Archive for March, 2010

In my recent posting looking at the changes that could deliver a 17% reduction in US emissions by 2020 (compared to 2005), I introduced 20 GW of carbon dioxide capture and storage (CCS). Notionally this is in the power sector and in my simple model it appeared in the coal fired sector. The issue that faces both the USA and many other countries around the world is how much CCS, how fast and in what form.

A good starting point for this is the CCS Technology Roadmap recently published by the International Energy Agency (IEA). The roadmap makes the case for the global deployment of CCS and spells out the necessary pace of deployment such that CCS can deliver not only on its potential by 2050 but its necessity in contributing to a global emissions pathway which equates to a long term atmospheric concentration of CO2 of 450 ppm. The take-away headline from the IEA Roadmap is that “CCS delivers one-fifth of the lowest cost GHG reduction solution in 2050.

 

The IEA roadmap breaks down the deployment by region and highlights the need for 29 projects in North America by 2020, leading to a very substantial deployment in 2050 where some 590 projects are foreseen. The projects include 11 GW (77 Mt CO2 per annum) in the power sector and a further 12 projects in the industrial and upstream oil and gas sectors, with the latter storing 44 Mt CO2 per annum. This gives a total 2020 storage in North America of some 120 million tonnes per annum, which could equate to 100-110 Mt/a in the USA. This is a less than the 20 GW in my simple model, but equally I have assumed delivery of the 17% on the basis of domestic action. Offsets may well play a role (that’s a subject for another post).

 

As I have mentioned in many previous posts, CCS isn’t a single technology but rather a family of technologies combined in a particular way, with all those technologies in operation at scale today in many parts of the world, but not in large scale CCS applications. Although there is doubtless room for improved technologies, CCS isn’t in need of more fundamental R&D, it is in need of demonstration in a number of large scale projects. Early demonstration projects will almost certainly command a higher price tag per project than those that come later. Economies of scale won’t figure early on as each new project will also have to establish new infrastructure, including storage sites, pipelines, monitoring agencies and so on. This means that early projects will need incentives, such as discussed below.

The question that now arises is “What policy framework that will deliver such a development?”. In that regard it is useful to at least look at the various elements that are now in place in the EU, although it should be noted that deployment is not underway just yet.

  1.  A CCS demonstration programme for the EU was announced, comprising 10-12 major projects across the EU, ideally testing a variety of technologies and geologies.  A timeline for investment decisions is defined through to 2015.
  2. CCS is now recognized as a mitigation option within the EU-ETS, thereby incentivising long-term deployment via the CO2 price.
  3. An EU legal framework is in place to allow CO2 to be stored underground. The process of turning this into national law at member state level will take longer but is underway.
  4. A measurement and reporting framework for CO2 storage has been agreed by EU member states.
  5. An incentive to start the investment programme has been developed. A set aside of 300 million EU allowances for award to early CCS projects (and novel renewables) for CO2 stored provides effective government support for the early higher cost demonstration phase of the technology. This incentive is targeted specifically at the 10-12 project demonstration programme.

Many of the ideas in the EU package of measures have come from the USA. They figure in proposed legislation such as the Waxman-Markey ACES Bill, which also recognizes the demonstration phase of this technology and seeks to support it.

 But key to all of this is the CO2 price, delivered through an emissions trading system. CCS fundamentally needs a driver such as this as there is no business reason to pursue the technology without it. However, other drivers might include a “Best Available Control Technology” (BACT) approach or an Emissions Performance Standard (EPS) for power plants, but none offer the flexibility contained within an approach supported by tradable allowances. Importantly, whilst cash-in-hand to develop a CCS project may be attractive, the operation of the facility requires ongoing resources which must be financed as well, therefore the need for an underpinning mechanism.

Almost irrespective of the policy approach adopted, getting a new large scale industry up and running, even with just a few projects covering a few of the technology options, will be a considerable challenge. Despite a full range of measures now coming into place in the EU delays persist and the recent weakening of the CO2 price through the recession has almost certainly delayed the process further.

Delivering on the early goals of the IEA Roadmap in the USA is by no means a given and will require continued effort by both the private and public sectors over the coming decade.

In my posting last week I looked at the potential that exists in the USA to reduce emissions in the medium term in line with the commitment the USA has made under the Copenhagen Accord, i.e. a 17% reduction by 2020 based on 2005. This is a first step in a journey to 2050 which could see reductions of some 80% by 2050.

