Saturday, January 5, 2013

Europe: Green Energy Policies Contributing to Increased Coal Consumption?

It is ironic—if not tragic—that at a time when natural gas prices and regulatory policies in the United States are causing large declines in coal consumption, the same factors are generating increased consumption of coal in Europe. 

An article in The Economist explains the factors at work.

"As American utilities shifted into gas, American coal miners had to look for new markets. They were doing so at a time when slowing Chinese demand was pushing down world coal prices, which fell by a third between August 2011 and August 2012 and is below $100 a tonne. These prices make European utilities willing buyers. European purchases of American coal rose by a third in the first six months of 2012."

Europe has not benefited from the increased supply of gas that fracking has provided in the United States. It still receives most of its natural gas via pipeline at prices negotiated long ago. But that is not the only factor in play. Imminent environmental regulations are causing a surge in coal usage to take advantage of the cost difference while still possible.

"In April 2012 coal took over from gas as Britain’s dominant fuel for electricity for the first time since early 2007. The amount of the country’s electricity provided by coal in the third quarter of last year was 50% greater than the year before."

This is expected to be temporary and Britain will eventually lower coal usage.

"Under a European Union directive which comes into force in 2016, utilities must either close coal-fired plants that do not meet new EU environmental standards or else install lots of expensive pollution-control devices. The deadline for companies to decide which course to take is this month. If a company closes a plant, it will be given a maximum number of hours to run before it must be shut down (depending on how much pollution it produces). This is a big incentive to burn a lot of coal quickly."

The cost of building coal-fired plants that meet the EU standards is not so great that they become uneconomical. A number of them are being planned for.

"....if you count the number of applications for permits to build coal-fired power stations—as the World Resources Institute, a think-tank in Washington, DC, does—the number of planned new coal plants in Europe is much higher: 69, with a proposed capacity of over 60 gigawatts, roughly equivalent to the capacity of the 58 nuclear reactors that provide France with most of its electricity."

In Germany, where the push for renewable energy is strongest (Energiewende), its policies have had unintended consequences. Germany accompanied its push for renewable sources with an aggressive plan to phase out nuclear power. This leaves the country with a need for new capacity, and cost effectiveness points toward coal.

The price differential between gas and coal is being exacerbated by the preference given to renewable sources. Power utilities would make most of their profit by selling power at high prices during the peak usage period. Unfortunately for them, that is also the peak in availability of renewable sources.

"At the beginning of November 2012, according to Bloomberg New Energy Finance, a research firm, power utilities in Germany were set, on average, to lose €11.70 when they burned gas to make a megawatt of electricity, but to earn €14.22 per MW when they burned coal."

In order to try to remain profitable, the energy utilities are switching from natural gas to coal. The net effect is that renewable energy sources are replacing gas with coal—not what had been intended.

This increase in coal consumption has reversed the EU’s downward trend in carbon emissions.

"The EU aims to reduce carbon emissions to 80% of their 1990 levels by 2020. Thanks in part to the recession, by 2009 it was most of the way there—a bit more than 17% down on the 1990 level. In 2010, though, emissions began rising. Bloomberg calculates that carbon emissions from power plants rose around 3% in 2012, pushing total emissions 1% higher than they were in 2011."

One might have expected the EU’s vaunted cap-and-trade system for carbon emissions to have precluded such an increase in carbon output. The following illustration indicates that while coal consumption has been rising, the carbon price has been flat or falling.

Having a carbon permit trading scheme is an excellent idea, but it is necessary that it function properly.

"The problem is that when the system was set up, regulators allowed companies overly generous permits to pollute, in part because of lobbying and in part because the effects of the recession were not foreseen. This oversupply has swamped the impact of emissions from coal-fired power plants."

Nevertheless, the long-term outlook for a greener Europe is positive, in spite of the current perversity. However, the author is unable to leave without a final dose of sarcasm.

" the moment, EU energy policy is boosting usage of the most polluting fuel, increasing carbon emissions, damaging the creditworthiness of utilities and diverting investment into energy projects elsewhere. The EU’s climate commissioner, Connie Hedegaard, likes to claim that in energy and emissions Europe is ‘leading by example’. Uh-oh. "

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