Analysis

Exclusive: Energy Bill loophole allows return of king coal

Joss Garman
License: All rights reserved. Credit: Greenpeace

Joss Garman reveals how a loophole in the government's energy reform package is likely to mean much of our power comes from ageing coal plants for years to come.

As I write this, about a third of the UK’s electricity is coming from highly polluting coal-fired power stations.

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The Economist recently noted how in April 2012 this country’s coal-burning fleet became the single biggest source of our power generation. This trend has continued over the past few months as we’ve seen a further jump in coal combustion, and consequently carbon emissions.

Now a loophole in the coalition’s new Energy Bill could allow continued high levels of coal burning at existing power stations well into the next decade. As well as risking very high greenhouse gas emissions, this scenario could also jeopardise investment in lower-carbon energy sources.

The prevailing consensus in the energy policy world has been that the recent spike in coal burn is a very temporary shift driven largely by high gas prices, low coal prices and an inconsequential carbon price signal from the impotent European Emissions Trading Scheme. (ETS) Furthermore, there has been a broad consensus – including from the leaderships of all three main political parties - that there should be no significant future role for coal generation without CCS, because of the excessive levels of pollution from the process. DECC’s central scenarios project that only about 1.7% of total UK power generation will be coming from unabated coal by 2029.

Ministers have consistently pointed to existing EU directives on acid rain pollution that are about to kick in (the “IED” and “LCPD”) as well as the UK’s new “carbon floor price” (CFP) as policies that will increase the costs of coal-burning and cause our old coal burning stations to become unprofitable and need to close.

Having surveyed the views of major industry players, I’m now convinced it is time to challenge this consensus.

The prevailing conditions of the energy market mean that coal burning is now so immensely profitable that utilities will be very tempted to ditch any plans they may have had to shut their filthy power stations. Instead they may keep them open by simply paying the Chancellor’s ‘carbon tax’ and fitting the necessary technology in order to limit acid-rain causing pollutants and comply with the European directives.

Significantly the government have said they will allow new ‘capacity payments’ to be paid to old coal operators. Crudely put, this means taxpayers could also be directly subsidising our existing giant coal fleet operators, making coal burning even more profitable than it would be anyway.

All this could, unexpectedly, see up to a staggering 20GW of coal – around a fifth of our national power generating capacity - stay on the grid that everybody had thought would be retired. (Bloomberg reportedly expect there will still be 14GW of unabated coal in operation once the new EU rules take full effect.)

A senior government source told me that DECC has not been planning for a scenario with such large amounts of unabated coal into the 2020s, and that anxiety over policy failure on this issue is now rising in the department.

As the Committee on Climate Change have repeatedly warned, continued unabated coal burning beyond the early 2020s would certainly ensure we have no chance of decarbonising in line with the national carbon budgets set out in the Climate Change Act.

A back of the envelope calculation suggests that if you take Bloomberg’s figure of 14GW of unabated coal staying on the system, that could lead to emissions of around 90 million tonnes of Co2 per year - about the same as the combined carbon footprint of Sweden and Norway.

But won’t George Osborne’s ‘carbon floor price’ stop life extension for dirty coal?

In a recent report the International Energy Agency (IEA) suggested:

“A price of about EUR 50 (around USD 67) would be required to effect a switch from coal to gas in the short run.

Given relative capital, operation and maintenance costs, prices required to influence long-term capacity switching are likely to be lower – around EUR 25 (USD 34) in Europe based on current conditions, for example.”

This suggests the UK carbon floor price (CFP) – currently set at £16 per tonne, and theoretically rising to £30 in 2020 – could be an insufficient lever to make unabated coal burning uneconomic by the early 2020s. (And that in turn assumes the floor price does indeed rise by 2020, which many doubt given how rightly controversial such a move would be. If you’ve followed the debate over fuel duty, you can see why many hold these doubts.)

So what does the power industry itself think?

When I asked RWE Npower – a company with major coal interests - whether they thought that the CFP would make unabated coal burning in the UK uneconomic, they acknowledged that it may well not, stating:

“A carbon floor price of £30 by 2020 (closer to £33 /t in 2012 prices) will have a significant impact on the economics of unabated coal-fired generation. It will however depend on other market conditions in 2020 and in particular coal and gas prices.”

Similarly, when asked the same question, Shell’s representative told me:

“The final answer is very sensitive to the various coal, gas and electricity prices at any one time. The age (and therefore efficiency) of the coal plant is also a factor. What is clear though is that the answer is fairly substantial – i.e. not a few Euros. Various studies show that you may get some shift starting at around €25-35 per tonne CO2, but others go as high as €60-70 for a long term substantial change.”

… And an analyst at Centrica told me:

“We would expect coal to gas switching in the UK to start happening to a limited extent at carbon prices in the range of €30-35/tonne, and more extensively in the range of €45-50/tonne.”

“When we refer to a "limited extent" we mean the point at which the highest efficiency gas station would first start displacing the lowest efficiency coal one.   There would then be a gradual move to gas from coal as the carbon price increases, such that the average gas plant has displaced the average coal plant in the second range.”

Similarly, BP’s chief economist Christof Rühl said just last week that average carbon prices in the EU's emissions trading system (ETS) would need to be around €40-45/tCO2e to drive a switch from coal to gas across Europe.

What this tells us is that whilst regulatory and fiscal forces may yet still combine to push old coal off the system, there is now clearly a substantial risk that they may well not if we only rely on the CFP and the ETS.

In fact, it’s possible to conclude that the only major reason we’re not witnessing a major new ‘dash for coal’ here is that the government’s new ‘Emissions Performance Standard’ – introduced following the high-profile public campaign to stop Kingsnorth and other new unabated coal stations – will soon take effect, making it illegal for any new coal power station to be built that doesn’t capture a proportion of its carbon emissions.

Viewpoint: There is a solution

It is time for the Energy Secretary Ed Davey and his team to look at shutting the loophole for dirty coal by simply extending their Emissions Performance Standard (EPS) ‘backstop’ function to make sure that it covers any coal plant that could remain on the grid.

It is important to note that this would not lead to the complete closure of these power stations, because the EPS operates as an annual limit to a power stations carbon emissions, and therefore this would merely limit coal plant running hours to prevent them operating at baseload.

This small change to the Bill is now crucial if decarbonising our economy is to remains possible – and if Ed Davey is to make good on his promise of no life extensions for old coal.

David Cameron made the argument himself back in 2007 as he announced his plan to introduce an EPS for power stations:

“All existing coal-fired power stations should be retro-fitted with CCS, and all future coal-fired power stations should be built with CCS. If we don’t do this, we will not meet our carbon emissions targets. Of course, today the technology is not yet fully in place. But that is not a case for inaction now.”