WWW.IPPR.ORG AftertheCoalRush: Assessingpolicyoptionsforcoal-fired electricitygeneration byMatthewLockwood July2008 ©ippr2008 InstituteforPublicPolicyResearch Challengingideas– Changingpolicy 2 ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration Contents Aboutippr........................................................................................................................................... 3 Abouttheauthor ................................................................................................................................ 3 Acknowledgements.............................................................................................................................. 3 Abbreviationsandacronyms................................................................................................................ 4 Executivesummary .............................................................................................................................. 5 Introduction ...................................................................................................................................... 10 1.Coal-firedpowergenerationintheUK:anoverview .................................................................... 12 2.Whyenergycompanieswanttobuildnewcoal-firedpowerstations........................................... 15 3.Theroleofcarbonpricing............................................................................................................. 24 4.Theroleofthe2020renewableenergytarget.............................................................................. 31 5.ImplicationsofnewcoalplantsfortheClimateChangeBillemissionstargets ........................... 36 6.Prospectsforcarboncaptureandstorage.....................................................................................42 7.AssessingtheUKpolicydebateoncoal....................................................................................... 49 8.AwiderperspectiveoncoalandtheEUemissionstradingscheme ............................................ 56 9.Policycredibility:addressingconcernsaboutcost,securityofsupplyandplanning................... 63 Conclusionandrecommendations.................................................................................................... 72 AnnexA.Listofinterviewees ........................................................................................................... 76 AnnexB.Netpresentvalueandrisk ................................................................................................ 77 AnnexC.Coalemissionsallowances:anumericalexample.............................................................. 79 References.......................................................................................................................................... 81 3 ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration Aboutippr TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank,producing cutting-edgeresearchandinnovativepolicyideasforajust,democraticandsustainableworld. Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakingintheUK.Through ourindependentresearchandanalysiswedefinenewagendasforchangeandprovidepractical solutionstochallengesacrossthefullrangeofpublicpolicyissues. WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedaspossible, whileourinternationalandmigrationteamsandclimatechangeprogrammeextendourpartnerships andinfluencebeyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch. ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:[email protected] www.ippr.org.RegisteredCharityNo.800065 ThispaperwasfirstpublishedinJuly2008.©ippr2008 Abouttheauthor MatthewLockwoodisaSeniorResearchFellowintheclimatechangeteamatippr.Heisco-authorof severalrecentipprreports,including2050Vision,onachievingan80percentreductionincarbon emissionsintheUK,andPositiveEnergy,onbehaviourchangeandenergyuse.Priortojoiningippr, MatthewactedasanadvisertothedeputymayorofLondon,andtotheLondonClimateChange Agency.HehasalsoheldseniorpolicypositionsinseveralinternationaldevelopmentNGOs,and workedasanacademic. Acknowledgements Thisresearchprojectonthefutureofcoal-firedpowergenerationwasfundedbytheEuropean ClimateFoundation(ECF).MattPhillipsfromtheECFplayedakeyroleintheearlystagesofthe developmentoftheproject,aswellasprovidingusefulinformationandcomments. Theauthorwouldliketothankallthosewhoagreedtobeinterviewedforthisproject(listedinAnnex A),someofwhomalsogavevaluablefeedbackonearlierdrafts. Thisreportisbased,inpart,onbackgroundanalysiscommissionedfromWillBlythofOxfordEnergy Associates,availableasaseparatereportontheipprwebsiteatwww.ippr.org.Healsomadevaluable contributionsthroughouttheproject.NicolaKircupattheEnergyMarketsteamatBERRkindly providedinformationoneffectivecapacitymargins. Theanalysisalsobenefitedfromcommentsbyparticipantsatanippreventontheframeworkfor investmentinlow-carbonelectricityheldinJanuary2008,andanipprseminaronthefutureofcoal- firedpowergenerationinMay2008. Inaddition,theauthorwouldliketothankSimonRetallack,HowardReed,DannySriskandarajah,Lisa Harker,MattJackson,MiguelCastroCoelho,GeorginaKyriacou,KellyO’Sullivanandothercolleagues atipprfortheircomments. However,noneoftheaboveshouldbearresponsibilityfortheviewsexpressedinthisreport,which aresolelythoseoftheauthor. 