Coal to Gas Fuel Switching in the UK: The Role of Carbon Pricing
The most under observed recent trend in European energy is the return of coal and the dire state many gas plants are now in, a stark contrast to what is occuring in the United States. To illustrate this consider a few simple statistics. Last year electricity from coal fired power stations decreased by 11%, while electricity from gas increased by 22%. However in the UK electricity generation from coal increased by about 30%, while electricity generation from gas decreased by about the same percentage. This is not the result of new coal plants being built in the UK - none are being built, and any new plants will require carbon capture and storage - or gas plants being decommissioned. It is simply a result of the changes in the relative costs of coal and gas.
Drax Power Station, England
The essence of an electricity mix is as follows. You build enough capacity to be able to supply peak demand, some coal, some gas, some nuclear, etc. However what is being fed into the grid at any given moment is based on what plants have the cheapest running costs. Wind farms have no fuel costs, so if it's windy the grid will take the electricity. Uranium is much cheaper than coal and gas, so nuclear runs 24/7 mostly. However the amount of electricity generated by gas and coal plants is very dependent on the relative costs of each fuel.
A good example of this is what happened in the United Kingdom last year. Coal was cheap and gas was expensive. The result: coal use went up around 30%, while gas went down by roughly the same amount. An obvious consequence was that the UK's carbon emissions increased.
What however would happen if the market ignored price, and only cared about the carbon intensity of the electricity generated? I will refer to this as an "emissions first electricity market." Quite obviously carbon dioxide emissions would go down, but by how much? Fortunately the Committee on Climate Change has estimated the achievable emissions intensity in each year from 2007 to 2012, which is in essence my "emissions first scenario."
The actual emissions intensity of UK electricity, and what is achievable are shown below:
As can be seen the emissions intensity shot up in 2012, from 483.9 to 531.1 gCO2/kWh, a 10% increase.
But what if instead of 531.1 gCO2/kWh instead we got that lower "Achievable" figure of about 315 gCO2/kWh? This would result in approximately 215 gCO2/kWh less being pumped into the atmosphere. And given the total UK electricity generation of 363.2 TWh, this would save approximately 80 million tonnes of CO2, or 15% of UK carbon dioxide emissions.
So, how could you achieve these emissions reductions? The problem here is simple. Coal from electricity is currently much cheaper than that from gas. There are only three things that can change this equation: coal can become more expensive, gas can become cheaper, or we can put a high enough price on carbon to cause coal to gas fuel switching. Once again figures from the Committee on Climate Change are instructive. Here is a graph they produced showing the evolution since 2011 of the short run marginal costs of electricity from existing coal and gas plants. In essence we want a carbon price that will result in the blue line below moving below the red line.
The change since 2011 is quite clear. From being very similar in price, coal has declined steadily in price, while gas has gone up. Essentially the marginal costs of electricity from coal are now almost half those from gas power plants.
In the first three months of 2013 the short run cost of gas generation averaged 5.34p/kWh compared to coal at 2.9 p/kWh. In comparison the figures for the first three months of 2011 were 4.53 p/kWh and 4.52 p/kWh for gas and coal respectively.
Predicting future prices of fossil fuels always has an element of shamanism to it, so I am not going to speculate about the prospects of gas becoming cheaper than coal. What about the carbon price? Clearly the carbon price from the emissions trading scheme is having no effect, it's currently the price of a cappuccino from Starbucks (and you can probably hold off on that extra shot of espresso). However we can use the figures above to get a rough idea of how high a carbon price would need to be to make the running costs of gas plants and coal plants very similar.
So, here is the current situation. One kWh of gas costs about 5.34 p/kWh and produces about 400 grams of CO2, while one kWh of coal costs about 2.9 p/kWh and produces about 1000 grams of CO2. To make the costs of gas and coal equal we would need a carbon price of around £40/tonne of CO2. This is about ten times higher than the current price on the European Emissions Trading Scheme, and is also much higher than the current carbon floor price of £16 set up by the UK government earlier this year, and even higher than the targeted price of £30 by 2020.
And those of us with no long memories can remember a time when the European Emissions Trading Scheme hinted at functionality and had a carbon price of over £30/tonne of CO2. However, as David MacKay points out, that didn't last long.
So, the UK seems to have some options to reduce emissions by coal to gas switching in power plants. One is to increase the current carbon floor price to around £40/tonne of CO2 (it is currently less than half this amount), the second is to bet on a rapid transition to shale gas, and the third is to attempt to reform the ETS so that the carbon price is as expensive as a meal for two with a bottle of wine, and not that of a Happy Meal. I will leave it to the reader to decide which one is more likely to succeed.
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