ENERGY WATCH #4 - September 4, 2018
“The biggest carbon supply squeeze Europe has ever seen” could lead to a gas boom – and crisis in coal mining regions
by Karel Beckman
The Carbon Tracker Initiative – the UK-based think tank which popularized the terms “carbon bubble” and “stranded assets” – reports that “The EU carbon market has been the hottest commodity market in the world over the last 16 months, with the price of European carbon allowances (EUAs) up 310% since May 2017, 120% since the start of the year.”
The price rice has been “driven by the market’s anticipation of the start-up from January 2019 of the Market Stability Reserve (MSR), the centrepiece of the EU-ETS reform agreed last year. With only five months to go before the MSR starts reducing the over-supply of EUAs [carbon allowances] by 24% of the outstanding cumulative surplus each year over 2019-2023, the market is now counting down to the biggest supply squeeze the EU-ETS has ever seen”, writes CTI.
In a new report, called Carbon Countdown, CTI tries “to model the amount of emissions reductions that can occur from fuel switching and energy-efficiency savings over 2019-23 if EUA prices rise to levels that flip the merit order and enable gas to run ahead of coal across the EU.”
“The logic of our argument”, writes CTI, “is that the supply squeeze caused by the MSR over 2019-23 will create a cumulative deficit for the power and aviation sectors over these five years of ~ 1.4bn tonnes, and that in order to clear the market over this period power generators will have to reduce emissions via switching from coal to gas.”
The report concludes “that in order to achieve the level of fuel-switching required to clear the market over 2019-23 it will be necessary for combined-cycle gas-turbine plants (CCGTs) with a thermal efficiency rate of 45% and above to displace coal plants with thermal efficiencies of 38% and below. With the fuel-switching price very sensitive to efficiency rates, then other things being equal this implies higher EUA prices than we imputed from our modelling in our previous report, Carbon Clampdown.”
CTI stresses that its projection for 2019-2023 is subject to many uncertainties, relating to:
- exactly how much abatement might be required over 2019-23
- the amount and availability of CCGTs with the required efficiency levels
- the evolution of commodity prices between now and 2021, the EUA price required to plug generators’ and airlines’ forward-hedging gap could be higher or lower than the levels imputed from our modelling
CTI also notes that “it is important to remember that the EU-ETS is ultimately a political construct, and there is therefore always a political dimension to EUA prices. This is not only because of the impact of CO2 prices themselves on EU industry – after all, industry is largely protected from high prices at the moment owing to its accumulated surplus of EUAs and to the fact that it is still receiving the vast amount of its EUAs for free – but also because higher CO2 prices will raise power prices for both industry and households. Accordingly, we also provide a reminder in this report of the measures that could be taken under existing legislation – i.e. before the scheduled review of the MSR in 2021 – to smooth the impact of lower auction volumes when the MSR is at its peak over 2019-21.”
In case you are wondering what exactly the Market Stability Reserve (MSR) is about, the CTI report has a very useful infographic that sums it all up:
Whatever the exact amount of coal-to-gas switching that we will see, it is clear that the rising CO2 price spells trouble for the coal sector.
That is not a big surprise. The European Commission’s Joint Research Centre published a report at the end of June, on the EU coal regions, noting that around 160,000 jobs of the half million jobs may be lost in the European coal sector by 2030.
The report contains interesting facts and figures and draws some important conclusions. Here some highlights:
- Coal today accounts for 16% of gross inland energy consumption in the EU, and 24% of the power generation mix.
- Six countries still rely on coal to meet at least 20% of their energy demand.
- The role of coal is, however, decreasing, as part of the ongoing transformation of the energy system. The need to reduce greenhouse gas emissions has led to an increasing share for renewables; and coal power generation is actively discouraged with stringent post-2020 emission requirements, high CO2 emission allowance prices, and likely restrictions on coal eligibility for future capacity remuneration mechanisms.
- There are currently 207 coal-fired power plants in 21 Member States … with a total capacity of almost 150 GW (15% of total European power generation capacity); and 128 coal mines in 12 Member States and 41 regions with a combined annual production of approximately 500 million tonnes (55% of gross EU consumption).
