriskassociatedwiththeROcanbemuchbetter managedbycompaniesthanhouseholds(Grossetal 2007). Third,Governmentwillhavetotackleanumberoftechnicalissuesthatcouldformasignificantbarrier toarapidandlargeexpansionofrenewableelectricitycapacity,includingsupplychainproblems, transmissionanddistributioncapacity(especiallyforoffshorewind)andaccess.TheBusinessCouncil forSustainableEnergyestimatesthataround34GWofadditionaltransmissioncapacitywillbe neededtomeetthetarget(BCSE2008).Thisisanareawhereincrementalreformwillnotbeenough –thenationalgridneedstoberebuiltfortheageofrenewables. TheGovernmentistakingsomestepsonthesetechnicalissues,butwillhavetotakemore,andvery soon.The2007EnergyWhitePaperlaidoutproposalsforimprovedgridinvestmentandaccessfor renewablegeneration,whicharecrucialforthesuccessfulexpansionofwind,andtheseplanswill needtobeupdatedandexpandedinlightofthenewdraftrenewabletargets.TheEnergyBill currentlybeforeParliamentprovidesthelegislativeframeworkfornewoffshoretransmissioncapacity tobeputinplace. Thereissomeunderstandingofthechallengesofmanagingpenetrationsofintermittentrenewables atupto20-30percentofelectricitygeneration(forexampleILEXandStrbac2002,Grossetal 2006),butnotathigherlevels,andmoreworkshouldbecommissionedinthisarea.Intheory,a renewablesmixthatincludedsignificantamountsofsolarPV,biomassandbiogasaswellaswind couldhelphandleintermittencyissues.ExperimentsattheUniversityofKassel,withvirtualbaseload generationusingcombinationsofrenewables,areinterestinghere.13 Governmentwillalsohavetoengagewithbottlenecksandshortagesinthesupplychainfor renewablessuchassolarandwind,whichsomeenergycompaniesareconcernedabout.Insomeother Europeancountries,governmentsareinterveningquiteactivelytoaddressthesesupplychain problemsforrenewables.Itshouldbenoted,however,thatallmajorpotentialenergyinvestment, includingnotonlyCCSandnuclear,butalsoconventionalgasandcoalprojects,allcurrentlyface shortagesofskilledlabourandhighmaterialscosts. Fourth,and,perhaps,mostimportantly,toestablishthecredibilityofanefforttoreachthe renewablestargets,theGovernmentwillhavetoengagewiththefactthatsomepotentialinvestors arenotyetconvincedthatacommitmenttoreachthetargetsispoliticallysustainable(Helmetal 2003).Theyfearthatthecostandplanningimplicationsofveryambitiousrenewableelectricity targetsmeanthatvotersmaynotsupportgovernmentsthatpursuethem,andthatbusinessmayalso opposethem.AnysupportmechanismthattheGovernmentputsinplacenowmaynotbemaintained infuture,whichwouldleavecompanieswithinvestmentsthatcannotcompetecommercially(called ‘stranded’assets).

13.See:www.kombikraftwerk.de/fileadmin/downloads/Technik_Kombikraftwerk_EN.pdf

35

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Thesefearsarenotwithoutbasis.Forexample,althoughtheCorporateLeadersGrouponClimate ChangebackstheproposedEUgoal(EUCorporateLeadersGrouponClimateChange2008),theCBI doesnot.Almostimmediatelyafteritwasannounced,theCBI’sdirector-generalRichardLambertsaid thattherewasnochanceofBritainmeetingitsshare,mainlyongroundsofcost(Traynor2008). IfcompaniescontinuetobelievethereisariskthatacommitmenttotheEUrenewableenergytarget mayberenegedon,theywillnotbuildtheamountofrenewablecapacityrequiredbythetarget.This, inturn,willmeanthattheneedforfossilfuelcapacitywillbegreater,atleastintotheearly2020s, andthismayincludenewcoal.ThisissueisdiscussedfurtherinChapter8.

Summary TheEuropeanCommissionhasproposedambitiousnewtargetsforrenewableenergy.Theimplications arethatupto40percentofelectricitydemandwouldhavetobecomefromrenewablesourcesby 2020(mostlyexpectedtobelarge-scalewind). ThistargetrepresentsaconsiderableexpansionofthecurrentUKGovernmentaspirationfor renewableelectricity,which,atpresent,isthat20percentofelectricityshouldcomefromrenewable sourcesby2020. IfthenewECtargetweretobemet,theremaybelittleornoneedtobuildnewfossilfuelpower stationsintheUK,subjecttotherequirementsforbalancingtheintermittentsupplyofpowerfrom wind. However,thisscaleofexpansionofrenewableelectricitycapacityintheUKfacesseveraltechnical andpoliticalproblems.Probablythemostseriousisthatthelargeenergycompanies,aspotential investorsinrenewables,havedoubtsaboutthewidercredibilityofthetargetwithvotersand business.Theyareparticularlyconcernedaboutwhetherthecostsofalarge-scaleandrapidexpansion ofrenewablesarepoliticallysustainable.Toestablishthecredibilityofthetargets,thisuncertaintywill havetobereduced.

36

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

5.ImplicationsofnewcoalplantsfortheClimateChangeBill emissionstargets Thepreviousthreechaptersprovidethefoundationsforunderstandingtheframeworkanddriversfor investmentinnewcoal-firedpowerstations,andcoal-firedpowergenerationintheUKmore generally.Inthischapter,weassesswhattheimplicationsareforcarbondioxideemissionsinthe periodupto2020,inthecontextofthetargetsintheClimateChangeBillcurrentlybeforeParliament. Theimpactofnewcoal-firedpowerstationsontheachievabilityoftheClimateChangeBilltargetsis oneofthemainconcernsofenvironmentalorganisations. Thisassessmentismadeinaseriesofsteps.First,wereviewtheconclusionsofthepreviousthree chapters,emphasisingthatthereisconsiderableuncertaintyabouttheprospectsfornewcoalbuildin theUK.Second,weexploretheimplicationsofarangeofnewbuildscenariosfortheClimateChange Billtargets,assumingthatallplantsarerunbaseload,andareadditionaltoexistingcapacity.Third,we assesstheconditionsunderwhichnewcoalbuildmightbeexpectedtoaddto,orreplace,existing coal-firedcapacity,anddrawouttheimplicationsforemissions.Lastly,wegivesomequantitative illustrations,basedonmodellingcommissionedbyGovernment.

Uncertaintyaboutnewcoalbuild Noone,includingtheenergycompaniesthemselves,knowshowmanynewcoal-firedpowerstations maybebuiltintheUK. Therearesomefactorsworkinginfavourofnewcoalbuild.Bothgasandcoalpricesaresettoremain highforsometime,whichwillworkinfavourofcoalnewbuild.Perhapsevenmoreimportantly,some companiesarelosingexistingcoalplantsandwanttoreplacethemtomaintainadiverseportfolioto matchtheircustomerbase.Thisgivescompaniesstrategicreasonsforwantingtoinvestinnewcoal planaboveandbeyondpurereturnoninvestmentcriteria(seeChapter2). Atthesametime,companieswilltaketheirexpectationoffuturecarbonpricesandcarbonpolicyinto account(seeChapter3).Facedwiththecertaintyofatightanddecliningcaponemissions,withhigh carbonpricesintothefuture,theywillnotbuildnewcoalplants,assuchpolicywillfavourtheless carbon-intensivegas.However,futurecarbonpolicyandpricesarestilluncertain,evenafterthe January2008proposalsfromtheEuropeanCommission.EvenwhenthefinalEUETScapsandrules areagreed,theywillnotnecessarilyhavefullcredibilitywithcompanies.Thismeanscompaniesmay discountexpectationsoffuturecarbonprices(seeChapter8forafurtherdiscussionofthecredibility problem). ThesamefactorsapplytotheproposedEU2020targetforrenewableenergy(seeChapter4above). Iftheimpliednewcapacityofrenewableelectricityweretobeagreedanddelivered,thentherewould belittleincentiveforinvestmentinnewfossilfuelcapacity,letalonecoal.However,manycompanies havedoubtsthatsuchanincreaseinrenewablescapacitycanbeachievedtechnically,orthatitwould bepoliticallysustainable. Modellingestimatesfornewcoalbuildby2020,evenunderquiteanarrowrangeofassumptions aboutfuelprices,carbonpricesandelectricitymarketconditions,rangefromnonetoaround9GW. Atthesametime,uncertaintyalsomeansthatthereisvalueinmaintaininganoptiontobuild(Blyth 2005,Trigeorgis1996,DixitandPindyck1994).Investorswilltendtodelayinvestmentdecisions, especiallyifthereareparticulardevelopments,eitherincommercialmarketsorinpolicy,thatwill clarifythemovementoffutureprices.Thevalueofkeepingoptionsopenmeansthatproposals(either formalSection36applicationsorjustscopingstudies)fornewcoalbuildwillnotnecessarilycometo fruition. Thevalueofhavinganoptiontobuildisparticularlyimportantinthecaseofcoal,becausethereare fewsitesintheUKsuitableforcoal-firedpowergeneration,combininggoodaccessforcoal(oftenby rivers)andtransmissiongridaccess.Manycompanieswanttokeepthesesitesinplayforaslongas

37

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

possible,butoptionscannotbekeptopenindefinitely,oratzerocost.Maintaininganoptionongrid access,forexample,becomesincreasinglyexpensiveasthedateapproachesbywhichthatoptionhas tobetakenup. However,thevalueofhavinganoptionislimitedincompetitivemarkets(Blyth2005),whichdoes applytoUKenergysupplymarkets.Sincethelargeenergycompaniesareverticallyintegrated,with generationbusinessescloselylinkedtoandcoveringtheircustomerbase,iftheywaittoolongthey risklosingsufficientcapacitytosupplytheircustomers.Thisinturnopensuptheriskoflosing customerstocompetitors,orhavingtorelyonelectricitysupplycontractswithindependentpower producers,atpotentiallygreatercost,againundesirableinacompetitivemarket. Analternativetodelayinginvestmentistofavoursmaller,moreflexiblepowerstations(Blyth2008). Thelattertendtobegas-fired,whichreinforcesthefactorsworkingforCCGTinvestmentexplained above.

Emissionsfromnewcoalbuild Giventhisdegreeofuncertaintyaboutnewcoalbuild,itisusefultolookattheemissionsimplications ofarangeofpossiblescenarios.Forillustrativepurposes,weconsiderthefollowingthreecases:

•

4GWofnewcoal-firedcapacity,representingtheGovernment’sprojectioninthe2007Energy WhitePaper(seeChapter2).

•

9GWofnewcoal-firedcapacity.Thisrepresentsascenarioinbackgroundmodelling commissionedbytheGovernmentfortheEnergyWhitePaper,wherecarbonpricesare discountedduetouncertainty.

•

11.6GWofnewcoal-firedcapacity,representingalltheprojectscurrentlybeingproposedor scopedbycompanies.Thisscenariomayberealisedinasituationinwhichbothgasandcoal pricesarehigh,andbothcarbonandrenewableenergypoliciesareweak.

Assumingacapacityfactor14 of0.9,andacarbonfactorof0.75kgCO2/kWhforsupercriticalcoal, theniftheseplantsranatfullload,theemissionsproducedwouldbe24,53and69MtCO2 ayear respectively(Table5.1). Table5.1.Annualoutputandemissionsfromnewcoal Scenario Annualelectricitygenerated(TWh) Annualemissions(MtCO2) Netadditionalemissions (asagainstgas)(MtCO2) Netadditionalemissionsasapercentageof1990emissions Source:Author’scalculations

4GW 31.5 23.6

9GW 71.0 53.2

11.6GW 91.5 68.6

11.0 1.9

24.9 4.2

32.0 5.4

However,the net additiontoannualemissionstheseplantswouldmakedependsonwhatisbuilt instead.Ifrenewablegeneration,saywindpower,werebuiltinsteadofcoalplants,thennetadditional annualemissionswouldsimplybethetotalemissionsproducedbythecoalplants.If,asismorelikely, gas-firedplantswerebuiltinsteadofcoal,thennetadditionalannualemissionswouldbeequalto emissionsfromcoallessthosefromgas–between11and32MtCO2 (Table5.1).

14.Thecapacityfactoristheproportionoftimeinayearthatapowerplantistypicallyavailablefor generation,outsidethetimeneededformaintenanceorrepair.Greenpeace,usingacapacityfactorof0.9, andalowercarbonfactorof0.65kgCO2/kWh,predictsemissionsof56MtCO2/year.

38

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Thesenetadditionalemissionsrangefromapproximatelytwopercentof1990emissionsuptoabout 5.5percent.Ifnewcoalbuildisatortowardsthetopoftherangeofcasesconsideredhere,ifthe plantsoperateatbaseload,andiftheyareadditionaltoexistingplants,theninvestmentinnewcoal wouldpresentamajorproblemforreducingemissionsintheUKinthefuture.

Emissionsfromnewcoalbuildversusexistingcoalcapacity However,thefuturetrajectoriesofemissionsfromcoal-burning,fromthepowersectorandfromthe UKasawhole,willdependnotonlyonthepotentialnetcontributionofnewcoalbuild,butalsoon whatwillbehappeningtoemissionsfromexistingcoalplants.Inparticular,ifnewcoalplantsdisplace existingones,thentotalemissionsfromcoal-firedpowergenerationcouldactuallybelowerinthe periodto2020thanwouldotherwisebethecase. Therefore,twokeyquestionsare:(i)howmuchoftheexistingcoalcapacitywouldstillpotentiallybe operatingto2020?;and(ii),howmuchwillitactuallyrun? TotalUKcoalcapacitynowstandsatjustover27GW(takingintoaccountreducedloadat EggboroughundertheNationalEmissionsReductionPlan).Akeyquestioniswhethermoreexisting coalcapacitywillclosethanthe8.2GWthatmustclosebecauseofsulphuremissionsreduction targetsundertheLargeCombustionPlantDirectivefrom2015.Coalplantswillalsohavetofitfurther equipmenttoreducenitrogenemissionsorpurchasenitrogenemissionscredits,undertheNational EmissionsReductionPlan,iftheyaretocontinuerunninguptofullload,butitisnotyetclearhow manywilldoso.Estimatesoffurtherclosuresdifferfromnonethroughtoafurther6GWby2020in theEnergyWhitePaperscenarios(HMGovernment2007),and7.5GWinthedetailedmodellingby RedpointEnergyStrategies(2007).IntheRedpointanalysis,Eggborough(1.9GW),Fiddler’sFerry (1.96GW),Ferrybridge(1GW),Longannet(2.3GW),andUskmouth(0.36GW)wouldcloseafter 2015. Theseestimateswouldleavebetween12.3GWand19.1GWofexistingcoalplantsinoperationby 2020.Withtherangeofnewbuildpossibilities,totalcoalcapacitycould,therefore,beanywhere between16.3GW–alittleoverhalfcurrentcapacity–and30.7GW–morethancurrentcapacity. Theotherquestionishowmuchcoalcapacitywillactuallyberunintotal.Thekeyissueiswhether newcoalplantswillsimplysubstituteforexistingplants,orwhetheritwillberunadditionallytoold plantsthatcanberunafter2015. Newcoal-firedplantswouldbemoreefficient,andhencecheaperthanoldplants.Asaresultthenew plantswillbedispatchedfirst.Itisalsothecasethatcompanieswillbekeentogetareturnontheir investmentassoonaspossible.Broadly,astrongEUETScarbonpolicywilldriveolder,more inefficientplantsoffthesystemfirstthroughfuelswitching,soanynewcoalplantsthatarebuiltwill displaceexistingcoalplants(seeChapter3above).Atthesametime,highcoalpriceswillalsofavour newcoalbuildoverold,asexplainedinChapter2above. Thepossiblecombinationsto2020aresummarisedinTable5.2.Highandlowcoalpricesarein relationtogasprices. Ifcompaniesanticipateastrongandcrediblecarbonpolicy,togetherwithlowcoalandgasprices, theywillnotinvestinnewcoal.Actualemissionsthendependonhowstrongcarbonpolicyturnsout tobe,andhowhighcoalpricesare. Withacredibleandstrongcarbonpolicyexpected,butalsoveryhighcoalprices,itispossiblethat theremightbesomeinvestmentinnewcoalonefficiencygrounds,butthiswoulddependonhow longthewindowonburningcoalwouldbeleftopenwithintheEUETS.Theworstcaseforemissions inthiscaseisifactualoutcomesaretheoppositeofexpectations–inotherwords,ifcarbonpolicy turnsouttobeweak,andcoalpriceslow.Inthesecircumstances,newcoal-firedpowerstationswill operatealongsideexistingstationsratherthandisplacingthem. Ifcompaniesexpectcarbonpolicytobeweak,theyaremorelikelytoproceedwithnewcoalbuild plans.Newcoalwillbemoreattractiveifcoalpricesaswellasgaspricesareanticipatedtobehigh. However,ifcarbonpolicyturnsout,infact,tobestrong,thenoldcoalplantswilltendtobephased outthroughfuelswitching,withnewcoalbuildtakingitsplace.

39

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Table5.2.Newcoalbuildandemissionspossibilities Expected Actual

Implicationforcoal

Carbonpolicy Strong Strong Strong Strong Strong Strong Strong Strong Weak Weak Weak Weak Weak Weak Weak Weak

Newcoalbuild Low Low Low Low Nonewbuild Nonewbuild Nonewbuild Nonewbuild High High High High Low Low Low Low

Coalprices High High High High Low Low Low Low High High High High Low Low Low Low

Carbonpolicy Strong Strong Weak Weak Strong Strong Weak Weak Strong Strong Weak Weak Strong Strong Weak Weak

Coalprices High Low High Low High Low High Low High Low High Low High Low High Low

Implication foremissions Displacing/adding Newdisplacesold Newdisplacesold Newdisplacesold Newaddstoold Oldcoalphasedout Someoldcoalremains Someoldcoalremains Moreoldcoalremains Newdisplacesold Newdisplacesold Newdisplacesold Newaddstoold Newdisplacesold Newdisplacesold Newdisplacesold Newaddstoold

Low Low Low Medium Low Low Low Low Low Low Low High Low Low Low Medium

Theworst-casescenariofromthepointofviewofemissionsoverallisifexpectationsofweakcarbon policyandhighcoalpricesencouragenewbuild,butintheeventcarbonpolicyisweakbutcoalprices arelowenoughinrelationtogaspricestoallowoldcoaltocontinueburningalongsidenew.

Modellingofemissionsfromcoal Therearefewquantitativeestimatesoffutureemissionsfromcoal-firedpowergeneration.However, thoseavailable–fromstudiescommissionedbytheGovernment–doillustratetheseinfluencesof fuelpricesandcarbonpolicy. AsdiscussedaboveinChapter2,modellingofdifferentscenariosforthe2007EnergyWhitePaper assumeacommoncarbonpriceof25from2015,butdifferentfossilfuelprices(seeTable5.2).This leadstoarangeofpredictionsfornewcoalbuildfromnone,to4GWand7GWforlow,centraland highfossilfuelpriceprojectionsrespectively. Atthetwoextremes,andusingthecentralpolicyimpactassumptionsfromtheWhitePaper,electricity generationfromcoalunderthelowfossilfuelpriceprojectionis63TWhby2020,correspondingto around57MtCO2.Underthehighfossilfuelpriceprojection,generationis121TWh,corresponding toaround100MtCO2 (BERR2007e).15 Thisis,effectively,becauseahighgaspriceencouragesmore coalburning.Itisclear–comparingthesefigureswiththeestimatesabove–that,inthesemodels, newcoalcapacityislargelydisplacingexistingcoalcapacity. Theimportanceofcarbonpolicyexpectationsisillustratedbydetailedmodellingcommissionedfrom RedpointEnergyStrategies(2007)asbackgroundforthe2007EnergyWhitePaper(seeChapter3). TheRedpointstudycontrastedtwoscenarios,bothofwhichseecarbonpricesrisingfrom25to 32/tCO2 overPhase3oftheEUETS.However,whileonescenariohaswell-functioninginvestment marketsandacrediblecarbonpolicy,theotherischaracterisedbyashort-terminvestmenthorizon

15.However,itshouldbenotedthat,underboththelowandhighfossilfuelpriceprojections,total emissionsfortheUKareaboutthesame.Thisispartlybecausehigherfossilfuelprices,whileleadingto morecoal-firedelectricitygeneration,alsomeanhigherelectricityprices,and,therefore,more conservationofenergyinfinaldemand.

40

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

andamuchmoreuncertaincarbonpolicy.Inthefirstscenario,newcoalbuildwas6GW;inthe seconditwas9GW. Thereisaconsiderabledifferenceintotalelectricitysectoremissionsbetweenthetwoscenarios (emissionsfromcoal-firedpowergenerationarenotavailableseparately).Inthefirst,emissionsfall fromaround185MtCO2 in2010to160MtCO2 by2020.However,inthesecond,electricityemissions riseovertheperiodandendupat195MtCO2,higherthanthe184MtCO2 emittedin2006. Finally,theUKCoalForumrecentlyproducedarangeofscenariosforthefutureofcoal-firedpower generation(Harrisetal 2008).TheForumconsideredarangeofnewbuildscenarios,fromnonew buildupto15GWofnewbuild,andassumesCCSisprogressivelyfittedtoallnewcoalbuildby2025. Nuclearplants,andplantswithCCS,areassumedtorunatbaseload,buttheCoalForummodelling appearstoconsidernoexpansionofrenewables. Inthe‘medium’newcoalbuildscenario(10GW),emissionsfromcoal-firedpowergenerationfallfrom justunder130MtCO2 in2006/7toaround80MtCO2 in2020/21,withtotalemissionsfromthe powersectorataround135MtCO2.The‘low’newcoalbuildscenario(5GW)givestotalpowersector emissionsofaround130MtCO2 in2020,withcoalcontributingalittleover70MtCO2.

Coal-firedpowergenerationandtheClimateChangeBilltargets TheanalysisinthischaptershouldbeseenwithinthecontextofthetargetsinthedraftClimate ChangeBill,especiallytheneartermtargetfor2020.The2020targetintheBillistoreducecarbon dioxideemissionsintotalbybetween26and32percentfrom1990levels.Thismeansafallfrom592 MtCO2 in1990tobetween436and402.5MtCO2 by2020. TheClimateChangeBillrepresentstheGovernment’scentralambitionsforreducingemissions,anda majorpartofitspurposeistodemonstrateinternationalleadership.Whileitisproposedthatthe ClimateChangeCommittee(includedwithintheBill)determinesexactlyhowmuchofthetargetis metthroughdomesticactivity,forpurposesofdemonstratingleadership,thiswillhavetobeahigh proportion. TotalUKemissionsin2006were554MtCO2.Thus,toreachtheClimateChangeBill2020targetband throughdomesticeffort,areductionofbetween116and151.5MtCO2 willbeneeded.Thisis equivalenttoareductionofbetween21and27percentfrom2006levels. Inmostscenariosoffuturedecarbonisation(forexample,Lockwoodetal 2007,Bowsetal 2006),the electricitysectorisexpectedtoleadtheway,reducingemissionsthequickestandmostdeeply.Thisis alsothecaseinthemodellingfortheEnergyWhitePaper. TheGovernmentestimatesthat,ifallthepolicymeasuresinthe2007EnergyWhitePaperhaveahigh impact,thenemissionswillbereducedto437MtCO2,justreachingtheupperendoftheClimate ChangeBilltargetemissionsrange(HMGovernment2007).However,withinthis,theGovernment assumesthatemissionsfromthepowersectorwillfallmorequicklythanemissionsoverall(Table5.3).

