Coal fired power generation accounts for 39 per cent of the world’s total electricity production. Where huge coal resources remain, in countries such as the USA, Germany, Poland, Australia, South Africa, China and India, utilization is very much higher than elsewhere due to its cost competitive edge.
Worldwide, the use of coal as a primary energy source remains crucial to the economies of many developed and developing countries. This is particularly true with the latter, where burgeoning industrialization and urbanization are driving a trend to soaring demand. Coal looks set to retain its position as a secure, reliable source of energy, and especially for the generation of electricity.
Proceed with caution: doubts over future carbon costs are deterring investment in new coal fired power plants
In its 2007 Survey of Energy Resources, the World Energy Council (WEC) reported that, among the major energy sources, coal is once again the most rapidly growing fuel on a global basis. While questions regarding the size and location of reserves of oil and gas abound, coal remains abundant and broadly distributed around the world. Economically recoverable reserves of coal are available in more than 70 countries worldwide, and in each major region.
Latest estimates put recoverable coal resources at some 850 billion tonnes, leading the WEC to speculate that coal will be with us for many decades, if not centuries, to come. The International Energy Agency projects that demand for coal will grow by 2.2 per cent a year until 2030 faster than demand for both oil or natural gas.
The dirty option
Not surprisingly then, electricity generators are keen to consider coal fired generation when looking at making new investments. Coal is seen as a plentiful resource providing security of availability around the world. And it is cheap.
Despite the fact that, in the West at least, coal fired plant is increasingly seen as the ‘dirty’ option, thanks to an extraordinary uprising in environmental awareness brought about by climate change, the show is by no means over for coal.
While use in some European countries remains static or is in decline, significant increases in coal fired generation capacity are taking place in many of the developing nations, such as China and India, where large capacity increases are planned to make use of abundant coal reserves far more plentiful than oil and gas reserves. It is not hard to see why: coal fired power plants have a long working life and, with the extensive investments being made in many parts of the world, coal is likely to remain an important source of energy well into this century.
In the developed world, however, coal has a tarnished image. Pilloried by environmentalists for its huge contribution to global carbon emissions, coal has become, not for the first time, but for different reasons, political.
As a result, investing in new coal fired generation has become a risky business. Michael Morris, the boss of AEP, one of the biggest generators in the US, knows only too well the difficulties of persuading shareholders to invest in what is seen as a heavily-polluting product that could turn into a liability if the government moved to limit emissions of greenhouse gases, as Europe already has.
Yet both the US and Europe are running their coal fired plants at full throttle. Moreover, still more are being built and in various stages of planning. How could this be? Part of the answer is that the raw material is cheap, readily available, and new technologies are coming to the fore to make it cleaner. Indeed, AEP is building a new plant in the US that, Morris says, will remain profitable even at carbon prices there of $20 a tonne.
At a recent conference he warned against abandoning coal fired generation in the US. “We will find ourselves in a classic electricity shortage and we will probably pursue the line that this country usually follows when it faces a shortage and come up with some terribly ill-conceived answers,” if construction of coal fired power plants continues to be curtailed, he said.
In Europe, RWE has announced plans for three new coal fired plants at a cost of $9.1 billion, slated for 2012. Enel, the Italian generator, may more than double its coal fired generation capacity over the next five years. Rising demand for electricity in Europe, coupled with spiralling oil and natural gas prices along with concerns over energy security mean European countries are set to build about 50 coal fired plants over the next five years.
The trouble is, the future of coal is inextricably intertwined with the future of climate change policy. The price of carbon permits for 2008 rose by four per cent as investors took the view that tighter emissions rules, which came into effect this year, will lead to permit shortages in the future.
Uncertainty over policy arising from climate change, and coal fired generation’s contribution to it through carbon emissions, has led to nervousness, but not yet panic in investing in new plants. Yet, speaking at the same conference as Morris, the US Federal Energy Regulatory Commission (FERC) chairman Joseph Kelliher, said that 54 per cent of coal fired power plants ordered since 2000 had been cancelled in the past two years.
Attractiveness of coal plantS diminishing
It is clear that carbon dioxide (CO2) costs will only affect those technologies burning fossil fuels. The lower efficiency of steam plants, combined with the greater level of carbon found in coal compared with natural gas, means that the gap between combined-cycle gas turbine (CCGT) plant and other coal fired technologies will widen as the cost of CO2 increases. The cost of nuclear and other renewables (deemed to be carbon neutral) remain unchanged and, therefore, become more competitive as the specific cost of CO2 emissions increases.
And the attractiveness of coal diminishes as the price of carbon rises, making the gap between coal fired generation and CCGT plant technology even wider. According to a recent study by Britain’s Royal Academy of Engineering, a carbon price of £30 ($59)/tonne adds £0.025/kWh to a unit of electricity generated by coal, but just over £0.01/kWh for a similar sized CCGT plant.
The cost of coal is rising, but it still offers a relatively cheap form of power generation
Coal is losing its appeal as a predictable investment. Having traditionally been the source of fuel underpinning low electricity prices, coal is seen increasingly as a polluting resource, leading the major power industry players to look at new technologies for its salvation.
A recent study by Synapse Energy Economics in the USA suggests that the present climate for investing in coal fired generation has slumped to that experienced by nuclear power in the 1970s. Prior to the 1970s, nuclear power appeared to be a relatively low risk investment, with construction and operating costs largely stable and easy to predict.
The promise of cheap, abundant, domestic energy had wide appeal. But the 1970s ushered in a new era, with construction costs in the nuclear industry beginning to spiral out of control. Numerous planned power plants were cancelled, and many utilities faced significant financial difficulties associated with their nuclear investments.
