“Perfect storm" has arrived for efforts to reduce carbon emissions

Efforts to reduce carbon emissions in the UK and across Europe are facing a combination of factors strongly hindering investment in low carbon power generation and energy efficiency and promoting the burning of coal.

Now who do you believe? Today, one British tabloid newspaper is reporting that the construction of gas power plants is “twice government predictions", while another is reporting the exact opposite.

The Guardian reports Friends of the Earth analysis of the latest Government figures, from October, saying that while about 5GW of new gas-fired power generation will be needed to supply the UK in the coming decades, “power stations with more than 3GW of capacity are already now under construction and nearly 10GW of plants have received planning permission. In addition, nearly 10GW of capacity is in the earlier stages of planning".

Meanwhile, the Financial Times is warning that with 11GW of mainly coal-fired generation due to close by 2015 under the EU’s Large Combustion Plant Directive, we are burning more coal because it is currently cheaper than gas.

What is the truth?

Actually, both, at different time scales. Either way, however, it's not good news for the climate.

Coal is too cheap

Gas is today trading at just over 58p per therm, yielding baseload power for delivery today from gas generation of ￡45.20 per megawatt-hour. This does not leave much room for profit when electricity is trading at 45.50 ￡/MWh, and this is why coal generation is now favoured over gas.

The FT says “coal plants have been pumping at more than 75 per cent capacity, compared with 25 per cent a year ago".

This is a continuation of the trend of burning more coal over the last two years which is helping to push up the U.K.'s carbon emissions.

Partly as a result of increased demand, UK Coal moved from an interim loss of ￡93.2 million to a profit of ￡22.1 million in the six months to last June, following losses totalling ￡270 million over the previous three years. (However, this has not stopped it from announcing plans today to close the U.K.'s biggest coal mine, Daw Hill, near Coventry, by early 2014 when current seams are exhausted.)

The demand is driving strong imports of U.S. and Colombian coal into Europe, and prices have fallen to just over $100 (￡64) a tonne.

This figure is wildly different from that predicted by the government just six months ago: $124 (￡80).

(In fact, the price of coal wasn't even the price that DECC's report said it was at the time it was published; yet these now wildly inaccurate figures are those on which the Government bases its energy policy.)

The low price for coal is also partly the reason why Drax announced last month that it was scrapping plans for a new biomass power station, calling for more support for biomass generation from the Renewables Obligation to counter an increase in its fuel costs; although it put these fuel costs at just ￡33.3 per megawatt-hour, significantly less than that for gas.

Too many carbon credits

None of this is helping the UK, or Europe, meet its greenhouse gas emission targets.

The problem is that with coal prices low, a recession on, and an over-abundance of EU Emissions Allowances resulting in a low price of carbon, there is insufficient disincentive to burn coal, let alone gas, and consequently even less incentive to build renewable energy generation, nuclear power stations or develop carbon capture and storage.

Hence the need for DECC's
announcement this week of a ￡20 million competition to develop Carbon Capture and Storage technology, in the hope that it will reduce the price of this still unproven technology.

This combination of factors is the perfect storm for attempts to reduce carbon emissions this decade.

Carbon prices fell by over half during 2011 and are now still trading for under €8.

Despite rumblings from Brussels, the Commission is dragging its feet on moves to set aside allowances in order to restrict demand and stimulate the price.

Instead, it seems to be hoping that by the end of the year, when airlines begin being required to purchase carbon-emission allowances as part of their role in the Emissions Trading Scheme, this will stimulate a price rise. But that is still nine months away.

According to carbon market analyst Steven Knell, from IHS CERA, the ETS in no longer the main policy tool for reducing emissions ″because the supply and price of allowances are fixed and predetermined. The market is poorly equipped to deal with disruptions in demand levels," he says.

“This, plus the financial crisis, the consequent fall in emissions, and the fragile nature of the recovery, added to recent price decline due to the expectation that policy risks will deprive the market of demand, mean that action to fix the problem is urgently required".

The oversupply means that only 6.8% of all EUAs are trading; a poor proportion. This amounts to 550 million tonnes, which is equivalent to all the emissions of the non-power generation industry members of the market in Europe, i.e., the high energy users like steel and concrete; or, to put it another way, all of the U.K.'s allowances.

“This yields a long position and indicates what the price will be like in 2020: that it will not change sufficiently to stimulate the demand required for investment in energy efficiency and renewable energy lesser-known carbon capture and storage or nuclear power," says Knell.

The supply of carbon-emission allowances needs to decline more aggressively and prices need to be higher.

The policy overlap in Europe needs addressing, he says. “The latest agreements give the possibility to set aside some EU Allowances to promote energy efficiency in the draft of the Energy Efficiency Directive, but the amount set aside would need to be substantial," he says.

“Strong medicine is needed."

“Strong medicine is needed," concludes Knell. He points to an increase in European ambition for emission reduction cuts from 20% to 30% by 2020, which, he says is achievable due to the recession's effects.

However, Poland has just vetoed this target at last Friday's meeting of environment ministers because of its own addiction to coal-fired electricity generation. This vote is not binding on a Commission decision however, and it remains to be seen what will happen.

In the meantime, only two strategies are available to individual governments, because they can't control the price of oil, and these are to tax carbon and support the carbon price.

Therefore, any measure that favours the energy-intensive industries by reducing the impact of carbon-penalising policies in next week's Budget from the Chancellor, George Osborne, will send precisely the wrong signals to the market.

The setting of the carbon price floor, and reform of the energy market are urgently required to favour carbon-reduction investment and weather this storm.

But contrary to the impression given by the Financial Times article, whatever happens the lights will stay on in Britain, because of the number of gas-fired power stations that have received planning permission; they may not be built just yet, but they will be built when coal and nuclear generation comes off-line in the future, to meet any demand not met by offshore wind.

But whether it's coal or gas, it locks in more UK carbon emissions than desirable for the next 20 or so years. Chancellor: are you paying attention?