POWER May 2014 - 66

POWER POLICY
shore wind), plus loan guarantees and liability
insurance provided by the government, looks
very much like a subsidy. What's more, the
strike price is guaranteed for 35 years.
Last October, EDF said it expected to take
the final investment decision by July, subject
to final negotiations with the British government
and agreement from the Commission
on rules about state aid.
Yet the Commission seems to agree that
there is something fishy about the Hinkley
Point contract, and an initial report published
in January suggests that the approval process
will not be an easy ride. " It is not clear to the
Commission that nuclear technology is immature
enough to warrant state aid, " the report
says, pointing out that the total subsidy
of £5 billion to £18 billion could be more
than the cost of the plant.
Dogged by delays to its EPR project at
Flamanville in France, EDF is still maintaining
publicly that Hinkley Point C can start up
in 2023. It seems unlikely, however, that the
Commission will deliver its ruling before the
autumn, and the process could take as much
as two years-given European Parliament
elections in May, a five-yearly reshuffle of
the Commission in October, and a UK general
election in 2015.
Carbon Price Floor Widely Reviled
Charging companies to emit carbon dioxide-either
as a direct tax or by allocating
a limited number of tradable certificates-
is widely seen as key to shifting generation
from high-carbon to low-carbon sources.
The EU's pioneering emissions trading
scheme (ETS) has failed in this respect.
Though the EU ETS carbon price has peaked
at £25/metric ton (t) CO2
, which should be
enough to promote low-carbon investment,
it is generally much lower-down to around
£4/t CO2
currently. A reform of the scheme is
overdue, but to date has proved difficult.
So as part of its electricity market reform,
in April 2013 the UK government introduced
a " carbon price floor. " This is currently set at
£16/t CO2
, rising to £25/t CO2
in 2017 and
3. Fuel shifting. The six-unit Drax Power
Station converted one unit to biomass in 2013
and plans to convert two more in 2015. Starting
in May 2014, one of those units will cofire 85%
biomass with 15% coal. Courtesy: Drax Power
£30/t CO2 by 2020. UK companies must pay
to the Treasury the difference between this
price floor and the EU ETS price.
In its first year the " carbon tax " raised
almost £1 billion, and by 2015/16 it will
be adding £30 to £60 to the average annual
household electricity bill.
The carbon tax is widely unpopular. Power
generators and fuel suppliers say it needlessly
increases costs to consumers, encourages
coal-fired generation to migrate from the
UK to the rest of Europe, and destabilizes
the investment climate because the tax could
be changed or scrapped at any time. Green
campaigners believe it is ineffective, with the
money disappearing into government coffers
rather than being used to support renewable
energy directly. Consumer champions and
fuel poverty campaigners hate the carbon tax
because it hits poor people hardest.
In response to criticism over rising household
fuel bills, the government recently carried
out a detailed review of its various " green
levies. " Although the carbon tax has so far
survived this scrutiny, in his budget of March
19, Chancellor George Osborne announced
that he will freeze it for one year. By 2015
the carbon price will have risen to £18/t CO2
and this level will remain through 2016.
From Coal to Biomass
In 2012, the UK saw a marked rise in coal use
for power generation, as low international coal
prices and collapsing EU ETS carbon permit
prices prompted generators to switch from
gas. DECC figures show that in 2011 the UK
got 30% of its power from coal and 40% from
gas. In 2012 these figures were effectively reversed.
Including other industrial and household
use, UK coal consumption climbed by a
quarter over 2011, and CO2
emissions rose by
about 4%, after years of steady falls.
Final figures for 2013 are unlikely to be
much different when they are published later
this year, though the DECC's preliminary data
for the third quarter of 2013 shows coal down
to 33% and gas down to 27%. A generation
mix containing 40% coal is not sustainable
in the long term, given that it implies about
18 GW of production from coal; now that the
shutdown of the UK's oldest and dirtiest coalfired
plants under the EU Large Combustion
Plant Directive is almost complete, the UK
has only about 20 GW of coal capacity.
Under new emissions performance standards
introduced in the Energy Bill, any new
coal plant would have to use carbon capture
and storage (CCS), as in the U.S. under new
Environmental Protection Agency regulations.
Since that is unlikely any time soon,
demand growth in the next few years will require
a shift back to gas, if it cannot be met
by an expansion of wind.
66
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Converting coal-fired plants to burn biomass
gives power companies a guaranteed
price of £105/MWh as well as avoiding the
carbon tax. This is a good deal, given that dedicated
biomass power plants get £120/MWh.
Not all conversion projects gain government
approval, however. In December, the DECC
said it would not approve funding for Eggborough
power station, which planned to convert
one of its four 500-MW units to biomass.
The UK's largest power plant, Drax, has
fared better (Figure 3). In 2012, Drax Power
canceled plans for a dedicated 290-MW
biomass plant, but it still wants to become
a predominantly biomass-fueled generator.
The plant has six 660-MW generating units
for a nominal capacity of 4 GW and supplies
around 7% of the UK's electricity.
Drax converted one unit to biomass last
year. Two further conversions are planned
for 2015; in advance of the conversion, one
of these units will cofire biomass from May
2014. (For more on cofiring, see " Utility
Coal-Biomass Cofiring: Turning Over a New
Leaf? " in this issue.) The plans won government
support in 2012 under the old Renewables
Obligation mechanism and now have
the option to switch to the new CfDs.
Drax Chief Executive Dorothy Thompson
is not happy with a freeze on the carbon tax,
claiming that the economics of the project
were calculated on the basis that power prices
would continue to rise in line with the carbon
floor price. However, she admitted that the
losses at Drax could be more than offset by
savings on the carbon tax paid by those units
that continue to burn coal.
The European Commission is also looking
into whether a government guarantee on
a £75 million loan for the conversion project
breached EU rules on state aid. The case was
raised by Friends of the Earth, which believes
it makes no sense to run the Drax boilers on
biomass imported from North America.
CCS: Still Years Ahead
Drax is also home to the White Rose project,
one of only two carbon capture and storage
projects now being funded by the DECC.
White Rose partners Alstom, Drax, and BOC
are now carrying out a front-end engineering
study for coal CCS, while Shell and SSE are
doing the same for gas at Peterhead in Scotland.
The two projects will then compete for
up to £1 billion in construction funding, while
two other previously rejected projects seek
funding through other means. The DECC
program is running late, and the White Rose
and Peterhead projects are unlikely to come
on stream before the early 2020s-if they get
off the ground at all. ■
-Charles Butcher is a UK-based
contributing editor.
POWER | May 2014
http://www.powermag.com
POWER May 2014

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