Peter Kent was Canada’s environment minister on September 5, 2012, when he announced regulations for reducing greenhouse gas (GHG) emissions from
coal-fired electricity generation plants. The announcement ended years of speculation and anxiety for Canadian coal producers including the majority that
sold thermal coal for domestic consumption. Ottawa reckoned something had to be done: coal-fired electricity was responsible for 11 per cent of the
country’s total GHG emissions and the vast majority of emissions from the electricity and heat sector.
That was two years ago, and about one year remains before they begin to apply to new coal plants on July 1, 2015. The regulations apply a performance
standard to all coal-fired electricity generation units, both new and those reaching the end of their useful life. The standard is set at 420 tonnes per
gigawatt hour – the emissions intensity of natural gas combined cycle (NGCC) technology (where gas turbines use their exhaust heat to boost electricity
generation by 50 per cent) and impossible to achieve for coal-fired units without emissions reduction technology.
Coal plants currently release about twice the carbon dioxide (CO2) per megawatt as NGCC plants, and if they cannot match their competitors, they must be
shut down. First closures are expected in 2020. Most Canadian coal plants are expected to be forced to cease operations by 2029.
It is not only Canada taking action. In the United States, the Environmental Protection Agency (EPA) is currently proposing new GHG emissions performance
standards on fossil fuel-fired electric utility steam generating units and integrated gasification combined cycle units that burn coal, petroleum coke, and
other fossil fuels. These standards are based on partial implementation of carbon capture and storage (CCS) as the best system of emission reduction.
How to duck a big punch
Coal producers with markets in the electricity generation sector are left with a choice: invest in a solution or wait for the fate sure to be handed to
them. An HSBC report from 2012 estimates that the thermal coal industry could see coal asset valuations plummet by as much as 44 per cent. The bank
predicted the “big four” U.K. miners – BHP Billiton, Anglo American, Rio Tinto and Xstrata (now Glencore) – will lose between $12 billion and $25 billion
in stock value if there is no dramatic shift in the way burning coal releases CO2 into the atmosphere.
“The new GHG regulations on coal may force a significant amount of low-cost coal capacity to be retired long before it otherwise would,” says Dave Butler,
the executive director of the Canadian Clean Power Coalition, an association of Canadian and American electricity producers devoted to developing and
advancing commercially viable solutions for lowering coal power plant emissions. “There is a significant economic loss associated with retiring these
But with the application of CCS, most of these plants would not need to be retired. CCS is essentially the only way coal-fired electricity generating
plants will be able to meet the new standards. The technology involves removing CO2 from the generating process and sequestering it in safe underground
geological formations. This can reduce GHG emissions by 90 per cent or more. Recovered CO2 can also be sold to enhance oil recovery in some situations.
As a strategic move, some coal producers are exploring ways of getting involved with CCS projects like FutureGen, a first-of-its-kind, near-zero emissions
coal-fuelled power plant, in cooperation with the U.S. Department of Energy (DOE). The DOE is contributing $1 billion, and other project partners will fund
the remainder of the project’s $1.65-billion capital cost. Most of those partners are coal producers: Alpha Natural Resources, Anglo American, Joy Global,
Peabody Energy and Glencore.
Expected to be on line in 2017, the FutureGen project will upgrade an Illinois power plant with oxy-combustion technology, which combusts coal in the
presence of a mixture of oxygen and recycled flue gas to produce an ultra-clean stream of CO2. Each year, some 1.1 million tonnes of CO2 will be captured
from the plant – more than 90 per cent of its carbon emissions. The CO2 will be transported and stored underground. The aim is to test and commercialize an
entire integrated CCS approach.
Producers’ participation makes economic sense. Anglo American entered into the FutureGen alliance out of a specific corporate strategy. “Coal makes up an
important part of our portfolio and we believe it has a significant role to play in the future, particularly in the developing world,” says Emily Blyth,
the company’s media manager. “We do, however, accept that it is our responsibility to ensure that we keep pushing the boundaries as far as reducing the
carbon intensiveness of our operations and, in fact, our goal is to run low – if not carbon-neutral – mines by 2030.” She says in order to achieve this,
Anglo American has to invest heavily in technologies and research and build constructive relationships with partners across academia, industry, government,
and in the NGO community. “Our participation in FutureGen is part of that approach.” Blyth says Anglo American’s overall investment in GHG emissions
reduction to date – including CCS – is US$201 million.
