Coal stocks pose power plants dilemma

 

Britain's power generators face a coal against gas burning dilemma this winter that extends beyond fuel prices, with high coal stocks, limited coal-fired power plant lifespans, and carbon prices blurring decisions.

Energy network operator National Grid expects gas prices to remain relatively low this winter as recession dampens demand at a time of plentiful liquefied natural gas supply.

This gas glut was expected to see gas-fired plants dominate UK electricity generation this winter - a time when coal is usually more profitable because gas prices normally surge due to heating demand.

But current low carbon prices, mountains of coal, and around 30 percent of Britain's coal plants that decided not to fit cleaning equipment facing closure in 2015 under the Large Combustion Plant Directive (LCPD) could spur more coal use.

"High coal stocks, carbon, and LCPD related considerations could restrict some of the fuel switching (to gas)" Peter Osbaldstone, manager of European Gas and Power Research at consultants Wood Mackenzie, said.

"It's potentially cheaper to run that coal now, rather than those later years leading up to 2015."

Under the LCPD, plants that have not fitted equipment to cut pollution can only run for 20,000 hours before they close in 2015.

The cost of emitting climate warming carbon is expected to rise significantly from 2012, potentially making coal-fired power generation much more expensive in the last three years of the plant's expected life. 

COAL STOCKS

Coal can be stored for years but a fall in spot prices this year prompted aggressive stockpiling, and the requirement to buy a certain percentage of future orders means burning could be an attractive option to manage brimming inventories.

The market has also seen older coal plants being run this winter, instead of more efficient and profitable newer plants, due to high stockpiles and the pressures on producers of the LCPD.

"It does look like it might be happening, actually, as I was a bit surprised that over the past week they haven't been more selective in offering prices from more efficient coal onto the market" a power trader at a bank said.

"We haven't been able to quantify if high stock piles is an issue or not, but we do know they have an expected obligation to take coal."

Latest government data showed that British coal stocks stood at 23.9 million tonnes in August, the highest level since 1995 and up 8 million tonnes from a year earlier.

LCPD opted-out plants are allowed to run for 20,000 hours until December 2015 but some are expected to shut as early as May 2012 as utilities run them hard early on, according to National Grid.

But the lure of cheap gas still clouds the issue for power generators, with some considering the postponement of planned LCPD opted-out coal plants closures.

"What they were planning to do when gas prices were high was to run on coal and shut in 2012 or 2013" Jonathan Robinson, energy consultant at Frost and Sullivan said. 

"But what's happened now is they've shifted a bit the other way because gas prices are low so they're thinking they can burn gas and keep coal going a bit longer."

Some traders think switching on power plants for the sake of burning coal does not make economic sense.

"That is true that they have large stockpiles, but if they come on, it'll trash the power price and bring into question the value of coal" said another power trader at an investment bank.

"If the power price gets trashed, then other coal stations will turn off. It's a bit of a silly argument, because it means people will act uneconomically, consistently."

CARBON PRICE

Prices for European Union Allowances (EUA) for carbon emissions could also impact coal-fired generators with the next phase of the EU emission trading scheme (ETS) in 2013.

"It's reasonable to suggest carbon prices will rise at that time" said Wood Mackenzie's Osbaldstone.

"As a result, those generators with coal in their portfolio will need to think harder about how the plants are operated, whether it's better to operate plants with limited lifespans harder now while carbon prices are lower, or perhaps spread that over the next couple of years."

Carbon prices have been low recently due to the slowdown in the industrial sector, but cash-rich utilities have been banking cheap EUAs in preparation for 2013. 

"If things happen in Copenhagen and there's a big agreement that links this, it definitely will drive burning coal and we'll see a big increase, but this will probably be next year" Frost and Sullivan's Robinson added.