Table5.3.Emissionsreductionsassumedinthe‘high’policyimpactscenario,2007Energy WhitePaper(MtCO2) Powersector Total 2005(actual) 175 556 2010 157 496 2015 139 469 2020 121 437 Reductionas%of2006 30.8 21.8 Note:Centralfossilfuelpricescenario.Assumesacarbonfactorof0.85forcoal-firedpower generation. Source:BERR2007e

41

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Inthecentralfossilfuelpricescenario,theGovernmentassumesthat4GWofnewcoalplantsare built(seeaboveChapter2),butthatitreplacesratherthanaddstoexistingcapacity,allowinga31 percentfallinemissionsfromthepowersectorby2020.Emissionsfromcoal-firedpowergeneration couldfallbyalmosthalf.Thisis,inpart,duetothecarbonpriceof25/tCO2 thattheGovernment assumesinthiscase.Ahighercarbonpricewouldexpecttoworkagainstcoalburningevenmore.16 However,asdiscussedabove,andillustratedintheGovernment’sownmodellingandcommissioned work,highergaspricesormoreuncertaintyaboutcarbonpricingcouldleadtomorecoalinvestment andmorecoalburning,and,therefore,higheremissions.Intheworstofthesescenarios,emissions fromthepowersectorin2020arehigherthantheyarecurrently,meaningthatitwouldbeimpossible toreachtheClimateChangeBilltargetsthroughdomesticeffort.

Summary ThereisgreatuncertaintyabouthowmuchnewcoalcapacitymaybebuiltintheUKunderthe currentpolicyframework.Thisisduetouncertaintyaboutfuelprices,aboutfuturecarbonprices undertheEUETS,andaboutfuturepolicyonrenewableelectricity. Assumingarangeofnewbuildscenariosbetween4and11.6GWgivesestimatesofadditional emissions(asagainstnewgas-firedcapacity)ofbetween11and32MtCO2,ifthenewplantsrunat baseload. However,futureemissionsfromnewplantsareonlypartofthepicture.Overallemissionsfromcoalfiredpowergenerationwilldependnotonlyonhowmuchnewcapacityisbuilt,butalsoonhow muchitisrun,whetheritreplacesoraddstoexistingcapacity,andhowmuchthatexistingcapacityis run. Theseoutcomesdependlargelyonexpectedandactualfuelpricesandcarbonpolicy.Thebest-case scenarioforemissionsiswhereastrongcarbonpolicy(thatis,atightcap)isexpected,alongwithlow coalpricesrelativetogasandthenwhereastrongcarbonpolicydoesactuallyapply,butwherecoal pricesriserelativetogas,meaningthatcoalburningislargelypushedtopeakload. Theworst-casescenarioiswhereexpectationsofaweakcarbonpolicy(thatis,aloosecap)andhigh coalpricesdrivenewinvestment,andthoseexpectationsarethenmet,meaningcoalisrunat baseload. Thesefactorsofcarbonpricingandfuelpricesarereflectedinmodellingcommissionedby Government,whichgivesquantitativeestimatesofpowersectoremissionsforvariousscenarios.This modellingsuggeststhat,ifcarbonpolicyisnotsufficientlystrongorcredible,upto9GWofnewcoal couldbebuilt,andpowersectoremissionscouldbehigherin2020thantheyaretoday.Thecurrent frameworkforcoal-firedpowergeneration,therefore,doespotentiallyposeaproblemfortheClimate ChangeBilltargetfor2020.

16.Insuchascenario,thepathoftotalUKemissionsisunclear.Ontheonehand,highgaspriceswould meanhigherelectricityprices,andmoreconservationofenergyinfinaldemand.However,ontheother hand,thecostofcarbon(whichwouldbepassedontoconsumers)wouldbelower.

42

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

6.Theprospectsforcarboncaptureandstorage Sofarinthisreport,wehavelookedonlyatexistingcoal-firedpowergenerationtechnology. Incrementalinnovationsincoal-firedpowergeneration,suchassupercriticalboilers,offertheprospect ofsomereductionincarbondioxideemissions.However,thesechangesarerelativelysmall.The technologythatcurrentlyofferstheonlyhopeofgenuinelylow-carboncoal-firedpowergenerationis carboncaptureandstorage(CCS).CCSis,therefore,akeypotentialtechnology,notjustintheUK, butalsoinplacessuchastheUSA,ChinaandIndia,wherecoalisplentifulandcheap.CCScanalsobe appliedtogas-firedelectricitygenerationandindustrialprocesses. DiscoveringwhetherCCScanbemadetoworkatpowerstationscale,atanaffordablecost,is, therefore,crucialforthefutureofcoal-firedpowergenerationinacarbon-constrainedworld.Thereis considerableconfidenceinsomepartsofgovernmentandindustrythatCCSwilleventuallywork technically.TheTUCarguesthat,giventheneedforCCSinChina,itwillhave tobemadetowork,at whatevercostrequired(CleanCoalTaskGroup2006).However,aprimeconcernforenvironmentalists isthatthediscoverywilltaketoolong.Forexample,GreenpeacequotesjournalistGeorgeMonbiot’s concernsthat:‘Wecouldbestuckwithanewgenerationofcoal-burningpowerstations,approvedon thebasisofapromisethatnevermaterialises,whichcommitustomassiveemissionsfor40years’ (Greenpeace2008a). Muchofthecurrentdebateoverthefutureofcoal-firedpowergenerationintheUKcentresonCCS, and,inparticular,onproposalstomakenewplants‘CCS-ready’.IfCCScanbeintroducedquicklyand cheaply,thenthepotentialemissionsproblemwithcoal-firedpowergenerationidentifiedinthe previouschapterdoesnotmatter.However,ifthisisnotthecase,then,inWWF’swords:‘Apromise ofcarboncaptureandstoragereadinesssimplyisn’tgoodenough–[theproposedplantat Kingsnorth]couldstillclaimtobe“CCSready”in30years’time,whilemerrilybelchingoutcarbonin theinterim’(WWF2008). Inthischapter,webrieflyreviewthetechnologyinvolvedinCCS,andestimatesofcost,andassessthe UKpolicyframeworkandlikelytimetableforitsimplementation.

CCStechnology TheIntergovernmentalPanelonClimateChangedefinesCCSas:‘…aprocessconsistingofthe separationofCO2 fromindustrial;andenergy-relatedsources,transporttoastoragelocationand long-termisolationfromtheatmosphere.’(IPCC2005:3) CCSwouldmakecoal-firedpowergenerationlow-carbonratherthanzero-carbon,withbetween85 and95percentofcarbondioxidecapturedwithavailabletechnology.Thiswouldmeancoal-fired generationwithCCSwillemitintheregionof50-100gCO2/kWh. Capture Therearethreetypesofcapturetechnology,allofwhichwillrequirefurtherdevelopmentand demonstrationbeforetheycanbedeployedatscale:

• ‘Post-combustion’:capturingcarbondioxidefromthefluegasesproducedbyburningcoalinair. • ‘Oxyfuel’:captureofcarbondioxidefromcombustionofcoalinpureoxygen. • ‘Pre-combustion’:gasifyingcoal(heatingcoalinthepresenceofsmallamountsofoxygen, ratherthancombustion),whichproducesamixtureofhydrogenandcarbonmonoxide(called syngas).Thecarbonmonoxideisthenseparatedfromthehydrogen(whichisburnedtoproduce electricity)andconvertedtocarbondioxide. Toretrofitexistingcoalplants,orapplyCCStoproposednewsupercriticalplants,post-combustion technologywouldhavetobeused.Themaintechnicalissuestoberesolvedinpost-combustion capturefromcoal-firedpowergenerationrelatelargelytothechoiceandefficacyofprocessesand solventsforremovingthecarbondioxidefromfluegases(withattendantimpuritiesanddust),atthe scaleofalargepowergenerationplant,requiringscalingupbyafactorof20to50timesfrom

43

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

existingapplicationsinthenaturalgasprocessingindustry(Metzetal 2005). Pre-combustionCCSwouldapplytolarge-scaleintegratedgasificationcombinedcycle(IGCC)power plants.Thereareanumberofdifferenttechnicaloptionsforconversionofcarbonmonoxidetocarbon dioxide(Metzetal 2005).Pre-combustioncaptureofcarbondioxideiseasierandcheaperthanpostcombustion,andisquitewidelyusedinvariousindustrialapplications,includingfertilizermanufacture andhydrogenproduction. However,forthepre-combustionapproach,theproblemsliemorewiththeunderlyingpower generationplant.Whereassupercriticalcoalplantsarewell-establishedasacommercialtechnology, IGCCisstilldeveloping.ThereareonlyahandfulofcoalIGCCplantsoperatingaroundtheworld,and allweresubsidised(Metzetal 2005).IGCCplantsusegasturbines,whicharemoreefficientthanthe steamturbinesusedinconventionalcoalplants,buttheycanbelessstableandflexibleinoperation thansupercriticalcoalandgas.BecauseCCSreducesflexibilityinoperationforalltechnologies,so CCSplantsarelikelytorunbaseload.ThiswouldnotmatterifIGCCwerecompetinginapurelyCCS market,butitisadisadvantageincurrentmarkets. Oxyfueltechnologyismuchlesswell-developedthaneitherpost-combustionorpre-combustion technologies,andisstillatthedemonstrationphase. Transport Capturedcarbondioxidewouldbecompressed,andtransportedbypipelineorship.Pipelinetransport ofcarbondioxidealreadyoperatesonacommercialbasis,withover2,500kmofpipelinesintheUSA carryingcarbondioxidefromnaturalsourcesforenhancedoilrecoveryinwesternTexasandelsewhere. ThemainchallengeinaUKcontextisthelayingofpipelinealongtheseabedouttostoragesitesin theNorthSea. Storage Thereareanumberofoptionsforstoringthecarbondioxidecaptured,includingdepletedoilandgas reservoirs,anddeepsalineformationsbothonshoreandoffshore(IPCC2005).Injectingcarbon dioxideintooilfieldscanalsobeusedforenhancedoilrecovery(EOR).Therearethreeindustrial-scale (around1MtCO2/year)projectsinvolvingsuchstoragelocations:inNorway,CanadaandAlgeria. Estimatesofthepotentialstoragecapacityingas-andoilfieldsandoffshoresalineformations availabletotheUKrangeconsiderably,from20,000upto260,000MtCO2 (POST2005).However, evenatthebottomendofthisrange,thesesitescouldaccommodatehundredsofyearsofemissions fromcoal-firedpowergeneration. TheIPCCreportonCCSgivesarelativelyhighdegreeofconfidencetotheviewthatthevastmajority ofstoredcarbondioxidewillnotleakfrom‘well-selected,designedandmanagedgeologicalstorage sites’(IPCC2005:14).

CostsofCCS Becauseitisstillatthepre-demonstrationphase,therealcostsofCCSforcoal-firedpowerstations (intermsofelectricityproduced)arenotyetknownwithcertainty. Thecostsofthefirstprojectsarelikelytobeveryhighindeed.TheEU’sZeroEmissionsPlatform (ZEP)projectestimatedthatacarbonpriceof103/tCO2 wouldbenecessarytosupportaprecombustiondemonstrationproject,whileacarbonpriceof129wouldbeneededforapostcombustiondemo(ClimateChangeCapital2007). Forsubsequentplants,arangeofcostestimatesareavailable,includingthosefromthe2005IPCC reportonCCS(Metzetal 2005),theEU’sZEPproject(ClimateChangeCapital2007),anda backgroundstudyforthe2007EnergyWhitePaper(RedpointEnergyStrategies2007).Althoughcost estimateschangesomewhatovertime(partlybecauseconstructioncostshavegoneupinthelastfew years),themaincostmessagesapplyacrossallsources.

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Figure6.1.Costs ofadvanced supercriticaland IGCCcoalplants withandwithout CCS(p/kWh)

Current 6.0 5.0 p/kWh

Source:Blyth(2008)

Emission costs

4.0

Fuel costs

3.0

Plant O&M*- variable

2.0

Plant O&M - fixed Plant capital costs

1.0 IGCC + retrofit CCS

IGCC+CCS

ASC + retrofit CCS

ASC+CCS

ASC

0.0 IGCC

44

*O&M=Operationsand maintenance

2031 6.0 5.0 Emission costs

p/kWh

4.0

Fuel costs

3.0

Plant O&M - variable Plant O&M - fixed

2.0

Plant capital costs 1.0 0.0 ASC

IGCC

ASC+CCS

IGCC+CCS

Figure6.1isbasedontheRedpointestimates,andgiveslevelisedcostsinpenceperkWhfor advancedsupercriticalcoal(ASC)andintegratedgasificationcombinedcycle(IGCC)plants,basedon thecentralEnergyWhitePapercoalpricescenario(seeTable2.1above)andwithacarbonpriceof 50/tCO2 asthebasisforemissionscosts. ThereareseveralimportantpointstonoteaboutestimatesofCCScosts. ThefirstisthatasupercriticalpulverisedcoalplantwithoutCCShaslowercapitalandoperatingcosts thanIGCCwithoutCCS,butonlyslightly.However,asnotedabove,itisamorematureandflexible technology. AsecondkeypointisthatcostestimatesforcoalplantswithCCSaremuchhigherundercurrent marketconditionsthanthecostsofcoalplantswithoutCCS,whetherpost-combustionorprecombustion.NocompanieswillcurrentlybuildacoalplantwithCCSonacommercialbasis(seealso ClimateChangeCapital2007).Someformofsupport,whethercapitalgrantsorcarbonpricing,willbe requiredtomakeCCScommerciallyviable.TheadditionalcostsofCCSliebothinhighercapitalcosts andinhigheroperatingcosts.Thisisbecauseoftheextraequipmentinvolved,butalsobecauseCCS plantsarelessenergyefficientthannon-CCSplants.Asignificantamountofenergyisusedupinthe carbondioxidecaptureprocesses(whichdominatecostsovertransportandstorage). Athirdkeypointisthat,ifthecostsofplantswithCCSarecompared,thecostdifferencebetween supercriticalcoalplantsandIGCCplantsdisappears.UndertheRedpointassumptions,thelevelised costsincludingCCSareverysimilarforthetwotechnologies,atjustover5.3p/kWh.Otherestimates

45

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

ofcost,incudingtheIPCCandtheZEPreviews,giveawith-CCScostadvantagetopre-combustion IGCCcaptureoverpost-combustioncapture.ThisisbecauseofthegreaterefficiencyofIGCCplants. Afourthpointisthatcostsareexpectedtodeclineovertime,withlevelisedcostsforboth technologiescomingdowntoabout4.5p/kWhby2030(incurrentprices). Finally,alastpointisthatretrofittingCCSatalaterdateisnomorecostlythanfittingatthetimeof thenewbuild,andthatthisisthecaseforbothconventionalsupercriticalandIGCCtechnologies.This meansthatthereisnopenaltyforcompaniesbuildingacoalgenerationplantwithoutcarboncapture now(whilecarbonpricesarebelowthebreakevenpriceforCCS)withaviewtoretrofittingthecapture andstorageplantshouldcarbonpricesrisesufficientlyinthefuture.Inthissense,theexpectationof aviableCCStechnologyprovidesanimportanthedgeagainsttheriskofhighfuturecarbonprices, essentiallyreducingtheriskofbuildingcoalplants.Therefore,newbuilddecisionsforcoalwithout CCScouldbeacceleratedasaresultoftheoptiontoretrofitCCSatalaterdate(BlythandYang 2007).

TheUKdemonstrationcompetition AlltheelementsofthethreephasesofCCS–capture,transportandstorage–doexistinlocations aroundtheworld,butnotyetatthescaleofaconventionalcoalplant,orjoinedupinasingle system. Therearemanycaptureandstoragedemonstrationprojectsbeinginvestigatedbycompaniesand governmentsaroundtheworld.TheCarbonSequestrationLeadershipForumlists19registered projects(CSLF2008),andtheEuropeanCommissioncites20potentialdemonstrationprojects signalledbyindustryin2006-07(EC2008b).However,anyprojectsatscaleatthisearlystagewill needsupport,somanycompanyproposalswillnotcometofruition.Demonstrationsofthefullrange ofelements–capture,transportandstorage–arealsoveryrare. TheGovernmenthasnowsetupaframeworkforasupporteddemonstrationprojectwithjustsuchan end-to-endapproach(BERR2007d).BritainiswellplacedtodemonstrateanddevelopCCS,asithas astrongscienceandengineeringbaseandgoodstoragesiteintheNorthSea. TheGovernmenthaschosentoinvitebidstodemonstrateaparticulartechnology–post-combustion capturefromcoal-firedpowergeneration,initiallyatascaleof50-100MWby2014,andthenat300400MWassoonaspossiblethereafter.Thisdecisionwasbasedonanumberofarguments:

•Itwouldnotbepossibletoevaluateandchoosebetweenbidsfromcompaniesfordemonstration projectsacrosstechnologiesinafairway.

•ThedevelopmentofCCShasmostsignificancefortacklingclimatechangethroughits deploymentinIndiaandChina,whichhavealargenumberofconventional(non-IGCC)coal plants.Onlypost-combustiontechnologycanberetrofittedtosuchplants.Atthesametime, thosecountriesarelookingtorichercountriestodemonstratethatCCStechnologyworksandis cost-effective.

•Capturefromgas-firedpowergenerationisbeingdemonstratedinothercountries,mostnotably inNorway.

•Pre-combustiontechnologyisalsobeingdemonstratedinothercountries,notablytheFutureGen projectintheUSA. Thisdecisionhasbeenstronglycriticisedbyanumberofcompanies,environmentalorganisations,the TUC,theCCSAssociationandothers.Criticismisbased,inturn,onanumberofarguments. Thefirstisthat,whiletherearesomerealtechnologicaluncertaintiestoberesolvedinthepostcombustionapproach,thepre-combustionapproachismuchnearerpotentiallarge-scaledeployment, withcostdiscoveryratherthantechnologicaldevelopmentbeingthemainpurposeofaprecombustiondemonstration.CompanieswithplanstobuildIGCCplantswithpre-combustionCCSsay theycouldhavefull-scaleoperation(thatis,at800MW)inplaceby2014.Byrulingoutaprecombustiondemonstration,theGovernmentisdelayingtheintroductionofCCSintheUK.

46

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

TheGovernment’sargumentthatpost-combustionCCSneedstobedemonstratedforChinais disputed,partlyonthegroundsthatChinaisquitecapableofdevelopingCCStechnologyitself. Interestingly,Chinaisindeeddevelopingitsown250MWpre-combustionIGCCdemonstrationplant, throughtheGreenGenprojectinTianjin. Atthesametime,theUSFutureGenIGCCprojectrecentlycollapsedwhentheUSGovernment withdrewfunding(Cleantech2008).Whileotherpre-combustiondemonstrationsmaystillgoaheadin theUSA,theyarelikelytobedelayeduntil2015attheearliest.ThedemiseofFutureGenpointsup theproblemthatthereis,asyet,noeffectiveinternationalmechanismforcoordinatingCCS demonstrationprojectsinawaythatmeansthatanyonecountrycanbeassuredthatitsownefforts willbecomplementedbyothersinapredictableway(Stern2007).TheCarbonSequestration LeadershipForumisthemostlikelycandidate,butcriticsarguethatitlacksthefundingandauthority toplaythisroleeffectivelyatpresent.TheEU’sZeroEmissionsPlatformalsosuffersfromalackof resourcesorpowertocoordinatememberstates’efforts. Likewise,theambitiontohave12demonstrationplantsupandrunningacrosstheEUhasnotbeen convertedintoaction.Withintheenergyandclimatepackage,theonlymajorissuenottogoforward asaDirectiveisthedevelopmentofCCS.ManycountriesintheEUareunenthusiasticaboutthe technology,inpartbecausetheyseetheiroptionsforstorageastoolimited. Intheabsenceofsuchastrongcoordinationframework,evenwithintheEU,proponentsofafurther pre-combustiondemonstrationarguethattheGovernmentshouldremainaninternationalplayeron thepre-combustionfront,notleastforreasonsofcommercialpositioningastheCCSmarkettakesoff. TheUKisalreadyaheadintermsofsortingoutregulatoryandlegalaspectsofCCS,andhasproposals forIGCCnewbuildfromseveralcompanies,aswellasgoodstoragesites.Ifthereweretobe agreementonthe12demonstrationplantsacrosstheEU,itisverylikelythattheUKwouldbe involvedinmorethanone,givenitscomparativeadvantages. Pre-combustionproponentsdonotargueagainstapost-combustiondemonstrationassuch,because oftheevidentneedtoretrofitcapturetothemanysubcriticalandsupercriticalplantsthatalready exist,orarebeingbuiltaroundtheworld.However,theydoarguethatpost-combustiontechnology shouldbedemonstratedonanexistingpowerstation.Ifanytechnologyistobetestedonanewbuild coalplant,itshouldbepre-combustion,asthisischeaperandnearerdeployment. Anotherdemonstrationprojectwould,ofcourse,meanmoremoney.Thelevelofsupporttothepostcombustiondemonstrationwillonlybedeterminedthroughtheprocessofselectingthepreferred bidder,butwillbeatleastseveralhundredmillionpounds,andcouldbeoftheorderof£1billion. Supportforapre-combustiondemonstrationcouldbeexpectedtobeofthesameorder.Withinthe widercontextofatightfiscalpositionintheUKoverthenextfewyears,thisisquitealotofmoney tofind. However,proponentsarguethatrevenueraisedfromauctioningofEUETScreditsinthepowersector shouldbeusedforthispurpose,assuggestedbytheEuropeanCommissioninitsproposalsinJanuary 2008(EC2008a).AreportbyPointCarbonforWWFestimatesthatauctionrevenuesintheUKwill beworth6-15billionoverPhase2oftheEUETS,or1.5-4billionayear(PointCarbonAdvisory Services2008).Thisneednotinvolveformalhypothecation. Analternativeapproach,proposedbyClimateChangeCapitalforCCSdemonstrationattheEUlevel, istoavoidcapitalgrantsupportandinsteadring-fencesome60millionallowances,andgivethree allowancesforeachtonneofcarbondioxidestoredthroughCCS(ClimateChangeCapital2007).This wouldprovideasufficientincentivetocoverdemonstrationcosts.

ThetimetableforCCSintheUK Afinal,andcrucial,issueistiming.Apreferredbidderforthepost-combustiondemonstrationproject willnotbeannounceduntilthemiddleof2009,withactualoperationofcapture,transportand storagebeingrequiredby2014atthelatest. Captureoperationforthedemonstrationplantwillbeat50-100MWinitially,andassoonaspossible thereafter(say2015)at300-400MW.Withtwotothreeyearsofoperationforlearning,planningfor

47

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

deploymentofCCSatfullunitscale(thatis,500-800MW)couldthenfollowonlyfrom2017-2018, withoperationstartingatsomepointintheearly2020s.Othersarguethatthereistheneedfortwo researchcycles,andputtheearliestdateforwidespreaddeployment atnoearlierthan2025. Proponentsofapre-combustiondemonstrationarguethat,sincethereismoreexperiencewithprecombustioncapturetechnology,andsitesandplansofcompaniesproposingIGCCplantsintheUK aremoreadvanced,therewouldnotbethesameneedforafullresearchcyclebeforewidespread deploymentcouldbegin.Assumingthisargumentistrue,andasupportmechanismisinplace,a numberofIGCCplantswithCCScouldbeinoperationbythesecondpartofthenextdecade. Inaddition,thereisthequestionoftheinfrastructureforcarbondioxidetransport,whichthe Governmenthasnotyetbeguntoaddress. Therearelikelytobeseveralregionalnetworksforpowerstationsandindustrialsites:ontheThames, ontheHumber(whereYorkshireForwardhasbeencoordinatingaCCSconsortium)andinsouthern Scotlandornorth-eastEngland.Anintegratedandcost-effectivecarbondioxidetransport infrastructurewillrequireplanningatanationallevel,alongwithaframeworkforfinancingamajor infrastructureproject,onasimilarscaletotheconstructionoftheNationalGrid.Majorinvestmentin suchaninfrastructurecannotbeginuntilcaptureandstoragehavebeenshowntoworkatsomescale, butifworkisstartedonlyafterthetechnologyhasbeenfullydemonstrated,thenwidespread deploymentcouldbepushedbackevenfurther. Finally,becauseitwillinvolveenergycompanies,engineeringcompaniesandoilcompaniesinanew kindofpartnership,makingCCSworkrequiresanewbusinessmodel,whichwillalsotaketimeto developsuccessfully(althoughthedemonstrationcompetitionshouldhelpinthisrespect). Takingintoaccountalltheseelements,evenanacceleratedtimetablecouldnotseelarge-scale deploymentofCCSintheUKmuchbefore2020.ThisisconsistentwithotherprojectionsattheEU level(Gibbins2007).

