Carbon pricing changes Europe’s power generation fuel mix
Carbon pricing changes Europe’s power generation fuel mix
A survey published this week, the second week of the COP15 climate talks, presents clear evidence that emissions trading in Europe is having a real impact on power generation investment decisions – precisely the effect it was supposed to have. The company that published the report, New Energy Finance, is one of the many businesses in Copenhagen this week for the historic negotiations.
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Guy Turner, Director carbon market research of New Energy Finance |
‘We deal a lot with the power companies as clients,’ says Turner, ‘and we know from first-hand experience that these companies take carbon trading seriously. It’s not a paper exercise. That’s not to say that they’re suddenly shutting down all their coal plants and building gas and renewables in place. But, on average, they look at the investment decisions that they have to make, they look at fuel prices, at power prices, at capital costs and at carbon prices. And it all goes into the mix.
Turner adds, ‘We know this but the rest of the world doesn’t. So we said: Let’s do a simple survey and talk to them on a formal basis, rather than the one-to-one chats we have as clients – and document it.’ The answer is clear: ‘European power generators see the ETS is here to stay and that it is starting to affect how they make multi-billion-Euro investments in new generation capacity.’
The report is based on responses from 13 power companies that together account for more than half of the European power sector’s emissions of CO2. They include Eon, RWe, Centrica, Scottish and Southern, Fortum and EDP. The survey finds that five years after the start of the ETS, carbon prices are being ‘fully integrated into investment decisions’. All the power generators that responded said they factor a carbon price into their investment decisions.
So what levels of carbon prices are these companies assuming? ‘We weren’t going to get the numbers. We asked, are you assuming 20, 30, 40, 50 Euros a tonne, but that’s too confidential,’ says Turner. ‘But what we were able to elicit was that they run a number of scenarios. The next question we asked was very important: Do you ever consider a zero-carbon price? The results were that 11 out of the 13 companies said they had no zero-carbon price scenario. The only two that did were in eastern Europe, and they have an issue with European policy as a whole.’
Investment focus
Turner says the carbon price, current and projected, is not sufficient on its own to justify an immediate wholesale shift to lower CO2-emitting technologies; fuel prices, power prices and direct government support for renewables are also important. However, it is altering power companies’ investment focus to include more lower-carbon technologies in their future plant mix. These include combined-cycle gas turbines (CCGTs) and high-efficiency coal.
Specifically, he adds, the ETS is having a ‘clear impact’ on:
- the build-rate of biomass co-firing capacity;
- the closure of older, dirtier, oil, coal and lignite plants covered by the large combustion plant directive; and
- investments in carbon capture and storage (CCS).
Although direct government support is playing a role in CCS decisions, says Turner, the EU ETS is the most important consideration. ‘The answers to the survey are indicative of a trend towards lower-carbon forms of power generation. Gas will play a big part in that, particularly with the very low gas prices we’ve got at the moment. Whether they will persist is another question. There’s a timing element here. If CCS does become the technology to drive down emissions, it could end up that coal-plus-CCS is more cost-effective than gas-plus-CCS. So what we’re probably going to see is another flurry of gas, over the next five years, but then maybe in the next 5-10 years the retro-fitting of CCS on the back of coal. And we’ll get this blend of high-efficiency coal, CCGTs and coal-plus-CCS. That’s probably the fossil mix going forward.’
So what does he make of recent remarks by Tony Hayward, the CEO of BP – a leader in CCS technology – that the only way to reduce emissions quickly enough over the coming decade to meet climate change mitigation targets is to use a lot more gas in power generation? ‘I would agree. What’s a few years amongst friends. We’re talking about the short-to-medium term – and I predicated my conclusion that there would be a shift to coal-plus-CCS on the basis that CCS is viable and works, and can be done.’ He agrees that this is yet to be determined.
‘I do think that we will be building a lot of gas plants in the foreseeable future. But even when you bring CCGT in, you can drop your emissions by 20-30%, but you’re not going to get to 60, 70, 80% reductions, which is what the science is telling us we need to do. Without doubt, gas is a proven technology, it’s a low-carbon form of power generation, it’s cheap to build, cheap to run right now, so why wouldn’t you do it? It’s a no-brainer. But there will be limitations. I don’t think gas will be as cheap as it is right now in the future, not if the rest of the world goes the same way and uses it for power generation instead of coal. Secondly, there’s still the security of supply issue. And thirdly it only gets us so far.’
