Image source: Scientific American (courtesy of American Electric Power).

Two pieces of news provide evidence of a fightback by coal. American Electric Power’s Mountaineer plant in West Virginia is reporting significant success for its small scale carbon capture project. And the UK has just licensed exploratory boreholes for offshore Underground Coal Gasification (UCG), a woefully under-researched technology that may make CO2 sequestration easier. The scale of the challenge facing the globe’s coal users is enormous but with determined research and development, the fuel may remain usable for power generation in a low-carbon world.

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Mountaineer
Vattenfall’s Schwarze Pumpe coal plant has been separating CO2 for a year or so. It hasn’t been putting the gas back into the ground because of resistance from citizens not wanting CO2 under their back yards. AEP started collecting and storing some of the CO2 from its Mountaineer electric power plant in early autumn 2009 using Alstom’s chilled ammonia process and injected the gas into permeable rocks 2.5km underneath the plant. Today’s process captures the CO2 from just 20 MW of the plant’s output. An upscaling of the plant will multiply this ten-fold by 2015.

Today (Wednesday 9 December 2009), the Wall Street Journal reports that the plant’s operators are pleased with the early success. AEP says that the energy penalty from operating the carbon dioxide separation and sequestering process is less than expected. (The Alstom process uses energy to heat the ammonia to separate the CO2 after it has been captured.) AEP’s CEO is reported as saying that the cost increase is no more than 4 US cents a kilowatt hour. Even this, however, would approximately double the cost of electricity produced at the plant. The optimism at AEP matches Vattenfall’s cautiously upbeat projections for the long-run cost of CCS when capturing the CO2 from a large power station’s entire output.

Clean Coal Ltd
Underground Coal Gasification (UGC) drives off useful combustible gases from coal seams. The gases are then burnt to produce electricity in a conventional gas power station. The technology has been known about for a century or more but technological advances have been slow. In recent years, the level of interest around the world has increased, partly as a result of concerns about climate change but also because of worries over the long-term availability of natural gas.

UGC is a ‘clean’ process in that it avoids the need for mining and burning coal and extracting sulphur and other pollutants. But it does face real environmental challenges in, for example, avoiding the pollution of local water supplies around the gasification sites. UGC is also not truly ‘clean’ in that it offers only a marginal improvement on conventional coal power stations in the amount of CO2 it produces. (This fact tends not to be mentioned by UGC proponents.) The world leader in UGC, Linc Energy of Australia, puts CO2 output per kWh of electricity at around 750 grams, compared to 400 grams for a combined cycle gas-fired power station.

The advantage of UGC is that it may offer cheaper sequestration of CO2 than a conventional coal station as well as much lower capital costs to build than a surface coal gasification plant. The gas coming up from the coal seam will be largely hydrogen, carbon monoxide, methane, and carbon dioxide. CO2 can be stripped from the combustible gases relatively easily because it is at high pressure. The remaining gases are then burnt in a gas turbine, producing water and nearly pure CO2. It may – only may – be possible to re-inject the gas into the coal seam for permanent storage. Some industry proponents think that this technique will eventually offer the lowest cost carbon capture and storage from coal.

The UK government has just licensed some experimental wells to be drilled by Clean Coal Ltd, a US/UK company run by industry pioneers. The wells will be in thin seams of offshore coal that would never be economical to exploit by conventional mining techniques. Offshore drilling also avoids some of the problems of subsidence that may occur when the coal is gasified underground in onshore locations.

The company’s press release says:

The UK Coal Authority has awarded Clean Coal Ltd licences to investigate the potential for underground coal gasification at 5 sites in the UK.  If the investigations over the next 12-18 months prove to be successful, commercial operations could start by 2014/15 and could lead to underground coal gasification producing 3-5% of the UK’s total energy requirement by that date.

This statement is over-ambitious. Other UCG projects around the world have taken much longer and gas production from underground coal is still something of an art. Although the Soviet Union ran UCG plants, only one of these remains open today. One of the leading scientists in the field, Dr Julio Friedmann of the US Lawrence Livermore lab, says, ‘A large number of basic science questions remain in the field of UCG.’[1]

Importantly, the Clean Coal press release is very vague about carbon capture and storage at its UK sites. Powerfuel, which is intending to use mined coal for surface gasification in Yorkshire, has been more specific and recently achieved EU funding for its plans. Without CO2 capture, Clean Coal Ltd is unlikely to be able to move forward in the UK or elsewhere, but the quickening worldwide pace of interest in UCG is a good sign.

