Memorandum submitted by Drax Power Limited
INTRODUCTION
1. Drax Power Limited (Drax) is the owner
of Drax Power Station, the largest, cleanest and most efficient
coal-fired power station in the UK. The output capacity from the
plant's six generators is 4,000MW and at current output levels
it utilises around 10 million tonnes of fuel (principally coal)
to supply some 7% of the UK's electricity needs. The plant has
the capability to be operating at high load factors up to 2025
and beyond, particularly if market conditions enable it to invest
in appropriate environmental upgrades.
GOVERNMENT POLICY
2. There is a range of initiatives which
could be taken in the energy sector to ensure that the key objectives
of security of supply, competitive markets and fuel poverty initiatives
are achieved simultaneously with environmental compliance. These
include the potential use of new nuclear plant, the expansion
of the renewable/biomass programme, increases in efficiency of
coal-fired plant and the development of carbon abatement technologies.
Each of these needs to be considered but the appropriate investments
will only materialise if long-term certainty can be realised through
a stable and consistent environmental and climate change policy.
3. It is important that much more clarity
is developed in the Government's long-term planning to ensure
that the Power Generation Sector can deliver the substantial investment
programme needed. In particular, there needs to be much more consistency
in policy formulation and implementation across Government, particularly
between DEFRA and the DTI.
4. The energy sector operates on long timescales
and investment in a new plant or retrofit abatement technology,
with typical payback periods of 10-15 years, is unlikely to happen
without a much higher degree of certainty relating to the extent
of future regulatory change, especially in the overlap of energy
and environmental policies. The potential for "stranded assets"
is currently too high to enable significant investment.
LONG-TERM
PROJECTIONS OF
ENERGY MIX
5. By 2020, on current projections, 60-70%
of the UK's electricity may be generated from gas, with 80% of
that gas being imported. This is not a particularly robust policy
since much of that gas will originate from areas of low political
stability. In addition, the uncertain medium to long-term outlook
is not promising because input fuel volatility means that there
are no price signals to sustain an early new CCGT build programme.
In the interests of security of supply at a competitive price,
Drax firmly believes that there needs to be a move away from an
over-dependence on gas in the future UK generation mix.
6. The uncertainty in the future gas market,
combined with the uncertain future of nuclear and the slow and
economically inefficient renewables programme, means the current
coal-fired generating capacity needs to remain in service. According
to Government projections, as given in the recent Updated Energy
Projections, output from coal-fired generation in 2020 will be
around 62TWh. This indicates that a substantial tranche of coal-fired
plant will need to be fitted with both Flue Gas Desulphurisation
(FGD) for SO2 control and Selective Catalytic Reduction (SCR)
for NOx control by that time.
7. Many renewable energy sources are intermittent
and cannot follow demand (or load). They, therefore, require both
the back-up and independent load-following generating capacity
which the coal plant can provide.
8. The world has abundant coal reserves—almost
200 years of proven reserves—and the Government needs to
ensure a regulatory climate conducive to investment at existing
coal-fired power stations which would enable them to supply electricity
reliably for many years to come. It is now time for a serious
re-consideration of the vital role that coal-fired generation
can play in helping to provide Britain with a long-term secure
energy supply at a competitive price, which, with assistance to
promote low carbon technologies, can also be in line with the
Government's environmental targets.
9. We recognise that environmental pressures
are set to increase and that these will be the critical parameters
affecting coal burn in the period up to 2020 and beyond. Indeed
environmental legislation and regulations will, over the coming
years, ensure that it is only the cleanest and most efficient
coal-fired plant that survives. Hence the UK requires a much improved
regulatory framework to facilitate investment in emissions abatement
technology to enable these plant to meet current and future environmental
pressures. In particular, the pressure is on the coal-fired generation
industry to invest in technology to significantly reduce carbon
dioxide emissions.
TECHNOLOGICAL OPTIONS
FOR CO2 CONTROL
AT COAL-FIRED
PLANT
10. A great deal is happening in order to
encourage the coal-fired plant to implement lower carbon technologies.
The Renewables Obligation (RO) was amended for co-firing specifically
to provide a mechanism for developing the energy crop market and
the DTI has recently published a Carbon Abatement Technologies
(CAT) strategy. Drax fully recognises that if significant reliance
on fossil fuels continues beyond 2020, there is a need to research,
develop, demonstrate and deploy a range of Carbon Abatement Technologies.
11. It is critically important for energy
and environmental policy-making in the UK to recognise that the
application of these technologies would enable boilers such as
those at Drax to emit CO2 in comparable amounts to
CCGT plant. This would put coal and gas on a similar policy footing
and would reduce, or even reverse, the view that coal-fired plant
cannot operate within a carbon-constrained economy.
12. The scale of these CAT programmes demands
that they receive Government support and this is fully justified
given the potential carbon savings that come with world-wide application.