AsupportframeworkforCCS EvenifCCSforcoalworkstechnologically,itisclearfromFigure6.1thatitwillnotbecompetitive withordinarycoalorgaswithoutsomesupport.Itisfairlywidelyexpectedinindustrythatthis supportwillcomeintheformofcarbonpricingthroughtheEUETS.Carbonpricingisprobablythe mostappropriateformofsupport,sincetheadditionalcostsofCCSarisemainlybecausethecapture processinvolvesanenergypenalty,whichreducesthenetoutputofthepowerstation(Climate ChangeCapital2007). Figure3.1suggeststhatcoalplantswithCCSonlybecomecompetitivewhenthecarbonpriceis around50/tCO2.Thisestimatecoincideswithviewsinindustry,althoughcompaniestendto distinguishbetweenthecarbonpricerequiredforthefirst-of-a-kindplantandforsubsequentplants, whichwouldbelower,possiblyaround40/tCO2,whichisthepricelevelbeingpredictedforPhase3 oftheEUETSundercurrentproposalsfromtheEuropeanCommission(seeChapter3).Estimates developedfortheEU’sZeroEmissionsPlatformvarymorewidely(at25-67/tCO2),butcoverthe samerange(ClimateChangeCapital2007). However,thereisnocertaintythatacarbonpriceattherightlevelwillbeinplaceatthetimethata viabletechnologyisproven.ClimateChangeCapital(2007)arguesforsupportingCCSdemonstration plantsbyring-fencingacertainnumberofEUETSallowancesandgivingCCSadditionalsupportby awardingamultiplenumberofallowances(three,forexample)foreachtonneofcarbondioxide capturedandsequestered. IfcarbonpricesarestilltoolowtosupportCCSoncethetechnologyhasbeenprovenpastthe demonstrationphase,thenthisapproachcouldbeextendedforsometime,orsomeotherdeployment mechanism(suchasportfoliostandard)mightbeused.However,ifcarbonpricingdoesfailtosupport CCSsufficientlyoveralongperiod,thecaseforabanoncoalwithoutCCSbecomesverystrong.This isexploredfurtherinthenextchapter.

48

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Summary Developinganddeployingcarboncaptureandstorageisofhugeimportance,notonlywithintheUK, butalso,moreimportantly,intherestoftheEU,China,India,theUSAandelsewhere.Itprovidesthe onlymeansbywhichcoal-firedpowergenerationmighthavealong-termfuture. Whiletherearetechnologicalquestionstobesettled,especiallyinrelationtopost-combustioncapture ofcarbondioxidefrompowerstations,theuncertaintiesaboutCCSaremoreabouthowquicklythe technologycanbedeployed,andhowmuchitwillcost. TheGovernmenthasshownleadershipindecidingtosupportademonstrationprojectwithpostcombustioncarboncapture.However,thereisastrongcasefortheUKrunningasecond demonstrationproject,involvingadifferenttechnology. Althoughtherewouldbeextracostsinvolved,suchademonstrationwouldbewidelysupported,since anaccelerationofCCSisbeingcalledforbyalargerangeofsectorsofsociety,includingmanyofthe energycompanies,tradesunions,andmostenvironmentalgroups.Asanexampleofconcreteactivity withintheUK(asopposedtopayingacarbonpremiumtosupportinvestmentelsewhere)itisalso likelytobepopularwiththewiderpublic(seeDowningandBallantyne2007). AsitholdsouttheprospectofmovingmorequicklytowardsdeploymentofCCSintheUK,the developmentofpre-combustionCCSisalsoimportantfortheobjectiveofinternationalleadership. IftheGovernmentwishestodemonstratethefeasibilityofaparticulartechnologythatwillhavetobe widelydeployedincoalplantsintheUSA,IndiaandChinainorderfordangerousclimatechangeto beavoided,thenapost-combustiondemonstrationmakessense.(Although,itshouldbenotedthat someofthesecountriesarecapableofexploringpost-combustiontechnologiesthemselves.) However,itmakesmoresensefortheUK(andmorewidely,Europe)tobedemonstrating–especially toChinaandIndia–howacountryorregionwithahighenergydemandcanachieve widespread deployment ofcoal-firedgenerationwithCCSquicklyandaffordably.Forthisobjective,aprecombustionroutemakessense,asthisisthemorelikelywaytodemonstratesuchatransition. Atthesametime,theUKshouldnotstopactivelypursuingafullyfundedandempowered internationalcoordinationframeworkforCCS,toensuretherapiddevelopmentoffull-scaleCCS demonstrationplantscoveringalltechnologiesbyothercountries. WithintheUK,otherimportanttasksarebeginningpreparationsfortheplanningandfinancingofa nationalcarbondioxidetransportinfrastructure,leadingtoconstructiontimedtoallowrapid movementfromfinaldemonstrationphaseintolarge-scaledeployment. Inanyevent,evenwiththedevelopmentofthepre-combustionoption,itisunlikelythatwidespread deploymentofCCStocoal-firedgenerationwilloccurmuchbeforetheendofthenextdecade.This deploymentwillbedependentonastrongEUETSpolicy(withacarbonpriceofatleast40/tCO2), or,intheeventthatthisdoesnothappen,willrequiresomeotherformofsupport. Afinalpointrelatestothedebateoverwhatconstitutesacoal-firedpowerstationbeing‘CCSready’. Thetimetableandcostfactorslaidoutabovemeanthatanewcoalplantproposednowcanbe‘CCSready’onlyinaverylimitedsense.Onthisview,a‘CCS-ready’supercriticalplant–suchasisproposed forKingsnorth–builtinthenextfewyearswillhavethesameemissionsasexistingsupercritical plants. Someengineeringchangesfromstandarddesign,toenableeasierretrofitatalaterdate,canbe specified,andspaceforchemicalplantcanbesetaside.Butanyfurtherinvestmentsthatwould involvemajorcostswillnotbemadeoutsideofthecontextofasupporteddemonstrationplant.Thus, ‘CCS-readiness’issomewhatofaredherring–eitherlargelymeaninglessontheonehand,ortoo expensivetoberealisedontheother.

49

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

7.AssessingtheUKpolicydebateoncoal Inthepreviouschapterswehaveexaminedtheeconomicsofcoal-firedpowergeneration,the implicationsforcarbonemissions,andtheprospectsforcarboncaptureandstorage(CCS).Inso doingwehaveshownthat,withinthecurrentpolicyframework,thereisconsiderableuncertainty aboutfuturenewcoalbuild,coal-firedpowergenerationmorewidely,carboncapture,andcarbon emissions. Overthenextthreechapters,weexaminetheimplicationsforemissionsandenergypolicyinthe lightoftheaboveanalysis. MuchofthecurrentdebatefocusesonUKleadership,theimplicationsofnewcoal-firedpower stationsfortheClimateChangeBilltargets,andtheriskthatalargepartoftheeffortwillhaveto bemadethroughpurchasingcreditsfromoverseas.Westartbyconsideringtheargumentsmade forproposalsfornewmeasurestoruleoutnewcoalbuildorlimitemissions,withtheaimof eliminatingthatrisk.However,boththeGovernmentandenergycompaniesareagainstfurther measuresofthistype.Attheheartofthisoppositionistheargumentisthatthesemeasureswill cutacrossandunderminethedevelopmentoftheEUemissionstradingscheme(ETS),whichisat thecentreoftheGovernment’sapproachtotacklingclimatechange. ThisimpasseleadstoaconsiderationofthedynamicsofcoalandtheEUETSattheEuropean level,wheretheissuelookssomewhatdifferent.TheEUETSisstilldeveloping,andcarbonprices areunlikelytofullyreflectthecapsetbytheEUuntilthereiscertaintyaboutthefutureofa globalpost-2012agreement.Beforethen,theEUETSwillnotshapeinvestmentdecisionsina wayfullyconsistentwiththecap.ThishasseriousimplicationsforUKandEUleadershipin movementtowardsasuccessfulpost-2012internationalagreement. Thestrongestcaseforconsideringfurthermeasurestosupporttheinvestmentframeworkby constrainingcoalnewbuild,therefore,applieswithinthisEUETScontext,whichisexaminedin thenextchapter. Thepolicydebatealsomakesclearthat,overthenext10years,suchaframeworkfortransition towardsalow-carbonelectricitysystem,involvinganambitiousexpansionofrenewables, constraintsonnewcoal,andalmostcertainlyanincreaseddependenceongas,meansfacingupto problemsofaffordabilityandsecurityofsupply.ThesecrucialissuesareaddressedinChapter9.

NewcoalbuildandUKemissionsrisk WestartbyconsideringtheimplicationsoftheanalysisinthisreportfortheUKcoaldebate.As alreadydiscussed,thefutureofcoal-firedpowergenerationintheUKisshroudedinuncertainty: itisnotyetclearhowmanynewcoalplantsmightinfactbebuiltorhowmanyexistingplants opted-inundertheEULargeCombustionPlantDirective(LCPD)willactuallyrunto2020and beyond.NorisityetclearhowcredibleEUETSpolicywillbeinPhase3orhowfarthe Government’scommitmenttothe2020renewableenergytargetcanberealised.Anditisnot clearwhetherCCSwillwork(oratleastbywhenitcanbemadetowork)oratwhatcost. However,whatcanbesaidisthatthisuncertaintymeansthatthereissomeriskthattheUKmay notmeetitsClimateChangeBilltargetsforemissionsreductionswithoutmajorrecoursetobuying creditsfromabroad.Some11.6GWofnewcoal-firedcapacityisbeingconsideredbythemajor energysuppliersand,althoughitisnotcertainthatallwillgetconsent,anditisprobablyunlikely thatallwillbebuilt,thequitepowerfulstrategicdriverofmaintainingportfoliodiversitymeans thereisagoodchancethatsomewill. Newcoalplantsmaytendtoreplaceexistingcoalplantsinoperationalterms,inwhichcase emissionsfromcoal-firedpowergenerationmayfall,evenifnewplantsarebuilt.However,ina worldwithlowcoalpricesandaweakcarbonpolicy,oldcoalplantsmayrunalongsidenewcoal plants,creatingaseriousshortfallinemissionsreductionsagainst2020ClimateChangeBill targets.

50

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

ThesignificanceofUKemissions Itisimportanttobeclearaboutthenatureofwhatisatriskhere.ReducingUKemissionswillnot,on itsown,directlyinfluenceatmosphericprocessessufficientlytoavoiddangerousclimatechange. Rather,theenvironmentalobjectiveofenergypolicyshouldbeseenasmediatedthroughpolitical action,and,specifically,throughinternationalleadership.AmajorintentionbehindtheClimateChange Billwastoprovideinternationalleadershiponclimatechange,asmuchastoreduceemissions perse. EnsuringthattheUK’senvironmentalperformanceisnotunderminedbyhighemissionsfromcoalis, therefore,aboutactinginawaythatisconsistentwiththedraftingoftheClimateChangeBilland leadershiponinternationalnegotiations,whichwillultimatelyleadtoreductionsinglobalemissions. However,althoughthistypeofriskisnotdirectlyenvironmental,itstillmattersiftheClimateChange Billistohaveservedanypurpose.IftheBillbecomeslaw,butalargeproportionofthe2020targetis metthroughbuyingcreditsfromabroad,whileatthesametimealargeamountofnewcoal-fired powergenerationcapacityisbuiltintheUKinthenextfewyears,thentheUK’sflagshipclimate initiativewillhavenocredibility.AsshowninChapter1,coal-firedpowergenerationplaysadominant roleinemissions,meaningthat,ifemissionsfromcoaldonotdeclinetowards2020,itwillbe impossibletomakeupforthisthroughemissionsreductionsinothersectors. Beyondthedetailsofemissions,thebuildingofnewcoalplantsintheUK,whicharebeginningtohave aniconicstatusinclimatechangediscourseinternationally,willbehardtosquarewiththeUK’simage androleasaninternationalleaderonclimatepolicy.Thefutureofcoalis,therefore,attheheartofthe UK’sinternationalcredibility. Acounter-argumentisthatwhatmattersintermsofinternationalleadershipisnotwhattheUKdoes, butratherwhatthewholeoftheEUdoes,especiallythroughreducingemissionsunderacap. CountriesincludingChinadonotcarewhattheUKdoesonitsown,andarenotparticularlyinterested intheClimateChangeBill. Thislatterargumentisnotfullyconvincing.WhattheUKdoesdomesticallydoeshavesignificance,not leastbecauseitisviewedcloselybyothermemberstatesintheEU.TheUKcannotexpecttoapprove severalnewcoal-firedplantsandincreasepowersectoremissionswhileexpectingothersintheEUnot todoso.Morebroadly,inthewordsoftheClimateChangeMinisterPhilWoolas:‘Thepointthatthe UnitedKingdom'scredibilityoverseasin[thepost-Kyoto]negotiationsmustbematchedbyacredible performancedomesticallyisofextremeimportance’(Woolas2008).

TheEUETSandtheClimateChangeBilltargets TheGovernment’stoolformanagingtheemissionsriskfromcoal,and,therefore,therisktotheClimate ChangeBilltargets,istheEUemissionstradingscheme.AsexploredinChapter3,thenewtargetsfor emissionsreductionsto2020should,intheory,leadtoasubstantialreductionincoal-firedpower generationacrossEurope. TheviewfromGovernmentandenergycompaniesisthatnewcoalplantsmaywellbebuiltintheUK undertheEUETS,but,aslongastheEU-widecapisnotbreached,thenthisisnotaprobleminitself. Iftheyarebuilt,newcoalpowerstationswillcomeonstreamonlyfromaround2015,and,withthe possibilityofretrofittingCCSfromtheearly2020s,theperiodduringwhichemissionsmaybehigher thantheyotherwisewouldhavebeenisrelativelybrief. However,thereareseveralreasonswhytheEUETSalonemaynotbesufficienttopreventemissions fromcoaldrivingprogresstowardstheClimateChangeBilltargetsoffcourse. ThefirstisthattheUKisinapositionwhereitisadoptingambitiousnational targetsforemissions reduction,while,atthesametime,isdependentinlargepartonaEuropean-wide policyinstrument (whichhastobeagreedacross27memberstatesandtheEuropeanParliament)inmeetingthose targets.17 17.IntheEnergyWhitePaper,itisassumedthattheEUETSwillberesponsibleforbetween41and58 percentoftotalUKemissionsreductionsby2020(HMGovernment2007).Thisissueisrecognisedinthe OfficeofClimateChange’srecentanalyticaloverviewofclimatepolicies(OCC2007).

51

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

CurrentlytheClimateChangeBillandtheEUETSaimfordifferent2020goals.TheBill’stargetfor 2020iscurrentlytoreduceUKcarbonemissionsbybetween26and32percentfrom1990levels. TheproposedcapfortheEUETSisbasedontheEU’scommitmenttoreduceoverallgreenhousegas emissionsin2020by20percentfrom1990levels.Onlyifthereisa‘satisfactory’international agreementwillthisbeincreasedtoa30percentemissionsreductiontarget. AsecondissueisthatmuchoftheactualemissionsreductiongeneratedbytheEUETSmaytake placeelsewhereintheEU,ratherthanintheUK(asexplainedinChapter3).Again,if,inpractice,the UKpowersectorreliesheavilyoncreditsboughtfromelsewhereintheEU,theinternationalcredibility oftheBillwillbeundermined(especiallyinEurope).TheGovernmentcurrentlyhasnoestimateofthe impactsoftheproposalsforPhase3onfuelswitchingintheUKpowersector. Inthiscontext,thecaseforfurthermeasuresadditionaltotheEUETSisbasedontheargumentthat theseareneededtoremovetheriskthatalargepartoftheClimateChangeBilltargetforemissions reductionsby2020willbemetbyinternationaltrading.Someproponentsofthisapproachwould wanttoseethetargetmetthroughdomesticactivityalone. Athirdfactoristhat,whiletheoverallcapforPhase3isnowunlikelytobechanged,thescheme couldbeweakenedintermsofitsinfluenceoninvestmentdecisionintheEUbyincreasingtheuseof CDMcredits. Finally,energycompaniesstilldonothavefullconfidencethatthecapsinPhase3andsubsequent phasesoftheEUETSwillberigorouslyimplemented(seeChapters3and8). Forthesereasons,therehasbeenconsiderabledebateonadditionalmeasurestostopnewinvestment incoal.

Aplant-levelemissionsperformancestandard IntheUK,mostofthedebatehasfocusedonaplant-levelstandardforcarbonemissions,informed andinfluencedbytheexperienceofCalifornia. ArangeofenvironmentalgroupsintheUK–includingWWF,Greenpeace,andFriendsoftheEarth– arecallingforamandatoryplant-levelemissionsperformancestandard(EPS)forallnewpower stationsintheUK.ThispolicyhasbeenadoptedbyboththeLiberalDemocratsandtheConservative Party.WWFisalsocallingforsuchanapproachattheEUlevel. TheEPSfollowsthemodeloftheCaliforniaPublicUtilitiesCommission,whichhasintroduceda performancestandardof500kgCO2/MWhforallnewbaseloadcapacity.Thelawisbeingextendedto capacitythatsuppliesCaliforniabutliesoutsidethestateborders(CPUC2008a).Someproponentsof thisapproachmakeananalogybetweentheEPSandminimumproductstandards,whencertain options(inthiscase,coal-firedpowerstations)areremoved. Inspiredbythisapproach,anamendmenttotheUK’sEnergyBillwastabledintheHouseofLords, proposingamandatorystandardat400gCO2/MWh.Atthislevel,astandardwouldruleoutcoal-fired powergeneration,unlessCCSwerefittedoracombinedheatandpower(CHP)approachwere adopted. Weresuchameasuretobeintroducedwithoutanyotherpolicies,energycompaniessaytheywould buildtheleastriskyandlowestcostalternativeinstead,whichisgas-firedplant.However,the proposalforanEPSusuallycomesinapackagetogetherwithotherproposalsaimedatchannelling investmentintoalternativeareasofenergyinvestment,includingenergyefficiency,renewables,CHP andCCS.InthecaseofCalifornia,theEPShasbeenadoptedwithina2003energyactionplanthat prioritisesconservationandenergyefficiencyfirst,thennewrenewablesanddistributedgeneration capacity,andonlythen‘cleanandefficientfossilfuelgeneration’(StateofCalifornia2003). AcentralattractionoftheEPSapproach,whichnowhasconsiderablepoliticalmomentum,isthatitis veryclear,andoffersapparentcertaintyforinvestors.However,asdiscussedinChapter9below,an EPSwouldstillhavetotacklecredibilityquestionsthatarisefromcostandsecurityofsupply concerns,soakeyquestioniswhetherinvestorsbelieveitmaybereversedorabandonedinthe future.

52

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

AnotherissuewiththeEPSproposalisthattherearesomecircumstancesinwhichsuchapolicy might,perversely,leadtohigheremissionsthanifnewcoalbuildwereallowedandnootheraction weretaken.Ifanewwaveofcoalplantsweretobebuiltandrunfromaround2014-15,thenbecause theywouldbesignificantlymoreefficientthanexistingcoalplants(manyofwhichdatebacktothe 1970s),thesenewplantswouldberunatbaseloadbeforeexistingcoalplantsarebroughtintothe generationrunningorder. Therearesomecircumstancesinwhichnewcoalplantswoulddisplace,ratherthanaddto,existing coal-firedpowerstations(seeTable5.2above).Themaincaseinwhichthismightariseiswhen carbonpolicyisweak,andacombinationofhighcoalpricesandlowgaspricestendstodrivethe leastefficientcoalplantoffthesystem. Ifnewcoalplantswerebannedinsuchcircumstances,theonlycoalavailablewouldbeoldcoalplants, withtheirhigherattendantemissions.

Amoratoriumonnewcoal-firedpowerstationswithoutCCS Aslongagoas1990,Denmarkintroducedamoratoriumonnewcoal-firedplants,whichwas reaffirmedin1997,alongwitharequirementforCHP(DanishEnergyAuthority1998).NewZealandis currentlyintroducingaclimatechangebillthatwouldintroducea10-yearlegislativemoratoriumonall fossilfuelbaseloadplants,bothcoalandgas,requiringnewinvestmenttofocusentirelyonrenewable sources(MinistryofEconomicDevelopment2007). WiththewidespreaddeploymentofCCSstillsomewayoff,evenonoptimisticviews,animmediate moratoriumonnewcoal-firedcapacitywithoutCCSwouldhaveasimilarimpactoninvestment decisionsandemissionstoaplant-levelemissionsperformancestandard,asabove. Canada,meanwhile,isintroducingarequirementthatanycoal-firedplantsbuiltfrom2012onwards willhavetomeetemissionsstandardsatlevelsbasedonCCSfrom2018onwards(Governmentof Canada2008).Thisisbasedinpartonthemodelof‘stretchtargets’thathavebeenappliedtovehicle emissionsinCaliforniaandotherplaces.Suchtargetsareambitious,butallowmanufacturerstimeto worktowardsthem. AmoratoriumoncoalwithoutCCSfromafuturedatewouldmakeCCScompulsoryifthetechnology worksandisofareasonablecost.IfCCSdoesn’tworkorisprohibitivelyexpensive,thencoal-fired powergenerationwillbeenvironmentallyunacceptableandwillhavetoendanyway.Inaspeechon climatechangelastyear,thePrimeMinisterreferredtoretainingthisoption(Brown2007). ThisrequirementforCCScould,inprinciple,workinasimilarwaytotherequirementforlowersulphur emissionsundertheEULargeCombustionPlantDirective(LCPD),whichoffersplantoperatorsa choice,byacertaindate,betweenfittingfluegasdesulphurisation(FGD)orlimitedrunninghours followedbyclosure. Crucially,thekeytothecredibilityoftheLCPDhasbeenthatthetechnologyneededwasbothwellestablishedandsufficientlycheaptoallowcontinuedcommercialoperation. ThecurrentframeworkforCCSisproceedingslowly,bothinternationallyandwithintheUK,anda bestavailabletechnology(BAT)18 (oritsimpossibility)maynotbeidentifieduntilwellafter2025.One approachwouldbetoalignarequirementforCCSorclosurewiththeEUETS,andapplyitfrom2028 (theendofPhase4,withcapsoncoalemissionsapplyinguntilthatdate). However,thisisverylatefromanemissionspointofview.Amoreambitiousapproachwouldbeto forcethepaceofCCSdevelopment,sothataBATwouldbeidentifiedearlier,andthenberequiredfor allnewcoalplantsandretrofittedtoallcoalplantsbuiltafter2008.InJanuary2007,theEuropean Commissionproposedsuchanapproach,withaCCSrequiredfrom2020(Europa2007).Asnoted above,Canadaisnowproposingarequirementfrom2018.Ifapplied,thisshouldhelpforcethepace

18.‘Bestavailabletechnology’isatermusedinenvironmentalregulationmeaningstate-of-the-art processes,facilitiesormethodsknowntobeeffectiveinreducingpollution.

53

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

ofCCSdevelopmentinternationally,sosuchatargetdateshouldbepossibleforothercountriesand regions,includingtheUK.Finally,theintroductionofarequirementforCCSwouldeventuallyhaveto applynotonlytocoal,butalsogas. Themainproblemforthefuturemoratoriumapproachisthat,ifitinvolvesaseriousthreattothe stabilityoftheelectricitysystem,andtheprospectofthelightsgoingout,thenitwillbepolitically impossibletocarrythrough.Themoregradualaphase-out,theeasieritistofollowthroughon.Ifa largeamountofcoal-firedcapacityisbuiltnow,plantownershaveastrongincentivetolobbyfora delayonthemoratorium,oritscancellation.

