Policies that subsidize the demonstration of large-scale technologies make economists queasy. Severin explored this topic in a recent blog.
In retrospect it’s easy to point to failures, including the United States Synthetic Liquids Fuels Program that died in the 1980s and Solyndra’s bankruptcy in 2011. But there are a few clear winners too. Take the government-supported technologies that enabled the US shale oil and gas boom.
Of course in retrospect, it’s easy to identify the failures and the successes. It’s much harder to do it in real time. Still, policymakers presented with many options and limited resources need to make decisions.
One important set of technologies that deserves a critical review right now is the use of coal to produce electricity but keep the carbon dioxide from entering the atmosphere and contributing to climate change.
Many of the world’s fastest growing economies are relying on coal to lift their populations out of poverty. In 2013, 70 percent of global coal consumption occurred in rapidly growing Asian countries. Remaining coal reserves are enormous too. According to BP’s latest statistical survey, world coal reserves in 2013 were sufficient to meet 113 years of global production.
If clean coal technologies do not become cost effective, developing countries will continue burning coal in an uncontrolled way to meet societal needs.
In the US, clean coal technologies have received hundreds of millions of dollars in subsidies since the mid-2000s, but the federal government is starting to yank its support.
In February, the US Department of Energy pulled the plug on the high profile FutureGen 2.0 project in Illinois. The project’s blue chip sponsors, including major coal producers like Peabody Energy and BHP Billiton, as well as foreign utilities E.ON of Germany and China Huaneng Group of China, needed continued government subsidies to build this first-of-its-kind project. The project had already gone through more than $200 million in federal money, and the DOE decided that was enough. Now FutureGen 2.0 has joined the dozens of other cancelled carbon capture and storage (CCS) projects.
While news from the Prairie State (Illinois) is grim, there has been some progress in the Hoosier State (Indiana), Magnolia State (Mississippi), and the Land of Living Skies (Saskatchewan!). Three plants have been completed or are approaching completion:
- Duke Energy’s 595 megawatt Edwardsport Integrated Gasification Combined Cycle (IGCC) plant in Indiana. The world’s first large scale IGCC plant. The carbon capture and storage component of the project was dropped part way through construction, although the plant could be upgraded with carbon capture and storage in the future.
Online date: June 2013. Forecast cost: $1.985 billion. Actual cost: $3.55 billion. Cost per unit of capacity: $6,000 per kilowatt.
- The Southern Company’s 582 megawatt Kemper plant in Mississippi. The world’s first large scale IGCC plant with CCS. The carbon dioxide will be injected underground in a nearby oil field. Online date: first half of 2016. Initial forecast cost: $2.4 billion. Revised forecast: $6.2 billion. Cost per unit of capacity: over $10,000 per kilowatt.
- SaskPower’s 110 megawatt Boundary Dam Project in Saskatchewan. The world’s first post-combustion coal-fired CCS project. The plant takes the flue gas from a pre-existing coal power plant and strips out the carbon dioxide. The carbon dioxide will be injected in a nearby oil field. Online date: late 2014. Actual cost: C$1.467 billion. Cost per unit of capacity: over US$12,000 per kilowatt (at today’s exchange rate).
The three plants received either direct government subsidies, or have been authorized by the government to recover costs from their captive customers—a sort of off-the-government’s books subsidy.
To put the plants’ costs in perspective, the graph below compares the capital cost per kilowatt of these plants with the capital costs of other technologies as estimated by the US Energy Information Administration:
The capital cost does not tell the whole story of how power generation technologies compare. Plants also vary in terms of fuel cost, percentage of time they operate, operations and maintenance costs, expected life and pollution they generate. Capital costs are, however, one of the most important components of the comparison between technologies.
The graph shows that these three plants were more expensive than the estimates for similar plants of the same technology, and were much more expensive than many alternatives.
However, it is also important to note that substantial knowledge and experience have been produced as a result of those government investments. Valuing that knowledge and experience is difficult.
Now it is time to ask—should the government subsidize additional coal projects like these? Should these first-of-their-kind projects be the last-of-their-kind?
To make this decision, policymakers should be exploring a number of things: Why did the projects cost so much? What caused the budget over-runs? How can costs be reduced and output increased for future plants? Is there a plausible path to make the technology cost competitive? How can clean coal avoid the increasing cost trends experienced by nuclear energy, highlighted by Lucas in a prior blog?
Policymakers need to carefully consider subsidizing second, and even third, versions of each promising clean coal plant. That may be a hard case to make in the US given expectations of large natural gas supplies and low natural gas prices, but European and Asian countries may be able to justify further government investments in coal.
The opportunity is too big to ignore coal.