The Committee on Climate Change says the most important prospective source of cuts in greenhouse gases lay in the ‘decarbonisation’ of electricity generation. Photograph: Graham Turner/Guardian.

The budget confirmed the acceptance of the Committee on Climate Change‘s recommendation for carbon emissions in 2020. The UK will have to reduce its CO2 output by about 110m tonnes by 2020, equivalent to a 21% reduction on actual emissions in 2005 (and 34% on the 1990 figure). The proposed rate of emissions reduction is far faster than the UK has achieved thus far and the chancellor’s budget shows the government has started to recognise the scale of the challenge.

***

The committee told the government in December last year that the most important prospective source of cuts in greenhouse gases lay in the ‘decarbonisation’ of electricity generation. This can happen by increasing the percentage of renewable electricity, by capturing carbon at power stations and from switching to low-carbon fuels such as nuclear and gas.

The budget had incentives to encourage all of these changes. Most importantly, it improved the prospects for offshore wind. The budget recognised that the decline in bank credit, the falling price of carbon permits, and the sharp drop in the price of fossil fuels have made offshore projects increasingly difficult to fund. The worrying prospect that the 400-turbine London Array might be abandoned in the next few weeks forced the chancellor to increase unexpectedly the subsidy for electricity generated offshore.

He claims it is new government support. This isn’t quite right: we will all be paying through higher electricity bills. The new subsidy encourages the developers of this vital scheme to place their turbine orders in the next twelve months. My guess is that the government may not quite have done enough and that further fiscal bribery will be needed to get this vital project completed. This scheme, the largest offshore wind farm in the world, cannot be allowed to fail if the UK is to achieve the necessary ten-fold increase in renewables generation by 2020.

The second major measure from Darling was an unexpectedly large increase in the money going into carbon capture and storage. Energy experts have warned that the UK would not be ready to install capture technology on power stations until after the crucial 2020 date, meaning that the government’s carbon budget would be likely to be breached. So £90m is offered for ‘preparatory studies’ by the electricity generators to try to encourage more rapid progress.

There was also a remarkably vague promise to fund a further three working demonstrations of carbon capture in addition to the single contract that is likely to be awarded to the new Kingsnorth power station. We urgently need more detail on this policy change.

There were some crumbs offered to the micro-renewables industry to stop it collapsing entirely in the next twelve months. £45m is not going to go far, perhaps putting solar panels on 5,000 homes compared with the millions around the rest of Europe.

By contrast, energy efficiency measures were emphasised by the chancellor. He promised £400m for research and development, although it is unclear how much of this money is additional to existing allocations. We are definitely seeing progress in government commitments to financing fundamental work in energy efficiency and power generation. But, for comparison, the UK spends about £2.5bn a year on basic defence research and development, over six times as much as the new figure for energy.

The Committee on Climate Change’s other priorities for meeting the carbon budget included an emphasis on low-carbon vehicles and the chancellor has already announced some remarkably detail-lacking plans for subsidising electric cars. In the budget he also committed to spending £20m installing a network of battery-charging points in a couple of UK cities. This is a good start, but he would have been better changing the harsh tax treatment of electric delivery vans. This is the single measure that would do most to get silent, non-polluting vehicles on our urban streets.

He also made some perverse changes to car tax. The owners of existing cars that were among the most efficient when they bought them will now pay higher rates of duty. Owners who thought they were being virtuous are now going to be penalised. The Treasury’s not-so-subtle reasoning must be that the car tax revenues, which are tied to the carbon emissions of the vehicle – providing about 6% of all government receipts last time I looked – will start declining sharply as more and more people buy ultra-efficient cars.

As for the extraordinary car scrappage scheme, the less said the better. It would have been far more effective to pay people to tear up their driving licences and promise to use public transport.

Two further measures were also the opposite colour to green: the excise duty on lorries was held down to placate the road transport industry. And a number of incentives encouraged more drilling for oil and the extraction of the last barrels from existing fields.

Nowhere was the inconsistency between these proposals and overall emissions reduction noted by the chancellor.



This article was originally published in the Guardian on Wednesday 22 April 2009.

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.

***

As the UK Climate Change Committee’s report of December 2008 showed, generators will generally wish to develop coal, rather than gas, power stations if carbon costs are low. E.ON’s persistence in the face of the widespread opposition to Kingsnorth is testament to the truth of this assertion. Coal is today’s fuel of choice. Speaking to investors on 3 March 2009, Dorothy Thompson, the CEO of the enormous coal power station at Drax, said that in current conditions ‘coal plants tend to be more economic than gas plants’. The company also said without equivocation that ‘coal remains the most attractive fossil fuel’.