The UK’s huge reserves of coal make it particularly important that the country invests in the research and development necessary to take the technology forward. Unfortunately, as ever, we are late to the game. China has graduated over 100 PhDs in UCG from one mining university and Linc in Australia is far more advanced with its plans for onshore gasification. As with several other technologies, the arguments for investing hundreds of millions in UK research and development over the next five years are overwhelmingly strong.

Footnote
[1] S. Julio Friedmann, ‘Accelerating Development of Underground Coal Gasification: Priorities and Challenges for U.S. Research and Development’, Coal Without Carbon: An Investment Plan for Federal Action (Clean Air Task Force report, September 2009), p. 8; available here in PDF format.

Until this week, we thought that Sizewell B was likely to be the most expensive nuclear power station built in the UK. Image source: World Nuclear Association.

The Guardian newspaper of Monday 19 October broke the story that the UK government is preparing to guarantee a minimum price for carbon dioxide emissions to encourage the development of nuclear power stations. Putting a high cost on greenhouse gas emissions from power stations will force up the wholesale price of electricity, ensuring a better financial return for nuclear power stations (and for renewables such as wind). The decision to create a floor price for carbon demonstrates that the full costs of nuclear technology are probably well above today’s wholesale electricity prices. We may well need nuclear power but we are going to pay heavily for it. The government’s optimistic noises from 2006 to the middle of this year about the commercial viability of nuclear power have turned out to be wrong.

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More generally, this note argues that the failure to incentivise nuclear construction in the current liberalised electricity regime may oblige the UK to introduce high guaranteed ‘feed-in’ payments for all low-carbon generators, including the very largest power stations. Guaranteed tariffs may be a more effective instrument for incentivising low carbon generation than the carbon dioxide price.

2006 government views on the costs of nuclear
In September 2006, David Kennedy, then a senior civil servant in the UK Department of Trade and Industry (now BIS) and currently the chief executive of the Climate Change Committee, submitted a paper to an academic journal on the economics of nuclear power.[1] The paper was published the following year. In the paper Dr Kennedy looked at the likely costs of building new nuclear plants in the UK. He then used these estimates to say what the wholesale price of power would need to be to encourage the building of new nuclear power stations.

Table 3 of his robust and cautious paper contained 10 estimates from independent external sources of what is called the ‘levelised’ cost of electricity from new nuclear. ‘Levelised’ figures spread the costs of a power station over its expected lifetime generation of electricity and account for matters such as the deconstruction of the power station at the end of its life. An interest rate is applied so that money spent now is given a higher weight than the money expended in sixty years’ time.

The ten estimates quoted by Kennedy were as follows:

The average was £30 per megawatt hour (mWh). This is equivalent to 3p per kilowatt hour. For comparison, current UK retail prices for electricity are about 13p a kilowatt hour.

Dr Kennedy’s paper went on to provide a more conservative figure that UK policymakers might use. He assumed a cost of £37.50 per kilowatt hour. The analysis also suggested a figure of £43.70 as an ‘extreme’ high case.[2] The wholesale price of electricity, at least as shown in medium-term contracts to buy and sell power, varies between about £50 per mWh and about £60.[3] Ofgem’s recent energy market scenario report also suggests a figure of about £60 for late in the coming decade when the first new nuclear plants might be starting to generate. So readers of Dr Kennedy’s paper would have assumed that nuclear power is profitable at current market prices and at projected future levels. Indeed, government policy-making from 2006 to 2009 has explicitly assumed that nuclear is ‘cost-competitive’ with other forms of generation such as gas and coal.

The views of the Committee on Climate Change, December 2008
By late 2008, the Committee on Climate Change (CCC) had a very slightly different view:

Current estimates of the likely cost of generating electricity from new nuclear are in the range 4-5p/kWh (£40-50 per mWh). These cost estimates are higher than typically produced two to three years ago, as a result of the significant increases in steel and other component prices, and of significant supply bottlenecks which have emerged as demand for new nuclear power station construction has come up against a limited capacity supply industry.

But fossil fuel price increases over that period have produced an even greater increase in the cost of fossil fuel based electricity, and the relative cost position of nuclear has therefore improved.

Less than a year ago, the CCC was saying that nuclear was the lowest cost generating plant for power generation even though its estimates were higher than Kennedy’s figure of two years earlier. ‘4-5p’ per kilowatt hour for nuclear compared favourably to more than 6p for gas generation and more than 7p for coal. Its view was unambiguous:

Nuclear power is competitive with both coal and gas-fired generation in the central fossil fuel price scenario even without a carbon price.

