The price of EU Energy Trading Scheme carbon allowances is likely to rise to around EUR25/tonne by 2012, driven by the European Union’s current carbon reduction target of 20 per cent by 2020, according to Deutsche Bank analyst Mark Lewis. If the Commission, as it has recently hinted, raises the target to 30 per cent by 2020, the carbon price would probably rise to EUR30-35/tonne in 2012 and EUR48/tonne by 2020. Such a price would seriously impact the new build of coal plants as an investment option.
Mr Lewis, speaking at the European Nuclear Power conference in London, 13 June, said that the upward pressure on carbon prices would come from an upswing in electricity demand from European utilities, which will have to buy more carbon allowances under Phase III of the scheme which commences in 2013. As an example he suggested that the German utility RWE, the biggest emitter in the EU ETS, would have to buy 160-170 million carbon permits a year under the 2013-2020 Phase III scheme, a huge increase on its 60-70m under Phase II.
European utilities currently have a net deficit of 500m tonnes of carbon allowances under Phase II, while industrial emitters such as steel manufacturers have a large surplus owing to the global recession, but are holding on to them in the hope of gettng a better price in time. These factors could push up the price of carbon, currently around 15 EUR/tonne, to 20 EUR by the end of 2010, said Mr Lewis.
Such a development could have a serious impact on power plant investments. Coal fired power plant is currently on the margin as an investment option for European electricity generators and a carbon price of above EUR30/tonne would effectively kill it off, according to Mr Lewis.
The price of a carbon allowance under Phase II of the European Union Scheme (EU ETS) is currently around EUR15/tonne but in July 2008 the carbon price reached its record level of EUR28.78/tonne. Mr Lewis, who is Deutsche Bank’s managing director of commodities research, global carbon markets desk, said a return to record levels would make coal less economic than new build nuclear and gas.
“Coal is basically out of the game as a new build choice with carbon prices above EUR30/tonne, except in specific circumstances,” Mr Lewis was reported as saying. “And if you believe that there will be an international climate change agreement in the next three to five years then [utilities] will have to be very wary about building new coal fired power stations.”
Assuming a crude oil price of $85/bbl and a coal price of $100/tonne, Mr Lewis said a carbon price of EUR40/tonne would mean the price of electricity would need to hit EUR83/MWh for new coal plant investment to be economic. This compares to EUR68-75/MWh for nuclear, EUR75/MWh for gas and EUR130-160/MWh for offshore wind.
While coal plant remains relatively cheap to build and operate, with a carbon price of EUR40/tonne the carbon price would be more than a third of the total costs of generating coal fired electricity. “Coal ... is out of the equation unless CCS solutions can be found. That is the future for coal.”
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