by Tanya Bodell, CRA International Inc.
Although advocates claim clean-coal power generation must be an underpinning of future U.S. energy policy, such power plants are not yet a reality. At question is whether developments in clean-coal technologies will occur fast enough to overcome other uncertainties surrounding its economic value.
Clean coal is shorthand for coal-based power generation with pollution-reduction technologies. Most recently, the focus of clean-coal technology has been on reducing carbon emissions through carbon capture and storage (CCS). If the project pipeline for integrated gasification combined-cycle (IGCC) power plants is any indication, however, commercialization of coal-fired power plants with CCS suffered a significant setback during the past year. Regaining investor interest requires a combination of factors, including reasonably predictable costs for carbon capture, transportation and storage technologies, attractive commodity prices and resolution of legal and regulatory uncertainties.
The IGCC Project Pipeline
The project pipeline for IGCC power plants is one indicator of potential investment in clean-coal power plants. The IGCC process creates a concentrated stream of CO2 that facilitates carbon capture and transportation. Although redesign of coal-fired power plants and retrofit technologies for existing plants provide alternative ways to create a clean-coal facility, investment in IGCC offers a more cost-effective option for producing power from coal in a carbon-constrained world.
Figure 1 illustrates the project pipeline of cumulative capacity for IGCC plants at the end of each quarter since 2000.
IGCC project additions were negligible in 2008. Although Duke Energy began construction on its Indiana plant, many more plants in the proposed or application phase were delayed or cancelled, resulting in a sharp decline in the quantity of IGCC facilities in active development since its peak in early 2007. This decline may seem puzzling given President Barack Obama’s support during the 2008 campaign for clean-coal and carbon policy. The decline in active projects, however, indicates significant uncertainties surrounding clean coal beyond carbon policy.
Uncertainty in Costs of Carbon Capture and Storage
There are substantial technical risks facing clean-coal investments. CCS encompasses many engineering systems: equipment required to separate and capture carbon, compressors to concentrate the effluent stream, pipeline systems to transport and injection technology to sequester it in long-term storage.
Means of monitoring, verifying ongoing storage and measuring possible seepage also may be required. Such technologies may differ for new plants vs. retrofits on existing coal plants, for IGCC vs. pulverized coal, and geographically because of geologic impacts on injection and storage. The total cost to produce power in clean-coal plants will vary according to the capital cost of capture and compression equipment, additional operating and maintenance costs, efficiency losses, the distance from the storage reservoir and the type of reservoir, plus the cost of carbon resulting from an implemented carbon policy.
Although components of clean-coal technology such as coal gasification, carbon pipeline transportation and enhanced oil recovery may be well-established, no operating coal-fired power plant exists that combines all the technologies required to reduce carbon emissions to levels at or below those of a combined-cycle natural gas plant.
Even the level of carbon emissions reductions that constitutes clean coal is subject to debate, ranging from 50 percent under recent Illinois legislation to 90 percent as defined by federal government-sponsored demonstration projects of a near-zero-emissions coal-fired power plant. Commercialization of clean-coal power plants is not expected until after 2020 and could be delayed depending on economic conditions and when legal and regulatory uncertainties are addressed.
Volatility Due to Commodity Prices
Clean-coal economics depend on energy commodity prices for two reasons. First, fuel prices drive electricity production costs and are an important component of the levelized cost of electricity (LCOE) without CCS. Second, the price of the additional electricity required by the equipment to compress, capture, transport and sequester carbon depends on fuel prices.
In an attempt to simplify the complexities associated with these cost variables into a single metric, the National Energy Technology Laboratory (NETL) under the Department of Energy (DOE) estimated the all-in costs of CCS for specific clean-coal technology configurations, using the LCOE as the analysis metric. The LCOE reflects the variable cost of producing power (e.g., fuel and O&M) plus the fixed cost converted to a price per megawatt hour produced over the life of the plant under an assumed capacity factor. Setting aside any option value (discussed later), the expected average price of electricity over the life of the plant would have to be sufficient to cover the LCOE before it would be considered a financially viable investment.
Figure 2 compares the LCOE of fossil-fuel technologies with and without CCS using the NETL cost assumptions, but modifying fuel costs to reflect current price levels for coal and natural gas compared with 2008 peak levels.
Base costs of fossil-fuel plants without CCS under 2008 levels indicate that pulverized-coal plants could be the most economic option for long-term investment under a scenario of high gas prices. Base costs for IGCC are slightly less than natural gas plants when gas prices are high—around $8 per MMBtu—a level above historical gas prices but not out of line with gas prices prior to the recession, possibly explaining the interest in developing IGCC plants as stand-alone generation plants.