Emissionsversusinvestment–amandatorylimitoncarbonemissionsfrom UKcoal-firedgeneration Anemissionsperformancestandardandmoratoriaareaimedatinfluencingthedecisiontoinvestin newcoalpowerstations.However,asdiscussedinChapter5,thenumberofnewcoalplantsbuilt doesnotconvertinanydirectwayintofutureemissionsfromcoal,sincethisdependsoncoalprices, carbonpricesandexistingcoalplants. Iftherealtargetofconcernisemissionsfromcoal,withinthecontextoftherisktotheClimate ChangeBilltargets,analternativeapproachwouldbetodirectlyintroducealimitoncarbonemissions fromcoalburningintheUKpowersector. Thereareprobablyseveralwaystointroducesuchalimit.Onemightbealimitonthenumberof hoursaparticularplantcouldrunoveraspecifiedperiod.Thiswouldbefeasible,astheamountof carbonemittedperkWhofpowergeneratedbyeachpowerstationismonitoredbytheEnvironment Agency.ThisapproachhasbeenusedforlimitingsulphuremissionsundertheLCPD.Coalplantsthat haveoptedoutoftheDirectivecanrunforamaximumof20,000hoursovertheperiod2008-2015. Amoreflexibleapproachwouldbetohaveatradablepermitscheme(seeAnnex3foranumerical example),whichisoneoftheoptionsforlimitingnitrogenoxide(NOx)emittedfromcoalplantsin theNationalEmissionsReductionPlan(NERP). Ineithercase,astrictcaponcarbonemissionsfromcoal-firedpowergenerationwouldbeeffectivein limitingemissions,althoughtherewouldbepressuretoincludeabuy-outprice,whichmightaffect this.AcapapproachwouldalsoallowtheGovernmenttosetaparticularlevelofemissions.Inthe periodupto2020,adecliningcapcouldbesetinrelationtotheClimateChangeBilltargets.Acap couldalsobeextendedbeyond2020,andprogressivelyreducedtophaseoutcoalburningwithout CCS. Thisapproachwouldnotruleoutinvestmentinnewcoalbuildperse,sinceitwouldbeaimedattotal coalemissions.However,withatightanddecliningcaponemissionsfromcoal,itis,inpractice, unlikelythatanyinvestorswouldbuildnewcoalplants,aslongasthepolicywerecredible.

CoalpolicyandtheEUETS WhentheabovemeasuresareproposedwithintheUKcontext,attheheartoftheresponsefromthe Governmentandenergycompaniesistheargumentthatdomesticmeasuressuchasthesearenot compatiblewiththeEUETS. Therearethreecommonlyexpressedpartstothisargument.Thefirst,especiallyappliedagainstan EPSormoratorium,isthatamarket-basedmechanismliketheEUETSfitsbestwiththeUK’s liberalisedenergymarkets. Forexample,thisargumentwasmadebytheEnergyMinisterMalcolmWicksinarecentparliamentary debateontheamendmenttotheEnergyBillproposinganemissionsperformancestandard(EPS). AlthoughanEPShasmoreofanexplicitlyenvironmentalbasisthanamoratorium,theMinisterstill emphasisestheclashwiththeliberalisedmarketframework: ‘TheGovernmentdonotbelievethatprescribingemissionlimitsinthatwayis themosteffectiveroutetolow-carbonpowergeneration.Suchanapproach goesagainsttheGovernment’sfundamentalapproachtoenergypolicy,asset

54

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

outinthe2007WhitePaper.IntheUK’scompetitivemarketframework,the choiceoffuelandtechnologyforanewpowerstationisamatterforthe energycompany.TheGovernment’sroleistosettherightframeworkto incentiviseprivatesectorinvestment,consistentwithmeetingourenergy goalsoftacklingclimatechangeandprovidingenergysecurity.’(Debateon newclauseoncarbondioxideemissionsperformancestandardpower,Energy BillCommittee,HouseofCommons,Tuesday26February2008) AsecondissuearisesinhowdomesticmeasuresinteractwiththeEUETStechnically.Considerthe caseofanEPSthatrulesoutnewcoal-firedpowerstationsintheUK.Thismightcutfutureemissions fromthepowersector.However,becausetheUKpowersectorisincludedintheEUETS,suchacut wouldmeanUKpowerproducerswouldthenbidforfewerallowances,leavingmoreallowancesfor thepowersectorsofothermemberstateselsewhereintheEU,andforheavyindustry.Thisisknown asproducing‘hotair’,andmeansthatthedomesticmeasurehastheeffectofmovingemissionsfrom oneplaceinEuropetoanother,ratherthanreducingthemintotal. ItisworthnotingthatthisproblemdoesnotariseinthecaseofCalifornia,becausetheEPSpredates proposalsforacap-and-tradeschemeliketheEUETS(CPUC2008b).Indeed,thePublicUtilities CommissionviewstheEPSasabridgetoapossiblecap-and-tradescheme,andaninsurancemeasure againstfinancialriskexposuretoanypotentialUSfederal-levelcap-and-tradescheme(CPUC2007). TotalemissionsundertheEUcapwouldreduceasaresultofanEPSonlyiftherewerealsoa downwardadjustmenttothecap,tomatchthiscutinemissionsfromUKcoal-firedpowerstations. However,theproblemliesinknowingwhatthisadjustmentshouldbe,sinceitisnotknownhow manycoalplantswouldotherwisebebuiltintheabsenceofanEPS,andhowmuchtheywouldrun. TherearealreadyUKdomesticpoliciesthatoverlapwiththeEUETS,includingtheRenewables Obligation,theCarbonEmissionsReductionTargetforthedomesticsector,andtheCarbonReduction Commitmentforthecommercialandpublicsectors.However,forthesepolicies,sofar,theoverlapis relativelysmall,whereasformeasuresthatwouldaffectlargeamountsofcoalcapacityorgeneration, theoverlapwouldbemuchmoresignificant. Thethirdresponsetoproposalsfordomesticmeasurestoconstraincoalisthemostimportant.Thisis thattheproposalsunderminetheEUETSpolitically,justasitscredibilityisbecomingestablishedafter severalyearsofpoliticaleffort.TheyareeffectivelyastatementofnoconfidenceintheEUETS, becausetheyreplacethecarbonmarketsasthemainforcedrivingthedecarbonisationofelectricity. Emissionsfromcoal-firedpowergenerationmakeupoverathirdofthetotalemissionscoveredbythe EUETS.Equally,sinceinvestmentincoal-firedpowergenerationistheformofinvestmentwiththe highestcarbonintensitycoveredbytheETS,governingnewcoalbyanEPSsendsastrongsignalthat theETSwillnotbeexpectedtoplayanysignificantroleinshapinginvestment. However,theforceoftheseargumentsdependsontheviewonetakesontheprospectsfortheEU ETStobeaneffectivedriveroflow-carboninvestmentinthefuture.Somecommentatorsbelievethat theEUETShasbecomeanendinitself,ratherthanbeingthemeanstoanend,andthatthe emphasisshouldshifttoothermechanismsfordeliveringemissionsreductions.Indeed,thewhole pointofconsideringfurthermeasuresattheUKlevelisbecauseofconcernsthattheEUETSisnot goingtobeeffectiveindeliveringemissionsreductionssufficientfortheClimateChangeBilltargets.

Summary Newcoalinvestmentcreatesariskthatthe2020ClimateChangeBilltargetsmaynotbeachievable withoutthepurchasingofalargeamountofcreditsfromabroad.Newcoalinvestmentwithoutcarbon capturewouldalsoseriouslyunderminetheUK’scredibilityasaclimateleaderinabroadersense. CriticsoftheEUETSarguethatitisfailingtopreventnewcoalbuild,toprovideassurancethatthe ClimateChangeBilltargetscanbemetmainlythroughdomesticactivity,andthattheUK’scredibility onclimateisatrisk.Thisisthebasisfornewandmoredirectmeasures,suchasanemission performancestandard.

55

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Amajorchallengeforaplant-levelemissionsperformancestandardisthatalthoughitoffersclarity,it isneverthelessopentotheproblemsofcredibilitythatfaceanyproposalthatmayinvolvehigher costsorgassecurityofsupplyproblems,especiallyinthelongerterm.Thesearediscussedinmore detailinChapter9. However,theEPSapproachdoesalsocutacrosstheEUemissionstradingscheme(intowhichtheUK andsomeothermemberstateshaveputconsiderablepoliticalinvestment)incertainways.Thusthe EPSproposaldrawstheresponsethattheyareincompatiblewiththemarketapproach,thatthey moveemissionsaroundwithintheEUratherthanreducingthem,and,mostimportantly,thatthey underminetheEUETSpolitically,justatthetimethatitscredibilityisbeginningtobeestablished.In turn,thisresponseismetwiththeargumentthat,sincetheEUETSisnotdeliveringonshaping investment,sotheuseofmoreeffectivemeasuresshouldnotbesacrificedontheEUETSaltar. OneclearconclusionthatcanbedrawnfromthisdebateisthattheEUETS–anddifferingviewsofit –lieatitsheart.TheeventualrolethattheEUETScomestoplayinshapinginvestmentcannotbe predictedinanysimplesense,sinceitwillbetheoutcomeofcomplexpoliticalprocesses. However,asecondconclusionthatcanbereachedisthattheoneissuethatbothsidesinthedebate agreeonisthatconfidenceintheEUETSisstillnotfullyestablished.Thislackoffullcredibilityinthe EUETSisimportantnotonlyfortheUKdebate,butalsoattheEuropeanlevel.Thewaythatit influencesinvestmentdecisionspointstoafurtherandseparaterationaleforadditionalpolicy interventionsoncoal.Thisisexploredinthenextchapter.

56

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

8.AwiderperspectiveoncoalandtheEUemissionstradingscheme TheexaminationoftheUKdebateoncoalinChapter7madeclearthattheEUemissionstrading schemeliesattheheartofdisputesaboutwhatshouldbedone.Inthischapter,welookatcoaland theEUETSinadifferentcontext–thatofthewholeoftheEU,ratherthantheUKalone. Thischangeofperspectiveleadstoadifferentwayofframingtheproblem,andtotheconclusionthat aregulatoryinterventiontolimitnewcoalinvestmentwillstrengthen thecredibilityoftheEUETS,not weakenit.

TheEUETSasabridgetoaglobaldeal AstartingpointistoconsiderwhytheEUETSisgivensuchacentralplaceinUKGovernment thinking.Asdiscussedinthepreviouschapter,itispartlybecausetheEUETS,asacarbonmarket,fits withtheliberalisedenergymarketintheUK. However,theGovernment’spositionisthattheEUETSmattersnotjustbecauseofemissions reductionsinEurope,althoughtheseareimportant,butbecauseofitslargerpurposetoprovidea platformfortheEUinglobalclimatenegotiations,andabridgetoglobalcarbonmarkets.Thesewill formanessentialpartofanewinternationaldealtocombatclimatechange. InthewordsofGrubb(2007:4),‘TheEUETSisbackboneofimplementationandcompliance,and focalpointofglobalattention’,beingtheprincipaltoolofEUdecarbonisation,dominating internationalcarbon-relatedfinancialflowstodevelopingcountriessuchasIndiaandChina,and energisinginternationalnegotiations. Clearly,carbonmarketsarenotsufficientontheirowntodeliversuccessfulglobalactiontolimit climatechange.Technologypolicyandahostofotherpolicies,fromregulationtoproviding information,willalsobeneeded(Stern2007).However,itistruethattheETSplaysacentralrolefor Europeinthecurrentinternationalcontext(GibbsandRetallack2006). Againstthisincrediblyimportantambition,theEUETShasgotofftoarockystart.Bycommon consent,Phase1hadvirtuallynoeffectonemissions,letaloneinvestment.Theovergenerous,free allocationsmayhavebeenneededtogetcompaniesonboard,buttheexperienceofPhase1has underminedtheconfidenceofmanyobservers(includingsomeenvironmentalorganisationsthat shouldhavebeensupportersoftheapproach)thattheEUETScaneverbemadetowork. AlsoproblematicisthelinktoCDM/JIcredits.Althoughthelinkallowsthetransferoffinanceto countrieslikeChinaandIndia,demonstratinghowfutureglobalmarketsmightwork,theexistenceof projectsthatdonotguaranteegenuinelyadditionalemissionsreductionshasstrengthenedtheview thattheEUETSisleaky–andthecarbonpriceislower–asaresult.

Uncertainty,credibilityanddiscountingintheEUETS However,theEUETSisevolving.TheproposalsforPhase3areparticularlyimportant,sincethey begintoanswermanyofthecriticismsmadeoftheschemeinPhases1and2,includingtheneedfor acentrallyset,decliningcap,andlimitsontheuseofCDM/JIcredits,aslongastheseproposalsare notdilutedthroughlobbying. Asaresult,independentanalysesagreethatthePhase3proposalsfromtheEuropeanCommission shouldhaveamajorinfluenceoncoalburning,withcoal-firedgenerationdecliningbyover40per centby2020(forexample,Lekanderetal 2008b).Thisisanenormouseffect,quiteunprecedented ontheEuropeanscale. Furthermore,asexplainedinChapter3,analysisofthecarbonprice,takingintobankingofallowances betweenPhases2and3,apriceofaround40/tCO2 shouldalreadybeemerginginthemarket (Lewis2008,LewisandCurien2008).However,carbonpricesare,atthemoment,significantlylower thanthis,intherange20-25/tCO2.Thisisbecausethemarketisdiscountingthecarbonpriceinthe faceofremaininguncertaintiesaboutthefutureoftheEUETS(forexample,Grubb2007,Fankhauser 2008).(SeeWhite2006forananalysisofhowthecarbonmarketsimilarlydiscountedcarbonprices againstuncertaintiesinPhase1oftheEUETS.)

57

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

OneuncertaintyiswhatthefinalagreementontheshapeofPhase3willbe.Whiletheoverallcapwill notchange,viewsdifferbetweenmemberstatesonthelimitsontheuseofCDMcredits,andthe degreeofauctioning.Industrygroupsareactivelylobbyingonthesepoints.Thisuncertaintywillnot beresolveduntiltheEuropeanCouncilandParliamentreachagreement.ThisisexpectedinMarch 2009,althoughitmaybedelayeduntilaftertheCopenhagenmeetingoftheUNFramework ConventiononClimateChangeattheendof2009. However,thereisawidercredibilityquestionrelatingtothecommitmentoftheUSAandChina,as thelargestemitters,toaglobaldeal.19 Ifthisisclear(inearly2010ifthingsgowell),thenthefuture oftheEUETS(and,beyondthat,theglobalcarbonmarket)willbeassured,andthecarbonprice shouldmovetoreflectthat.However,ifaglobaldealinvolvingthemajoremittersisnotforthcoming, thenthefutureoftheEUETSislessclear,sincehowfarmemberstategovernmentswillwantto continueunilateralcarbonpricinginthesecircumstancesisnotknown. AstheSternReviewnotes,uncertaintycreatesalackofcredibility,whichisakeyelementforeffective carbonpolicy(Stern2007).ThecurrentsituationisrecognisedbytheGovernmentinitsrecent consultationdocumentonPhase3oftheEUETS:‘Marketsandinvestorsneedtohaveconfidencein thecontinuedrigouroffuturecapsettingintheEUETSinordertotakelow-carboninvestment decisions(forexampleinvestmentinrenewables)andweneedtolookathowwecanreinforcethat confidence’(Defra2008:22). Uncertaintyleadstodiscountedpricesbecausetradersandcompaniesbelievethatthereisstilla possibilitythattheEUETSmaybenotberigorouslyappliedatsomepointafter2010,and, consequently,thecarbonpriceinthefuturemaygoveryloworfalltozero.Thecurrentprice, therefore,reflectsanadjustmenttotakeaccountofthispossibility. InthetimeframeinwhichseveralcompaniesintheUKareseekingtomakedecisionsonsubstantial newinvestments–thatis,thenextonetotwoyears–theuncertaintiesaboutthefutureoftheEU ETSarenotlikelytoberesolved.However,thisalsoappliesmuchmorewidelyacrosstheEU,with somethingintheregionof140GWofnewcapacityrequiredby2015(RWE2007).

Theriskofhigh-carbonlock-in Whydoesthismatter?Thedangeristhatdifferentchoicesaremadefromthosethatwouldhavebeen madeunderamoreestablishedEUETS;choicesthatdrivealock-intohigher-carbongeneration.The riskofsuchalock-informarketsthatarenotyetwell-establishedenoughtocorrectlyshape investmentishighlightedinfollow-upworktotheSternReview(SternReview2007). Atthelevelofanindividualcompany,regulatoryuncertaintygivesavaluetotheoptionofwaiting untiltheuncertaintyisresolvedbeforemakingadecisiononaninvestment(Blyth2005,Dixitand Pindyck1994).WemightthereforeexpectenergycompaniesacrossEuropetowaitfortheoutcome ofboththeEUenergyandclimatepackage,andthepost-Kyotonegotiations.Pricerisescausedbya tighteningofcapacitymarginsfrom2015wouldnotnecessarilybeabadthing,seenatthelevelof theindividualfirm. However,asBlyth(2005)pointsout,theoptiontowaitismuchlessvaluablewhenthecompanyis partofacompetitivemarket,sinceifacompanydefersinvestmentinafavourablemarket,itrisks losingmarketshare.Thisisaveryrealissueforverticallyintegratedenergycompaniesthatfacelosing asignificantpartoftheirgeneratingcapacityundertheLargeCombustionPlantDirectiveorforother reasons.Itisalsothereasonwhysomeenergycompaniesaresokeentoinvestoverthenextfew yearseveninaclimateofgreatuncertainty. Butalthoughtheymaynotwanttowaittomakeinvestments,uncertaintywillstillmakeenergy companiesdiscountfuturecarbonprices,whichiswhatinturnwilldeterminewhetherornottheywill buildnewcoalplants.Effectively,uncertaintyaboutthefutureofthecarbonmarketmakesbuilding coalplantslessrisky.

19.IamgratefultoTimPykeforpointingoutthisaspectofuncertaintyabouttheEUETS.

58

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

WiththecurrentuncertaintiesaboutthefutureoftheEUETS,asubstantialnumberofnewcoal plantsmaybestartedinthenexttwotothreeyears.Itwillbeverycostlyandpoliticallydifficultto reverseinvestmentdecisionsonceconstructionhasstarted.AsnotedinChapter2,in2007therewere proposalsfor64GWofnewcoalandlignitepowerstations.Oncebuilt,thesenewcoal-firedpower stationswillhaveanoperationallifeof40yearsormore. ThemostfrequentlyexpressedconcernaboutthissituationintheUKcontextisthat,ifCCSturnsout tobeunworkable,orveryexpensive,thentheUKwillbelockedintocoalburningto2050orbeyond. However,ifthisisthecase,afewcoal-firedpowerstationsintheUKwillbeminorproblem,compared withthescaleofthecoalprobleminChina,forexample. AmoreimportantproblemistheimplicationfortheETSitself.Oncenewcoalplantsarebuilt,plant operatorswillwanttorunthenewplantsatbaseloadoverthisperiodtomaximisethereturnon capital.Ifalotofnewcoalplantsarebuilt,then,comparedwithasituationinwhichlesscarbonintensivegeneratingcapacityisbuilt(saygas),emissionswillbehigherfromaround2015onwards (giventhefive-tosix-yearbuildtimeforcoalplants).Thiswilltendtobethecase,especiallyin circumstanceswherenewcoaldoesnotdisplaceold,but,rather,addstoit;forexample,ifgasprices arerelativelyhigh(seeTable5.2above). Thescaleoftheproblemcanbeseenbyconsideringtheproposalsfornewcoal-andlignite-fired powerstations.RWE(2007)estimatesthatabout25GWofnewcoalandligniteplantswillbebuiltby 2012.Table2.2,takentogetherwithUKproposals,impliesaround75GWofnewcoal-firedpower stationsarebeingconsideredacrosstheEUoveralongertimescale.Comparethesescenarioswith LewisandCurien’spredictionthat60GWofnew gas-firedcapacitywillbeneededforfuel-switching awayfromcoaltomeettheproposedPhase3cap(LewisandCurien2008). If75GWofnewcoalandlignitepowerstationsweretobebuiltandrunatbaseload,theywouldemit morethan200MtCO2 morethananequivalentamountofgas-firedcapacityperyear.For comparison,underthebasicPhase3proposals,thetargetforreductionsinannualemissionsby2020 is254MtCO2e.Inotherwords,ifallnewEUcoalproposalsweretoberealised,thiswouldcomeclose todoublingtheemissionsreductionsrequirementinPhase3.Sincepowersectoremissionsmakeup abouttwo-thirdsofthosecoveredbytheETS,thiswouldbeimpossibletoachieve.Whilenotallthe plantslistedinTable2.2arelikelytobebuilt,thedrivertoreplaceclosingcoalpowerstationsand maintainadiverseportfolioisaverystrongone,andmanymaybebuilt. AlargeamountofnewEuropeancoalbuild,combinedwithhighgasprices,willputhugeupward pressureonthecarbonpriceinthelatterpartofPhase3.Withahighdemandforcarbonallowances becauseofalotofcoalburn,carboncapturethenbecomesacriticaltechnologyforPhase3,because itistheonlywayinwhichlargeamountsofcoalcanbemadeconsistentwiththecap.Itispossible thatupto12demonstrationplantsmaybeoperatingintheEUtowards2020attheendofPhase3, butthesewouldnotbeoperatingcommercially. AnalysisbyDeutscheBankimpliesthateveniftheETScarbonmarketwereoperatingwithfull credibility,thecarbonpricewillneedtorisetothelevelneededtomakecarboncaptureandstorage commerciallycompetitive(LewisandCurien2008).Whilethiscouldbenohigherthan40intoday’s pricesinthe2020s,intheperiod2015-2020itislikelytobesignificantlyhigherthanthis,sincethe technologywillonlyjusthavebeendemonstratedatscale.Themorenewcoalplantsarebuilt,the morewillhavetobefittedwithcarboncapturetoavoidabreachingofthecap.Thusaconsequence ofbuildingalotofnewcoalplantsnowmaybetoacceleratethedeploymentofCCSacrosstheEU. Buttheconsequencesofthiswillbefeltintheelectricityprice.CoalwithoutCCSremainscheaper thangasasawayofproducingelectricity,butcoalwithCCSislikelytobemuchmoreexpensive.As canbeseenfromFigure6.1above,thepriceofelectricityfromcoalwithCCScouldeasilybedouble thatfromcoalwithoutCCS.Intheearlystagesofthetechnology,thepricedifferentialcouldbeeven more.Withalargeamountofnewcoalbuild,ifelectricitypriceswillrisetopoliticallyunsustainable levels,theconsequencewillbeabreachingofthecapandacollapseofthescheme. Theother,quitelikely,possibilityissimplythatCCSonalargescaleisnotfeasiblebeforetheendof Phase3,inwhichcasethecapwillbebreachedinanyevent.Someofthoseworkingdirectlyonthe

59

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

developmentofCCSwithintheenergyindustrytaketheviewthatwidespreaddeploymentwillnotbe possibleuntilthelaterhalfofthe2020s. Thedynamicsofinvestmentandexpectationsalsosuggestthatthecurrentsituationisunstableand mayleadtoarushofnewcoalinvestment.Thisisbecausethemorethatothercompaniesinvestin newcoalplants,thelowerthecredibilityofthePhase3targets,andsothemorelikelyitisforeach companytoseektorealiseanycoalplansitmayhave. ThisisanentirelynewchallengefortheEUETS,sincethemajorissuesofarhasbeentheopposite problem:alackofscarcityinthemarket.However,thecombinationofatighter,decliningcapandlots ofnewcoalplantscoulddramaticallyreversethispicture. Thus,attheheartoftheproblemisthedangerofaself-fulfillingprophecy–allowingalargenumber ofnewcoal-firedpowerstationstobebuiltatthisstage,beforethecredibilityoftheEUETSisfully established,willactuallyweakenitscredibilityfurther,byintroducingnewuncertaintiesaboutwhat willhappenbeyond2015. BeyondtheseimpactsontheEUETSitself,theprospectofalarge,newwaveofcoalplants underminesthewiderimageoftheEUasthekeyleaderonglobalclimatechange. Inthesecircumstancesaninterventiontostrengthenthemarketmakessense.AsBlyth(2005:4) pointsout,‘Althoughriskingeneraldoesnotrequirepolicyintervention,apossibleexceptionisrisks createdbygovernmentpolicyitself.’