13. Drax foresees such a programme happening
in three or more stages:
(a) Co-firing uses existing generating capability;
it is an efficient, effective and relatively simple means of reducing
overall CO2 emissions. Costs are lower than alternative
renewables generation technologies and there is no "new build"
environmental impact, which is often associated with other renewables
sources. Co-firing has emerged as a credible renewables technology
and it is already making a difference through delivering significant
savings in CO2 emissions. But, more importantly, only
minor capital investment is required in existing plant to enable
a biomass throughput of up to 10%. Beyond that level, it is anticipated
that increasing biomass throughput to 20% would require significant
expenditure (for example, in burner and materials handling facilities)
but this is still potentially commercially and environmentally
attractive. If all the opted-in (under the LCPD) coal-fired plant
were modified to burn 20% biomass (by heat output), the savings
in CO2 would be 10 million tonnes per year or nearly
twice the total savings the Government is seeking to be made in
CO2 emissions by all power stations by 2010. Drax alone
is capable of making savings of up to 4.4 million tonnes of CO2
through co-firing, that is, some 80% of the Government's target
for the sector.
(b) Investment in feedwater heating systems
using either biomass or, more likely, gas could give rise to substantial
further CO2 reductions of up to 20%. This is achieved
partly by the substitution of gas or biomass for coal, but also
because better use is made of the waste heat from the gas turbine
exhaust than would be the case in a more expensive, stand-alone
CCGT plant. The additional fuel is utilised with a thermal efficiency
equivalent to a Combined Heat and Power plant.
(c) The UK fleet of coal-fired power stations,
with unit sizes in the range 500-660MW and efficiencies of 35-38%
(LHV), is typical of the large, sub-critical boiler-turbine plant
built in the 1960s to 1980s, with Drax the leader in terms of
size and efficiency. However, more recent plant built overseas
in Europe and Asia use supercritical boiler-turbine technology
and achieve efficiencies in the range 42-46% (LHV), a technology
that is now standard in China for large power stations. Replacement
of Drax's existing boilers with supercritical units would require
a 12-18 month outage but would improve the efficiency of the unit
by 17-20%.
(d) In the long term, carbon sequestration
deserves examination. Whilst not on the horizon just yet, we believe
that further work is necessary to ascertain its economic and environmental
implications and to that end we welcome the attention afforded
Carbon Capture and Storage in the Government's CAT strategy.
14. Figure 1 illustrates the incremental
savings that can be made in CO2 emissions with each
of the above technologies:
15. The following table compares the capital,
generating and CO2 abatement costs for onshore and
offshore wind power (assuming a capacity factor of 25% and excluding
the necessary back-up costs that would be required for wind power
and any costs that might be required to strengthen the electricity
grid) with a retrofitted 600MWe advanced supercritical (ASC) coal-fired
boiler operating at a 60% load factor. The calculations assume
a given level of CO2 savings against existing coal-fired
plant operating at 36% efficiency.
|
600MWe Supercritical Retrofit |
234MWe Installed Wind Turbines Onshore |
234MWe Installed Wind Turbines Offshore |
| CO2 savings (kte/yr) | 471
| 475 | 475 |
| Capital cost (£m) | 116
| 175 | 216 |
| Generation cost (p/kWh) | 1.81
| 3.752 | 5.52 |
| Cost of CO2 abated (£/te) |
12 | 40 | 62 |
Notes:
¹ 15 year write off
² 20 year life
16. The table illustrates that wind power is significantly
more expensive in terms of capital cost, between two (onshore)
and three (offshore) times more expensive in terms of generating
costs and at least three (onshore) and five (offshore) times more
expensive per tonne of CO2 abated.
POLICY REQUIREMENTS
17. We believe that with the right policy framework,
that is one that supports and encourages the examples given above,
coal-fired generators such as Drax would be able to provide continued
secure and competitive supplies of electricity, whilst contributing
to emissions reductions targets for many years to come. However
there are several policy issues which need to be resolved before
such a programme could be considered.
Biomass Policy Requirements
18. Through the RO and the CAT Strategy, co-firing could
make a major contribution to realising the Government's commitment
to reducing CO2 emissions. However, the current regulations
under the RO are putting this important contribution at risk.
Instead of encouraging the growth of co-firing of biomass at Drax,
the current regulations introduce a level of uncertainty that
is both reducing Drax's confidence in both the short and long-term
markets and delaying or even losing altogether, a real opportunity
to reduce CO2 emissions.
19. In our view the RO should be able provide the necessary
incentive for Drax to develop both the equipment to co-fire biomass
as an increasing component of the plant's long-term fuel procurement
strategy and to ensure that the biomass supply chains are well
founded. However, the willingness to invest in the necessary technologies
and processing plant, and particularly in contracting for the
relatively expensive energy crops which generally require Renewables
Obligation Certificates (ROCs) support to make them commercially
viable, is critically dependent on the perception of magnitude
and stability of the future ROC price.
20. We recognise that in the long term the combination
of an increase in the price of CO2 under the EU Emissions
Trading Scheme (EU ETS) and a more competitive biomass market
may make co-firing biomass economically viable without ROC support.
