Efforts to curb greenhouse-gas emissions have yet to dent enthusiasm for coal

NO UTILITY with any respect for its shareholders’ money, says Michael Morris, the boss of the biggest one in America, AEP, would build a heavily polluting coal-burning power station in America these days, for fear that it would become a liability if the government moved to limit emissions of greenhouse gases. Europe already has a cap on emissions, which is designed precisely to discourage dirty fuels such as coal. So why is it that utilities in both places are running their coal-fired plants at full throttle, have several new ones under construction and would like to build even more?

Using coal to generate electricity produces more greenhouse gases per resulting watt than using oil or natural gas, but coal is cheap. In countries where there are no limits on emissions and where demand for power is growing rapidly, such as India and China, coal is booming. Energy lore has it that in China a new coal-burning plant is fired up every week. What is certain is that China has become a net importer of coal for the first time this year. India’s imports have been growing steadily for the past 20 years. The International Energy Agency, an energy watchdog for rich countries, projects that demand for coal will grow by 2.2% a year until 2030—faster than demand for oil or natural gas. Coal-mining firms in Indonesia and Australia, the biggest exporters, are digging as fast as they can but are still struggling to cope with the surge in orders. Freighters are literally queuing up off Newcastle, Australia, the world’s busiest coal port.

But poor and fast-growing places are not the only ones with a hunger for coal. In America, more coal-fired generation is being built than at any time in the past seven years, despite the threat of emissions caps, according to the Department of Energy. In Europe, several power companies are building new coal-fired plants, even though every tonne of carbon dioxide that they emit will require an expensive permit. For example, RWE, a German utility, plans to spend €6.2 billion ($9.1 billion) on three new coal-fired plants by 2012. One of them is already under construction.

All this has helped to push the price of coal steadily upwards in the past few years. Nonetheless, it has risen less quickly than that of oil or natural gas. Coal is now by far the cheapest of the common fuels for power stations relative to the amount of heat it generates when burnt (see chart). At the very least that is encouraging utilities to run their existing coal-fired plants flat out. But it is also prompting some to convert oil-fired plants to run on coal instead. Enel, Italy’s former electricity monopoly, has already performed one such refurbishment, and has two more under way, at a cost of €3.8 billion. Leonardo Arrighi, who supervises the firm’s investments in generation, says it would like to build “more and more” coal-fired plants.

In theory, the carbon price (in Europe) and the threat of one (in America) should dent this enthusiasm for coal. But in practice many utilities are betting that the disparity in fuel prices will outweigh the cost of extra permits to pollute. At the moment such permits cost pennies in Europe, because governments handed out too many of them. Although there should be more of a shortage starting next year, the futures price would have to rise from the current €22 per tonne of carbon to over €30 per tonne to prompt a significant switch away from coal over the next two years, according to Henrik Hasselknippe of Point Carbon, a consultancy.

To be fair, many of the coal-fired power stations under construction in Europe and America are very efficient, and so emit less carbon per watt of output than existing plants. RWE and Enel both claim that their new plants will be among the most efficient in Europe. AEP is building a similar plant in America, which will remain profitable at carbon prices of up to $20 a tonne, according to Mr Morris. Meanwhile, many American firms are cancelling or delaying plans to build grubbier coal-fired plants until they have a clearer idea of future carbon prices.

Politicians in both Europe and America talk of carbon prices eventually being so high that coal-fired plants will be viable only if they capture their emissions and store them underground. But no such plants yet exist. Most of those under construction are not even “capture-ready”, as the industry jargon has it, since utilities do not consider the extra expense worthwhile. Even in Europe, with its steadily tightening emissions cap, much higher carbon prices or stricter regulation will be required to get utilities to build capture-ready plants, says John Krenicki, the head of the energy division at General Electric.

In fact, governments are sending out conflicting signals. Germany, for example, is making it easier to build new coal plants by granting them free emissions permits, even though it aims to reduce emissions to 40% below the 1990 level by 2020. Enel hopes to persuade the governments of Bulgaria and Romania to do the same. In America, the most prominent proposals for regulations to reduce emissions all involve generous hand-outs to the coal industry. For a supposedly dying breed, advocates of coal-fired generation still seem to have plenty of clout with Europe’s and America’s politicians.

From The Economist