ETS Reform: Will we see gas overtake coal?
With no economic rationale to run or build gas-fired power plants, modifications to the European Emissions Trading Scheme (ETS), which regulates factories, heat-emitting installations and power stations, are a change that everyone has been waiting for in the national gas industry. Better regulation could mean that power generation companies have an incentive to burn lower emitting natural gas instead of running on much cheaper, dirtier coal.
Reforming the ETS would aim at reducing this oversupply, according to Geoffroy Hureau, Secretary General, CEDIGAZ, who says that by doing that, normally the price then should increase and could increase at a level that would favor gas over coal.
But coal is really much cheaper than gas in terms of energy: 2-3 times cheaper than gas, he reports.
According to him, while this has been going on for several years the burning of coal has been increasing in the period 2009-2012. “In 2013, I think less coal was burnt, but that didn't mean more gas was being burnt,” he observes. “Renewables keep coming on the market and now in Germany some coal plants have started to also have problems and are not profitable any more. They've started to become less and less profitable. At some point, only the lignite plants will be profitable – that's a problem.”
Now, he says, change could be forthcoming.
“Policymakers have started to realize that something has to be done in order to have the adequate capacity at some point to deal with the intermittency created by renewables, because when renewables don't run you still need the same capacity as without renewables,” explaine Mr. Hureau. “If these capacities are not profitable, they close. That's what's happening at the moment and why in some countries we see the emergence of capacity markets to avoid not having enough capacity.”
According to him, there were some things missing from the ETS when it was formulated in 2005.
He says, “In fact, the amount of allowances that were issued were calculated on historic emission trends and emissions curve targets, but it didn't take into account the other policy of a certain percentage of renewables – Horizon 2020 was not taken into account in the calculation of the allowances – they were two separate policies, and because of the increase in renewables, less allowances were needed in fact.
“It resulted in an oversupply of allowances and very low prices of CO2, and those prices were not enough to make a difference between coal and gas. It was not an incentive to invest in low carbon technologies,” says Mr. Hureau.
Within that context, last year his organization, CEDIGAZ, released a report on gas and coal competition in the european power sector.
“This report shows that coal may be a problem, but the main problem is gas demand in the power sector with the rapid growth of renewable power, which has created overcapacity that has pushed other capacity means with higher costs out of the market – and those are gas plants, which are at the far end of the cost curve” he explains.
According to Mr. Hureau, while this has been apparent in Germany with the Energiewende, it is also happening in other countries like the UK, at least for a period.
“Gas lost a lot of ground, while coal progressed,” he says. “This was partly due to short-term factors like the fact that some of the old coal plants in the UK had only a certain number of hours to go, and with the anticipation of a tax in the UK they wanted to use these allocated hours before the tax went into force, so they were run at high rates,” he recalls.
While the fall in the oil price has resulted in lower gas prices, according to Mr. Hureau, at the same time coal prices have gone down, so this doesn't change anything. “To make a change, CO2 prices have to go up. That's what's happening in the UK, because they have a tax to compensate between a minimum level and the price of allowances in the market,” he says.
Mr. Hureau recalls that his organization began drafting its coal/gas report with the premise that coal was the problem, but then realized it was a secondary problem to renewables.
He explains, “Gas power has always been more expensive than coal that's in the system, even before all this renewable power came online – both were used and gas was used for peak periods, and that made a business case for gas. Now, there's just no need for this extra capacity, so in our report finally what we say that there is obviously a need for reform of the EU ETS and that's very important.”
Following that, he says the industry is likely to need a new market design to allow investment to enable the necessary capacity to deal with the intermittency of renewables. “We believe the best energy to manage intermittency is gas, because it's more flexible than coal, more efficient for load following,” says CEDIGAZ's Geoffrey Hureau.
-Drew Leifheit