VideoHazelwood is the world's dirtiest power station. Located near the vast Latrobe Valley brown coal deposits in Australia's Victoria state, the plant is a magnet for environmental protesters, angry that its emissions of greenhouse gases per unit of electricity topped a recent global ranking by the World Wildlife Fund.
Hazelwood was scheduled to close last year. Yet it remains in service thanks to a pioneering deal struck in June 2005 between its owner, London-based International Power, and the government of Victoria, allowing the company to keep the station going—and start a new open-cut coal mine nearby—as long as it agrees to limit the plant's lifetime carbon dioxide emissions to 445m tonnes. Once emissions reach that limit, the station must close. Currently, it produces about 17m tonnes a year, which would give it a life of a little over 26 years.
"There is no question that brown coal from the Latrobe Valley emits relatively high levels of CO2, [so] we were happy to make those concessions," says Mark Williamson, International Power's CFO. Agreeing the emissions cap gives the company the incentive to invest in "clean coal" technology, since extending the life of the station depends on it, Williamson says.
Hazelwood is just one of International Power's 40-plus power stations in 18 countries being influenced by a new carbon economy. Williamson says that all investments made by the £2.9 billion (€4.4 billion) company are now based on the assumption that environmental compliance costs will increase. That's already had an impact—though International Power's generation capacity rose by nearly 50% in the past three years, CO2 emissions per kilowatt-hour fell by 15%.
Nowhere is this new reality more apparent than in Europe, which accounts for about a third of the company's generating capacity. Since the EU launched its CO2 emissions trading scheme in January 2005, Williamson says that his company "treats carbon like a fuel when selling forward our output."
Europe's "cap and trade" system, which allocates tradable emission allowances to the EU's largest emitters, "kick-started the global carbon market," boasted Stavros Dimas, the EU's environment commissioner, in a speech last summer. When it ratified the Kyoto protocol in 1997, the EU set itself an ambitious target of reducing greenhouse gas emissions by 8% from 1990 levels by 2012.
The linchpin of this commitment is the CO2 trading scheme, which covers around 40% of the EU's total greenhouse gas emissions. In 2005, regulators dispensed pollution permits to 11,500 plants in the oil, power, steel, cement, glass, ceramics and paper sectors. Exceeding permitted levels results in a €40-per-tonne fine in the first phase, which runs through 2007, though companies can buy and sell their rights to manage shortfalls and surpluses. During the second phase, which will run through 2012, a fresh batch of allocations will be awarded to a wider range of companies, with additional greenhouse gases, like methane and nitrous oxide, possibly also included. Penalties in the second phase will rise to €100 per tonne.
The Power of Carbon
With the power sector accounting for nearly 60% of the EU's
CO2 scheme, energy companies have been the market's most
active participants.
Drax has been more active than most. The £929m group operates the massive 4,000 megawatt power station at Selby, in northern England, the largest coal-fired plant in Europe, supplying 7% of the UK's electricity while emitting around 21m tonnes of CO2 every year. Last year, Drax exceeded its annual CO2 allowance by 6.3m tonnes, forcing it to buy extra permits in the market at an average price of £14 per tonne.
As the scheme intended, carbon now factors heavily in the company's investment decisions. "Because CO2 now has a price, we are able to evaluate and make investments that benefit both the company and the environment," Drax finance director Gordon Boyd says. "In the short time that the emissions trading scheme has been live, we have acquired a lot of knowledge about its drivers."
Later this year, Drax's board will consider the refurbishment of turbines in its generators, an investment of about £100m over five years to improve the station's energy efficiency by 1.5 to 2 percentage points. Though a marginal efficiency gain, it would also save 1m tonnes of CO2 per year. "It's an investment we feel more comfortable making because there is a price for CO2," Boyd says. "It will save coal costs, but what makes it more likely than not that the board will approve the project is that it also saves CO2."
Carbon limits, even for the heaviest polluters, haven't hurt profitability. Drax's Ebitda surged to £239m in 2005, from £90m in 2004, and was again £239m in just the first six months of 2006, compared to £72m in the same period a year earlier. International Power, meanwhile, saw its European operating profit jump 168% in 2005, rising a further 109% in the first half of 2006. The sharp hike in profitability came as the cost of CO2 allowances rose exponentially (see "Fizzy" at the end of this article), accompanied by rising oil, gas and coal prices. UK power generators, with a carbon shortfall of 23% in 2005 (see bottom chart), were the biggest buyers of CO2 allowances in the EU, but were still able to make around €1 billion in profit by feeding carbon prices into electricity prices, according to the Carbon Trust, a British quango.
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