E.ON

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The existing Kingsnorth power station. Image source: E.ON.

The existing Kingsnorth power station. Image source: E.ON.

E.ON’s £1bn plan for a new coal-fired power station at Kingsnorth is waiting for approval from the UK government. Other generators have shifted away from coal. Drax, which owns by far the largest coal power station in the UK, is investing in biomass. Other companies have focused on new gas plants. Why is the world’s largest investor-owned utility pushing ahead with a project to burn coal without carbon capture?

The answer, unsurprisingly, is that burning coal to generate electricity is extremely profitable. Very low prices for emissions permits and tumbling coal costs mean that a profit-seeking management team is highly incentivised to try to push for permission to use coal in power stations. This article provides the background calculations for an estimate that the new Kingsnorth will generate an operating profit of about £300m a year if current fuel and carbon prices persist. Additionally, it also tries to show that the cost of fitting CCS equipment and running the plant to capture the large majority of all carbon emissions is likely to add no more than about 1.5p per kilowatt hour to the cost of generating electricity at current coal and carbon prices. This means that a new coal fired power station with CCS may have operating costs only marginally above gas power plants

Nevertheless, E.ON has just asked for government subsidy to install CCS at Kingsnorth from day one. The purpose of this article is to offer an estimate of the maximum the government ought to offer E.ON in order to get it to invest in CCS prior to opening the new power station.

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Yes, do lag your loft

For once, the government has got its climate change policies right. The idea of a windfall tax on energy suppliers has widespread support. One hundred or so Labour MPs have come out in favour. Caroline Lucas, the newly elected leader of the Greens, has advocated such a policy and many Conservatives express private approval. The trade unions were infuriated by Alistair Darling’s refusal to back the proposal. Rather than backing a windfall tax, it looks like he favours plans that oblige the utilities to improve the energy efficiency of customers’ homes.

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Offshore location map of the London Array
Offshore location map of the London Array. Click on the image to see a more detailed map from the London Array website (opens as a PDF).

Shell backed out of its commitment to provide the financing for one third of the world’s largest offshore wind farm off the Kent coast. The London Array, expected to cost about £2bn, now needs to find a new investor. What about tapping the public? The project has reasonable economics, and private individuals could benefit from 40% tax relief by putting shareholdings into pension plans. Perhaps as importantly, such a move would raise understanding of renewable energy generation among the wider community.

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E.ON's planned Kingsnorth supercritical coal plant
E.ON’s planned Kingsnorth supercritical coal plant

E.ON’s plan to install supercritical coal-burning technology on its Kingsnorth site in Kent was (unsurprisingly) supported by the planning authority. A more interesting question is why E.ON persisted with the application in the first place. Even carbon efficient power stations emit far more carbon than gas plants. A high price of carbon would make the Kingsnorth coal plant uneconomic. The answer to the question must be that E.ON is confident that supercritical coal plants can be economically retrofitted with carbon capture technology (CCS). So even if the carbon price increases dramatically, coal will still be competitive.

E.ON’s US operation is closely aligned with the co-operative FutureGen venture, which plans to build a coal gasification plant in the US within five years. This power station will then capture CO2 and store it in sandstone. FutureGen gasification carbon capture technology is ‘pre-combustion’, unlike the ‘post-combustion’ focus in Europe. US electric utilities are now assuming that coal plants without CCS will not be allowed. But in both the US and Europe there seems to be a prevailing assumption that a $30 per tonne CO2 price is sufficient to cover the cost of CCS technology, meaning coal will eventually be back in the power station mix.

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BBC World ServiceTwo pieces of market research published in the last week give some more support for the view that opinion is moving towards accepting that climate change will require lifestyle changes. BBC World Service interviewed individuals across the globe. Power company E.ON produced its segmentation of British consumer attitudes.

The BBC survey suggested that over 80% of UK people are ‘ready to make significant changes in the way I live to help prevent global warming’. Nearly 90% think that changes in lifestyle will be necessary to address the problem. These numbers are approximately the same as among urban Chinese and only marginally higher than the US.

E.ON’s segmentation has over 20% of the UK already taking serious and possibly costly personal action related to climate change. Less than 15% actively reject any need to act now.

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It is adventurous of E.ON to decide to invest in tidal stream generator farm. The announcement in the last few days confirmed that the company intended to put a tidal plant off the coast of Wales in a partnership with Lunar Energy.

The Severn barrage scheme (see Carbon Commentary Newsletter #3) is a ‘tidal range’ scheme. The electricity is generated by damming the river at high tide and then letting the water flow out through turbines as the tide falls. Tidal stream technology captures the energy of the tide as it flows through constricted channels. The UK has many potential sites for tidal stream power stations, but the best locations are off the north coast of Scotland and around Alderney in the Channel Islands.

Why then has E.ON chosen Wales? Perhaps the company doesn’t want to test the technology in the toughest conditions. An attempt to use similar underwater turbines in New York’s East River has been frustrated by the breaking off of the tips of the turbine blades in the fast flowing tides. The UK’s offshore conditions will be far tougher. Or it might be that E.ON knows that it would be expensive or impossible to connect the turbines to the distribution grid in the locations of highest energy potential (see the news story in this section on BT’s plans for wind turbines in Orkney and Shetland). Previous rumours have suggested that the eventual site chosen will either be off the coast of Pembrokeshire or off Anglesey.

The recent report into the Severn barrage noted that there at least 24 different technologies for capturing tidal stream energy in the UK. The device promoted by Lunar Energy sits on the sea floor, is about 20m long and has a turbine diameter of about 12m. The blades sit within a case which focuses the tidal flow. As a Venturi device, the speed of the water flow within the case is greater than the flow outside, adding to the amount of energy that can be captured.

Is wave power economic? It is probably too early to say. The UK has excellent tidal streams around the country, but even this advantage may not be enough. Lunar Energy optimistically quotes figures of around 2.5p to 5p per kilowatt hour, which would make the technology extremely attractive, but these figures appear only to be based on some guesses made in the US. The Carbon Trust’s recent report suggested figures at least three times as much for the first implementations of tidal stream power plants. On the other hand, informal figures from the New York project have suggested figures close to the Lunar Energy estimates.

E.ON has been working with Lunar Energy for some time. It had been thought that the generator would not commit until after sea trials of the first Lunar device in Scotland next year. Last week’s announcement suggests that E.ON’s confidence in the technology and Lunar Energy is high.

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Do dedicated biomass electricity generating plants make financial sense?

E.ON UK has recently announced a plan to build a second power station using 100% energy crops as fuel. The first investment – a £90m power plant at Lockerbie in Scotland – will open within the next few months. The second plant, still only in the planning stage, will be in Sheffield on the site of a previous generating station. Both power plants will use wood from forestry and specially planted willow but Sheffield will also burn waste wood from other sources, such as industrial pallets. These are the first two large-scale plants in the UK if we exclude the ill-fated Arbre plant of several years ago. (Arbre was an extremely advanced wood chip gasification plant built in Yorkshire. It was never fully commissioned.)

By the standards of the electricity industry, the E.ON investments are tiny. The proposed Sheffield plant has a price tag of £44m compared to £1bn for E.ON’s intended investment in the new super-critical low(ish) emissions coal power plant at Kingsnorth in Kent. Nevertheless, Lockerbie and Sheffield do appear to make good financial sense, at least in part because of the revisions to the renewable energy subsidy scheme announced in the government’s June 2007 Energy White Paper.

This article looks at the prospective financial return from operating a power plant burning wood and other energy crops.

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