The role of coal in the European power sector
Delivered steam coal prices into Europe have increased two-fold over the course of 2003. Whilst this may satisfy the strategic objectives and profits of coal suppliers in the short-term, a more interesting question is whether this state of affairs can continue.
The position of coal suppliers into the European market is best looked at by pulling together developments in fuel supply, production efficiency and environmental regulations. The focus of this article is to provide an idea of the magnitude of the challenge facing coal suppliers into the European market by natural gas and the impact of the EU Emission Trading Scheme due to take off in 2005 and designed to curb the emission of greenhouse gases.
Gas-fired technology is cleaner and more efficient
When it comes to power production, coalâs main challenger is natural gas. From a technological standpoint, the thermal efficiency of a pulverised coal (PC) power plant is far less than that of a gas turbine in combined cycle configuration (CCGT). Typical efficiency of a PC is around 36% whilst that for a newer CCGT is 50%, measured in terms of delivered energy based on higher heating value of the fuel. If we compare the fuel plus operating costs per unit of production, this means that the price of coal (in terms of price per unit of energy) must be nearly 40% lower for the two power stations to be on equal footing.
Over time new generating capacity will be required to replace the old and to meet growing demand for electricity and heat. Coal-fired plant cost about twice as much to build on a cost per unit of capacity installed as an equivalent CCGT plant ($1,100/kW and $550/kW for PC and CCGT plant respectively). For baseload production this means that a new CCGT would be cheaper than equivalent PC plant unless coal prices reflected a discount to the price of natural gas of more than 60% (This conclusion is not affected by the promise of improved efficiency. At 36% efficiency, the coal price must include a discount of 62% when compared to the price of gas. If the efficiency of a new PC were 45%, the discount would still have to be 58%).
Taking the impact of new emissions regulation into account
How will this conclusion be affected by the growing awareness of environmental matters? In the European context, it is worth highlighting two initiatives: the introduction of the Large Combustion Plant Directive (LCPD, Directive 2001/80/EC) and the forthcoming EU Emissions Trading Directive (ETD). Both discriminate against dirtier and more carbon intensive plant and will play a role in determining the medium term demand for coal.
The revised LCPD legislates for a tightening of emission rates, starting from 2008, for SO2, NOx and dust. Higher coal use depends on owners willingness to install flue gas clean up equipment, otherwise plants will face early closure.
Whether owners make the necessary investments depends a lot on the value of greenhouse gas emissions certificates. The ETD paves the way for a EU15 cap-and-trade scheme to limit the amount of CO2 emitted as part of the wider effort to meeting the requirements of Kyoto. This Directive tells us that most of the EU Allowances (EAUs) will be allocated at zero cost to the owners of affected installations, giving carbon intensive units such as coal-fired power stations an advantage. However, just because these allowances are inherited, it does not mean they have no value. The fact that these can be traded in the secondary market means that for internal management, power companies will incorporate the full market cost of the allowances on operations and investment decisions. This threatens to have a significant impact on the competitiveness of PC plant.
After taking into account the carbon content of the fuel and the thermal efficiencies, a typical PC station produces more than twice the amount of CO2 per unit of electricity delivered than a gas-fired CCGT (about 900kg/MWh for PC against 370kg/MWh for CCGT). Therefore, the impact on the marginal operating costs would be nearly three times greater for a PC plant than a CCGT as shown in Figure 1.
Figure 1: Additive impact of EUAs on PC and CCGT marginal operating costs
The early market for EUAs has prices in the range of 10 to 15 â¬/tonne. The impact of an allowance priced at the equivalent of $10/tonne would be to increase the cost of energy delivered to the grid by a PC plant by $9.0/MWh and that for CCGT by $3.7/MWh. For two existing PC and CCGT plants to be equally matched, the price of coal would therefore have to incorporate a 53% discount on the price for natural gas (compared to 39% without CO2 pricing). If we switching attention to question of new build, the equivalent discount for coal would have to be 68% before an investor would consider building a new PC power plant before a gas-fired CCGT plant (compared to 62% without CO2 pricing).