The Guardian’s news story
In October 2009, if the Guardian reports are accurate, the government is admitting that nuclear is not able to compete with fossil fuels except with protection from a high carbon price. The newspaper mentions a figure of €30 a tonne, compared to today’s price of CO2 emissions permits in Europe of about €13 a tonne. This levy will be added to the cost of using coal as a fuel for the power station and the effect will be to increase wholesale prices.[4] A €30 price for a tonne of CO2 will add about £20 to the cost of producing a mWh of coal-generated electricity.

During the course of 2009 the implied cost of nuclear power has risen from being no worse than competitive with gas and coal (at a zero carbon price) to being €30 (£27) per mWh more expensive.

Put at its simplest, the progression in nuclear cost estimates is therefore as follows:

* £20 for the carbon permits to produce a mWh of coal-fired electricity added to the current wholesale price of £50 or future prices of £60 per mWh. Assumes that that the €30 a tonne figure suggested by the Guardian is the level required to cover the ‘levelised’ costs of nuclear power per mWh.

For reference purposes, it may be helpful to know that the last nuclear power station built in Britain, Sizewell B, has levelised costs in today’s money of about £60 a mWh, or somewhat less than the apparent current projections of nuclear costs but higher than any of the government figures from the 2006-8 period.

Why is this important?
Nuclear power has gone up in price, probably by a factor of between two and three above what was expected even a few years ago. This is no surprise and even this blog predicted such figures early this year (see here and here). The continued problems at the new Finnish nuclear power station raise the strong suspicion that cost estimates will rise further in the future.

More generally, the Guardian report buttresses the case of those who say that the UK needs a guaranteed floor on the carbon price urgently. Today’s gas prices are very low by recent standards and depressed world economic growth may cause this to continue. The rational investor is therefore looking to build new combined cycle gas turbine power stations to profit from these low fuel prices. This runs the risk of either locking the UK into carbon-emitting power generation and/or shortages of power if the current glut of gas reverses unpredictably or if emissions targets oblige the generators to curtail production. But, as it stands today, the generators are queuing up to build unabated gas power stations. At today’s gas and carbon prices not only nuclear power but coal with carbon capture is looking very expensive.

The EU’s decision last week to back Powerfuel’s Hatfield coal gasification (IGCC) plant is welcome, but the project may only make financial sense with carbon prices at least as high as needed for nuclear power. Powerfuel’s proposed technology is still largely unproven at the scale envisaged and it may well turn out to be far more expensive than expected. There are many sceptics out there around the world saying that IGCC with capture will be even more expensive than nuclear. And offshore wind, today buttressed by a temporary increase in renewable subsidies in the UK, will need similar long-term incentives.

Are there any solutions?
My strong sense is that the woefully slow progress in developing new UK sources of low-carbon electricity might possibly be remedied by agreement between the main UK political parties on a high and semi-permanent carbon tax, probably of at least £40 a tonne. This may imply an increase in electricity costs of about 3 pence per kilowatt hour, a painful jump on already historically high levels.

Or – and this runs completely against the spirit of electricity market liberalization over the last twenty years – it may be simpler to copy the micro-generation feed-in tariffs scheme and offer a stable and guaranteed price for low-carbon electricity sources constructed in the next fifteen years, perhaps with higher prices for the first 10, 20, and 30 gigawatts of capacity constructed. The early rate might be £80 per mWh for nuclear, £90 for coal with capture, £70 for onshore wind, and £100 for offshore. The effect of this measure will be to unwind the working of the free(ish) markets in electricity generation and retailing. Few people may yet be willing to contemplate such a massive change, but even enthusiasts for liberalised energy markets must surely admit that the inability to incentivise the construction of nuclear, coal with CCS or even wind under the current system is indicative of a market failure of dangerous and unprecedented proportions.


Footnotes
[1] David Kennedy, ‘New nuclear power generation in the UK: Cost benefit analysis’, Energy Policy, 35.7 (2007), 3701-16.
[2] Kennedy 2007: 3709.
[3] Drax power station, by far the biggest in the UK, records in its latest financial statement of August 2009 that the average price it has sold electricity in the forward market for 2011 is £60.30 per mWh.
[4] This requires the assumption that coal power stations are pressed into service last: after gas and renewable (i.e. in economist’s language, coal stations are the ‘marginal’ producers).