AEuropeanCarbonBank? Theconventionalapproachtothecredibilityproblemistodelegatepowersovercontrolofamarketto anindependentagency(Helmetal 2003).Inthemonetarypolicyfield,thistakestheformofgiving thepowertosetinterestratestoanindependentcentralbank.Theideaisthatsuchanagencyis insulatedfromthepoliticalpressuresthatbearongovernments,andisthereforeabletotaketheright decisionsbasedonthelong-termobjectivesithasbeenset. ConcernedtobolsterconfidenceintheEUETS,PrimeMinisterGordonBrownfloatedtheideaofan independentEuropeanCarbonBankinFebruarythisyear.AstheGovernment’srecentconsultation paperontheEUETSputsit: ‘TheCommission’sproposalsforarevisedEUETStakeabigstepintheright direction,byrecommendingacleartrajectoryforfuturecaps.TheGovernment wantstoconsiderhowgivingresponsibilitytoanindependentinstitution couldunderpinthatconfidence,andremovetheriskofshort-termpolitical pressuresinterferingwiththelong-termcommitmenttoalow-carbonfuture.’ (Defra2008:22) Inthelongerterm,suchaproposalmakessenseasameansofstrengtheningconfidenceinthe market.However,theUKproposalhasnotbeentakenupbytheCommissionatthispoint. Thereisalsothequestionofhowsuchaninstitutionwouldacttodealwiththedangeroflock-into high-carbonelectricitygenerationthroughawaveofnewcoalinvestmentinthenextthreeyears. TheexistenceoftheBankmightgiveinvestorssomegreaterconfidencethatthecapmightnotslipin thefaceofveryhighprices.However,ifactorsconcludethatalotofnewcoalbuildproducesa significantriskthatthecapcannotbeattained,thenthecreationofanewinstitutionwouldnot,on itsown,preventacollapseincredibilityofthemarket.

Afloorpriceforcarbon? Anotherapproachtouncertaintyoralackofcredibilityinpollutionmarkets,exploredintheStern Reviewandelsewhere(forexample,White2006),isfortheGovernmenttoprovideafloortothe price.Thiscouldbeachievedviaalevyoncarbonemissions,iftheEUETSpricefellbelowthefloor,or bytheGovernmentguaranteeingtobuycreditsatthatprice. AvariantwouldbefortheGovernmenttooffera‘contractfordifference’onthecarbonprice.This

60

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

wouldmeanthatifthepriceofcarbonintheEUETSfellbelowacertainlevel,theGovernmentwould makeuptheshortfall,butifitroseabovethatlevel,companieswouldhavetopaythedifferenceto Government.Thisistheapproach,forexample,currentlyproposedforfixingapriceofcarbonasa formofsupportintheUKCCSdemonstrationcompetition(BERR2007d). Oneproblemwiththisapproachisthescaleofthegapbetweenthecurrentcarbonpriceinthe marketandestimatesofthepricethatwouldbeobtainedinafullycrediblemarket.At15-20/tCO2, thisgapwouldinvolveamassivepublicfinancialliabilityonanyapproachthatinvolvedmemberstate governmentsbuyingcreditsatthefloorprice. Alevyoncarbonallowancesatthepointofpurchaseprovidesanalternativeapproach.However,if thelackoffullcredibilityinthemarketisduetouncertaintyaboutwhathappensafter2011,then thisuncertaintyalsoappliestothelevyitself.Thereiseveryreasontoextendtheuncertaintyabout futurecarbonpolicytothefutureofsuchalevy,sincememberstatecommitmenttothelevywould surelybequestionableifaglobaldealwasnotforthcoming.AstheSternReviewnotes,‘peoplewould …havetobelievethat[theflooritself]willnotbechanged’(Stern2007:330). Withoutfullcredibility,itislikelythatmarketactorswilladjusttheunderlyingpricesothatthenew priceincludingthelevyreflectsthis.Forexample,ifthecurrentcarbonpriceis25/tCO2,andalevy of15/tCO2 isintroduced,theunderlyingpricewillfallto10/tCO2 tooffsetthelevy. Overall,whileafloormechanismmaycrediblyworktostabilisecarbonpricesatalevelwithinthe rangeinwhichtheyarealreadyfluctuating,ormovethemslightlyhigher,itisalessattractiveoption forinducingamajorshifttoanewlevel.

Apauseininvestmentinnewcoal? Insuchcircumstances,thereisastrongcaseforsomeformoftemporarymeasurerulingoutnew investmentoncoal-firedpowerstationsacrossEurope,tosupporttheEUETSthroughaninitial periodwhilecredibilityisnotfullyestablished.Ifaglobalagreementisreached,andthefutureofthe EUETSassured,thenthemeasurecouldbeended.Inacontextofconsiderableuncertaintyfor investorsinthemediumterm,theaimwouldbetoreduceuncertaintyaboutdecisionsthathavetobe takenintheshortterm. Giventhetimetableforinternationalnegotiations,itwouldmakesenseforsuchaninvestmentpause torunatleastuntilearly-to-mid2010andpossiblylater.Marketswillbelookingforbankable commitmentstotheexpansionandintegrationofcarbonmarketsindevelopedcountries(especially theUSA),whichareunlikelytobeinplaceintermsofaformalagreementuntiltheConferenceofthe PartiesinCopenhagen,dueinlate2009.However,giventhetimingoftheUSelections,itisalso possiblethatthiswillbepushedbackuntilearly2010.Marketactorswillalsowanttoobservehow anynewagreementisreceivedbypublicopinioninlargecountriesliketheUSA. However,tofunctionasabridgetoamoreeffectiveETS,suchafreezeshouldbetime-limited. Otherwise,liketheemissionsperformancestandard,itwilleffectivelybeareplacementfortheETS.A time-limitedandrelativelyshortfreezewillalsosufferalotlessfromcredibilityproblems. Oneimportanteffectofatemporarymoratoriumonthistimetableisthatitwouldpushbackthe possibilityofanynewcoal-firedpowerstationscomingonlinetoaround2016-17attheearliest, giventypicalbuildtimes.WhileseveralEUcountries,includingGermany,theCzechRepublic,Hungary andPoland,facetheneedforsomenewgenerationcapacityby2015(RWE2007),thisissueis probablythemostpressingfortheUK,becauseofthephaseoutofexistingcoalplantsunderthe LargePlantCombustionPlantDirective(LCPD). TheLCPDwillmeanthatsome12GWofoldcoalplantswillhavetobeclosedbyJanuary2016.This situation,togetherwiththeclosureofMagnoxnuclearreactors,ispresentedbysomeenergy companiesasmeaningthattheUKelectricitysystemfacesa‘cliffedge’ingeneratingcapacityat somepointbetween2012and2015. However,theseanalysestendtoplaydowntheconsiderableamountsofnewgas-firedcapacityinthe pipeline,alongwithincreasingamountsofoffshorewind.In2007,4.5GWofnewgascapacitywas

61

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

neartoorunderconstruction,andanother9.5isintheformalplanningprocess.Accordingtothe Government’slatestforecast,whichexcludesanypotentialexpandedrenewablesinvestmentor furthergas-firedproposals,theeffectivecapacitymargin20 willonlyfallbelowthelevelitwasin 2005/06(5percent)byaround2017or2018(BERR2007c). Inreality,andasdiscussedinChapter2above,the‘cliff-edge’problemappliesmuchmoreto individualcompaniesintheUK,ratherthantothecountryortheEUasawhole.Inparticular,RWE willloseall,andE.ONalmostall,theircoalcapacity,andalargechunkoftheirtotalcorporate generatingcapacity,by2015,becausetheyconsistofcoal-firedplantsoptedoutundertheLCPD. ScottishPowerwillalsolosearound1GWofcapacity.Withamoratoriumonnewcoalinplaceuntil early-to-mid2010,thesecompaniesfaceachoicebetweeninvestinginnewgascapacity,andwaiting toseeiftheystillwanttobuildnewcoalfrom2010,withthelikelihoodthattheywillhavetorelyon independentpowerproducersinthewholesaleelectricitymarketforabriefperiodaround2015-2017 iftheychoosethelatteroption. Theotherquestionishowatemporarymoratoriumwouldworkinpractice.IntheUK,thereisa precedentforamoratoriumonaparticularfuelwithintheenergysector,ironicallyoneintendedto protectthecoalindustry.InOctober1998,PeterMandelson,thethenSecretaryofStateforTradeand Industry,introducedatemporarybanonnewgaspowerplants(Helm2003).Themoratoriumwas liftedinNovember2000. ThegasmoratoriumworkedinpracticesimplybytheGovernmentwithholdinglicencesfornewpower plants.Undertheverybroadpowersgoverningpermissiontobuildnewpowerstationsgrantedtothe SecretaryofStateundersection36ofthe1989ElectricityAct,atemporarymoratoriumonnewcoal plantscouldbeintroducedwithoutnewlegislation.

UKorEUaction? IfthebasisforalimitonnewcoalbuildistosupporttheEUETSthroughaperiodinwhichcredibility isnotfullyestablished,thenitmakessensetodothisatanEU-widelevel.Afurtheradvantageof actingattheEU-widelevelisthatthisapproachallowsaburden-sharingofanyproblemsarisingfrom highercostsofpowerthatmightresultfromrulingoutcoal.Ifamoratoriumisappliedwithinanyone country,thenallthecostsarebornebyasinglecountry,whichwouldposeintra-EUcompetitiveness problemsforsomeindustries.Theevidenceisthatintra-EUcompetitivenessproblemsfromhigher energypricesaregreaterthancompetitivenessproblemsbetweentheEUandtherestoftheworld (Satoetal 2007). However,whiletheUKGovernmentcouldintroduceanational-levelmoratoriumquickly,actionatthe EUlevelmaybemoredifficultpolitically.IfEU-levelactionisnotpoliticallyfeasible,isitstillworthit fortheUKtoactunilaterally? AtemporarybanonnewcoalbuildintheUKalonewillhavemuchlessofanimpactonexpectations aboutthefutureoftheETSthanactionattheEUlevel.21 SuchactionwouldalsomeantheUK exposingitselfunilaterallytocostandcompetitivenessproblems. Atthesametime,newcoalbuildplansintheUKarethesecondhighestintheEU,behindGermany. Indeed,ifabilateralagreementcouldbereachedbetweenGermanyandtheUKtointroducean investmentpauseoncoal,thiswouldcoveraroundtwothirdsofnewbuildplansinEurope,andwould haveamajorimpactontheETScredibilityproblem.ItwouldthereforeperhapsbebestfortheUKto useaproposalforatemporarymoratoriumoncoalasawaytoengageothermemberstates (especiallyGermany)ontheissue.

20.Theexcessofelectricitysupplyoverpeakdemand,adjustedtotakeaccountofthefactthat generatingplantsarenotavailableallthetime. 21.Itisinterestingtonotethat,sincetheobjectiveoflimitingnewcoalbuildwouldbetoeaseupward pressureontheEU-widecap,the‘problem’thatthismaycreate‘hotair’elsewhere,seenfromwithinthe contextoftheUKdebate,turnsouttobepreciselythepointofthemeasure,whenseeninthewider contextoftheEUETSlock-inproblem.

62

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Summary ThepaceofnewinvestmentinpowergenerationacrosstheEUisrunningaheadoftheestablishment offullcredibilityintheEUETS,andthereisadangerthatanewwaveofcoal-firedpowerstations willfurtherundermineconfidenceinthefutureofthescheme,giventhetimetableforCCS. Lock-intoahigh-carbonpowersystem,withconsequentpressuresontheEUETScap(andwiderEU emissionsreductionstargets),isarealdanger.Undersuchcircumstances,itwillbehardforEuropeto continueitsleadingroleinmovementtowardsapost-2012internationalagreement. Itseemscounterintuitivethatanon-marketintervention,suchasamoratoriumonnewcoalbuild, couldstrengthenamarketmechanismliketheEUETS.However,itispreciselybecausethisisadirect formofregulation,whoseroleisrelativelyshort-lived,thatitcanplaysucharole.

63

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

9.Policycredibility:addressingconcernsaboutcost,security ofsupplyandplanning InChapters7and8,variouspolicyoptionsforpreventinginvestmentinnewcoal-firedpowerstations intheUKorlimitingemissionsfromcoal-firedpowergenerationwerediscussed. Suchmeasuresareaimedatpoliticalobjectives–hittingtheClimateChangeBilltargets,andavoiding high-carbonlock-inandreducedcredibilityoftheEUETS–thatare,inturn,partofaglobaleffortto mitigatedangerousclimatechange. Theultimateenvironmentalimperativeisveryclear,andfromthisflowsapoliticalimperativeforthe UKandEuropetolimitnewcoalinvestmentsandreduceemissions,ifwewanttoplayaseriousrolein helpingtotackleclimatechangeatagloballevel.However,reducingemissionsisnottheonly objectiveofenergypolicy,and,moreimportantly,isnottheonlyconcernofthewidersociety, includingvoters,consumersandbusinesses.Securityofsupplyandthecostofelectricitymatter,too, especiallytocertainpoliticallysensitivegroupssuchasthefuelpoor,andenergy-intensiveindustries.22 Thereisalsoasetofissuestodowithplanningpermission,andperceptionsabouttheeffectof energyinfrastructureonlandscapeandlocalqualityoflife,thatarepoliticallyimportant. Thus,whileenvironmentalorganisationswanttoeliminaterisksofhighemissionsfromcoal,others placeagreaterfocusonrisksthatfuelsuppliesmaybeinterrupted,thatcostswillriseexcessively,or thatthelocalenvironmentwillsuffer.Thecurrentdebateaboutcoalcanbeseenintermsofwhere differentpartieswanttherisktobedistributed. ThepoliticalimportanceoftheissuesofsecurityofsupplyandcostfortheGovernmentshouldnotbe underestimated.Retailelectricitypriceshaverisentwiceduetowintergasmarketproblemsinthelast threeyears.Thesepricehikesareunpopularwithconsumers(whoare,ofcourse,alsovoters),and withbusinesses.Inthewinterof2006,highgaspricesledtoproductionatseveralpapermills, glassworksandchemicalplantsbeinginterrupted(CBI2007).Theyhavealsosharplyincreasedthe numbersofhouseholdsestimatedtobelivinginfuelpoverty(see,forexample,HMGovernment 2007). Inalonger-termcontextofrisingoilandgasprices,thereisalsosomenervousnessinpartsof governmentaboutaddingfurthertoelectricitycoststhroughambitiousEUETSandrenewables policies.Theexpansionofwindenergyhasalsofacedconsiderableoppositionthroughtheplanning system. Coalisseenbybothgovernmentandenergycompaniesashelpingwiththeseissues,andthecasefor newcoalisoftenmadeintheseterms.Thus,proponentsofallpoliciesthatbanorlimitcoalnewbuild orgeneration–includingastrongEUETSpolicy–havetoengagewiththeseissuesofcost,security ofsupplyandplanning.Thischapteraddressestheseissues.

Thepolicycredibilityproblem Theexistenceofmultiplepolicyobjectivesandunderlyingsocietalconcernsmeansthat,althoughthe Governmentisbeginningtosetframeworksforemissionsreductionsandthepromotionofrenewable power,itscommitmentcansufferfromacredibility problem,whichwillhaveanimportantimpacton thesuccessorfailureofthoseframeworks(Helmetal 2003).

22.TheotherpoliticalissueassociatedwithcoalisthefutureofminingintheUK.TheBritishcoalmining industryisashadowofitsformerself,withonlyaround8,000peoplenowemployedindeep-mineand open-castproduction.TheminingunionsandtheTUChaveseriousconcernsaboutthesurvivalofthe industry,andUKcoalasastrategicnationalasset(althoughitshouldbenotedthattheTUCiscommitted toafuturefortheuseofcoalinelectricitygenerationonlyonthebasisofcarboncaptureandstorage) (CleanCoalTaskGroup2006).

64

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Suchpoliciesaredesignedtoshiftinvestmentfromconventional,high-carbontechnologies(for example,coal)intolower-carbontechnologies(forexample,gasorwind).Ifgovernmentscared onlyaboutreducingemissions,thencommitmenttosuchpolicieswouldbequitecredible.Butin thecaseoftheUK,theGovernmentalsohassecurityofsupplyandlowpricesaspartofitsgoal. Behindtheseobjectivesliesthepoliticalincentiveofre-election,sincenogovernmentthatlets thelightsgoout,orenergybillstoriseexcessively,islikelytobere-elected. Itisthisfact,thatGovernmenthasanincentivetorenegeoncommitmentstoreduceemissions, thatmaymakecompaniesbackawayfrominvestmentsinlow-carbontechnologiesthatthey wouldotherwisebewillingtomake.Theresponsetopoliciesbycompaniesintermsofactual investmentswilldependonwhethertheythinkgovernmentswillstandbytheirpromises.If companiesmakelong-livedinvestmentsonthebasisofenvironmentallyambitiouspoliciesthat turnouttobepoliticallyunsustainable,andaresubsequentlyreversed,theyriskendingupwith strandedassetsontheirhands.Thislackofcredibilitycanseriouslyunderminetheinvestment response. Thus,whilecompaniesprefercertaintyandclarityinpolicy,theywillalwaysassessclear statementsofintentwithinthiswidercontextofcredibility.Atthemoment,someofthosein energycompaniesmakinginvestmentdecisionsareexpressingconsiderableuncertaintyabouthow societywantstobalanceenvironment,securityandaffordability.Inthewordsofonesenior strategymanager:‘Arepeoplereallypreparedtopaytherealcostsoftacklingclimatechange?Is thereanyhardevidencethattheyare?’Thelowtake-upofgreentariffs,andtheoppositionto planningconsentsforonshorewindiscitedasevidenceofalackofwillingnesstoembracestrong climatepolicy. IfcompaniesdoubtthattheGovernmentcansustainastrongcarbonpolicyandimposethe proposedECrenewabletargets,andbelievethattheClimateChangeBilltargetswillbemet mainlybypurchaseofcreditsfromabroad,ratherthanthroughdomesticeffort,thentheyare muchlesslikelytoinvestheavilyinrenewables,andmorelikelytotaketheriskofbuildingnew coalpowerstations. Thecredibilityissueappliesequallytomeasuressuchasadirectmoratoriumonnewcoalbuild,a plant-levelemissionsperformancestandard,oralimitoncoalemissions.Whilethesewould preventinvestmentinnewcoalintheshortterm,iftheyarenotcrediblethencompanieswilltake theviewthattheywillbeoverturnedatsomepoint,andkeepcoalplansreadyathandforrapid deploymentinthatevent. Belowwenotethetwomainissuesunderlyingthepolicycredibilityproblem:securityofsupply andcost.

Securityofsupply Notethatwereferheretothesecurityofsupplyofthefuelsusedtogenerateelectricity,notthe functioningofthetransmissionanddistributionsystem(whichwerefertoas‘resilience’). MaintainingreliableenergysuppliesisoneoftheobjectivesoftheGovernment’senergypolicy. Withinalonger-termgoaltoconserveanddecarboniseenergy,thisobjectivemakessense,since moderneconomiesandsocietiesareheavilyenergy-dependent,andlossofenergysuppliescanbe highlydisruptive. Sincestoringelectricityiscurrentlyexpensive,withlimitedoptions,securesuppliesoffuelfor generatingelectricityareamajorconcern.Whenphysicalsuppliesoffuelarethreatened,even indirectly,coststendtorise,leadingtohigherpricesforindustryandcustomers.TheCBI,for example,saysthatitsmembersareconcernedaboutsecurityofsupply. Thisconcernappliestoothercountriesaswell.Forexample,whileNewZealandiscurrently introducingamoratoriumonnewfossilfuelbaseloadgeneration,thelegislationdoesprovide exemptionsforcircumstancesinwhichthereareconcernsoversecurityofsupply(Ministryof EconomicDevelopment2007).