Anglo American has been involved in various international CCS developments at the research and pilot scales, Blyth notes. “In Australia, we also contribute
to the Coal 21 Fund for development of low emission technologies and in South Africa we are founding members of the Centre for Carbon Capture and Storage,”
she says. The centre is building technical and human resources capacity in South Africa in order to make CCS implementation possible.
Ken Humphreys, CEO of FutureGen, says several global and North American coal companies have made important commitments. “Notable examples [of CCS projects]
with coal producer involvement include the DOE Regional Carbon Sequestration Partnerships that cover much of the U.S. and Canada; the Australian Callide
oxy-combustion pilot project and Surat basin storage project; and the South African geologic storage assessment studies.”
There are other CCS projects underway in nearly all corners of the globe at varying stages of development, and many are receiving financial support from
the mining industry. It can be difficult to choose which projects are most deserving of investment. Australian Coal Association Low Emissions Technology
(ACALET) has several producers participating in its CCS research. “The New Hope Group, along with most other black coal producers in Australia, fund ACALET
through a voluntary levy,” says a New Hope Group representative who spoke on the condition of anonymity. He says ACALET will fund up to $1 billion into
various CCS projects over 10 years.
“We invested US$430 million in emissions reduction and energy efficiency projects across our operations globally between FY2007 and FY2012,” says Eleanor
Nichols, a spokesperson for BHP Billiton. “We participate in the Cooperative Research Centre for Greenhouse Gas Technologies, one of the world’s leading
collaborative research organizations focused on CCS.” BHP Billiton is also a member of the Global Carbon Capture and Storage Institute that aims to
accelerate the development, demonstration and deployment of CCS globally through knowledge sharing, fact-based advice and advocacy and work to create
favourable conditions to implement CCS.
But Humphreys says that while producer involvement in early stage CCS R&D and pilot projects is high, producer involvement in commercial-scale projects
like FutureGen is much more limited. That is principally due to the challenging market economics that first-mover coal-based CCS projects currently face.
According to the independent Center for Climate and Energy Solutions, installation of CCS technology will result in short-term electrical rate increases of
45 to 83 per cent, depending on whether it is retrofitting an existing plant or adding CCS at the construction stage of new plants. Peabody Energy’s
involvement in China’s GreenGen project is a good example of a coal company forging ahead, Humphreys says. GreenGen expects CCS to be operational by 2020,
storing more than 80 per cent of CO2 emissions. Peabody did not respond for comment.
A daunting project with a lot of uncertainty
Why should coal producers get seriously involved with advancing CCS? “Policy-makers are clearly moving toward policies and regulations that are intended to
reduce carbon emissions,” advises Humphreys. “How fast those policies and regulations will move forward is unclear, but it is very clear that coal will
continue to be a dominant global fuel, and that carbon will continue to be a business issue. Investments in advanced technology that reduce carbon
emissions are a strategic hedge in an uncertain regulatory future. Investments in CCS position the coal industry as a problem solver.”
In fact, Humphreys considers producers’ involvement a necessity. “Fossil-based utilities and coal producers have a major strategic interest in the success
of CCS,” he says. “With low North American gas prices, most fossil utilities are shifting focus toward natural gas-based strategies. It is in the strategic
interest of the coal industry to demonstrate that coal with CCS can be affordable and have a carbon footprint equal to or better than natural gas.”
Butler agrees but cautions that CCS is still an expensive and unproven technology commercially: “More of these plants need to be built to bring their costs
down. However, low natural gas prices have helped reduce power prices, making it more difficult to justify CCS projects on coal plants.”
The Canadian Clean Power Coalition has been studying CCS technologies for a decade now, says Butler, and can help producers get involved despite the
hurdles. “We help our members understand which GHG reduction options are likely to be more attractive than others,” he explains. “We also study new
technologies that may be available in a decade. In addition, there are several CCS test facilities in North America. The National Carbon Capture Center in
the U.S. has also been testing new and novel carbon capture technologies. Helping to fund testing of these new technologies and joining the Canadian Clean
Power Coalition would be a good way to get involved.”
