In terms of the political calculus, GHG regulation faces an uncertain future, at least into 2013. And as a flood of cheap gas erodes the perception of an impending environmental crisis,...
Carbon Costs: The Coming Battle
Where are prices going, and where have they been?
generators are beginning to examine how such a cost, in whatever form it may take, will change the current dynamics of fuel choice and power prices.
Examining data throughout the United States for the years 1990-2005 shows that an average coal unit now emits close to 1 ton of CO 2 per megawatt-hour of power, a number that has remained stable as the few new coal units have offset the slow, and normal, efficiency losses as units age. Conversely, average natural-gas CO 2 output has diminished markedly, an unintended benefit of the combined-cycle led construction boom that peaked in 2002.
Since 2000, these new units have pushed down average CO 2/MWh output from 0.6/tons to 0.5/tons for natural gas units. Oil-fired generators emit only slightly less CO 2 than coal generation, at about 0.95/tons CO 2/MWh, though great strides in reducing this are occurring in PJM. But petroleum liquid generation has ebbed in the United States, despite the push for dual-fueled generation in the Northeast. Any shrinking of its margin from carbon costs will push the fuel further up the generation stack, making its usage more and more of a special localized phenomenon.
In the battle between coal and gas, which combined take up the lion’s share of clearing units, gas will see net revenues stay steady in the face of an additional carbon cost. Coal units, which now enjoy robust spark spreads during the peak, will see profits squeezed as increased revenues from a higher clearing price will not match the concomitant increase in generation costs. As a rule of thumb, a coal generator that is not the marginal clearing unit will see its margin diminish on a megawatt hour basis by one half of the dollars per ton in carbon costs that are incurred.
Argus’ assessed forward curve on power and generation fuels prices currently extends through 2009. Given the still-preliminary discussions occurring on carbon costs, modeling multiple carbon-price levels, based on the current fleet, provides important clues on the intermediate impact on power generation in the United States. Over the long-term, carbon costs will influence research and development spending and shift generation to less carbon-intense sources, but for the purpose of comparison of already installed or soon to be installed generation, four pricing levels per ton were chosen: $7, $10, $30, and $22.63/ton, the last of which corresponds to a recent 10-day average price for 2008 EU carbon credits. To focus on the possible effects, rather than politics, all assumptions are incorporated on day one of the new scheme. In reality, any scheme likely would be phased in over time.
PJM forward curves currently show Calendar-09 power pricing near $78/MWh for peak and $50/MWh for off-peak. The peak marginal heat rate for a gas unit that can just cover its fuel costs is 7,381 BTU/kWh. Coal units show positive spark spreads for a 10,000 BTU/kWh unit of between $48 and $56/MWh, depending upon coal source. Coal spark spreads for off-peak power are between $20 and $30/MWh, while a gas unit is out of the money