Elsevier

Energy Policy

Volume 35, Issue 2, February 2007, Pages 1064-1074
Energy Policy

Future carbon regulations and current investments in alternative coal-fired power plant technologies

https://doi.org/10.1016/j.enpol.2006.01.020Get rights and content

Abstract

We analyze how uncertain future US carbon regulations shape the current choice of the type of power plant to build. Our focus is on two coal-fired technologies, pulverized coal (PC) and integrated coal gasification combined cycle technology (IGCC). The PC technology is cheapest—assuming there is no need to control carbon emissions. The IGCC technology may be cheaper if carbon must be captured. Since power plants last many years and future regulations are uncertain, a US electric utility faces a standard decision under uncertainty. A company will confront the range of possible outcomes, assigning its best estimate of the probability of each scenario, averaging the results and determining the power plant technology with the lowest possible cost inclusive of expected future carbon related costs, whether those costs be in the form of emissions charges paid or capital expenditures for retrofitting to capture carbon. If the company assigns high probability to no regulation or to less stringent regulation of carbon, then it makes sense for it to build the PC plant. But if it assigns sufficient probability to scenarios with more stringent regulation, then the IGCC technology is warranted. We provide some useful benchmarks for possible future regulation and show how these relate back to the relative costs of the two technologies and the optimal technology choice. Few of the policy proposals widely referenced in the public discussion warrant the choice of the IGCC technology. Instead, the PC technology remains the least costly. However, recent carbon prices in the European Emissions Trading System are higher than these benchmarks. If it is any guide to possible future penalties for emissions in the US, then current investment in the IGCC technology is warranted. Of course, other factors need to be factored into the decision as well.

Introduction

Electric power plants last a lifetime. The plants built today—and over the next several years—will be a substantial element of the fleet for a long time to come. And yet electric utilities responsible for investing in new plants face an enormous uncertainty about which technology is most economical. Updated versions of the traditional pulverized coal technology (PC) still offer the lowest cost power—assuming there is no need to control emissions of carbon. But should control be mandated sometime in the future, retrofitting these plants to capture the carbon is extremely expensive and the economic equation is substantially altered. Newer technologies—notably integrated coal gasification combined cycle (IGCC)—offer the prospect of more affordable capture of the carbon together with other potential advantages. But these technologies have higher upfront investment costs that must be justified.

Currently the US government does not mandate control of carbon emissions, so a naïve economic calculation favors investment in PC plants. But the government has the power to change the regulations in the future, either because the scientific evidence implicating carbon emissions in dangerous levels of global warming becomes stronger or because the political winds change and power shifts to those who feel the existing evidence is compelling enough. An electric utility that makes its investment decision solely on the basis of today's regulations may find—if regulations change—that it has saddled itself with plants that must either be retrofitted at high cost or that entail high charges for uncontrolled emissions. Of course, if carbon emissions in the US remain unregulated, today's investment in a PC plant will be vindicated.

A wise investment decision today must be made with eyes wide open about the full range of future conditions within which the plants might have to operate. How is this decision to be made? What factors must be incorporated? Does the specter of future regulation of carbon argue for construction of IGCC plants? Or is that specter too remote and too uncertain, so that current investment should be in PC plants?

This paper addresses these questions. Drawing on studies of the costs of various plant designs, we compare the costs of power from two key coal-fired power plant technologies, PC and IGCC, under a single base case scenario. We then analyze the potential costs of future carbon regulations, including the costs of retrofitting the plant with carbon capture technology and the potential cost of paying charges for emissions. We then discuss how to incorporate uncertainty about the future regulation of carbon emissions into the decision to build one plant design or the other. As an aid to decision-making, we provide some useful benchmarks for possible future regulation and show how these benchmarks relate back to the relative costs of the two technologies and the optimal choice for the power plant investment.

Section snippets

Cost and performance of alternative power plant technologies—PC and IGCC with and without carbon capture

A number of studies have examined the economics of various coal and other fossil fuel power plant technologies with and without carbon capture, including EPRI (2000), EPRI (2003), Gottlicher (2004), McPherson (2004), National Coal Council (2004), NETL (2002), Nsakala et al. (2003), and Rubin et al. (2004). These studies examine a plethora of scenarios recognizing the variability and uncertainty of key parameters such as capital costs, fuel costs, operating efficiencies, among others. To

Capitalizing the costs of future carbon regulations

We now turn to accounting for the cost of carbon regulations under different scenarios. There are many different types of regulatory policies the government could employ some time in the future. One simple policy would be a charge or tax for carbon emissions. Another would be the creation of a cap and trade system like the European Union's carbon Emissions Trading System or the US SO2 program, from which would arise a market price for carbon permits in the US. Other policies do not so obviously

The initial investment decision—PC or IGCC

The basic tradeoff complicating an electric utility's initial investment decision is clearly illustrated in Fig. 1, Fig. 4. At a zero or low level of a carbon price it is optimal to build the PC plant over the IGCC. On the other hand, if the path of future carbon prices is flat, then for any price above $23.27/t CO2, it is optimal to build the IGCC plant. If the carbon price is expected to grow over time at 4% per year, then the switch point occurs at the lower initial price of approximately

Conclusions

Beliefs about future carbon regulation clearly affect the economic case for building new coal-fired power plants using either the PC or the IGCC technology. Electric utilities cannot simply assume that because of the current lack of carbon regulations, therefore the apparently cheaper PC technology maximizes shareholder value. The choice of a technology for such a long-lived capital investment is a standard decision under uncertainty. If there is sufficient probability that stringent carbon

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This research was supported by the MIT Joint Program on the Science and Policy of Global Change and the MIT Carbon Sequestration Initiative. The MIT modeling facility used in this analysis was supported by the US Department of Energy, Office of Biological and Environmental Research [BER] (DE-FG02-94ER61937), the US Environmental Protection Agency (XA-83042801-0), the Electric Power Research Institute, and by a consortium of industry and foundation sponsors.

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