(The author is a Reuters market analyst. The views expressed are his own.)
Limited reform of EU emissions trading may not achieve much in CO2 cuts as the falling competitiveness of cleaner technologies is driven more by plunging coal than carbon prices.
The financial crisis has slashed carbon prices to record lows by creating a glut of emissions permits.
The European Commission wants to boost prices by rationing the supply of EU allowances (EUAs) from next year.
The aim is to tilt investment in favour of lower carbon energy like gas, nuclear and carbon capture and storage (CCS), as well as to drive efficiencies by raising the cost of carbon emissions.
But raising carbon prices would also hike energy bills across the 27-country bloc as suppliers pass the higher electricity generating costs to power prices, a significant political risk.
Energy Commissioner Guenther Oettinger last week suggested that CO2 prices should double for the scheme to be more effective.
“A price of 6 to 8 euros is not a price signal for anything, not for investors and not for consumers,” he told Reuters, preferring a range of 12-18 euros.
But a glance at the economics of power generation shows it is falling coal prices that is making low-carbon nuclear and CCS especially uncompetitive right now.
Carbon prices would have to rise to eye-watering levels to reverse that, to about seven times present levels to make nuclear competitive with coal, for example, and far higher levels to make CCS economic.
Similarly, Oettinger’s carbon price of about 15 euros would fail to make gas competitive with higher carbon-emitting coal, because coal prices are so low.
Intervention may make sense to drive lower cost emissions cuts, but the Commission should be explicit about the size of benefit, for example in additional carbon curbs or energy savings, before taking the risk of hiking consumer fuel bills.
Full generation costs for the lifetime of a new power plant can be compared across coal, gas, nuclear and CCS in a measure called the levelised cost of energy (LCOE).
One important part of the LCOE, especially relevant here, is the carbon cost.
Burning coal in a power plant emits more than twice as much carbon dioxide as burning gas.
Burning Europe’s more popular, bituminous coal emits 0.83 tonnes of CO2 per megawatt hour (MWh) compared with 0.37 tonnes for gas, according to the International Energy Agency, using recent data averaged across developed countries.
The EU ETS assumes that nuclear power is zero carbon, while CCS plants are expected to trap about nine tenths of emissions from burning fossil fuels.
From 2013, power plants in western Europe must buy a carbon permit for each tonne of CO2 emissions.
Under present EUA prices, the resulting carbon costs are highest for coal (5.8 euros per MWh); followed by gas (2.6 euros), CCS+coal (0.6 euros), CCS+gas (0.3 euros), and nuclear (0 euros).
Using Energy Commissioner Oettinger’s preferred EUA price of about 15 euros, these carbon costs are roughly doubled.
At that point they account for nearly a fifth and a tenth of the LCOE for a new-build coal and gas plant respectively.
However, they still do not make nuclear and CCS competitive, after sharp falls in coal prices over the past 12 months.
A Thomson Reuters LCOE analysis using published consultancy (Parsons Brinckerhoff) estimates for operating and capital costs plus actual, present wholesale fuel costs suggests that EUA prices would have to rise to politically unfeasible levels to make nuclear or CCS competitive with coal or gas.
EUA prices would have to rise to around 45-90 euros to make nuclear compete with coal and gas, and 70-140 euros for CCS.
Similarly, the EUA (fuel switch) price needed to make gas more economic than high-carbon coal is currently around 50 euros (depending on assumptions about fuel price and power plant efficiency), seven times the present carbon price.
The conclusion is that nuclear power and CCS, and for that matter renewable energy and gas, all need other support policies to help them compete with coal.
Just how far nuclear power and CCS lag fossil fuel raises two questions.
First, is the extra support money well spent that policymakers (and ultimately consumers and taxpayers) have to pay to make these technologies work?
In Britain, for CCS, that additional support will include a power price premium (also passed to consumers), a share of a 1 billion pound UK capital grant and a share of a European Union 2 billion euro fund.
And secondly, is a limited reform of the carbon market worth it? The answer is probably “yes”, but the European Commission must explain better why.