The Kingsnorth project
The new Kingsnorth will be a ‘supercritical’ coal plant composed of two 800 mW units. Total output will therefore be about 1.6 gW when the station is running at full capacity. E.ON has entered the competition for a grant to fit CCS on a portion of the new power station. It has said that it will fit CCS on the rest of the plant when it makes sense financially, and not before.

E.ON has a point. It is in business to make money. CCS will always add – probably significantly – to the cost of generating power. So it wants the UK taxpayer to fund the incremental cost. Other generators around the world have made similar requests, though rarely in so bold a way. E.ON’s great rival RWE has proposed a 450 mW plant with carbon capture at Huerth in Germany, and has made pointed remarks to Chancellor Merkel about subsidy for construction costs. US coal-fired generators have proposed an imaginative scheme for encouraging early CCS projects.

The wily folks at E.ON must have noticed the fixed and discomfited smile on ministers’ faces when talking about Kingsnorth. Which politician wants to go down in history as the person who approved a new unabated coal power station just before the Copenhagen climate change negotiations begin? E.ON seems to have offered a tempting political bargain – give us the cash and we will fit CCS from the opening of the plant. It all comes down to money.

The economics of Kingsnorth
Coal stations need maintenance, both planned and unplanned. Drax managed to be available for operation for about 85% of the time last year. Its position as the lowest cost fossil fuel station in the UK meant that its output was actually asked for about 75% of the hours in the year. Other coal stations were similarly busy. Kingsnorth will probably run about 80% of the year, slightly more than Drax. It is newer and will have a lower marginal cost to operate. (Its position in the ‘merit order’ will be behind only nuclear and wind.)

Drax has already sold much of its output for 2011. The price is about £63 a megawatt hour. If Kingsnorth achieved this price its yearly output of approximately 11.2 terawatt hours would be worth about £702m. (11.2 terawatt hours is about 3% of UK electricity use.)

The primary costs of operating Kingsnorth will be coal purchases, carbon permits, coal transport, and operations and maintenance (O+M).

Coal
Kingsnorth will be very efficient for a coal-fired power station and turn about 42% of the heat value of coal into electricity, but to be conservative I have used a figure of 40%. To generate 11.2 terawatt hours, Kingsnorth will need to buy about 3.4 million tonnes of coal. At current spot prices – which may not be representative of levels in five or ten years, or of prices for long-term contracts – this will cost about £163m. (Although coal prices are currently low, they are still above the costs of extracting the fuel.)

Carbon
Kingsnorth will generate about 8.6m tonnes of carbon dioxide. At today’s European permit prices, this will cost about £103m. (I assume that by the time the station is opened power stations will have to pay for their entire allocations of permits.)

Coal transport
The current cost of shipping coal to Drax from non-UK sources is about $17 a tonne. It should be lower at Kingsnorth because the station is on the Kent coast and can receive its own coal shipments by ship. Nevertheless, I have taken the Drax figures. This adds about £42m to the costs of running Kingsnorth.

O+M
Drax cost about £230m to operate last year. This includes the cost of maintaining the station and keeping it running flat out for most of the year. A substantial problem at one of the six turbines probably slightly inflated this figure. I have calculated an O+M cost for Kingsnorth, pro-rated by the respective electricity outputs of the two stations. This is about £101m.

I estimate net operating profit at just under £300m. (Drax operates at an approximately zero net working capital position, so this figure would be approximately the same as the cash generated by the plant before any tax.)

Summary estimate of the operating profit of the proposed Kingsnorth plant

If these numbers are correct, E.ON can expect an annual return of about 30% on its proposed £1bn investment.

The impact of adding CCS
Dr Golby, the CEO of E.ON UK, says that first generation CCS will reduce the efficiency of the plant by 20%. This is a surprisingly low estimate; others have produced much higher figures for the efficiency loss. In effect, E.ON is saying that to produce the same amount of electricity it will need about 25% more coal.[2]

Adding 25% to the cost of coal purchases will cost £41m. This is about 0.36 pence per kilowatt hour. The capital cost of a plant will be much higher if CCS is installed and its operating costs will rise. E.ON has estimated elsewhere that these extra costs total about 2p per kilowatt hour. (See ‘Carbon, costs and consequences’ from the E.ON website – I have estimated this figure from the bar chart on page 9 of the PDF.) So the additional cost of adding CCS is about 2.4 pence per kilowatt hour.

But the plant will save most of its cost of CO2 permits. Most power engineers assume that CCS will cut emissions by 90%. Only having to buy 10% of the existing volume of emissions will save E.ON about 0.83 pence per kilowatt hour.

The net consequences of adding CCS to the Kingsnorth project are therefore approximately as follows:

At current gas and coal prices, the prospective future margins for electricity generation are about 1 pence per kilowatt higher for gas than for coal.[3] (It is fair to note that gas turbine power stations are cheaper to construct than coal-fired plants, which will somewhat reduce the significance of this figure.)

