California energy crunch renders coal more attractive

Dare we say it? Coal making a comeback? Even the stature of gold hasn’t fallen as low as this once-mighty commodity, whose role in the development of modern industrial society remains virtually unchallenged.

Nonetheless, with the world’s sixth-largest economy, California, running out of electrical generating capacity and desperately seeking new supply sources, governments are looking first at natural gas and then at coal to meet their burgeoning energy requirements.

The energy situation is so critical in California’s fabled Silicon Valley that many businesses there have been forced to secure supplemental energy sources. Sun Microsystems, an industry giant in the high-tech sector, recently obtained permits for new diesel generators to keep its computer-manufacturing facility running through a blackout.

Alas, with natural gas prices soaring, along with heating and electrical bills, some of the dubious environmental concerns expressed about power generation systems in California (many of them, coal-fired) and elsewhere are being reconsidered, and even abandoned.

It seems consumers are increasingly willing to support the development of new electrical generating capacity from traditional sources, and for one basic reason: supply shortages are hitting them right where it hurts — in their pocketbooks.

With world demand for electrical energy escalating sharply, governments and industry are looking at new, environmentally friendly technologies that will allow countries to utilize their natural resources in an effective manner. Canada is fortunate to have a variety of energy alternatives, including natural gas, oil, nuclear and coal, each of which has unique characteristics.

Hydro-electricity, which accounts for more than 60% of the total electricity produced in Canada, is generally considered the least expensive source, followed by nuclear and coal-fired generation. Conventional gas-fired generation is relatively expensive, especially in the context of current high prices for natural gas. Thus, electricity prices can be affected by changes in generation sources and the volatility of fuel costs.

A group of leading Canadian coal and coal-fired electricity producers have joined together to form “The Canadian Clean Power Coalition,” whose objective is to secure a future for coal-fired electricity generation, while addressing public concerns about plant emissions. In order to achieve this end, the coalition is proposing to construct and operate a full-scale demonstration project by 2007 that will remove greenhouse gases and all other emissions of concern from an existing coal-fired power plant.

Although coal-produced electrical energy does not have wide public support, it continues to play a vital role in Canada’s energy supply sector. About one-fifth of this country’s electricity is generated by coal, including 15% of Ontario’s net generation, 60% of Nova Scotia’s and Saskatchewan’s, and 75% of Alberta’s.

Internationally, dependence on coal is even more acute. In China, 81% of electric generation is fueled by coal — much of it, high-sulphur coal, which has fouled the atmosphere of many large urban centres. Coal accounts for about 75% of India’s electrical generating capacity and 57% of the total generation in the U.S., the world’s largest economy.

What makes coal attractive from an economic standpoint is the fact that it ranks among the least-expensive forms of power generation. Also, there’s plenty of it, especially in western Canada, which is noted for its low-sulphur coal. Alberta alone is estimated to have enough coal for another 800 years of domestic consumption. (It will be a mighty long time before you’ll see anyone in Alberta freezing in the dark!)

However, coal generation is responsible for nearly 16% of Canada’s net greenhouse gas emissions, which are said to contribute to global warming. In the Windsor-Quebec City corridor, particulate matter and sulphur dioxide from coal combustion in Canada and the U.S. are blamed for smog and related health problems.

Conversion

Increasingly, governments are facing pressure from environmental groups to convert coal plants to natural gas. However, coal industry officials argue that this is not the best long-term solution for our energy woes. A recent study by the Electric Power Research Institute (EPRI) in the U.S. indicated that “even if there were a wholesale shift to natural gas, by 2025, coal would again become a major source of electric energy.”

“Our study revealed that even if [an] initial shift from coal to gas could be accomplished, reliance on natural gas for electricity generation could not be maintained at such a high level for an extended period of time,” says EPRI spokesman Gordon Hester.

The Canadian Clean Power Coalition is supporting a multi-fuel approach to electric power generation that would include new coal combustion technologies that are applicable to both existing and new coal-fired plants. Government and industry would fund development of this technology over the next decade at a cost of approximately $1 billion.

