World still needs Old King Coal even with shift to green energy

The shift away from our reliance on fossil fuels can be achieved only through the building of more power stations reliant on it.

Steam billows from the cooling towers of Vattenfall’s Jaenschwalde brown coal power station behind wind turbines near Cottbus, eastern Germany. Pawel Kopczynski / Reuters

It is paradoxical, but the world will manage the shift away from fossil fuels to renewable energy only if more fossil fuel power stations are built.

Clean coal and gas-fired plants are essential as a bridge to keep the electricity supply stable while nations build up their capacity for generating electricity from the wind, sun and biomass.

The reason is simple – countries need more power all the time, not just when there is sun and wind. In the absence of nuclear power, which many nations are moving away from after Japan's Fukushima disaster in 2011, fossil power offers steady, reliable power regardless of the weather.

Gas power stations in particular can plug sudden gaps in the energy supply because they can be fired up rapidly – and they, like coal-fired plants, are becoming increasingly efficient and clean.

In the United States, the production of shale gas has led to a glut of cheap electricity. In the western part of the country, natural gas could be the dominant power source for the next two decades before making way for solar, research from the University of California Berkeley suggests.

In Europe, meanwhile, shale gas is unlikely to play much of a role because of concern about environmental damage caused by its production through hydraulic fracturing or “fracking”. The profit margins of utilities are being squeezed by the high price of gas imports and downward pressure on power prices.

The situation has become so difficult that companies across Europe have announced plans to sell or mothball unprofitable power plants. The Swedish state-owned utility Vattenfall wrote down the value of its gas and coal-fired power plants at the Dutch subsidiary Nuon by US$2.2 billion in the second quarter.

Power plants have become so cheap that they are being seen as an investment opportunity for buyers patient enough to wait for higher power prices. The Dutch-owned energy trading group Vitol in July finalised the purchase of Britain’s largest combined-heat-and-power plant from Phillips 66. The Australian bank Macquarie led an investment group that bought EDF’s England-based Sutton Bridge gas plant late last year.

However, for the moment, the outlook for new clean coal and gas power stations looks bleak in Europe, especially in the continent’s biggest economy, Germany, whose ambitious energy revolution has run into serious difficulty.

In fact, Germany, so often championed as a model for the rest of Europe, is at risk of turning into an example of how not to manage the energy transition. In its attempt to boost the installation of solar plants and wind turbines with subsidies, the government has skewed the market and made gas and coal uneconomical.

In 2009, the German utility RWE proudly completed what it boasted at the time was the world’s most modern combined gas and steam turbine power plant with a conversion efficiency of 57 per cent, meaning 57 per cent of the energy in the gas was turned to power. It was a shining example of a clean power plant.

But high gas prices, cheap coal and a glut of output from renewables meant that the plant was unprofitable from the start. In the first half of 2011, it worked at only 57.4 per cent of capacity. In the first six months last year, usage fell to 19.8 per cent. In the first six months of this year, it was 15.3 per cent. Other German utilities tell a similar story.

Under Germany’s Renewable Energy Act introduced in 2000, power from solar and wind plants is subsidised through guaranteed prices or “feed-in tariffs” financed by electricity consumers via a surcharge on their bills. Green energy also gets priority in the electricity transmission grid, meaning that power from fossil sources is used only when there is no green electricity available.

The supply of green electricity has reached 25 per cent on average, although it can rise far above that on sunny and windy days, reaching an all-time record on 61 per cent on one Sunday last June. The surge in green electricity has driven down the wholesale price of power. On the futures market of the German-Austrian power exchange, the trendline has fallen from about €63 (Dh312.92) at the beginning of 2010 to about €43 for a megawatt hour (MWh) in mid-2013 for power deliveries in 2016, according to Renewables International magazine.

Utilities sell most of their power generation three years in advance, so the full impact on profits of the recent drop in wholesale prices has not even been felt yet. Worse, for the utilities, the renewable share is increasing in Germany much faster than expected.

“The situation is unacceptable for us as an investor,” said Jürgen Tzschoppe, the German head of the Norwegian power company Statkraft, whose new €300 million gas-fired power station in the western German town of Hürth has hardly been used all year because it makes no commercial sense to fire it up.

Regardless of how modern and efficient your gas power station, it’s impossible at the moment to make money from it. By contrast, ageing coal-fired power stations – both lignite and black coal – are boosting their output because coal prices are relatively low.

So while the chancellor Angela Merkel’s government is talking about clean energy, German coal plants are belching out carbon dioxide.

At the same time, offshore wind turbines are being built at such a rate that network operators cannot keep up with building the power lines needed to connect them to the grid. Diesel engines are being used to turn the rotor blades of 30 new turbines built off the coast of the North Sea island of Borkum – to stop them rusting while they wait for the power line to be completed. Other wind farms face the same problem.

“Conventional power plants will be the backbone for ensuring a stable power supply over the long term, even if renewable energy will account for an ever greater share of electricity generation” said Sven Becker, a senior manager at German utility group Trianel.

He cited research by the German Energy Agency, an independent think tank, that even in 2050, gas and coal plants will still have to account for some 60 per cent of Germany’s secured power, defined as electricity that can be generated at any time, regardless of the weather.

Under current government plans, renewables will make up 80 per cent of average power generation by 2050 – but only 24 per cent of secured power.

“Conventional power stations are systemically relevant today and in the future,” says Mr Becker. Fossil power plants therefore urgently need to be modernised to make them cleaner and better able to respond to power supply fluctuations from renewables.

But why invest in new plants when prices are so unfavourable, and when there is no real market incentive to stop emitting carbon dioxide? The price of CO2 certificates in the European Union’s carbon emissions market, a scheme that aims to provide an incentive for companies to curb pollution by forcing them to buy tradeable certificates entitling them to emit CO2, is a further obstacle to investing in clean fossil plants.

Mrs Merkel had failed to push through an urgently needed reforms of her energy transition plan and of the European carbon trading scheme, partly as her government had been in wait-and-see mode all year because of the election, which was held this month.

Power managers say she will need to act fast to redress the economic distortions caused by her energy transition. For a start, the subsidies for renewables need to be scaled back.

“Very soon after the election decisions will be necessary to ensure that this justified undertaking doesn’t completely fly off the rails,” said Johannes Teyssen, the chief executive of E On, Germany’s biggest utility.

One option being considered by a number of countries including Britain and Germany is to create a market in which backup capacity is rewarded financially to remain on standby, also known as a capacity market. That could spark a recovery in power prices that investors in fossil plants are hoping for.