One of the key balances in any approach to managing emissions across an economy are the respective roles of coal and natural gas. This will almost certainly be true in the USA as well. Today some 2 billion MWHrs per annum of electricity is generated from coal, with just under 1 billion from natural gas. Together they make up nearly three quarters of US electricity production. In the process of generating that electricity, the coal plants release about 1.6 billion tonnes of CO2 per annum and the natural gas plants some 380 million tonnes (Sources: EIA and IEA). Based on those figures, natural gas is about twice as CO2 efficient when compared to coal for electricity generation in the USA today.

Existing US coal plants also have a very distinct age profile, with nearly a third (100 GW) operating before 1970 and the bulk built between 1970 and 1985 (Source: EIA). This may mean considerable retirement over the coming 10-15 years coinciding with the period that the US is looking to begin reducing emissions. The age profile might also mean that there is little justification retro-fitting carbon capture and storage (CCS) to many existing facilities, with CCS new builds being the preferred route.

The above sets up a scenario where older coal fired power stations retire in the relatively near future and are likely replaced by natural gas, at least in the short term as “Coal + CCS” matures and can become a large scale generating option again in the 2020’s and beyond. The necessary natural gas capacity in fact already exists, given that USA nameplate capacity is over 400 GW (Source: EIA), but the actual average load requirement is about a third of this. Of course this capacity is important for peak load management, so it is not necessarily a given that it is simply “available”. However, much has been built in recent years.

 One question that remains is the availability of natural gas. Whilst coal is largely domestic, the marginal tonne of natural gas is imported.  But that is changing as well. More domestic natural gas production and continued positive results from “tight gas” exploration and production is shifting the supply-demand picture (see below for 2008, Source: BP Statistical Review of World Energy Use).

The remaining ingredient to get this all to come together is a carbon price, sufficient to justify the closure of some of the older coal fired power stations and underpin a switch to natural gas. In addition, a carbon price will drive further development of CCS which will be an important element in new coal capacity in the 2020′s. What is clear, is that maximizing gas usage in power generation now should make the largest and most cost-effective contribution to meeting the US 2020 target. Gas will continue to play a role as the 2050 goal looms, with CCS for gas increasingly playing a role.

Replacing 100 GW of current coal capacity with natural gas could result in an emissions drop in the USA of some 400 million tonnes per annum. As noted in my previous post, the reduction required from 2008 to 2020 is some 1.2 billion tonnes – this shift represents a third of the job required.

 

A Focus on the USA – Overview

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Over the coming months as the energy and climate discussion plays out in Congress there will doubtless be much discussion regarding the appropriate emission reduction target for the USA. Setting the scene for this, besides the bill itself, will be the US pledge under the Copenhagen Accord to reduce emissions by 17% from 2005 by 2020 – which in turn was the 2020 cap under Waxman-Markey.

With this pledge as a basis for analysis, it is possible to do some simple “back of the envelope” calculations to gauge the scale of change that will be required over the coming ten years, assuming a rise in population to 340 million and that the USA does this on the basis of domestic action only. The land use / forestry emissions position (currently an annual drawdown) remains unchanged. The starting point is International Energy Agency (IEA) and US Energy Information Administration (EIA) data for the USA for 2007/2008. The US picture is shown below.

In 2008 the USA GHG emissions (excluding land use) were 7.1 Gt, down from 7.2 Gt in 2005. That means a reduction to 6.0 Gt by 2020, or 15.5% from 2008 levels. Total primary energy use was 97 EJ.

To achieve a reduction in emissions to 6.0 Gt (CO2 equivalent) by 2020 there are many possible ways forward. There is a tradeoff between the degree of energy efficiency and decarbonization, between coal and gas, between renewable, nuclear and CCS and so on. My example is somewhat arbitrary in this regard, but at least serves as an example of the effort required.

Between 1990 and 2008 the USA improved energy efficiency by 1.7% p.a. but achieved almost no decarbonization (remained static at 60 tonnes of CO2 per TJ). For the period 2008-2020 an efficiency improvement of about 3% per annum and decarbonization of 1% per annum are required. By 2020 the picture looks something like this.