Whilst future expectations of high biomass throughputs at Drax
are predicated on that assumption, that position is some way off
and in the short to medium term we look to the RO as a vehicle
through which Drax can "kick-start" a high volume biomass
industry, including the production of quantities of energy crops.
21. We are, therefore, concerned that, from April 2006,
the proportion of an electricity supplier's obligation under the
RO allowed to come from co-firing reduces from 25% to 10%. This
is likely to lead to an oversupply of co-fired ROCs, a collapse
in their market price, a significant cut in the extent of co-firing
at Drax and a consequent increase in CO2 emissions.
The risk of a lower, or even negative, return to Drax through
co-firing post-2006 means that we are becoming much more risk-averse
when contracting with farmers and biomass suppliers. In turn,
farmers are expected to become even more reluctant to plant energy
crops, which may take up to four years to mature, as they fear
being left with un-saleable crops.
22. Drax Power has put forward to the DTI one option
to tackle the short-term problem of a surplus of co-fired ROCs.
Instead of having a cut-off for redeemable ROCs, there would be
a reallocation of the total ROC value over all redeemed ROCs,
ensuring that they all achieve the same average value. This would
mean that, in the event of a cap being exceeded, there would be
a smooth reduction in ROC prices rather than a situation where
their value collapses to zero. An electricity supplier, therefore,
would continue to receive value from co-firing or banked ROCs
in the event that the relevant cap is exceeded. The effect of
the proposal is to share the risk of an excess number of co-firing
ROCs, and this therefore removes the advantage that vertically
integrated companies have through the potential to secure value
at the expense of independent generators.
23. The Government has rejected this approach on the
grounds that it is not looking to change the co-firing limits
in the RO, that it would make the RO more complex and that it
may require primary legislation. We are not, however, aware that
any alternatives have been proposed either by the Government or
other interested parties. It is our concern that if nothing is
done, the opportunity for encouraging significant reductions in
CO2 emissions at zero net cost to the consumer will
be lost. This would be unfortunate given the fact that climate
change policy is high on the political and public agenda.
24. The prospect of such an event is already inhibiting
independent generators, such as Drax, from securing a market for
our eligible renewables generation and it could significantly
affect the extent of CO2 reduction that we can effect.
In addition, and perhaps more importantly, it will considerably
impair our plans for entering into long-term contracts with farmers,
foresters and landowners for energy crops. We firmly believe that
a collapse in the price of ROCs would be highly embarrassing and
damaging, not only to confidence in the RO and the market but
also to our ability to develop the technology necessary to co-fire
energy crops into the future.
25. Without such a mechanism, the current ROC limits
will certainly constrain total energy crop usage and will seriously
impact total UK CO2 reduction both in the short and
long term. This would appear to fly in the face of the Government's
recently announced CAT Strategy, which fully recognises the contribution
that co-firing can make to reducing emissions of CO2.
Plant Upgrading Policy Requirements
26. If 12GW of the UK's 28GW coal-fired fleet were retrofitted
with advanced supercritical boilers and turbines, the saving in
CO2 would be almost 10 million tonnes of CO2
each year or around 11.5% of the amount of the annual reduction
that the Government is seeking by 2010 compared with 1990.
27. However, for a feedwater repowering, or an advanced
supercritical boiler/turbine retrofit, considerable amounts of
capital would be required and such investment would only be made
if there was sufficient confidence in the long-term market conditions
as well as a confidence in the technologies to be employed. The
Government could make a significant contribution in both these
areas, particularly by supporting a supercritical retrofit project
to demonstrate the substantial efficiency improvements that can
be made at existing power stations such as Drax; Government support
of around £30 million is needed.
28. In respect of commercialisation, all forms of low-carbon
energy will cost money, whether coal or gas with carbon capture,
renewables or nuclear. The RO has encouraged some investment,
particularly in wind farms, but at £1 billion per year by
2010, it is expensive. Mechanisms are required to encourage investment
in clean coal technologies, with rewards closely linked to improved
environmental performance. Such a mechanism needs to be in place
quickly, in order to provide the incentives to modify coal plant
within Phase 2 of the EU ETS.
CONCLUSIONS
29. There will continue to be a significant future reliance
on fossil fuels for electricity generation. Hence, there is a
need to research, develop, demonstrate and deploy a range of Carbon
Abatement Technologies. Government support is critical to this
process to ensure that the power generation sector delivers the
substantial investment programme needed and, in turn, delivers
the significant CO2 savings that are possible.
30. Appropriate market-based mechanisms are required
to encourage investment in clean coal technologies, with rewards
closely linked to improved environmental performance.
31. As one of the most economic and efficient renewables
technologies, the uptake of co-firing biomass under the RO should
be maximised and not constrained by regulations. The Government
needs to recognise the inherent flaws and introduce a mechanism
into the RO to ensure continuity in support for co-firing in the
short term, preferably along the lines already suggested by Drax.
21 September 2005
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