IGCC offers a low-cost option to implement CCS in the face of carbon constraints. The incremental cost of CCS reflects costs of carbon-capture equipment, transportation and storage costs, as well as an inefficiency penalty created by CCS processes. Under DOE assumptions, the costs to capture carbon from bituminous coal plants are significantly higher than the incremental costs of CCS technology on coal gasification and natural gas plants. IGCC plant configurations offer cheaper carbon mitigation, providing a more cost-effective option to add carbon-capture capability in a carbon-constrained world.
Although the all-in LCOE for natural gas and IGCC plants are similar, CCS is not likely to be employed on natural gas plants. The values at the bottom of Figure 2 indicate the cost of avoided CO2 on a dollar-per-ton basis. Natural gas combined cycles produce lower carbon emissions and the cost per ton to capture and store emissions for a natural gas plant is significantly higher than for a coal-fired plant. CCS technology is most expensive on natural gas plants and least expensive on IGCC plants when measured by cost per avoided ton of CO2. For example, if carbon prices were $40 per ton, CCS would be an economic option for IGCC. Unless the carbon price doubled, however, a gas-fired plant owner would be better off paying for the right to emit carbon, either through the purchase of a carbon-emissions credit or payment of a carbon tax, rather than investing in carbon-control technologies.
Relative price levels and volatility in commodity prices are important factors in clean-coal investment decisions. As the relative cost levels in Figure 2 illustrate, the recent fall in natural gas prices creates an economic challenge for IGCC power plants.
Regulatory and Legal Uncertainties
Clean-coal risks are not solely technical. Without consistent policies mandating change and government support for research and development, the promise of clean coal may never be realized.
Government support of clean coal currently takes many forms. Funding research and development is one way the DOE has supported clean-coal advancement. Illinois recently signed into law the Clean Coal Portfolio Standard Act, creating a mandatory requirement for load-serving entities to purchase up to 5 percent of their electricity from clean-coal facilities (defined as those that reduce CO2 emissions by at least 50 percent and ensure that other emissions are no higher than combined-cycle units). Subsidies also direct investment toward carbon-control technologies. Even with these supports, however, expenditures to capture and store carbon will not occur without carbon policy.
Furthermore, despite government support, significant regulatory and legal uncertainties remain. Debt holders require sufficient comfort that debt service will be paid, comfort that markets and government support have yet to provide. Investor-owned utilities want assurance that regulators will allow them to recover costs invested in CCS, regardless of its subsequent economics; regulators generally have been unwilling to give those assurances. In the current environment, investors might be willing to invest in a clean-coal facility, but only with adequate protections.
Other uncertainties compound the matter. Which government agency will regulate which carbon emissions under which regulation? Will investors incur potential liability under the Safe Drinking Water Act if carbon injected underground is absorbed into drinking wells? What if injected CO2 escapes back into the atmosphere? Could carbon be considered a hazardous waste and therefore be subject to a new set of regulations? What will be the role of the Clean Air Act? These uncertainties make it difficult to assess the regulatory risk associated with a CCS investment.
Legal uncertainties currently stymie the investment decision. If the investment were to proceed, what level of insurance would be required? What should be the area of coverage surrounding the carbon-storage area? Who will define the property rights associated with underground injections and requirements related to ongoing monitoring?
These practical questions have just begun to be addressed. A 2008 U.S. Government Accountability Office report, -Climate Change: Federal Actions Will Greatly Affect the Viability of Carbon Capture and Storage As a Key Mitigation Option, delineates many legal, regulatory and structural hurdles to the feasibility of clean coal.
Clean-coal investment has been stalled by significant uncertainty across all major aspects of the investment decision:
- Unclear timing of clean-coal technology commercialization,
- Economic dependence on market prices for energy commodities,
- Volatility in the relative economic position of IGCC and pulverized-coal plants compared with natural gas plants,
- Trade-offs between lower CCS costs and higher upfront capital requirements,
- Commercialization of existing coal-plant retrofits vs. new builds, and
- A significant number of CCS legal and regulatory hurdles that must be addressed before investors will become comfortable funding an asset that otherwise could become a large liability.
Clean coal continues to encounter significant uncertainties, not the least of which is carbon policy. Until these uncertainties can be resolved, private investors are unlikely to invest in coal-fired power plants with CCS, especially in the absence of adequate guarantees regarding the return on their investment.
The author thanks Ken Ditzel and Scott Bloomberg of CRA’s climate and sustainability group for their input, although any errors or omissions are the responsibility of the author. She also thanks Margarita Sapozhnikov and Ted Iobst for their assistance in the analyses presented in this article. More information about CRA’s energy and environment and climate and sustainability capabilities is available at www.crai.com.
Tanya Bodell is vice president of CRA International Inc., a global consulting firm that provides economic, financial, strategy and business management advice to the energy industry. E-mail email@example.com.