65

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Concernsovergas ThemainsecurityoffuelsupplyconcernsinthecontextoftheUKrelatetonaturalgas.Britainhas beenlargelyself-sufficientinnaturalgassincethelate1970s,butthissituationissettochange.By 2020,wecoulddependonimportsfor80-90percentofourgasuse(Bird2007).Thisdevelopment hascoincidedwithasharpriseinwholesalegasprices,especiallycomparedwithcoal(seeFigure2.1 above). Thetwotrendsarerelated,inthatashiftfromself-reliancetoimportswillincreasinglyexposetheUK topricerisks(andpossiblyevenphysicalsupplyrisks)associatedwiththeEuropeanregionalgas market(Helm2007,Stern2006).AlthoughtheUKissuppliedbyanumberofcountries,including Norwayand,increasingly,Algeria,thesecountrieswillsellgasatpricessetbytheconditionsof exportsfromRussia.Anexpansionofliquefiednaturalgas(LNG)supplywillonlypartiallyoffsetthis dominance(Helm2007). Russiahaspursuedastrategyofincreasingcontroloverpipelinesto,andincreasinglywithin,Europe, maintainingcloselinkswithothersuppliers,andattemptingtoblockthedevelopmentofalternative supplies,forexamplefromtheCaucasus.Atthesametime,theUKisattheendofphysicalpipelines thatrunthroughcontinentalEurope,andwhicharecontrolledbysupplycompaniesthathavean interestinprioritisingtheirownphysicalsecurityofsupplyoverthatofUKcompanies.Unlikemany continentalcompanies(especiallyinGermany),whichhavenegotiatedlong-termcontractswith RussiansupplierGazprom,UKcompaniestendtorelyheavilyonspotmarketsforimports,leadingto greaterpriceinstability. Therearetwoparticularconcernsinthissituation.Thefirstisthethreatthatgaspressuremaybelost, aswasthecaseinpartsofEuropeduringadisputebetweenRussiaandUkraineinJanuary2006.In thisevent,industrialuserswouldbeaskedtocutusefirst,toprotectdomesticcustomers,butthe politicaldamagecouldwellexceedtheeconomiccostoflostproduction.Thesecondconcernisthat gaspricescansoarifsuchaneventiseventhreatened,letaloneifithappens,andelectricityprices follow. Bycomparisonwithgas,coalisabundantandsuppliedcompetitivelyinaglobalmarket.Currentlythat marketistight,but,inthelongerrun,theprospectsarethatthepriceofcoalwillbelowerandmore stablethanthatofgas.Inaddition,while70percentofdemandismetfromimports,theUKalsohas largecoalreserves(Bird2007). Coalcapacitycanhelpmoretoeaseanyshort-termphysicalinterruptions toUKgassupplythatmight arise.Whileanumberofgas-firedplantsintheUKdohaveoil-firedbackupavailable,beingableto bringinmorecoaltoreplacegasovershortperiodsgivesthesystemstrongerresilience.Switching fuelinpowergenerationisalsothemostcost-effectivewayofavoidinggasoutages,accordingto workcommissionedbytheGovernmentfortheEnergyWhitePaper(Oxera2007). Coalis,therefore,seenasabufferagainstrisksassociatedwithgassupplies.Forexample,theEnergy MinisterMalcolmWicksrecentlyarguedtheneedtoworktoensure:‘thatcoal…canmaintainits presentnicheinUKenergyportfolio,producingreliable,affordablepower,andsohelpingtodeliver securityofsupplythroughdiversityofsupply’(Wicks2008). Giventhevalueofcoal-firedcapacityinthiscontext,thecredibilityofanyproposaltolimittheroleof coalwillbeincreasedbypoliciesthatreducethelikelihoodofphysicalinterruptionstogassupply. Increasedefficiencyofgasuse TheplentifulavailabilityofnaturalgasfromtheNorthSeahasallowedtheUKtobelazyinits thinkingabouttheresource.OntheContinent,wherecountrieshavebeenreliantonimportsfrom othercountriesforalongtime,costandsecurityofsupplyconcernshavedriveninvestmentinamuch moreefficientuseofgas,includinggreaterstrategicsecuritythanintheUK,andawideruseofCHP incountriessuchasGermany,Holland,DenmarkandFinland.WithNorthSeasuppliesrunningout, theUKneedstocatchup,andstartthinkingaboutgassuppliesinanewway. Powergenerationmakesuponlyabout30percentofnaturalgasuseintheUK.Useofgasforspace

66

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

andwaterheatinginhomesandbusinesses,alongwithindustrialuses,isfarmoreimportant. Improvingenergyefficiencyintheseareaswould,therefore,helptoimprovesecurityofgassupplyby reducingdemand.Itwouldalsosavemoney. Thereareanumberofexistingpoliciesinplaceaimedatachievingsuchobjectives,includingthe CarbonEmissionsReductionTargetforhomesandtheCarbonReductionCommitmentforbusinesses, aswellasbuildingregulationsthatrequiremoreefficientdomesticboilersanddouble-glazing. However,thesemeasureshavesofartendedtoconstraingrowthratherthanleadtomajorreductions indemand,sothereisastrongcaseforfurtheractiononheat. ThewideruseofCHPproduction,whichusesgasmoreefficientlythancentralisedpowerplusboilers, wouldalsoimprovesecurityofsupplyforgasthroughreduceddemand.Forexample,inanapplication ofitsmodeltotheUKinastudyproducedforGreenpeace,theWorldAllianceforDecentralised Energyestimatesthatinvestingheavilyindecentralisedenergycapacitycouldleadtoa14percent fallingasuseby2023,asagainstacentralisednewbuildscenario(WADE2006). However,CHPcurrentlyrepresentslittlemorethansevenpercentofBritain’sgeneratingcapacity(5.5 GW,includingindustrialplants,whichhavethemajorityofcapacity),andgrowthinschemesand capacityisstilllow(BERR2007a).WhilethemarketforCHPinnewdevelopmentsisnowbeginning tobedrivensomewhatbyplanningrules,thescaleofinvestmentsisstillverysmall. Thegapbetweencurrentinvestmentlevelsandaspirationscanbeseenbyconsideringthecaseof London.In2006,GreenpeaceandtheGreaterLondonAuthoritypublishedastudyofthepotentialfor decentralisedenergyinthecapital,basedpartlyonthedensityofcommercialandresidentialheat loads.Thispotentialwasidentifiedasbetween2.5and3.7GWeby2025(GreenpeaceandMayorof London2006).Bycontrast,currentinstalledcapacityofCHPisaround175MWe(MayorofLondon 2004).Achievingthepotentialwouldmeaninstallingaround250-350MWeofCHPcapacityevery yearbetweennowand2025.Totalcapitalcostswouldbeintheregionof£3billionand£4.4billion, implyinganannualinvestmentrequirementoftheorderof£300-440million(MayorofLondon 2006). GreenpeaceandotherorganisationshavecalledformuchwideruseofCHPaspartofadecentralised approachtoenergy(see,forexample,Greenpeace2005).TheexampleofthetownofWoking,Surrey, whereacreativeapproachusingCHPcombinedwithrenewableelectricityinanewbusinessmodel,is frequentlycitedasaninspiration.Therearevariousbarrierstomoreinvestmentincommunity-scale CHP,whichincluderegulatoryburdensonsmallpowerproducers(LCCA2007).However,majorenergy companiesalsotaketheviewthatopportunitiestogetagoodrateofreturnoncapitalincommunityscaleCHParelimited,thatcosts(especiallymanagementoverheadsandcapitalcosts)arehighin relationtorevenuestreams,andthatitisdifficulttopersuadepotentialcommercialcustomersto agreetolong-term(10-15year)contractsforheat,whicharenecessarytorepaytheinvestmenton theheatnetwork. Similarcommercialdifficultiesexistforthecaptureanduseofheatfromlargepowerstations. CurrentlytheGovernmentdoesrequirecompaniesproposinglargethermalplanttoconsider possibilitiesforCHP,andhaspublishedamapofheatloadstohelpthisprocess (www.industrialheatmap.com).E.ON,forexample,saysthatitisexaminingtheoptionsforanewcoalfiredpowerstationatKingsnorthtoserveaheatnetworkintheThamesGateway.Thisideahasalso beenproposedforheatfromanextensionofBarkingpowerstation.However,inpractice,suchheat captureanduseisrareintheUK,onlybeingusedatscalebyConocoforitsrefineryatImminghamon theHumberestuary. Thisismainlybecauselargepowerstationsgenerateanenormousquantityofheatthroughoutthe year,andgeneratingcompaniesconsideritbothdifficultandcostlytoalignmanypotentialusersof thatheatintherightconfigurationandwiththerighttimingtoproduceaviablecommercialdeal.This isdifficultenoughwhenthepotentialcustomersareoneortwolargeindustrialcompanies,but virtuallyimpossiblewherethereareanumberofdevelopersworkingtodifferenttimescales,andwith milesofheatnetworktobeconstructedtoserveresidentialloads.

67

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Whilethemajorenergycompaniesdohavesomeinterestindecentralisedrenewableenergy,suchas biomassCHPandespeciallyinnewdevelopments,itisclearthatonacommercialbasis,thiswill remainanicheactivityforthesecompanies.ThisisdespiteapackageofsupportforCHPofferedby Government,whichincludesmeasuressuchasexemptionfromtheClimateChangeLevyonpower producedbyCHP,andhigherEnhancedCapitalAllowances(BERR2007a)(toqualifyforLevy ExemptionCertificatesandECAs,CHPhastobeof‘goodquality’,inotherwords,highefficiency). Aneffectivepolicytoencouragemorecommunity-scaleCHPislikelytoinvolveagreaterroleforlocal authoritiesinschemes,withanappropriatefinancialandtechnicalsupportpackage.Investmentin CHPforlargepowerplantsmayonlyhappenastheresultoflegalrequirement,ashasbeenthecase inDenmark. Measurestoincreasedomesticgassystemresilience Whilealotofattentionisfocusedonconcernsaboutproblemsarisingfromthesourceofgas(Russia) andtransit(continentalEurope),inrecentyearsmoreseriousthreatstoUKgaspressurehavecome fromincidents–mainlyfires–atfacilitieswithintheUK,includingmostrecentlyatBacton,Norfolk, inFebruary2008.AccordingtoStern: ‘Summarisingthesecurityincidentswhichhaveoccurredoverthepast25 yearsinEurope,therehavenotbeenverymany…[and]…facilityincidents appeartohaveincreasedoverrecentyears.Inparticular,asfarastheUKis concerned,theriskoffacilityincidentsbecameincreasinglyproblematicinthe mid-2000sduetothetightnessofthesupply/demandbalanceandthelack ofstoragecapacity.DespitereferencesbytheEUtoproblemsofimporting gasfrom“regionsthreatenedbyinsecurity”itisdifficulttothinkofany historicalincident[upto2001]involvingpoliticalinstabilitywhichhas preventedgasfrombeingdeliveredtoEurope.’(Stern2006) Cost-effectivemeasurestoincreasetheresilienceoftheUKgassystemwould,therefore,makean importantcontributiontopolicycredibility.Suchmeasureswouldincludeimproveddemand-side managementthroughsmartmetering,butalsoimprovednetworksandstrategicgasstorage(Oxera 2007,Helm2007). TheprivatesectoriscurrentlybuildingnewpipelinesfromNorwegianandDutchgas-fieldsandnew LNGterminals.Therearealsoplanstoincreasegasstoragecapacitytoallowforatleasttwomonths supply(CBI2005).TheEnergyBillcurrentlybeforeParliamentalsocontainsmeasurestofacilitatethe developmentofoffshoregasstorage.AccordingtoarecentspeechbytheSecretaryofStatefor BusinessJohnHutton,between2005and2010,theUKmarketwilldeliveraround£10billioninnew gasimport,storageandpipelinecapacity(Hutton2008b).Asaresult,theGovernment’sassessment ofthegasmarketoutlooktakestheviewthat: ‘Intheshortterm…theUK’sgassupplycapacityappearsrobustagainst mostcrediblescenariosandevents.Forthemediumtolongterm,investments overthenextfiveyearsarecritical;iftheycomeforwardasexpected,the capacitymarginwillbelargeenoughtoprovideabufferagainstmostlarge singleinterruptions.’(BERR2007c) Measurestoimproveregionalmarketconditions Asnotedabove,whiletheUKreceivesgasimportsfromarangeofsources,Russiadeterminesthe priceintheregionalmarket,andhasbeenhighlystrategicinitsdominationofthatmarket.Atthe sametime,theUKisattheendofacontinentaldeliverysystemoverwhichothernationalenergy companieshavecontrol. Thereare,thus,anumberofpolicychangesthattheUKcouldusefullypursueattheEuropeanlevel. Theseinclude(Helm2007):

•PlanningofandinvestmentinEuropeangasnetworks •UnbundlingtocreateaEuropeangasinfrastructure,ratherthanaseriesofnationalones

68

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

•Strategicgasstoragetoprotectagainstgeo-politicalrisk •DevelopingacentralisedEuropeanframeworkforenergynegotiationswithRussia,ratherthana seriesofbilateralrelationships

•EstablishingreciprocitywithGazpromonownershiptoprotectEuropeannetworks •CreatingaEuropeanEnergyAgencytodrivethisagendathrough. Renewables Itisalsoquitewidelyarguedthatsecurityofsupplyconcernscanbeaddressedthroughthegreater useofrenewableenergy.Thisargumentismade,forexample,bytheEuropeanCommission,infavour ofthe2020renewableenergytarget. Aswithcoal,morerenewableenergyattheEUleveloverthelongtermwillhelptoreducedemandfor gasforpowergeneration,andsoshouldbeardownonpricesintheregionalmarket.Unlikecoal, somerenewables(includingwind,theUK’scurrentmainoption)cannotbedispatchedondemand, whichmaylimititsuseinaddressingshort-terminterruptionstothephysicalsupplyofgas.Theother importantissuewithamajorexpansionofrenewablesiscost.Thisisdiscussedbelow.

Cost Whatevertheparticularcombinationofpoliciesadoptedtodecarboniseelectricityandshiftawayfrom theuseofcoal,therewillbeadditionalcostsinvolved.ThisistrueofacarbonpriceintheEUETS,but italsoappliestoarapidandlargeexpansionofrenewableelectricity,grant-supporteddemonstrations ofCCS,andaneffectivesupportpackageforcommunity-scaleCHP. Costsofalternativestocoal Althoughthepriceofcoalhasriseninrecentmonths,thepriceofgasremainsevenhigher,withlittle signofthissituationchanginginthenextfewyears.However,otheralternativestocoalfortheperiod 2015-2020arepotentiallyevenmoreexpensive,inparticularrenewableenergy. Acceleratedrenewablesinvestmenttomeetthe2020targetdiscussedinChapter4willneedeitheran expandedRenewablesObligationorsomenewinstrument(bothenvironmentalorganisationsandthe ConservativePartyhaveproposedfeed-in tariffs23 formicro-renewables,forexample).Bothwill probablybefinancedbyraisingprices.FortheUK,thecheapestandmostabundantrenewablepower sourceiswind,butthisisarelativelymaturetechnology,inwhicheconomiesofscalefromturbine sizeshavenowbeenlargelyrealised.Windpowerisalsosufferingfromrisingmaterialscosts,problems thatmaypersistintothenextdecade(see,forexample,ODE2007).Deploymentsupporttoother technologiescanalsobeexpensive. Risingcostsforwindbecauseofshortagesofmaterialare,ofcourse,sharedbyotherpowersector investments.In2007,RWEreportedthatshortagesofsteel,equipmentshortagesandrising subcontractorcosts,drivenbytheworldwideboominconstruction,havealsopushedupthecostsof buildingnewfossilfuelplantsby15-20percentinthelasttwoyears(RWE2007).Thismeansthat, regardlessofthefuelortypeofgeneration,intheneartermelectricitywillcostmore.Buttheissue hereiswhethertherelativecostsofcoalandrenewables–especiallyoffshorewind–havechanged. Thereisnoevidencethatthisisthecase. Therearealsouncertaintiesaboutthecostsofdealingwiththeintermittencyofelectricityproduced bywind,whichislikelytobethedominantrenewableintheUK.Thereareestimatesofsystem capacityandbalancingcostsforpenetrationofwindofupto20percent,whicharequitesmallat£23/MWh(0.2-0.3p/kWh)(Grossetal 2006).ILEXandStrbac(2002)putthecostperadditionalunit

23.Feed-intariffsareguaranteedratesforelectricityexportedfromagenerationsiteandfedintothe electricitydistributionsystem.The2006ClimateChangeandEnergyActcalledonUKelectricitysupply companiestooffertariffsforgenerationorexportfrommicro-renewables,andseveralnowdoso.

69

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

ofrenewablegenerationat20percentpenetrationsomewhathigher,at£3-9/MWh,risingto£411/MWhat30percentpenetration.Attheupperendoftherangeofestimatesfor30percent penetration,thisimpliesannualisedcostsofaround£1billionayear. InGermany,whichhasseenthelargestexpansionofrenewableenergyinEurope,feespaidto exportersofrenewableelectricityamountedto5.5billionin2006(GermanFederalMinistryforthe Environment2007).Abouthalfofthisgoestowindprojects,and15percenttosolarPVoutput.Of thiscost,justover3billionwaspassedtoelectricityconsumers.Fordomesticcustomers,these passed-oncostsrepresented0.72centsperkWh,orjustunderfourpercentofhouseholdelectricity costs. TheEuropeanCommissionestimatesthatachievingthe2020renewableenergytargetwillcost1318billionayearacrosstheEU.IninitialworkontheUKcommissionedbytheGovernment,Pöyry Energy(2008)estimatesthatthecostwillbeoftheorderof£5-7billionperyear,or£200-300extra onelectricitybills. AnacceleratedandenlargedprogrammeforCCSwouldalsoaddtocosts.AsdiscussedinChapter6, aneffectiveCCSpackagewouldprobablyneedtoinvolvesupportforpre-combustionCCS,inaddition tothecurrentpost-combustiondemonstrationcompetition,whichcouldcostseveralhundredmillion poundsayear.Additionally,therearethecostsofconstructingacarbondioxidetransportation pipelinenetwork.Thiscouldbefinancedthroughprivateinvestment,butcostswouldagainbepassed ontocustomers. CHPisoftenarguedtobeacost-effectivetechnology,withhighercapitalcostsbeingoffsetby savingsonfueluseandavoidedtransmissionanddistributioninvestments.However,costestimates usuallyomitdevelopmentandprojectmanagementcosts,whichcanberelativelyhigh.Asaresult,the majorenergycompaniesregardcommunity-scaleCHPas,atbest,anicheinvestment(seeabove). Aneffectivepackageforcommunity-scaleCHPwould,therefore,probablyneedtoincludeamajor supportprogrammeandfinancingforlocalauthoritiesasleadagentsinpublic-privatepartnerships,as hasbeenthecaseinanumberoftownsandcities,includingWoking,butalsoSouthampton, Aberdeen,Leicester,and,mostrecently,Birmingham.Itisnotcurrentlypossibletosaywhatthecosts ofasupportpackagesufficienttogetinvestmentonascalesignificantenoughtohelpwiththe securityofsupplyofgaswouldbe. Thetotalcostofalloftheseelementswilladdseveralhundredpoundsperyeartoelectricitybills.This orderofmagnitudeiswellwithinrecentrisesinelectricitycostsforconsumersandbusinesses.This underlinesthefactthatthehighcostofgas,drivenbyrecordhighsinoilprices,worksinfavourofall theapproachesoutlinedabove(althoughnotenoughtomakethemcompetitivewithoutsupport). However,ahighcostofgasalsoworksinfavourofcoal,and,althoughcoalpriceshaveriseninrecent months,thestructuralfactorsbehindthoserisesarenotasdeeplyentrenchedasthoseinoilandgas markets. Meetingadditionalcosts CostisaparticularconcernatatimewhenbothconsumersandGovernmentarebearingrelatively highdebtburdens,andconcernsaboutcosthavealreadybeenusedbytheCBIasabasisfor oppositiontotheEC’sclimateandenergypackage(Traynor2008).Thissituationisnotconfinedto theUKorEU.InthecaseofNewZealand,whichisbringinginamoratoriumonnewfossilfuelpower stations,mediacoveragehasfocusedonthelikelycoststobusinessesandhouseholds(Espiner2007). Decarbonisingelectricitythroughsupply-sidemeasureswillinvolveextracosts.Withinthiscontext, thebiggestcredibilityproblemfornewinitiativesinvolvingrenewables,CHPandCCSprobablyliesin theuncertaintyaboutcosts,andaboutthewillingnessofbusinessandvoterstoacceptfurtherrisesin costsoverthemediumterm. Probablythemosteffectivewaytoreducethisuncertainty,and,therefore,thecredibilityofpolicies,is forgovernmenttodevelopauthoritativecostestimates,andexplorethepoliticalacceptabilityof measures,intermsofthebalancebetweencostandemissionsreduction(andotherbenefits).This shouldbedoneasamatterofurgency.

70

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Inaddition,policycredibilitywillbestrengthenedbyemphasisingthattherewillbeeconomicbenefits, whichmeansdevelopingauthoritativeestimatesoftheresultantemploymentandexports. Someorganisationsarguethatadditionalcostsshouldbemetthrough,orsetagainst,revenuesfrom auctionedEUETSallowances.Theseareexpectedtobeoftheorderof50billionacrosstheEUby 2020(EuropeanUnion2008),24 andcouldbe4.5billionayearintheUKaloneinPhase3(Point CarbonAdvisoryServices2008).Althoughthisisunlikelytobeenoughtocoverallthecostsdiscussed above,itcouldmakeaseriouscontribution.Thechallengewiththisapproachisthatmostcosts,in practice,wouldbemetviapricerisestoconsumers,ratherthanthroughpublicspending,soa mechanismwouldhavetobedevelopedtoredistributerevenuetoconsumersinafairandcostefficientway. Afinalpointisthatinadditiontoreducingcarbon,measuressuchasalargeexpansionofrenewables willhaveotherlong-runbenefitsforconsumers,suchasenergyindependence,andprotectionfrom fuelpricevolatility(suchasiscurrentlybeingdrivenbyspeculationinoilmarkets).Itisessentialthat thismessagereachthepublic.

Planning Theexpansionofrenewables,CCSandCHPalsopotentiallyopensupdirectpoliticalrisksfor governmentintheformoflocaloppositiontothesitingofonshoreandoffshorewindfarms,new overheadtransmissionlines,CCSpipelinesandtowncentreCHP. Planninghasbeenthemajorconstraintontheexpansionofwindpower–especiallyonshorewind– intheUKtodate,withanapprovalrateofonly56percentforprojectsinScotlandin2007 (Chamberlain2008).Therecentrejectionofanapplicationtobuilda650MWwindfarmontheisland ofLewisunderlinesthispoint. Althoughitislessobvious,planningmayalsobeanissueforsettingupaCCStransportinfrastructure. Accordingtosomeofthoseinterviewed,suchaninfrastructureprojectwillbeoftheorderof magnitudeofplanningandbuildingthenationalgrid,andtherewillbemajorissuesofhowthe pipelineswillberouted,andhowlocalplanningwillbeobtained. TheGovernmenthasintroducedanewPlanningBilltomakeenergyinvestmentseasiertogetthrough theplanningsystem.However,theBritishWindEnergyAssociationarguesthattheBillwillnothelp windprojectsasmuchasmightbeexpected,becausetheyareeithertoosmalltobecoveredbythe Bill,orareinScotland,wheretheBillwillnotapply.Itestimatesthatonly300MWofthe8GW currentlyheldupintheplanningsystemwouldbefast-trackedundertheBill’sprovisions. Moreover,itisclearthatcompaniesstillhaveconcernsthatthelegislationmaynotbeeffectiveonthe ground,iflocalfeelingisverystrong.Theywillonlybeconvincediftheyseeacoupleofyearsof effectiveimplementation. WhileoffshorewindprojectsoftendofacechallengesfromtheMinistryofDefenceandwildlife charities,itisonshoreprojectsthatfacethestrongestlocalopposition.Onefactorinthisoppositionis thatownershipisusuallydivorcedfromlocation–almostallUKwindfarmsaredevelopedandowned bylargecorporations.ThiscontrastswithGermany,wherethevastmajorityofwindfarmsareowned byfarmersorprivateindividuals,andwhereplanninghasnotbeensuchamajorissue(Szarkaand Blühdorn2006).Encouragingmorelocalownershipofwindfarmscouldhelpincreasethecredibility ofwindexpansion.

24.Note,however,thatamoratoriumonnewcoal,ormeasurestoreduceemissionsfromcoal,wouldalso reducethenumberofallowancesbidfor,andhencetherevenueavailable.

71

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Summary Limitingcoal-firedpowergenerationandinvestmentraisesrealchallengesrelatingtothesecurityof supplyofnaturalgas,costandplanning.Thesechallengesunderminethecredibilityofpolicieswith investors,and,therefore,theeffectivenessofpolicy.However,therearemeasuresthatcanhelp addressthesechallengesandincreasethecredibilityofarangeofpolicies,fromframeworksfor renewableenergythroughtocarbonmarketsandregulatorylimitsonnewcoalbuild. Havingcoal-firedcapacitywillbeeffectiveinhelpingaddresssecurityofsupplyproblems,mainlyin theformofshort-runinterruptionsofphysicalsupply,ratherthanhighprices. Whilesuchepisodesarenotunknown,itisalsoimportanttorememberthattheUKgassystemis fairlyrobust(BERR2007c).GashasplayedasubstantialroleintheUKpowersectorforover15years nowwithoutanylarge-scaleproblems.WhileNorthSeasuppliesarenowbeginningtorunout,which meansthattheUKwillhavetoimportmoregas,mostanalystsnotethatthisdoesnotnecessarily meanthatgassupplywillbecomelesssecure.WhileRussiansupplydominatestheEuropeanmarket, therearestrongincentivesforRussiatomaintainsecuresupplytothatmarket(Stern2006). Themoresignificantissuesarelikelytobedomesticresiliencetoincidentslikefires,andproblems withfreeflowofgasthroughEuropeanpipelines.Bothofthesecanbeaddressedthroughappropriate policies,andmuchhasalreadybeendonetoimprovethesituation.Additionalpoliciestoreduce(orat leastcontain)demandforgaswouldalsobeimportant.Theotherpolicythatcouldbeeffectivein reducinggaspriceswouldbethemajorexpansionofrenewablesenvisagedbytheEuropean Commissioninitsproposalsfor2020targets. However,thispolicy,alongwithastrongEUETSpolicy,anexpandeddemonstrationprogrammefor CCS,andasupportprogrammeforCHP,allhavecostimplications,and,therefore,credibilityproblems. Thebiggestchallengetoovercomingtheseproblemsistoproduceauthoritativeestimatesofthecosts involved,andmakethecaseforinvestment,partlybyalsodevelopingestimatesofbenefitsinterms ofjobsandexportearnings. Finally,theexpansionofrenewables,butalso,potentially,city-centreCHP,andtheestablishmentofa CCSinfrastructure,faceacredibilityproblemintermsofoppositionthroughtheplanningsystem.The newPlanningBillmayhavesomeimpact,butthisBillitselfisopentoacredibilityquestion,the outcomeofwhichmaynotbeclearforayearortwo.Makingthepoliticalcaseforinvestments remainsnecessary.Inrelationtoonshorewindinparticular,encouragingmorelocalownershipwould help.