The implication of this is that at today’s fossil fuel and carbon prices, and using E.ON’s own estimates, adding CCS to Kingsnorth leaves this coal power station only marginally more expensive to operate than a new gas-fired power station. Coal with CCS may be only about half a pence a kilowatt hour more expensive than gas.

Why does this matter?
E.ON’s recent announcements have opened a negotiating door. The company is clearly signalling that it wants a deal over CCS. It seems to be asking for a guaranteed price premium. Rather than see Kingsnorth open without CCS, the government might be prepared to agree a deal. The purpose of this note is to suggest that the premium should not be large; analysis seems to suggest it can be well under 1p per kilowatt hour.

To the outside observer E.ON’s tactics do not look pleasant. The government knows that the electricity supply situation looks grim beyond 2016. It may have to accept more coal. So E.ON is offering to make that new coal capacity more environmentally acceptable – provided we all pay the additional cost. In my view, the government should do the deal, provided it can keep the cost below 1p.



Footnotes
[1] Operating profit takes no account of interest payments or depreciation.
[2] If efficiency goes down by 20%, it will fall from 40% to 32%. To get the same daily output, coal use would have to rise by 25%.
[3] The ‘Dark Green Spread’ less the ‘Green Spark Spread’.

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.

***

Kingsnorth power station is currently composed of two large coal-fired plants with two burners in each. With old technology, this power station would eventually have to have been closed under the EU’s Large Combustion Plant Directive. E.ON has applied to switch the plant to using supercritical coal technology, which substantially reduces emissions. A typical old coal plant will produce 850g of CO2 per kilowatt hour produced, but this is reduced to less than 700g for a new supercritical plant, saving 20% more of the carbon emissions.

Of course another benefit is that less coal is used. A new supercritical plant achieves 45% thermal efficiency compared to 36% at today’s Kingsnorth power station (45% means that just under half the thermal value of coal is translated into electricity, with the rest disappearing as waste heat). An advanced supercritical plant will have the lowest emissions of any coal technology in the world and, with today’s gas prices of 50p a therm, the lowest fuel bills.

Nevertheless, its carbon emissions will still be far higher than a new integrated cycle gas turbine plant at about 350g per kWh. This is other UK utilities are tending to favour gas for their new power stations. When E.ON made the decision to push ahead with coal at Kingsnorth, it must have known that a high CO2 price in the European Emissions Trading Scheme could cripple the generating station. Putting £1bn down at Kingsnorth can only mean one of two things: either E.ON is convinced that coal prices will stay very much lower than gas for the next 20 years, even including a carbon premium; or, carbon capture technology is relatively close to commercial implementation so that it can afford to risk a high carbon price at some future date. Even for a company as large as E.ON, putting a £1bn down on a gamble that coal power stations will still be possible in ten years would be very brave if one didn’t feel that CCS would be available to insulate the company against a high price of carbon.

Contrast this optimism with a statement from a US power company that recently backed away from a new coal power station:

PacifiCorp has scrapped a plan to build a 527 mw pulverized coal unit in Sweetwater County.

A spokesman for the company told the Casper Star-Tribune that there is a ‘significant amount of uncertainty about what climate change regulation might do to the cost of coal plants,’ which makes ‘coal projects no longer viable.’

‘Within the last few months, most of the planned coal plants in the United States have been cancelled, denied permits, or been involved in protracted litigation.’

(From the Casper Star-Tribune, December 2007)

In the US, coal plants are being abandoned because operators cannot be sure that future regulation will allow their continued operation. In the UK, Kingsnorth indicates that utilities are actually confident of two things – first, that carbon capture will become available at a reasonable price; and second, that the price of carbon will be enough to warrant CCS. This is a big change over the past year.

Kingsnorth will probably be looking to use the Babcock CCS technology that will be trialled at the Ferrybridge coal station. This is a post-combustion technology.

In the US, the public-private FutureGen partnership announced its preferred site in mid-December for a pilot pre-combustion CCS project. CO2 will be captured from a coal gasification plant and injected into a sandstone rock formation several thousand feet below the surface. The gas will be captured in the pores of the rock and will probably never reach the surface again.

FutureGen’s proposed carbon capture plant

The FutureGen plant may not actually go ahead. Though it is backed by big coal producers and electricity utilities, the government’s commitment appears to be fading as the cost of the project increases. The original budget in 2004 was $1bn but the cost has risen to over $1.5b in three or so years as a result of steel and other price increases. This money only buys a 275 MW generator, compared to the 1600 MW E.ON is getting for about £1bn. It is an expensive experiment on a technology that will not be possible to retrofit to Chinese and Indian plants. It also requires large amounts of water and may never be economic.