4 ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration Abbreviationsandacronyms ASC advancedsupercriticalcoal BAT bestavailabletechnology BERR DepartmentforBusiness,EnterpriseandRegulatoryReform CBI ConfederationofBritishIndustry CCGT combinedcyclegasturbine CCS carboncaptureandstorage CDM CleanDevelopmentMechanism CEA coalemissionsallowance CHP combinedheatandpower CO2 carbondioxide DEFRA DepartmentforEnvironment,FoodandRuralAffairs EC EuropeanCommission EOR enhancedoilrecovery EPS emissionsperformancestandard ETS emissionstradingscheme EU EuropeanUnion EUAs EUallowances FGD fluegasdesulphurisation GW gigawatt GWe gigawattelectrical GWh gigawatthour IGCC integratedgasificationcombinedcycle JI JointImplementation kWh kilowatthour LCPD LargeCombustionPlantDirective LNG liquefiednaturalgas MEP MemberoftheEuropeanParliament MtCO2 milliontonnesofcarbondioxide MtCO2e milliontonnesofcarbondioxideequivalent Mtoe milliontonnesofoilequivalent MW megawatt MWe megawattelectrical MWh megawatthour NERP NationalEmissionsReductionPlan NPV netpresentvalue RO RenewablesObligation SRMC short-runmarginalcost tCO2 tonneofcarbondioxide TUC TradesUnionCongress TWh terrawatthour UKERC UKEnergyResearchCentre 5 ippr|AftertheCoalRush:Assessingpolicyoptionsforcoal-firedelectricitygeneration Executivesummary InearlyJanuary2008,MedwayCouncilgaveapprovaltoaplanningapplicationfromenergycompany E.ONtobuildanewcoal-firedpowerstationonthesiteofanexistingplantatKingsnorth.Thiswould bethefirstmajorcoal-firedpowerstationbuiltintheUKsincethe1970s. TheKingsnorthapplicationhasprovokedamajornewdebateoncoal,energypolicyandclimate policyintheUK.Thisis,inpart,becauseitisthefirstrealtestofboththeClimateChangeBillpassing throughParliament,andthewiderconsensusacrossGovernment,businessandcivilsocietythatmore radicalactionmustbetakentoreducecarbonemissions. Inthisreport,weprovideacomprehensiveexaminationoftheissuesatstake.Todecidewhatshould bedoneaboutKingsnorthandotherproposednewplants,wearguethatitisessentialtounderstand thewidercontextofenergymarketsandenergypolicy,bothwithintheUKandatEuropeanlevel. Muchoftheargumentaboutnewcoalischaracterisedbyahighdegreeofuncertainty,asarefuture electricitygenerationandinvestment. AchievingtheGovernment’sambitiousrenewableenergytargetsalsohasimplicationsforcoal–the moreelectricitywegetfromwindandotherrenewablesources,thelesswewillneedfromcoal. Ifwecouldapplytheemergingtechnologyofcarboncaptureandstorage(CCS)tocoal,thenmuchof theproblemwouldbesolved.However,boththetimingandeconomicsofCCSareuncertain,with littleprospectthatitwillmakeadifferencebefore2020. Thus,underthecurrentpolicyframeworkforcoalasafuelinelectricitygeneration,thereareno guaranteesonfutureemissions,and,asaresult,thereisariskthattheClimateChangeBilltargetsfor domesticemissionsreductionwillnotbemet.Thisisaseriousconcern,andhasledtoanumberof proposalstoclosedownthisrisk,forexamplenewregulationsonplant-levelemissions,adopted recentlyinCalifornia,oramoratoriumonnewcoalbuilduntilCCShasbeenfullydeveloped. TheGovernmentandenergycompaniesareresistanttosuchideas.Thisispartlybecausetheysee themasraisingrisksinotherareas–thatsecurityofsupplywillbemademorevulnerable,andthat energypricesmayrisetopoliticallyunsustainablelevels.Thesearerealconcernsamongthepublic, andanypolicytoreduceemissionsmustaddressthemconvincinglytoestablishcredibilitywith investors. Thereisalsoresistancebecauseproposalsforadditionalmeasuresarearguedtoundermineandcut acrossthepolicyattheheartofthecurrentframework–theEuropeanUnionemissionstrading scheme(ETS).ThecredibilityoftheEUETSasamechanismtoguideinvestmentisjustbeing established,anditsproponentsseefurthermeasuresasathreat. However,majordecisionsonpowersectorinvestmentacrossEuropehavetobetakeninthenext threeyears.Withcompaniesandtradersdiscountingthecarbonpricebecauseofuncertaintyabout thefutureofthescheme,thereisadangerthatalargeamountofinvestmentinnewcoalplantswill goahead,whichwouldnothavehappenedinafullycrediblemarket. Insuchascenariothereisariskthatitwillnotbepoliticallyfeasibletokeepthecaponemissionsin thescheme,especiallyfrom2015whenmanyofthenewplantswouldcomeonstream.Maintaining thecapinsuchcircumstanceswouldmeanlarge-scaledeploymentofcarboncapture,withmajor