Butler points out that they have had very strong financial participation from Canada’s largest producer of thermal coal, Sherritt International, whose
Canadian coal operations are now part of Westmoreland Coal Company. “It is in the interests of coal suppliers to help coal consumers find ways to extend
the life of existing coal plants and to find ways to build new coal plants which meet the emissions control regulations. That way they will be able to grow
and sell more coal,” he says.
But recent low thermal coal prices of less than US$75 per tonne compared with $190 in mid-2008 challenge the economics for producers looking to get
seriously into CCS investing.
In fact, economics were blamed for the 2012 demise of Project Pioneer, a large CCS project in Alberta. Project Pioneer was a joint effort by coal producer
TransAlta Corporation, Capital Power L.P., Enbridge Inc., and the federal and provincial governments to demonstrate commercial-scale viability of CCS
technology. Although it demonstrated that the technology works and capital costs were in line with expectations, the market for carbon sales and the price
of emissions reductions were insufficient to allow the project to proceed.
“One of the key components of the revenue stream that we needed to make the project’s economics work was that there would be a value on the CO2 emissions
that were reduced,” explains Don Wharton, vice-president policy and sustainability, TransAlta Corporation. “As it turned out, the [federal government]
regulation put no value on carbon reduced, so that revenue stream disappeared.”
The second expectation for the revenue stream was to be sales of CO2 to Alberta oil and gas producers for enhanced oil recovery (EOR). “It turned out the
commercial entity we were negotiating with made the decision that, rather than CO2 flooding, they were going to put their money into horizontal drilling
technology, so that revenue stream dried up,” says Wharton. “Those two things happened coincidentally and essentially made it impossible for us to be able
to build the project on budget.”
Wharton accepts, however, that in order for CCS to be commercially viable, a project should not rely on selling CO2. “First and foremost this was a
demonstration project, and we recognized in the long haul that sequestration was going to be the big nut because Alberta [oil wells] couldn’t absorb all
the CO2 that coal-fired power produces should CCS take off,” he says. “So we had both an EOR stream and a sequestration stream; we drilled disposal wells
as part of the project.”
Wharton has faith in the capability of CCS technology despite the current marginal economics. “I think the major thing we proved to ourselves was that the
technology would work – both the capture and the sequestration.” He says what was not proven was the economics, and he still believes that is the
outstanding issue as to whether CCS can be deployed on coal-fired power in a way that allows them to be competitive with other forms of electricity.
“That’s still to be proven,” he says. “You can put CCS on a plant but if it’s not economic, especially in deregulated electricity markets like Alberta, you
are hampering your ability to sell your product.”
He says the handful of worldwide coal-fired plants with CCS that are moving ahead have an advantage: “One is that almost all of those other jurisdictions
are regulated electricity jurisdictions; Saskatchewan is a perfect example. They are moving ahead very well on their Boundary Dam project but they get to
pass those costs through to the ratepayer once the regulator approves it. So it is a whole different ball game than companies fronting a lot of the capital
cost and then having to sell into a competitive market.” SaskPower’s Boundary Dam project, one of the leading CCS demonstration projects as applied to
power generation in Canada, has no coal producers as investors, according to project spokesperson Tyler Hopson.
But Wharton feels that is no reason for producers to turn their backs on CCS: “It has huge possibilities if we can work the project economics and scale
factors properly. So we are carefully watching developments on that broad global technology to see if and when it might prove to be economic and some of
those will be externalities like the price of natural gas as a competitive fuel.” He figures the supply and price of natural gas will be major determining
factors in whether CCS for coal-fired generation takes off.
Still, Wharton does not expect to see a miracle technology that changes the game overnight. He has some advice for would-be investors: “Number one, it is a
long game. Don’t expect that something is going to pop out in the next three to five years. The stage of technology development on CCS and the economics
that go along with it are kind of like the oil sands were 20 or 25 years ago. In our view it is likely at least a decade away before CCS becomes a
commercially competitive and viable solution and will go gangbusters.”
A decade is a long time in the current regulatory environment, however; and only cash is likely to speed up the research necessary to make CCS a commercial
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