Last year I posted a blog on The Future of Coal that looked at its contribution to global warming and the high capital and operating costs of curbing its carbon emissions. With President Trump promising to revitalize the industry, I posted Another Look at Coal this January, asking whether he can deliver on his promise. I concluded that, even if his administration dismisses coal’s contribution to global warming ‒ which it has ‒ market principles still paint a dim future for the fuel. Overtaken by natural gas, wind and solar, coal is no longer the low-cost provider of electricity, not by a long shot, even without incurring the costs of curbing carbon emissions. In terms of job creation, coal also pales by comparison to wind and solar energy. But, that’s not stopping advocates from promoting fiscal and regulatory policies to skew the playing field.
Congress uses fiscal policy to subsidize activities across a broad spectrum of the economy, from housing and infrastructure to food and energy production. Subsidies are often in the form of tax credits, either for investment (an ITC) or production (a PTC). Congress is now considering a major reform to the tax code, which would include lowering the corporate tax rate while scaling back or eliminating many tax credits. However, one measure working its way through Congress calls for increasing a PTC that would benefit the coal industry.
Currently, a tax credit is provided for each ton of carbon dioxide (CO2) captured from the flue of a coal-fired power plant and pumped for permanent storage in a geological formation. Termed carbon capture and sequestration (CCS), the amount of the subsidy depends on whether the repository is a partially depleted oil field, where the CO2 is used for enhanced oil recovery (EOR), or simply a natural formation. Recognizing that CO2 has commercial value in the first case, the PTC is $10 per ton of CO2 with EOR and $20 per ton without. The proposed legislation would increase the subsidy to $35 per ton in both cases and extend duration of the credit from 10 to 12 years.
To get a better feeling for the potential effect of the credit, I converted it from tons of CO2 to the amount of electricity in kilowatt hours (kWh) corresponding to production of the CO2. The result depends on whether CCS is used to retrofit an existing power plant, which has a nominal thermal efficiency of 35%, or integrated with construction of a new plant with an efficiency of 40%. Using properties of bituminous coal, the credit comes to 3.5 cents per kWh for the retrofit and 3.1 cents per kWh for the new plant. Additional revenue could be obtained if the CO2 can be used for EOR. The amount would depend on the price of oil and could range from $10 to $40 per ton for oil prices between $50 and $100 per barrel (about 1 to 4 cents per kWh for a retrofit).
These numbers may not mean much to you, but to provide some context consider that the national average retail rate (the price of electricity to consumers like you and me) is about 13 cents per kWh. A PTC of 3.5 cents per kWh for a retrofit would be attractive, even more so if it’s augmented by use of the CO2 for EOR.
Among its advocates, the hope is that the new subsidy for CCS will stimulate widespread implementation of CCS and in the process increase coal production. Were that to happen, what would be the impact on the U.S. Treasury?
If we assume that plants accounting for 50% of 2016 coal-fired generation are retrofitted to capture and sequester 90% of their CO2 emissions. The annual cost to the Treasury would be $19.4 billion per year and the cumulative cost over 12 years $233 billion. No small change and clearly a generous subsidy for coal. But would it be enough to convince utilities to retrofit their plants?
In last year’s post I discussed the Petra Nova project in Texas, which has become the poster child for advocates of CCS. A 610 megawatt (MW) power plant was retrofitted to capture 90% of the CO2 from a flue gas slip stream corresponding to 240 MW of the total power. At a cost of $1 billion, with $160 million provided by a subsidy from the U.S. Department of Energy (DOE), the retrofit alone comes to almost $4,200 per kW of generating capacity. That’s more than four times the cost of building a modern gas-fired power plant producing only half the emissions of a coal-fired plant and more than twice the costs of wind and solar power with zero emissions. And, digging a little deeper, it’s even worse.
It takes a good deal of power to separate CO2 from a flue gas ‒ up to 25% of generation ‒ and for Petra Nova that power is drawn from a comparatively inefficient combustion turbine without capturing any of the CO2 from its emissions. Assuming a 20% parasitic power requirement for the CCS process and evaluating cost on the basis of the net power (240 MW minus 48 MW), the retrofit comes in at $5,200 per kW. Although the project uses the CO2for EOR, a return of 1 to 2 cents per kWh is as good as it gets with oil at $50 per barrel and not nearly enough to justify future projects, that is unless the government were willing to provide generous construction subsidies, either as outright grants or an ITC. That’s unlikely, but there may be another way to enhance coal’s competitiveness: Impose a regulatory mandate.