Achieving the target requires improvements and changes throughout the economy. The list might look something like this:

  • Increase the energy efficiency of the economy such that total primary energy use drops by some 4% in absolute terms. This is delivered by a 5+ mpg jump in on-the-road vehicle efficiency (i.e. all vehicles, not just the new ones), a 10% drop in total residential energy demand despite a >10% rise in population and a drop in commercial and industrial energy use. Power generation efficiency must also improve.
  • Reinvigorate the nuclear industry and achieve a net increase in capacity of about 15 GW – i.e. no drop off in capacity as older stations are retired.
  • Install ~10,000 5 MW wind turbines, that’s over 2 every day. Each of these turbines is over 100 metres high.
  • Fit (or build new) nearly 20 big coal fired power stations with carbon dioxide capture and storage. Not one large scale commercial plant exists today. It means the first round of demonstration facilities (say 10 units) must be agreed on in 2010 so that construction can start.
  • As older coal fired power stations are retired build 50+ GW of new efficient gas fired capacity.
  • Install 6 GW of large scale solar, both photovoltaic and solar-thermal.
  • Shift the vehicle fuel pool to 10% biofuels with a near-zero carbon footprint and get some 7 million alternative fuel (e.g. electricity, hydrogen) vehicles on the road.

Of course if much bigger energy reductions can be achieved then less decarbonization will be required. Either way, the economy will look different as a result.

Over the coming weeks I will build on this example and look at some of the practical aspects of implementation. Stay tuned.

Cap-and-Trade under the Clean Air Act

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Last week the International Emissions Trading Association (IETA) held a seminar in Washington on the Clean Air Act and its potential role in the management of greenhouse gases in the US economy. Specifically, the IETA seminar focussed on the potential for a cap-and-trade system under the Clean Air Act. The seminar had an excellent turnout, with about 70 people from US industry, Capitol Hill, various Washington based concerns and a spattering of international visitors such as myself.
For starters, there was little disagreement amongst the speakers that a cap-and-trade type construction is feasible under the Clean Air Act, so the discussion quickly progressed from feasibility to possibility. Three key obstacles came up during the presentations and discussion:
  • The role of a National Ambient Air Quality Standard (NAAQS):  the use of cap-and-trade may require the Environmental Protection Agency (EPA) to promulgate a NAAQS for greenhouse gases. This would mean setting a limit for greenhouse gas concentrations in the air as measured in the United States and most probably at a level below the 388 ppm that is currently recorded on Mauna Loa in Hawaii. As the speakers noted, given that the level of GHGs in the atmosphere is a function of global energy use, industrial production and agricultural practices, an NAAQS is not a practical option.
  • Setting parameters within the cap-and-trade system: the creation of a cap-and-trade system would require the EPA to create rules around a number of issues, such as the overall cap for a given year and the mechanism by which allowances would be distributed and particularly the approach that would be employed for any free distribution of allowances. The point was made that the EPA must always act in a way that is technically defensible, rather than being arbitrary and capricious. One example given: establishing the level of the cap for the USA, with some link to an overall global need to reduce emissions could be deemed arbitrary given the nature and inherent uncertainty of climate science. As such, legal challenge could be expected which in turn would delay implementation.
  • Caution in rulemaking, stemming from the experience with the Clean Air Interstate Rule (CAIR): CAIR is a program that is designed to permanently cap emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) in the eastern United States. It had wide support yet was remanded to the EPA (without vacating it) following a ruling by the U.S. Court of Appeals for the D.C. Circuit in response to what was described by the speaker at the IETA meeting as a “fringe challenge”. The outcome left many of the CAIR participants financially exposed as allowance prices fell following the decision.
According to the speakers at the conference the above points could result in uncertainty and delayed implementation for a lengthy period (perhaps as much as ten years) as challenges are addressed. It was noted that even if a market resulted it may suffer from liquidity problems given the reluctance of industrial players to hold allowances following their experience with CAIR.
Whilst the speakers did not rule out a cap-and-trade type approach, their view was that EPA would eventually progress down the “Best Available Control Technology” (BACT) route, but that even this could be more broadly implemented as a standard (e.g. xx tonnes of CO2 per unit of production) rather than a prescriptive requirement for a certain piece of technology.
My personal take on this is that in the end, a BACT approach may result in higher costs for the US economy than is actually necessary to reduce emissions. A comprehensive, economy wide cap-and-trade system can deliver the required reductions at lowest overall cost to the economy. It does this by moving progressively through the abatement curve (of reduction opportunities) in an organized way, driven by the allowance trading aspect of the design in combination with the cost of abatement for a given project. But an EPA driven approach will dive into the abatement curve at somewhat arbitrary points linked to certain technologies, potentially leaving lower cost abatement opportunities on the table. This may ultimately cost the economy more than a cap-and-trade system.