- It is estimated that the coal sector currently employs about 237,000 people. The vast majority work in coal mining (185 000). Poland employs about half of the coal workforce, followed by Germany, the Czech Republic, Romania, Bulgaria, Greece and Spain. Twenty regions account for nearly 200,000 direct coal-related jobs. Six of these regions are in Poland (including the region of Silesia with an estimated 82 500 jobs in 2015) and another five in Germany.
- Throughout the coal value chain the number of indirect jobs dependent on coal activities is up to 215,000, with four regions in Poland, Bulgaria and Czech Republic presenting above 10,000 jobs each. Many of these jobs will become redundant in the next decade, both in direct and indirect coal activities.
- The vast majority of coal-fired plants in Europe were commissioned more than 30 years ago. These plants are on average 35 years old, with an estimated efficiency of 35%, well below the current state of the art. The first wave of power plant retirements will take place in the period 2020-2025, driven by competition in a carbon-constrained world. This could lead to the loss of 15,000 direct jobs in power plants.
- The countries hit hardest are likely to be the UK, Germany, Poland, the Czech Republic and Spain. A second decommissioning wave between 2025 and 2030 could cause the loss of another 18,000 jobs, mainly in Germany, Poland, UK, Bulgaria and Romania. By then, approximately two thirds of the current coal-fired power generation capacity will have been retired.
- Carbon capture and storage (CCS) as a mitigation option to reduce CO2 emissions could facilitate the continuity of operation of retrofitted coal plants in the longer term provided it is economically viable and that legal and regulatory challenges are overcome. Preliminary estimations indicate that roughly 13% of European capacity can be retrofitted with CCS.
- Coal mines are already closing down due to a lack of competitiveness. In 2014-2017, 27 mines were closed across Germany, Poland, the Czech Republic, Hungary, Romania, Slovakia, Slovenia and the United Kingdom. In 2018, 5 more will close in Germany, Poland Romania and Italy. Further 26 mines are expected to close in Spain. Taking into account criteria, including mine productivity, depth of operation and product quality, it is estimated that coal mines in Romania, Slovakia, Spain, the Czech Republic, Germany, Italy, Poland, Slovenia and the United Kingdom could close in the short to medium term. Overall, it is estimated that about 109 000 mining jobs are exposed to high risk due to a lack of competitiveness.
- In regions with mining infrastructure the dependency on the coal industry resulted in limited development of other economic sectors – most coal regions have a lower GDP/capita than the national average.
- The decline in coal-related activities will also affect other sectors of the economy. The European iron and steel sector relies on domestic coking coal – a critical raw material for the European economy – to meet 37% of its needs. Hard coal mines capable of producing this type of coal could continue to operate purely by serving this sector, as long as coking coal prices are sufficient enough to sustain mining operations.
According to the JRC, “the retirement of coal assets should be coupled with a strategically planned and gradual industrial restructuring process, aiming to support redundant coal workers. New employment and business opportunities can be created by building on the industrial heritage of the affected regions and establishing new, competitive industries and services.”
What also will not come as a surprise is that not everyone is ready to accept the end of the coal era in Europe.
The Polish electricity industry association PKEE has reacted fairly critically to the JRC report. In a press statement released on 30 August, the PKEE notes that “The assumption of decommissioning ca. 70% of coal-fired power plants’ installed capacity in Poland by 2030 is at the same time completely unrealistic. Its fulfilment would result in a serious threat to energy supply security. This would result in the entire Polish economy having to pay the cost of implementing the decarbonisation policy.”
Overall, the European Commission’s Report “minimises the impact assessment of the negative consequences of the coal sector restructuring that will affect mainly local communities”, says the PKEE. “The Report fails to indicate well-justified proposals for remedial measures and at the same time ignores the consequences such as depopulation of coal regions as a result of migration, loss of human capital or increase in poverty. The Report leads to the conclusion that it will be local communities which will pay the most for meeting obligations, benefits of which will be distributed on a global scale. Therefore a just distribution of the costs of decarbonisation coupled with sources of financing adequate to the scale of the identified challenges should be a necessary precondition of the transformation to a “green” EU economy.”