Coal (and nuclear) power plants provide “base load” power to the grid. The base load is the minimum power required over time, and because coal plants can operate continuously (24/7) over extended periods, they are well suited for this purpose. However, because wind and solar energy are increasingly contributing to base loads and because they operate intermittently, they could compromise the reliability of power supplied by the electric grid. This supposition provides the basis of an unusual request made by DOE Secretary Rick Perry to the Federal Energy Regulatory Commission (FERC).
Specifically, Secretary Perry has asked FERC to establish regulations that insure compensation for the grid “resilience and reliability” provided by coal-fired power plants operating in deregulated markets. A tariff would be imposed by Regional Transmission Organizations (RTOs), which control power transmission between states, and would be paid by consumers through higher utility rates. His request is flawed in two ways.
First, it’s a false premise that wind and solar power are impairing grid reliability. Currently, the nation’s RTOs are having no problem managing solar and wind generation. Moreover, Europe has shown that it’s possible to maintain grid stability with much higher levels of solar and wind power. For example, in 2016 Germany produced 30% of its electricity from renewable energy ‒ on certain days more than 80% ‒ without impairment of grid reliability. On the other hand, utility-scale wind and solar contribute less than 7% of total U.S. generation. Their contributions can therefore continue to grow well before they affect grid stability. And, before then, there is ample time to negate their effects by expanding and modernizing the grid, as well as by implementing battery storage technologies whose costs are rapidly dropping. The bottom line is that Secretary Perry’s proposal is little more than a political maneuver camouflaged by a nonexistent problem.
The second concern is that, if implemented, the proposal would significantly disrupt deregulated electricity markets, which are currently functioning precisely as intended. Ironically, the proposal is also contrary to the free-market policies advocated by Secretary Perry as Governor of Texas. One consequence of deregulation in the 1990s was that these markets became fiercely competitive. They should not be changed to prop up coal-fired generators that are no longer economically ‒ or environmentally ‒ competitive.
In previous posts, I’ve talked about an energy future driven increasingly by clean energy technologies such as wind and solar power, a modern grid, electric vehicles, and battery storage. Last year, solar power grew by 50% ‒ faster than any other fuel source ‒ with almost half the growth occurring in China. And with every doubling of solar capacity, panel costs have dropped by an average of 28%. Following the “experience curve” that has marked the trajectory for electronic chips, costs will continue to drop, with solar becoming the lowest cost source of electricity within the next five years. Led by wind and solar energy, renewables accounted for almost two-thirds of global capacity additions (165,000 MW) in 2016 and are projected to add another 920,000 MW of capacity by 2022.
China has announced plans to move exclusively to electric vehicles by 2030, with nations such as India, Britain, and France committing to do so over similar time frames. The demand for battery storage will increase accordingly, insuring that costs, which decreased 80% over the last decade, will also follow the experience curve. By decreasing another 80% over the next decade, electric vehicles will be more than cost-competitive, as will grid-scale battery storage. Combined with expansion and modernization of electric grids, battery storage will allow renewables to feed ever increasing amounts of electricity to the grid without decreasing its resilience or reliability.
China and India “get it,” as do the EU, Japan and other countries, large and small. They are “all in” and committed to developing domestic markets that nurture domestic industries and employment. And, make no mistake; China with its huge domestic market and large capital infusions is intent on being the world’s leader in developing, implementing, and exporting related technologies. It is currently the world leader in wind and solar energy, as well as in creating a grid that will accommodate rapid growth in these sources. It is also intent on being a global leader in producing batteries and electric vehicles. If you’re yet to be convinced that coal is not the answer to our future energy needs, take a look at the case made in a recent editorial.
Do we want to cede leadership in developing tomorrow’s technologies? If we’re willing to subsidize energy development through the tax code or the regulatory process, where would we get the best returns on our investments? What would better stimulate innovation, strong domestic and export markets, and job creation?