72

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Conclusionandrecommendations Theplanningapplicationforanewcoal-firedpowerstationatKingsnorthhaskick-startedamajor debateaboutcoal-firedpowergenerationintheUK.Inthisreport,wehavearguedthat,inorderto knowwhattodoaboutKingsnorthandanyfuturecases,weneedtolookatthebroadcontext, includingenergypolicymorewidely,thefutureofrenewableenergy,theprospectsforcarboncapture andstorage(CCS),and,aboveall,theEUemissionstradingscheme(EUETS). Thefutureofcoal-firedpowergenerationmattersbecauseitisattheheartoftheclimatechange challenge.Historically,emissionsfromcoal-firedpowerstationshavedominatedtheUK’stotal emissions.ProposalsfornewcoalplantswillbethefirstrealtestoftheGovernment’sambitionsfora transitiontoalow-carboneconomy,expressedthroughtheClimateChangeBilltargetsfor2020and 2050. Forenergycompaniesseekingaportfolioofgenerationfromdiversefuels,coalhassignificant attractions.Inrecentyears,ithasbeenhighlycompetitiveoncostgrounds.Coalisalsoavailableona worldmarketfromarangeofdifferentcountries,incontrastwithgas,wheretheUKisbecoming increasinglyexposedtoaregionalmarketdominatedbyRussia. However,itisfarfromclearhowmanyofthecoalplantscurrentlybeinglookedatwillactuallyget built.Companiescurrentlyfacerisksnotonlyfromvolatilecoalprices,butalsofromuncertaintyabout futurecarbonpricesintheEUETS,bothofwhichareimportantforpotentialreturnsoninvestmentin newcoalplants. Thisuncertaintyalsoextendsbeyonddecisionsaboutinvestmentinnewcoalplantstothewider runningofallcoalpowerstations–newandexisting–and,hence,tototalfuturecarbonemissions fromthepowersector. Afurthernewfactorintheequationisthenewrenewableenergytargetfor2020.Ifthisweretobe achieved,thecommercialcasefornewcoalcapacitywouldbemuchweaker,becauseofthehuge increaseinrenewableelectricitycapacitythatthetargetimplies.However,itisclearthatthereis uncertaintyintheenergyindustryaboutwhetherthetargetcanandwillbemet. Carboncaptureandstoragehasthepotentialtodramaticallyreduceemissionsfromcoal-firedpower generation.However,technologicalandcostuncertaintiesremain,andthedemonstrationof successfulCCSwilltaketime.EveniftheGovernmentsignificantlyextendsitsframeworkforCCS,it willnotbewidelydeployedmuchbefore2020. Thefirstconclusionfromthisanalysisisthattheuncertaintiessurroundingcoalmeanthatthereisa realriskthatmeetingtheClimateChangeBill2020targetlargelythroughdomesticemissions reductionswillbecomeverydifficult,ifnotimpossible,withinthecurrentpolicyframework. MuchoftheUKdebatefocusesontheClimateChangeBillandUKleadership.Havingtomeeta significantpartofthetargetthroughbuyingcreditsfromabroad,whileatthesametimeseeingan increaseinemissionsfromnewcoal-firedpowerstations,would,indeed,beaseriousblowtotheUK’s credibilityasaleaderonclimatechange,andwouldcallintoquestionthepointofhavingaClimate ChangeBillinthefirstplace. TheUKdebatehingesultimatelyondivergentviewsontheroleoftheEUETS.Foroneside,theEU ETSliesatthecentreoftheframeworktoguideinvestmentandemissionsreduction,andany attemptstodisplacetheEUETSbydomesticinterventionistoberesisted.Ontheotherside,critics oftheEUETSarguethatitisfailingtopreventnewcoalbuild,andtoprovideassurancethatthe ClimateChangeBilltargetscanbemetmainlythroughdomesticactivity.Theyproposenewmeasures, suchasanemissionperformancestandardorabanonnewcoal,whichimplyadowngradingofthe importanceoftheEUETSinguidinginvestment. However,attheEUlevel,thereisaseparateandfurtherconcern,basedonthefactthattheEUETS doesnotyethavefullcredibilitywithcompaniesandtraders,whichisakeyreasonwhyitisfailingto guideinvestmentconsistentlywiththetightercapsetfor2020.Thiswillnotchangeuntilanew

73

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

climatedealisagreedandthefutureofglobalcarbonmarketsissecured.Becauseofthiscredibility problem,carbonpricesintheEUETSarecurrentlylowerthanwouldbeconsistentwiththeEUcapfor 2020. Unfortunately,itisnotpossibletodelaydecisionsoninvestmentsinnewgeneratingcapacityuntil after2010,whenuncertaintyaboutaglobaldealshouldhavedeclined.BoththeUKandmanyother countriesintheEUhavetomakedecisionsinthenexttwotothreeyears. Inmanyofthesecountries,companiesareplanningtobuildnewcoalplants.Butamajornewwaveof coalplants,comingonstreamaround2015,maywellplacehugeupwardpressureonprices,leading topoliticallyunsustainableelectricityprices,orabreachingofthecap.Thisprospect,inturn, threatenstofurtherweakenthecredibilityoftheschemeatacrucialtime. ThusatemporarymoratoriumonnewcoalinvestmentattheEuropeanlevelwouldservenotto weaken,buttostrengthentheemissionstradingscheme,andhelpensurethatitactsasabridgetoa newglobalagreementonclimatepolicy.

Recommendations Becausethecoalissuesitswithinthewiderframeofenergyandclimatepolicy,acoherentapproach toaddressingitrequiresactionacrossanumberofareas. Carboncaptureandstorage Theonlywaytomakecoal-burningconsistentwithtacklingclimatechangeisthroughtheemerging technologyofcarboncaptureandstorage.BothattheEuropeanandthegloballevel,itisessential thatCCStechnologybedevelopedanddemonstratedasamatterofurgency.Allgovernmentsare movingtooslowlyinthisarea. TheEuropeanUnionhassofarfailedtofollowthroughearlierplansfor12demonstrationplants, whichshouldimmediatelybefast-tracked.AnewCCSDirectivespecifyingaprocessforthis programme,alongwithassociatedresourcesforthedemonstrationplants,shouldbeadoptedintothe energyandclimatepackage. TheUKGovernmenthasstartedaprocesstodemonstratepost-combustionCCS,butgiventheUK’s sizeanditscarbonstorageoptions,itcouldandshoulddomore,extendingtheprogrammetoinclude asecond,pre-combustiondemonstration.Suchamovewouldhavethesupportofkeygroups, includingenvironmentalorganisations,tradesunionsandenergycompanies,aswellasthewider public. Atthesametime,theUKGovernmentshouldimmediatelystartplanningaframeworkforthecarbon dioxidetransportinfrastructurethatwillbeneeded. The2020renewableenergytarget Inordertotackleclimatechange,itisalsoessentialthatrenewableenergybedeveloped,deployed andbroughtdowninprice.Atthesametime,iftheUKcanachievetheambitiousrenewableenergy targetadoptedfor2020,theneedfornewcoalforconventionalgenerationismuchless. ReachingthetargetmeansputtingtheUKonanentirelynewenergypath,andrequiresapublic policyeffortoftheordernotseenintheenergysectorsincetheconstructionofthenationalgrid. DecisiveandspeedyactionfromGovernmentwillbeessentialandnecessitatesfivesteps:

•

Thefirststepistodevelopstrongerpoliciestoradicallyincreasetheconservationofelectricity use,sincethelowerthetotaldemand,theeasieritwillbetomeetthetargetonthesupplyside.

•

Second,theUK’ssupportpolicyforrenewableswillthenhavetoberevisited.Strongerincentives foroff-shorewindarelikelytobeneeded.Thisincludesthepossibilityofsomeformof productionorexporttariffformicro-renewables,ifsmallerscaleinvestmentbyhouseholdsand communitiesistoplayaroleinreachingthetarget,whichwillhelpbuildpoliticalsupport.New guidanceforOfgemtoensurethatitplaysasuitablerolewillalsobeneeded.

•

Third,governmentwillhavetotackleanumberoftechnicalissuesthatcouldformasignificant

74

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

barriertoarapidandlargeexpansionofrenewableelectricitycapacity.Strategicplanningfor newtransmissionanddistributioncapacity(especiallyforoffshorewind)andguaranteeing accesstothatcapacityisparticularlyimportant.Thisisanareawhereincrementalreformwillnot beenough–thenationalgridneedstoberebuiltfortheageofrenewables.

•

Fourth,approachestomanagingthepenetrationofintermittentrenewablesofabove30per centneedtobeexplored.TheGovernmentshouldensurethatitlooksatallpossibleoptions, includingtheuseof‘dynamicdemand’appliancesand‘vehicle-to-grid’technologies.

•

Fifth,and,perhapsmostimportantly,toestablishthecredibilityofanefforttoreachthe renewablestargets,theGovernmentwillhavetomakeamajorefforttopersuadevotersand businessofthefeasibilityandaffordabilityofthisgoal.Keyelementsofthiswillinclude: highlightingthebenefitsintermsoffutureprotectionfromenergypricevolatility,andenergy security;adetailed,authoritativeandtransparentcostestimateforreachingtheelectricity componentoftheproposedrenewableenergytarget;steeringthroughnewplanning arrangementsthatareacceptedontheground;andgenuineandwideconsultation.

StrengtheningtheEUemissionstradingscheme Carbonmarketswillnotontheirowndelivereffectiveinternationalactiontolimitclimatechange.But theEUemissionstradingschemeremainsakeyelementinthebuildingofaglobalclimateagreement, anditisimportantthatitfunctionseffectivelyaspartofaframeworkfordecarbonisingtheEU. Inanumberofareas,includingtheauctioningofcredits,andtighterlimitsontheuseofClean DevelopmentMechanism(CDM)credits,itisimportantthattheproposalsforPhase3ofthescheme bytheEuropeanCommissionarenotweakened.TheUKGovernmentshouldworkashardaspossible toensurethatthisisthecase. Atthesametime,theoperationoftheCDMitselfshouldbereformedtoimprovethecredibilityof projectsandtobetterensureadditionalityofprojects. Asoutlinedabove,theETSisstillevolvinganddoesnotyethavefullcredibilitywithcompaniesand markettraders,becauseofuncertaintyaboutitsfutureimplementation,muchofwhichisrelatedto theoutcomeofnegotiationsforapost-2012internationalagreementonclimatepolicy.Thissituation isunlikelytoberesolveduntilearly-to-mid2010attheearliest. Thediscountingofcarbonmarketsmakecoalinvestmentmorelikely,andatthesametime competitivepressuresaredrivingenergycompaniestomakeinvestmentsinthenextfewyears, preciselyovertheperiodofuncertainty.However,majornewcoalinvestmentscomingonstream acrosstheEUfrom2015presentgraveproblemsfortheemissionstradingschemecap,andplacetoo greatarelianceonthepossibilityofwidespreaddeploymentofCCSintheperiod2015-2020. Toaddressthissituation,anEU-widemoratoriumoninvestmentinnewcoal-firedpowerstations shouldbeintroduced,lastinguntilmid-2010. TheUKGovernmentshouldpre-commititselftosuchanapproach,andusethispre-commitmentto bindinothermemberstateswithlargeenergymarkets,suchasGermany.Thismoratoriumwould includetheapplicationforanewcoal-firedplantatKingsnorth. Addressingcostandsecurityofsupplyconcerns Somemeasuresthatreduceemissionsfromcoal(includingastrongEUenergyandclimatepackage), andexpandrenewableenergy,raisepotentialrisksfortheotherobjectivesofenergypolicy–thatis, costandsecurityofsupply.Theyarealsolikelytofaceproblemsofpolicycredibility,ifcompaniesare notconvincedthattheyarepoliticallysustainable. IftheGovernmentisseriousaboutreducingemissionsandreachingthe2020renewableenergy target,thenithastoclarify,andwherepossiblereduce,thesecurityofsupplyandcostrisks. Themosteffectiveapproachtoimproveenergysecurityandcontainthecostsofrenewables expansionwouldbetoradicallyincreaseeffortstoimproveenergyefficiency.Amoreeffective programmeofsupportforcombinedheatandpowerthatmakesmoreefficientuseofgasinpower productionshouldbepartoftheseefforts.

75

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Howeverifcoal-firedelectricitygeneratingcapacityistobephasedout,anddependenceongas increases,thenalternativemeasurestostrengthenphysicalsecurityofsupplyinparticularwillalsobe needed.TheprioritiesaretodevelopstrategicgasstorageintheUK,andworkattheEUlevelbothto improvetheframeworkforenergynegotiationswithRussiaandtopreventEuropeanenergy companiesfromusingtheircontrolofgaspipelinestodivertgassuppliestotheirowncustomers. Intheshortrun,itisinevitablethatthedecarbonisationofelectricitysupplywillhavecosts.Given this,threestepsarekeyforincreasingthecredibilityofpolicyaimedatsuchatransition:

•

First,theGovernmentneedstoprovideauthoritativeandwidelyacceptedestimatesofwhatthe coststo2020areactuallylikelytobe.

•

Second,effectivepoliciesareurgentlyneededtoreducetheimpactofcostsonpotentially vulnerablegroups,especiallythefuelpoor.IftheUKtakesbilateralactions,considerationofthe situationofenergy-intensiveindustriesexposedtocompetitionwillalsobeneeded.

•

Finally,Governmentneedstomakethebenefitsofdecarbonisation,intermsoftechnological opportunitiesandemploymentinrenewableenergy,CCSandotherareas,muchclearer.

Summingup ThepotentialnewcoalrushisthefirstrealtestoftheUK’sandEurope’sdesiretohelpleadtheworld towardsasolutiontoclimatechange.Inthelongterm,thesolutionsareclear–carboncaptureand storageandvastlyexpandedrenewableenergycanofferusenergysecurityandlowcarbonelectricity atanaffordableprice.Therealchallengeisintheshort-termtransitiontothatfutureoverthenext twodecades,duringwhichtimemuchofEurope’selectricitygenerationcapacitywillhavetobe replaced. Theinvestmentdecisionswemakeoverthenextfewyearsareabsolutelycriticaltowhetherwecan makethattransitionsuccessfullyornot.Thecurrentpolicyframeworkhasworkedwellincertainways inthepast,anddoescontainsomeoftheelementsthatwillbeneeded.Butitisnotcurrently sufficientonitsowntomanagethetrade-offsbetweenthechallengeofclimatechange,energy securityandaffordabilitythatareinevitable.Furtherstepsareneeded.

76

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

AnnexA.Listofinterviewees KeithAllott,HeadofClimateChange,WWF DrRobertClay,AssistantDirector,BERR KirstyClough,ClimateChangePolicyOfficer,WWF RachelCrisp,DeputyDirector,CarbonAbatementTechnologies,BERR NigelDownes,BusinessDevelopmentManager,Centrica MatthewFarrow,HeadofEnvironment,CBI JossGarman,ClimateCampaigner,Greenpeace SimonGoodwin,HeadofCleanCoal,Centrica DieterHelm,ProfessorofEnergyPolicy,UniversityofOxford EdmundHosker,HeadofEnergyMarketsUnit,BERR MichaelJacobs,SpecialAdvisertothePrimeMinister,PrimeMinister’sOffice JudithKonigshofer,CarbonCaptureandStorageAssociation CharlieKronick,SeniorClimateAdviser,Greenpeace AndrewLever,GenerationStrategyManager,E.ONUK RussellMarsh,HeadofPolicy,GreenAlliance StevenMarshall,TechnologyStrategyManager,ScottishPower NickMabey,Director,E3G ChrisMorritt,PublicAffairsManager,E.ONUK SamPeacock,PublicAffairsManager,ScottishandSouthernEnergy PhilipPearson,EconomicandSocialAffairsDepartment,TradesUnionCongress LisaPoole,PublicAffairsManager,Centrica TimPyke,HeadofClimateChange,E.ONUK AndyRead,BusinessDevelopmentManager,CleanCoalDevelopment,E.ON BrianSeabourne,HeadofRegulationandGovernmentAffairs,E.ONUK AlexTindall,HeadofPortfolioDevelopmentandStrategy,RWEnpower RobinWebster,HeadofClimateandEnergy,FriendsoftheEarth DrAnthonyWhite,ManagingDirectorofMarketDevelopment,ClimateChangeCapital BryonyWorthington,SustainableDevelopmentManager,ScottishandSouthernEnergy

77

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

AnnexB.Netpresentvalueandrisk Whenconsideringaninvestment,acompanywillputtogetherexpectedrevenueandcostsineach yearoftheproject.However,ratherthanthensimplyaddingtheseup,thecompanythendiscounts futurenetrevenue(orcosts)atacertainrate.Thisisessentiallybecauseuncertaintyincreasesover time,andrevenuenextyearmattersalotmorethanrevenue20yearshence.Thesumofthe discountedrevenuesoverthelifetimeoftheprojectisknownasitsnetpresentvalue(NPV).Of course,sincetherearealsouncertaintiesaboutfuturecostsandrevenues,investmentappraisalwill typicallyinvolvearangeofnetpresentvaluesratherthanasingleestimate. NPVisabasictoolinappraisinginvestments,andismorerelevantthancostsperse.Thismatters becausethetwoareratherdifferent,especiallyinrelationtorisk,ascanbeseeninFiguresB1andB2. FigureB1showsarangeoflevelisedcostsforcombined-cyclegasturbine(CCGT)plants,supercritical coal,andanemergingcoaltechnologycalledintegratedgasificationcombinedcycle(IGCC),allin £/MWh.Theblacklinesshowtherangeofcostsforeachtechnology,basedondifferentfuturefuel pricescenariosfromthe2007EnergyWhitePaper,andforcarbonpricescenariosrangingfrom 0/tCO2 to25/tCO2 (seeChapter4).Theredbargivestheaveragecosts. FigureB1. Levelisedcosts fordifferent technologies

Levelised Cost £/MWh

60 50 40 30 20 10 0

FigureB2.Net presentvalues fordifferent technologies Source:Blyth 2008

Net Present Value (£/kW)

Gas (CCGT)

Coal (ASC)

Coal (IGCC)

1,200 1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 Gas (CCGT)

Coal (ASC)

Coal (IGCC)

78

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

Asnotedabove,averageexpectedcostsforCCGTandsupercriticalcoalareveryclose,withIGCCa littlehigher.However,intermsoftherangeofpossiblecosts,and,therefore,therisks,itisthecostof CCGTthatisthemostuncertain.Thisisbecausethereismoreuncertaintyaboutfuturegasprices thanaboutfuturecoalprices,andthecarbonpricerangeisnotenoughtooffsetthis. FigureB2isbasedonthesamecostinformation,butshowstherangeofNPVsin£/kWofnew capacityforthesametechnologies,havingfactoredinexpectedrevenues.Again,averageCCGTand supercriticalcoalNPVsareveryclosetogether,andexceedthatforIGCC(whichisnegative,showing whynocompaniescurrentlyhaveplanstobuildIGCConacommercialbasis).However,theimportant pointtonoteisthat,whileCCGThasalargercostrange,andthereforehigherrisk,itissupercritical coalthathasamuchlargerNPVrange,andthereforerisk. Thisisbecause,withgaspricesexpectedtobehighrelativetocoal,coalwilltendtoberunas baseload,withgascomingintomeetpeakdemand.Asexplainedabove,thepriceofelectricitywill reflectthecostsofthemarginalplant,whichwillbegas.Thismeansthat,evenifthecostofgas increases,thepriceofelectricitywilltendtorisewithit,sothatgas-firedplantswillstillbeableto recovertheircosts.Bycontrast,coaloperatorswillgetapricethatbearslittlerelationshiptotheir costsofoperation.Asaresult,coalappearstobeasignificantlymoreriskyinvestmentprospect.As such,itmayalsobemoreexpensivetoraisecapitaltopayfortheinvestment,since,asarule,thecost ofcapitalreflectsrisk(Grossetal 2007). ThispatternofNPVriskmayexplainwhyanumberofCCGTplantsarecurrentlybeingbuiltinthe UK,despitegaspricesbeinghigh. Afinalpointaboutrisksassociatedwithinvestmentisthattheexistenceofuncertaintygivesacertain valuetokeepingoptionsopenandwaiting,untilmoreinformationbecomesavailable.Ittakesabout fourtofiveyearstoplanandbuildacoal-firedpowerstation,andtwotothreetodothesamefora CCGTone.Ifcompaniesanticipatethatelectricitypriceswillstarttoriseintherun-uptoageneration gapopeningupearlyinthenextdecade,theywillnotwanttowaituntilthelastminutetoinvest. However,ifthereareparticulardevelopmentseitherincommercialmarketsorinpolicythatwillclarify themovementoffutureprices,thesedevelopmentswillreduceuncertainty,and,therefore, investmentrisk.

79

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

AnnexC.Coalemissionsallowances:anumericalexample ItispossibletoconstructatradableschemethatistechnicallyconsistentwiththeEUETSanddoes notsimplymoveemissionselsewherewithintheEU. OnewaytodothisinPhase3wouldbetousetheGovernment’sroleinauctioningEUETScredits. TheGovernmentcouldring-fenceacertainnumberofcredits,equivalenttothetargetforemissions fromcoal-firedpowergeneration.Thesecreditswouldnotbeauctioned,but,rather,removedand heldbyGovernment. Intheirplace,theGovernmentwouldauctionanequivalentnumberofnewemissionscredits.These newcredits,calledcoalemissionsallowances(CEAs),couldbeusedonlyforcoal-firedpower generation.GeneratorswouldberequiredtoholdsufficientCEAstocovertheiremissionsexactly. CEAscouldbeassociatedwithcoalsupply,or,alternatively,withpoweroutput,sincethecarbonfactor foreachcoal-firedpowerstationisknown.Onceauctionedoff,CEAswouldbeentirelytradable betweencoalgenerators,allowingleastcostabatementwithinthesub-sector.Sincegeneratorswould belegallyrequiredtopresentEUETScreditsattheendoftheperiod,theywouldpresenttheirCEAs toGovernment,whichwouldthenconvertthembackagaintoEUETScreditsforthispurpose. EUETScreditswouldnotbeacceptabletocoveremissionsfromcoal-firedpowergeneration,but,if coaloperatorsheldmoreCEAsthantheiremissionsattheendoftheperiod,theycouldconvertthem throughaone-wayvalvetoEUETScredits. SincethenumberofCEAsissuedisexactlythesameasthenumberofEUETScreditswithdrawnfrom auction,thisapproachwouldmeanthattheoverallEUcapwouldremainthesame(seebelowfora numericalexample).OverallUKdemandforEUETScreditswouldnotbereduced,althoughitwould beswitchedawayfromcoalgenerationtogasgeneration.Theonlycircumstancesinwhichemissions mightbemovedtotherestoftheEUwouldbeifthecaponemissionsfromUKcoal-firedpower generationweresetatalevelhigherthanwouldbethecaseotherwise.Thecapwouldhavetobeset withthisinmind,andtakeintoaccounttheretirementofplantsandreducedrunningundertheLarge CombustionPlantDirective(LCPD).However,itshouldbepossibletoconstructacoalemissionscap thatmeetstheserequirements. Thisapproach,thusmirrorsthewaythattheEUETSworks,butguarantees thatacertainlevelof emissionsreductionislocatedintheUK.Themaincompatibilityproblemitposesis,therefore,not technicalbutpolitical,inthatitwouldeffectivelybereplacingtheEUETSinakeysector.However,it wouldbeintroducedintheeventofaweakPhase3agreement,and,ifEUcarbonpolicy subsequentlystrengthenedagain,theCEAapproachcouldbephasedout. Finally,anypolicythatguaranteesacertainlevelofemissionsforaparticularsectororsub-sectoris likelytoraisetheoverallcostofabatement(asindeedafloorpricewould),andcould,therefore,pose acredibilityproblem(seeChapter8).However,achievingemissionsreductionintheUKinthisway, throughinducingacertainleveloffuelswitching,istheleast-costmethodofabatementwithinthe sectorscoveredbytheEUETS.