The U.S. Department of Energy recently offered US$95 million in matching funding to its energy sector to fast-track the development of advanced clean coal technologies that can be installed on current plants or designed into new plants to increase power generating efficiencies — in effect, generating more megawatts of electricity from the same amount of fuel. Currently, coal-fired power plants convert only about a third of the energy value of the fuel into electricity.

Among the technologies covered by the program are those that can lower emissions of air pollutants and allow coal-burning power plants — especially older units — to continue operating while meeting more stringent air quality standards.

Canadians, in particular, tend to regard low energy prices as a constitutional right. However, competitive market forces today are increasingly dictating energy prices, rather than the monopolistic (non-competitive) approach to power generation and ownership that provincial governments have traditionally adopted.

Alberta is following California’s lead in deregulating its electrical market — a process that government officials claim is irreversible, despite mounting concerns about spiraling electricity rates. Under deregulation, electric utilities are being reorganized from integrated monopolies (companies that own generation, transmission and distribution facilities) into separate generation, transmission and distribution service companies.

This separation, or “unbundling” as it is often called, is intended to promote competition among power generators and provide access to transmission and distribution systems. In theory, unbundling increases competition in the marketing of electricity and makes more choices available to consumers.

Prices vary

Consumer prices in Canada are determined in a provincial setting and based on the costs of electricity generation, long-distance transmission and local distribution. Public utilities account for most of this country’s electrical generation and their rates are generally subject to government regulation. Consumer prices vary among provinces, largely because of differences in generation costs.

Alberta introduced its de-regulation legislation, the Electrical Utilities Act, in 1996, but no new generating capacity has come on-stream since the act’s introduction, owing to uncertainties surrounding the legislation. Two of the province’s largest cities, Edmonton and Calgary, have already suffered blackouts because of capacity shortfalls in the province’s electrical generating system, and future disruptions are likely.

Restructuring of the electricity industry has been under way around the world for several years. In Australia, New Zealand and the United Kingdom, government-owned monopolies have been largely deregulated. In the U.S., high electricity rates in some areas, and large rate differences between utilities, have provided the impetus for state governments to promote competition in the power generation and transmission sectors.

In Canada, progress has been uneven, with each of the provinces assessing its unique regional circumstances and issues. Alberta and Ontario are the furthest-advanced in restructuring their electricity markets, with the latter facing fierce resistance to the construction of coal-fired generating stations in particular. Environmental groups complain that smog emissions from Ontario’s coal-fired power plants are three times greater than the standard imposed by the U.S. Environmental Protection Agency; and they cite Ontario’s Nanticoke power station, the largest coal plant in North America, as a major polluter.

Power ‘blocks’

As restructuring proceeds in Canada, the generation component of electricity rates will be based more on market forces. The market price may be determined by a power pool, which is currently the case in a number of U.S. regions and Alberta, and as planned for Ontario. In Alberta, competing generators submit price bids for specific amounts, or “blocks,” of electricity. The price at which sufficient supply becomes available to satisfy demand sets the pool price. The power pool is administered at arm’s-length from the generation companies and electricity buyers.

Inter-provincial and Canada-U.S. trade may have more influence in setting local prices in a restructured market than in the traditional market structure, since regions that experience relatively high electricity costs will now be able to gain access to lower-cost electricity from other regions.

Whether prices in a given region will be higher or lower on a sustained basis is a matter of debate. This will depend greatly on the market’s response to price signals to build enough generating and transmission capacity to meet demand. In the restructured market, consumer rates will still be subject to regulatory approval, as transmission and distribution will remain regulated.

In recent years, about 7% of the electricity generated in Canada has been exported. That has translated into substantial profits for many electrical generators, especially in Alberta and British Columbia.

The good news is that our American cousins, especially in California, are paying premium prices for our power and some of the windfall royalties that governments are taking in are being rebated to Canadian consumers.

Canadian and American smelting and refining companies, which have their own power sources (hydroelectric dams, for example), have not been doing too badly either. They’ve been cutting back production of commodities such as aluminum and refined zinc to sell power to local utilities, reaping windfall profits in the process. The commodities business was never this good!