Similarly, all the evidence would seem to show that coal is an increasingly risky long-term investment. More than 20 proposed coal fired power plants were cancelled in 2007 and three dozen more were delayed.
Carbon costs deterring coal investment
The Synapse report points also to the damaging costs of CO2. It considers a 600 MW pulverized coal plant (PCP) operating at an average 85 per cent capacity factor. With carbon costs of $30/tonne, an investor-owned utility that owned this particular plant would pay between $11 million and $85 million for CO2 emissions allowances in 2012.
This would increase to between $65 million and $259 million in 2020 and between $166 million and $414 million in 2030. The Synapse CO2 price forecasts that form the basis for the annual costs are substantially lower than a number of the other recent price projections. If such were to be the case, the annual CO2 costs would be even higher.
Generators know that, to remain viable, coal emissions must be reduced, but capture and storage technology is not currently commercially viable and may not be for years, or even decades. In the United States, federal greenhouse gas regulation, state regulation, the ambiguous status of technology to manage carbon emissions from fossil fueled power plants, worldwide competition for construction resources and other issues have alerted investors to the pitfalls.
“Coal projects need more regulatory certainty before any new ones are going to get built in the near future,” said David Eskelsen, a spokesman for PacifiCorp. “The current situation does make utility planning very challenging.” The company, through a joint venture with Rocky Mountain Power, has cancelled a demonstration coal gasification project in Wyoming, USA.
“This was a most difficult decision for the company,” said Richard Walje, president of Rocky Mountain Power. “Many factors influenced the decision, but the primary reasons are that overall costs of the project came in very high after detailed capital investment and operating estimates were completed. As well, significant technology risks remain, especially with the application of carbon capture processes.”
More coal plant plans canned
Even though Wyoming appears to be one of the most promising states for permanent geologic storage of carbon, there does not yet exist a federal legal and policy framework to address concerns regarding long-term liability related to geologic sequestration of carbon emissions.
“Finally, the support of the federal investment tax credit on the overall cost of energy from the project, although beneficial, was determined to not be significant compared with the overall costs our studies show. Our company did not want to put itself in a position of potentially receiving tax credits from the Department of Energy, but ultimately having to withdraw because total costs and risk for our customers were higher than we can accept,” Walje said.
Last November, Southern Company cancelled construction of another advanced clean coal power facility near Orlando, Florida, two months after breaking ground on the project.
Southern and its partner in the project, Orlando Utilities Commission, cited uncertainty about potential state regulation on greenhouse gas emissions. Scrapping the 285 MW integrated gasification combined-cycle (IGCC) facility at the Stanton Energy Center, the partners said they would instead build a traditional natural gas fired plant. The $600 million Stanton IGCC plant was the fourth coal project in Florida to be dropped in a year, but the first that was already under construction.
Public aversion to coal fired plants, uncertainty over the future costs of complying with CO2 emission caps and concerns about climate change and its effect on the economy have forced many utilities to cancel plants across the US, while onerous new regulations in Oregon, Washington and California limiting greenhouse gas emissions have also led to plans being abandoned.
Capital costs, aside from impending emissions caps, are another significant worry for investors. Standard & Poor’s noted last June that: “The power industry has seen capital costs for new generation climb by more than 50 per cent in the past three years, with more than 70 per cent of this increase resulting from engineering, procurement and construction (EPC) costs.
They also noted that: “Continuing demand, both domestic and international, for EPC services will likely keep costs at elevated levels. As a result, it is possible that with declining reserve margins, utilities could end up building generation at a time when labour and materials shortages cause capital costs to rise, well north of $2500 per kW for supercritical coal plants and approaching $1000 per kW for CCGT.”
In July, the president of the Siemens Power Generation Group told the New York Times he estimated that between February 2006 and July 2007, the price of a coal fired power plant had risen by 25 to 30 per cent.
In the UK, plans by E.ON to build a $3 billion new coal fired plant at Kingsnorth in Kent, using carbon capture and storage (CCS) technology have been put on hold until the government there has finished consultation on regulating CCS technology. It would be Britain’s first coal fired plant for 20 years.
E.ON’s UK chief executive, Paul Golby, still believes CCS is the way ahead: “Decarbonising fossil fuels – and especially coal – is one of the key challenges to be overcome if we are to combat climate change, and we aim to be right at the centre of the debate.”
The UK’s Parliamentary Office of Science and Technology recently estimated the costs per tonne of CO2 emissions reduced by CCS. They vary, but range from about £30 to £90 without enhanced oil recovery (EOR). If the CO2 is used in EOR to recover more oil, these costs are reduced by an amount dependent on the oil price.
The costs of emission reduction using CCS are comparable with those of using offshore wind power or nuclear power, the study said. Carbon emission reduction costs of about £50/tonne CO2 have been estimated to add about £0.01-0.03/kWh to the costs of electricity generation (estimates of the cost of generating electricity from fossil fuel fired baseload plants without carbon capture have been estimated as £0.022-0.032/kWh).
In the US, their faith remains in emergining technologies to breathe new life into coal fired generation.
The FutureGen Industrial Alliance, for example, has pledged some $400 million dollars under its current cooperative agreement with DOE. This level of non-profit financial donation, by the coal and coal fired utility industry, to a DOE programme, and without any opportunity for financial return on its donation, is unprecedented.
FutureGen said it hoped that the administration and Congress would view this fact as proof of the importance of FutureGen at its proposed Mattoon project, where it proposes to build a fully integrated, near-zero emission power-plant project in a small town in central Illinois.
Further proof, perhaps, that the coal fired sector can be at least as innovative as its peers. Whether the it can reverse the march of environmental politics to such a degree that the economic goal posts remain wide enough to enable it to score, only time will tell.