Anumericalexample UndertheCommission’sproposalsforPhase3,theEU-widecaponemissionswouldbe1,974MtCO2, withanequalnumberofEUallowances(EUAs)issued.TheUKGovernmentwillbegivenabout10.5 percentofthis(Lekanderetal 2008a),thatis207millionEUAs,ofwhichabouthalfwillbeauctioned tothepowersector(say100millionEUAs). WedonotknowwhatUKpowersectoremissionswillbein2013,butbasedonprojectionsfromthe 2007EnergyWhitePaper,theycouldbearound140MtCO2.Thus,theUKpowersectorwouldbe around40millionEUAsshort.Uptosevenpercentofthisshortfall(thatis,2.8million)canbe coveredbybuyingincreditsthroughtheCleanDevelopmentMechanismorJointImplementation, leavingademandforEUAsof37.2million. Currently,over70percentofpowersectoremissionscomefromcoal,butthiscouldbelowerby

80

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

2013,asLCPDslowrunningcomesintooperation.Iftheproportionofpowersectoremissionsin 2013is,say,60percent,thismeanscoal-firedpowergenerationwouldberesponsibleforsomething oftheorderof84MtCO2. TheproposedschemewouldinvolvetheGovernmentretiring,say,75millionEUAsfromtheallocation intendedforpowersectorauctioning.Thisleaves25millionbehind,whichareauctionedtothepower sectortocovernon-coalgeneration(thatis,56MtCO2).Assumingallallowancesareboughtat auction,thisnon-coalsub-sectoristhen31millionshort,andwouldhavetobuycreditsonthe market. Governmentthencreates75millioncoalemissionsallowances(CEAs),whichareauctionedtocoal generators,andtradedamongthem.Coalgeneratorsarethusninemillionallowancesshort.However, unlikethenon-coalsub-sector,theyhavetoabatebyrunningless(orbuyinglesscoal),reducingtheir emissionsbynineMtCO2,withtheleastefficientplantsbeingthefirsttoreduceoutput. Combinedcyclegasturbine(CCGT)powergenerationwouldincreaseoutputtocovertheshortfall, whichalsoincreasesthedemandforEUAsamongCCGToperators(whichwill,inmanycases,bethe samecompaniesasarerunningcoalplants).However,becausegasislesscarbonintensivethancoal, theirdemandwillgoupbyninemillionEUAsscaleddownbytheratioofgastocoalcarbonfactors: thatis,aroundfourmillion.Thismeansthatthenon-coalsub-sectorisnow35millionallowances shortintotal. Intotal,emissionsfromtheUKpowersector(assumingthatthenon-coalsub-sectorbuysratherthan abates)isnine(fromlowercoalemissions)lessfour(fromhigherCCGTemissions)=5MtCO2.Ineach year,thecaponcoalemissionswouldbereducedfurther(forexample,70MtCO2 in2014,etc.).

81

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

References AdamD(2008)‘Coalpowerpolicyunderattackfromtopscientists’inTheGuardian3April,available at:www.guardian.co.uk/environment/2008/apr/03/fossilfuels.energy BERR(2008)UKRenewableEnergyStrategy:Consultation, London:BERR,availableat: http://renewableconsultation.berr.gov.uk/ BERR[DepartmentforBusiness,EnterpriseandRegulatoryReform](2007a)DigestofUKEnergy Statistics London:BERR,availableat: www.berr.gov.uk/energy/statistics/publications/dukes/page39771.html BERR(2007b)QuarterlyEnergyPricesDecember2007 London:BERR,availableat: www.berr.gov.uk/files/file43302.pdf BERR(2007c)EnergyMarketsOutlookLondon:BERR BERR(2007d)Competitionforacarbondioxidecaptureandstoragedemonstration:Project InformationMemorandumLondon:BERR BERR(2007e)UpdatedenergyandcarbonemissionsprojectionsBackgroundpaperfortheEnergy WhitePaper2007, London:BERR,availableat:www.berr.gov.uk/files/file39580.pdf BERR(2007f)Dynamicdemand:GovernmentResponsetoClause18oftheClimateChangeand SustainableEnergyActLondon:BERR,availableat:www.berr.gov.uk/files/file41011.pdf BirdJ(2007)EnergySecurityintheUK:anipprfactfile London:InstituteforPublicPolicyResearch, availableat:www.ippr.org.uk/publicationsandreports/publication.asp?id=555 BlythW(2008)Theinvestmentcaseforcoal-firedpowergenerationintheUK:Finalreporttothe InstituteforPublicPolicyResearchLondon:InstituteforPublicPolicyResearch,availableat: www.ippr.org/uploadedFiles/research/investment_case_for_coal.pdf BlythW(2005)ImpactofclimatechangepolicyuncertaintyonenergysectorinvestmentsPilotPhase report,ChathamHouse,London:RIIA,availableat: www.chathamhouse.org.uk/files/3274_wbmar05.pdf BlythWandYangM(2007)ClimatePolicyUncertaintyandInvestmentRisk Paris:International EnergyAgency BowsA,ManderS,StarkeyR,BledaMandAndersonK(2006)LivingwithinacarbonbudgetReport forFriendsoftheEarthandtheCo-operativeBank,Manchester:TyndallCentre,Universityof Manchester,availableat: www.tyndall.ac.uk/publications/briefing_notes/Livingwithacarbonbudget.pdf BrownG(2007)SpeechonclimatechangebyPrimeMinisterGordonBrown,ForeignPress Association,London,19November2007,availableat:www.number10.gov.uk/output/Page13791.asp BuchanD(2008)‘Europe,emissionsandechternach–assessingBrussels’Januarypackage’inOxford EnergyCommentOxford:OxfordInstituteforEnergyStudies,availableat: www.oxfordenergy.org/pdfs/comment_0108-1.pdf BusinessCouncilforSustainableEnergy(2008)ImplementingtheEURenewableEnergytargetinthe UK:Emergingissuesforconsideration, availableat:www.bcse.org.uk/ BritishWindEnergyAssociation(BWEA)(2008a)‘UKWED:Projectsinplanning’,webpage,available at:www.bwea.com/ukwed/planning.asp BWEA(2008b)‘WindindustrywelcomesEU'sgreenenergyrevolution’,pressrelease,24January 2008,availableat:www.bwea.com/media/news/080123.html CaliforniaPublicUtilitiesCommission(2008a) Interimopiniononphase1issues:Greenhousegas emissionsperformancestandard availableat: http://docs.cpuc.ca.gov/published/FINAL_DECISION/64072.htm

82

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

CaliforniaPublicUtilitiesCommission(2008b)‘CPUCmakesrecommendationstoairresourcesboard toreduceGHGemissions’,pressrelease,13March2008,availableat: http://docs.cpuc.ca.gov/PUBLISHED/NEWS_RELEASE/80131.htm CarbonSequestrationLeadershipForum(2008)‘CSLFRecognizedProjects’,availableat: www.cslforum.org/documents/CSLFRecognizedProjectsJan2008.pdf CarbonTrustandDTI(2003)RenewablesNetworkImpactStudyAnnex4:IntermittencyandLiterature SurveyLondon:CarbonTrust ChamberlainP(2008)‘Stillmuchtobedoneonplanning’inrealPower 12,London:BWEA CleanCoalTaskGroup(2006)AframeworkforcleancoalinBritainLondon:TUC,availableat: www.tuc.org.uk/extras/coal.doc Cleantech(2008)‘FutureGengoesFutureBust’,newsrelease,31January2008,availableat: http://media.cleantech.com/2391/futuregen-goes-futurebust ClimateChangeCapital(2007)ZEP:AnalysisoffundingoptionsforCCSdemonstrationplantsLondon: ClimateChangeCapital ConfederationofBritishIndustry(CBI)(2007)ClimateChange:Everyone’sBusinessReportfromthe CBIClimateChangeTaskforce, London:CBI ConfederationofBritishIndustry(2005)PoweringtheFuture:EnablingtheUKenergymarketto deliverLondon:CBI ConnorS(2007)‘Britain’scarbonstrategy“upinsmoke”’inIndependent, 17December2007, availableat:www.independent.co.uk/environment/climate-change/britains-carbon-strategy-upin-smoke-765465.html DanishEnergyAuthority(1998)ReportconcerningDanishenergypolicy, 20May,availableat: www.ens.dk/graphics/Publikationer/Energipolitik_UK/epr/epr98uk.htm#IndexMark4_2 DepartmentfortheEnvironment,FoodandRuralAffairs(Defra)(2008)ConsultationonproposedEU EmissionsTradingSystemfrom2013London:Defra,availableat: www.defra.gov.uk/corporate/consult/euets-2013amendments/consultdoc.pdf Defra(2007)Estimatedemissionsbysource,NationalCommunicationcategories,1970-2006:carbon dioxide,methaneandnitrousoxideLondon:DEFRA,availableat: www.defra.gov.uk/environment/statistics/globatmos/download/xls/gatb05.xls DepartmentforTradeandIndustry(DTI)(2004)RenewablesInnovationReviewLondon:DTI DixitAandPindyckR(1994)InvestmentunderUncertaintyPrinceton,NJ:PrincetonUniversityPress DowningPandBallantyneJ(2007)TurningPointorTippingPoint?Socialmarketingandclimate change London:IpsosMORI EspinerC(2007)‘Powerpricerisecostofclimatefight’inThePress 5December,availableat: www.stuff.co.nz/4312234a11.html Europa(2007)‘AimingtowardsalowCO2fossilfuelfuture’,pressrelease,10January,availableat: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/8 EuropeanCommission(EC)(2008a)ProposalforaDirectiveoftheEuropeanParliamentandofthe CouncilamendingDirective2003/87/ECsoastoimproveandextendthegreenhousegas emissionallowancetradingsystemoftheCommunity, availableat: http://ec.europa.eu/environment/climat/emission/pdf/ets_revision_proposal.pdf EuropeanCommission(2008b)CommunicationfromtheCommissiontotheEuropeanParliamentand oftheCouncilSupportingearlydemonstrationofsustainablepowergenerationfromfossilfuels, availableat:http://ec.europa.eu/energy/climate_actions/doc/2008_co2_comm_en.pdf EuropeanCommission(2008c)ProposalforaDirectiveoftheEuropeanParliamentandoftheCouncil onthepromotionoftheuseofenergyfromrenewablesources, availableat: http://ec.europa.eu/energy/climate_actions/doc/2008_res_directive_en.pdf

83

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

EUCorporateLeadersGrouponClimateChange(2008)‘Powerfulbusinessgroupingwelcomes EuropeanCommission’sclimatechangeproposals’,pressrelease,23January EuropeanUnion(2008)‘BoostingEurope’sgrowthandjobsbymeetingclimatechange commitments’,newsrelease,23January,availableat: www.eurunion.org/News/press/2008/2008005.htm FankhauserS(2008)‘Anintroductiontocarbonmarkets’,PresentationtotheFinancialMarkets Group,LondonSchoolofEconomics,15May.Availableat: fmg.lse.ac.uk/upload_file/1051_Sam_Fankhauser.ppt Forbes(2008)‘RWEhaltsinvestmentsinGermanpowerplantsduetorisingemissioncosts’,31 January,availableat:www.forbes.com/markets/feeds/afx/2008/01/31/afx4596286.html FriendsoftheEarth(2007)ConsultationonreformoftheRenewablesObligation:Responsefrom FriendsoftheEarth London:FriendsoftheEarth,availableat: www.foe.co.uk/resource/consultation_responses/renewables_obligation.pdf GermanFederalMinistryfortheEnvironment(2007)Renewableenergysourcesinfigures–national andinternationaldevelopment Berlin:BMU,availableat: www.bmu.de/files/english/renewable_energy/downloads/application/pdf/broschuere_ee_zahlen _en.pdf GibbsTandRetallackS(2006)TradingUp:ReformingtheEuropeanUnion’sEmissionsTrading Scheme,London:InstituteforPublicPolicyResearch,availableat: www.ippr.org.uk/publicationsandreports/publication.asp?id=513 GibbinsJ(2007)‘Carboncaptureandstorage’PresentationtoAnglo-FrenchScientificDiscussion seminar,27September,availableat:www.ambascience.co.uk/IMG/pdf/Gibbins-Slides-Seminar2.pdf GovernmentofCanada(2008)TurningtheCorner:Takingactiontofightclimatechangeavailableat: www.ecoaction.gc.ca/turning-virage/index-eng.cfm GowDandWoodwardW(2008)‘Greenlawsandregulationriskenergycrisis,sayEurope’spower companies’inTheGuardian 7February,availableat: www.guardian.co.uk/environment/2008/feb/07/energy.renewableenergy Greenpeace(2008a)‘Theproblemwithcarboncaptureandstorage(CCS)’,blogpost,3January2008, availableat:www.greenpeace.org.uk/blog/climate/the-problem-with-carbon-capture-andstorage-ccs-20080103 Greenpeace(2008b)‘PlanningproblemleaveUKsufferingfrom“trappedwind”’,blogpostavailable at:www.greenpeace.org.uk/blog/climate/planning-problems-leave-uk-suffering-from-trappedwind20080205 Greenpeace(2005) DecentralisingPower:Anenergyrevolutionforthe21stCentury London: Greenpeace GreenpeaceandMayorofLondon(2006)PoweringLondonintothe21stCentury London: Greenpeace GreenpeaceInternational(2007)BriefingonCoal-firedpowerstationsandtheEuropeanUnion Amsterdam:GreenpeaceInternational,availableat: www.greenpeace.org/raw/content/international/press/reports/coal-fired-power-stations-and.pdf GrossR,HeptonstallP,AndersonD,GreenT,LeachMandSkeaJ(2006)TheCostsandImpactsof Intermittency:Anassessmentoftheevidenceonthecostsandimpactsofintermittentgeneration ontheBritishelectricitynetworkLondon:UKEnergyResearchCentre GrossR,HeptonstallPandBlythW(2007)Investmentinelectricitygeneration:theroleofcosts, incentivesandrisks London:UKEnergyResearchCentre GrubbM(2007)‘SustainingEUactionpost2012inaworldofincompleteparticipation’Presentation

84

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

tohearingoftheEuropeanParliament,TemporaryCommitteeonClimateChangeSession“The ClimateProtectionChallengepost2012”,Brussels4October.Availableat: www.europarl.europa.eu/document/activities/cont/200712/20071220ATT17143/20071220ATT1 7143EN.pdf HarrisJ,TopperJ,BrewerDandYaxleyN(2008)‘CoalForumReportonthisyear’swork’, presentationtoCoalUKConference,February2008 HelmD(2008)‘TheEUClimateChangePackage:evenmoreradicalthanitlooks’,commentpiece, availableat:www.dieterhelm.co.uk/publications/Commentary_Jan08.pdf HelmD(2007)‘TheRussiandimensionandEurope’sexternalenergypolicy’,commentpiece,available at:www.dieterhelm.co.uk/publications/Russian_dimension.pdf HelmD(2003)Energy,theStateandtheMarket:BritishEnergyPolicysince1979 Oxford:Oxford UniversityPress HelmD,HepburnCandMashR(2003)‘Crediblecarbonpolicy’inOxfordReviewofEconomicPolicy 19,3:438-450 HMGovernment(2007)MeetingtheEnergyChallenge:AWhitepaperonEnergy Cmd7124,London: TSO HuttonJ(2007)‘TheUKMeetingtheEnergyChallengewithEurope’,SpeechbySecretaryofState forBusinessJohnHuttoninBerlin,10December2007,availableat: www.berr.gov.uk/pressroom/Speeches/page42831.html HuttonJ(2008)‘TheFutureofUtilities’,SpeechtotheAdamSmithInstitute,London,10March, availableat:www.berr.gov.uk/pressroom/Speeches/page45211.html ILEXEnergyConsultingandStrbacG(2002)Quantifyingthesystemcostsofadditionalrenewablesin 2020:AreporttotheDepartmentofTradeandIndustryOxford:ILEXEnergyConsulting IntergovernmentalPanelonClimateChangeWorkingGroupIII(2005)SpecialreportonCarbon DioxideCaptureandStorage:SummaryforPolicymakers Geneva:IPCC IPA(2006)UKPowerSectorEmissions–targetsorreality?ReporttoWWF-UK Godalming:WWF-UK KemptonWandTomić J(2005)‘Vehicle-to-gridpowerimplementation:fromstabilizingthegridto supportinglarge-scalerenewableenergy’inJournalofPowerSources 144,1:280-294 LekanderP,ComperSandGandolfiA(2008a)‘ETSPhase3:Domesticemissionsreductionmisttriple’ inUBSInvestmentResearchBriefing 22February LekanderP,ComperSandGandolfiA(2008b)‘Halfofcoalgenerationshutby2015’inUBS InvestmentResearchBriefing22February LewisM(2008)TheETSreview:Afirstreaction London:DeutscheBank LewisMandICuiren(2008)IttakesCO2 tocontango London:DeutscheBank LockwoodM,BirdJwithAlvarezR(2007)2050Vision:HowcantheUKplayitspartinavoiding dangerousclimatechange? London:InstituteforPublicPolicyResearch,availableat: www.ippr.org.uk/publicationsandreports/publication.asp?id=572 LondonClimateChangeAgency(2007)‘LCCASubmissiontotheDBERR/OFGEMDistributedEnergy WorkingGroup’,availableat: www.lcca.co.uk/upload/pdf/OFGEM_DISTRIBUTED_ENERGY_REVIEW_REGULATORY_BARRIER SREVIEW_OF_ARRANGEMENTS_WITH_ANNEX4.pdf MayorofLondon(2006)TheMayorofLondon’sSubmissiontotheEnergyReview London:Greater LondonAuthority,availableat:www.london.gov.uk/mayor/environment/energy/docs/energyreview-response.pdf MayorofLondon(2004)GreenLighttoCleanPower–theMayor’sEnergyStrategyLondon:Greater LondonAuthority

85

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

MetzB,DavidsonO,deConinckH,LoosMandMeyerL(2005)SpecialreportonCarbonDioxide CaptureandStorageGeneva:IntergovernmentalPanelonClimateChangeWorkingGroupIII MinistryofEconomicDevelopment(2007)Additional/RegulatoryMeasures:SynthesisoftheAnalysis oftheNewZealandEnergyStrategy,availableat: www.med.govt.nz/templates/MultipageDocumentPage____32045.aspx#A0 OfficeofClimateChange(2007)AnalyticalAudit:FullReport,availableat: www.occ.gov.uk/activities/analytical_audit/FULL_REPORT.pdf OffshoreDesignEngineering(2007)Studyofthecostofoffshorewindgeneration:Areporttothe RenewablesAdvisoryBoard&DTI London:DTI,availableat:www.berr.gov.uk/files/file38125.pdf Ofgem(2006)SubmissiontotheconsultationonthereformoftheRenewablesObligationLondon: Ofgem Oxera(2007)AnassessmentofthepotentialmeasurestoimprovegassecurityofsupplyAreport preparedfortheDTI,London:DTI,availableat:www.berr.gov.uk/files/file38980.pdf PagnamentaRandKennedyS(2008)‘EDFandRWEbattleheatsupoverBritishEnergy’inThe Times, 11April ParliamentaryOfficeofScienceandTechnology(2005)CarboncaptureandStorage(CCS)Postnote No238,March PointCarbonAdvisoryServices(2008)EUETSPhaseII–Thepotentialandscaleofwindfallprofitsin thepowersector,ReportforWWF, Godalming:WWF RedpointEnergyStrategies(2007)DynamicsofGBElectricityGeneration:Investment,Prices,Security ofSupply,CO2EmissionsandPolicyOptions Backgroundpaperpreparedforthe2007Energy Whitepaper,availableat:www.berr.gov.uk/energy/whitepaper/page39534.html deRivazV(2005)‘Short-termstrategiescandistortemissionsprogress’inFinancialTimes28July RWE(2007)FactbookGenerationCapacityinEurope availableat: www.rwe.com/generator.aspx/investor-relations/praesentationen/faktenkompakt/property=Data/id=481528/de-factbook-juni-2007-2.pdf SatoM,GrubbM,CustJ,ChanK,KorppooA,andCeppiP(2007)‘Differentiationanddynamicsof competitivenessimpactsfromtheEUETS’CambridgeWorkingPapersinEconomics 0712,Faculty ofEconomics,UniversityofCambridge SchneiderL(2007)IstheCDMfulfillingitsenvironmentalandsustainabledevelopmentobjectives?An evaluationoftheCDMandoptionsforimprovementReportpreparedforWWF, Berlin:Öko Institut,availableat:http://assets.panda.org/downloads/oeko_institut__ 2007____is_the_cdm_fulfilling_its_environmental_and_sustainable_developme.pdf StateofCalifornia(2003)‘EmergencyActionPlan’,availableat: www.energy.ca.gov/energy_action_plan/2003-05-08_ACTION_PLAN.PDF SternJ(2006)ThenewsecurityenvironmentforEuropeangas:worseninggeopoliticsandincreasing globalcompetitionforLNG Oxford:OIES,availableat:www.oxfordenergy.org/pdfs/NG15.pdf SternN(2007)TheEconomicsofClimateChange Cambridge:CambridgeUniversityPress SternReview(2007)Buildinganeffectiveinternationalresponsetoclimatechange–PaperC,After theSternReview:Reflectionsandresponses, availableat: www.occ.gov.uk/activities/stern_papers/stern_yalec091107.pdf SzarkaJandBlühdornI(2006)WindpowerinBritainandGermany:explainingcontrasting developmentpathsAreportfortheAnglo-GermanFoundationfortheStudyofIndustrialSociety, London:AGF,availableat:www.agf.org.uk/pubs/pdfs/1485web.pdf TraynorI(2008)‘CBIdirectorsaysemissionstargetunrealisticandnotcost-effective’inTheGuardian, 30January

86

ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration

TrigeorgisL(1996) RealOptions:managerialflexibilityandstrategyinresourceallocationCambridge, Mass:MITpress VidalJ(2008)‘BritainseeksloopholeinEUgreenenergytargets’inTheGuardian, 29March VidalJ(2007)‘Labour’splantoabandonrenewableenergytargets’inTheGuardian, 23October WaraMandVictorD(2008)ArealisticpolicyoninternationalcarbonoffsetsWorkingPaper74, ProgramonEnergyandSustainableDevelopment,StanfordUniversity WhiteA(2006)MoresmokethanfireParliamentaryBrief,ClimateChangeCapital,July2006,London: ClimateChangeCapital,availableat:www.climatechangecapital.com/uploadedFiles/ Moresmokethanfire__Parliamentary_Brief_07_06.pdf WhiteA(2005)‘Concentratedpower:thefutureofelectriccompetition’inPublicUtilitiesFortnight, February WicksM(2008)SpeechtoCoalUKAwardsDinner,8January,availableat: www.berr.gov.uk/pressroom/Speeches/page44565.html WoolasP(2008)EvidencebyPhilWoolastoanEnvironmentalAuditCommitteeinquiryon‘PostKyoto:Theinternationalcontextforprogressonclimatechange’,25March,availableat: www.publications.parliament.uk/pa/cm200708/cmselect/cmenvaud/uc355-iv/uc35502.htm WorldAllianceforDecentralisedEnergy(2006)DecentralisingUKenergy:Cleaner,cheaper,more secureenergyforthe21stCentury London:Greenpeace WorldDevelopmentMovement(2008a)‘NewsfromtheStopKingsnorthCampaign’,availableat: www.wdm.org.uk/kingsnorth/news.htm WorldDevelopmentMovement(2008b)SupporterbriefingFebruary2008,‘StopKingsnorth:Nonew coal-firedpowerstations’,availableat: www.wdm.org.uk/resources/briefings/climate/kingsnorth12022008.pdf WWF(2008)‘Kingsnorthpowerstationdecisionbodesbadlyforclimate’,NewsRelease,3January 2008,availableat:www.wwf.org.uk/news/n_0000004665.asp