EU coal is safe for now
OXFORD ANALYTICA
Exclusive
September 1, 2008 at 7:48 AM EDT
SUBJECT: The future of coal in the EU.
SIGNIFICANCE: Coal remains an important, if increasingly unloved, part of the EU's energy economy. Its share of the Union's energy needs has declined, being increasingly reduced to a fuel for power generation. Even in this market its position has been eroded and may be put under further pressure by a variety of factors.
ANALYSIS: Coal is unlikely to disappear from the EU's energy balance in the short term, particularly while oil and gas prices are high. Its long-term future depends on the development of an effective carbon capture and storage (CCS) technology. While governments and industry support CCS in principle, they are less willing to provide the necessary funds to demonstrate the technology on a large scale.
Steady decline. In 2006, solid fuels (of which coal is by far the largest component) accounted for just under 18 per cent of EU total energy needs. Of this, around 60 per cent is produced inside the Union, compared with 75 per cent ten years before:
• EU differences. The long-term decline has been strongest in countries such as Belgium and France, where the industry has almost closed, while Germany, Spain, the United Kingdom and Poland (the EU's largest coal producer) retain reduced mining capacity. The industry is characterized by varying degrees of competitiveness – Germany and Spain being the least competitive, while Poland and the United Kingdom can compete internationally.
• Restructuring. The industry is also marked by varying degrees of aid, whether for operational or restructuring purposes. The European Commission has generally approved such aid. The pace of domestic restructuring has increased in recent years, even Germany – traditionally among the least willing to restructure – agreeing to phase out aid over the next decade and in the process allow an ongoing reduction in the output of hard coal.
• Market disconnection. This decline appears to be largely unconnected to changing international market conditions: prices have doubled from 2006 levels thanks to rising prices in the oil and gas markets as well as supply side difficulties in some coal exporting states.
While high prices make the reopening of U.K. mines and the maintenance of output in Poland potentially viable, elsewhere the degree of uncompetitiveness (as well as technical and other difficulties) render a revival unlikely. By contrast, the brown coal sector – which is less energy efficient than steam coal, but less costly to mine and used in mine-mouth power plants – appears to be thriving in countries such as Germany and the Czech Republic.
Power generation. Power generation is an increasingly important part of the coal market, representing more than 80 per cent with the remainder used mainly in steam-raising industrial processes. However, coal's share of the electricity market depends on the relative price and availability of other sources of power generation.
In 2006, coal (hard coal and lignite) accounted for just under 30 per cent of power generated in the EU; sectoral shares varied from none or minimal in France, Sweden, Austria and Belgium, to over 30 per cent in the United Kingdom, around 50 per cent in Germany and over 90 per cent in Poland:
• Maintaining capacity. Though lower than in the past, the figures remain surprisingly robust. Tightening EU rules on emissions and on the age of much coal capacity should have forced a decline in the contribution of coal to power generation. Yet current energy market conditions make the continued use of coal-fired generation attractive enough for utilities even in the longer term. Some major utilities, including Vattenfall, E.On and RWE, are planning new coal plants (partly to replace existing ones) in various parts of Europe, particularly Germany and the United Kingdom.
• Public opposition. Yet, notwithstanding economic conditions and mostly supportive governments, such ambitions face serious public opposition from environmentalists and local groups. Plans for new coal capacity in Germany have faced particular challenges – the issue may yet split the first regional Green-Conservative coalition in Hamburg. In the United Kingdom, environmentalist protests have been intensified against proposed sites, while planned investments in the Netherlands have faced court challenges.
Emissions issues. The main driver of opposition to new coal is its contribution to carbon dioxide (CO2) emissions (a coal-fired station emits almost three times as much as a gas-fired plant). While coal advocates claim that, compared with existing plant, the stations will be more efficient and emit relatively less CO2 per kilowatt-hour produced (and reduce considerably other emissions), critics argue that new coal will lock in electricity systems to high levels of CO2 emissions for another 40 years:
• CCS technologies. Coal's future will depend on the development of effective CSS technologies. Long-term targets, such as the reduction of emissions by 50 per cent by 2050, will be hard to meet without such technology. Moreover, with the high levels of coal use in other parts of the world, EU policy makers have highlighted the importance of demonstrating the technology to bring others into future phases of climate mitigation (and potentially securing a lead in this technology).
• New EU rules? As part of the 2008 energy-climate package, the Commission proposed a directive on the procedures for the geological storage of carbon along with amendments to existing legislation on such issues as environmental impact assessment, pollution control and environmental liability.
The Commission argued this would ensure a high level of environmental integrity for the development of this activity, allow it to operate on a cross-border basis and avoid distortions of the carbon market and of competition more generally. The proposal establishes a framework for permits for exploration and development of sites, while leaving member states with discretion over implementing the framework.
• CCS incentives? The Commission also proposed measures to encourage CCS development, including the establishment of twelve large-scale demonstration sites by 2015 (an objective originally agreed in 2007). A mooted mandatory target that all new plants be equipped with CCS after 2020 was not included as the technology is not yet mature.
Such a view is shared by most member states, but some European parliamentarians are pressing for a greater range of incentives and sanctions to encourage CCS take-up. The parliamentary negotiators have called for an obligation on new plants planned after 2015 to incorporate CCS and for emission credits for CCS plants under the emission trading scheme (ETS) – i.e., more than the currently envisaged ‘zero emission' status which would render CCS competitive with a conventional coal plant paying for emissions permits.
• State aid? There are also numerous calls for direct support to CCS. Many in the electricity industry are concerned that the carbon price will not by itself be enough to boost investment in CCS. Direct subsidies upwards of €1-billion ($1.5-billion U.S.) are seen as necessary to build large-scale demonstration plants, and the Commission has signalled that extensive support will not breach state aid rules.
• EU funding? However, the Commission may be forced to do more than allow governments to provide aid. There is growing pressure for EU-level aid given the apparent unwillingness of most member states to provide sufficient funding. Yet it is not clear where such funds could come from – so far, the EU only envisages 200 million euros for CCS-related research. Proposals to earmark some of the proceeds from ETS auctions are not likely to find favour with governments, many of which regard this as general revenue.
CONCLUSION: The French EU presidency is expected to present a CCS Action Plan in the coming months. However, in the absence of substantial financial support and (politically sensitive) mandatory targets, it will be difficult to boost CCS in the medium term. In the interim, coal will continue to contribute substantially to the EU's energy needs (and its carbon output).
