EU Energy Policy Blog

It is beginning to dawn on the CEO’s of the electric power sector that emerging policies on climate change will be unevenly distributed among countries, companies and their customers. Coal heavy utilities who tend to be low-cost generators are not excited about the prospects of weaning off coal, or paying for carbon permits and are likely to see their prices rise significantly. Nuclear, hydro, natural gas and renewable heavy utilities, on the other hand, are likely to be modestly affected. Since their current prices tend to be higher, they will rise by smallish percentages as they switch to lower carbon sources. For this and other reasons, the impact of any carbon regulations will be unevenly felt.

But the transition to a low carbon power generation sector is going to be long in the making due to the long life of the investments in existing assets and painful, no matter what. This is pitting one segment of the industry against another as companies take positions on the issues.

Criticizing the proposed cap and trade scheme under consideration in the US Congress, The Wall Street Journal (9 Mar 09), not known for its environmental sensitivities, pointed out – correctly – that putting a price on carbon would distribute climate costs in “deeply unequal” ways.

That prompted Lewis Hay, the CEO of FPL Group, the parent of Florida Power & Light, one of the largest US utilities, to point out (WSJ, 3 Apr 09) that “On the contrary, putting a price on carbon would finally establish fairness for those electricity consumers who have been doing their part to address global climate change,” adding, ”Putting a price on carbon is the market-based solution to climate change. Only then will we create incentives to switch to cleaner sources of energy.”

Mr. Hay asks, “Over the longer term, would a price on carbon have a bigger impact on those who emit more carbon? Of course, just as the gas tax has a bigger impact on those who drive gas guzzlers. If you don’t like paying the gas tax, you’ll drive a more fuel-efficient car. And if you don’t like paying for carbon emissions, you’ll emit less.”

Mr. Hay happens to be the CEO of a utility blessed with operating nuclear power plants and has been among the biggest investors in renewable energy (see table on page 6). Like others who have invested in nuclear, natural gas, renewables and energy conservation, he is finally vindicated by the turn of the events relative to coal-dependent utilities – who in his view – have been complacent, although he remains silent on this point. He writes, “If anything, the customers of clean utilities have had their wealth transferred to areas where electricity is artificially cheap because it doesn’t carry the true cost of carbon.”

Not every utility CEO, of course, is as fortunate or as enlightened as Mr. Hay appears to be. Some, like Jurgen Grossmann, the CEO of coal-dependent RWE in Germany, for example, view carbon taxes or permits as inherently unfair. As previously reported in this newsletter, in an interview with the Financial Times (8 Dec 08), he warned that making power companies like RWE pay for the CO2 that they emit would mark “the end of fair competition in the energy sector in Europe.”

“Companies such as ours that … rely on coal-fired power generation will find themselves at a distinct disadvantage vis-à-vis companies like EDF, which are based mainly on nuclear and have virtually no CO2 costs,” he said.

Mr. Grossmann says that full auctioning of carbon permits in EU starting in 2013, now off the table, would give Electricite de France (EDF) a €40 billion competitive advantage, allowing the French utility to go on a “buying spree” in Germany and elsewhere. “If coal is discriminated against, the competitive landscape in the EU is likely to look very different in the future. That worries me.” His estimate is based on RWE’s current annual emissions of approximately 140 million tonnes and assuming a €35 per tonne carbon price by 2020. Current carbon prices have recently collapsed to around €13 per metric tonne on London’s European Climate Exchange.

He and other critics of emission trading scheme (ETS), however, appear to be missing the point – or prefer to pretend that they do not get it. The ETS is precisely designed to send the strong signals that worry the likes of Mr. Grossmann at companies like RWE that rely on conventional coal-fired generation. The message is that carbon emissions are going to become costly, encouraging such companies to switch to alternatives. Granted, it will take time for a company the size of RWE to reduce its 50% reliance on coal-fired generation, but how else can we make any progress to reduce carbon emissions?

There are always more than one way to look at any issue.

F.P. Shioshansi

This post is extracted from EEnergy Informer, May 2009 issue.

This entry was posted on Friday, April 24th, 2009 at 11:50 am and is filed under Climate Change. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.