Brussels' CO 2 Permits Expected to Cost Drax Its Independence

                                                                                         

Drax, operator of Europe's biggest coal-fired power plant, is facing a crippling increase in operating costs after the European Union decided yesterday to begin auctioning carbon emission permits rather than giving them away, analysts said.
"In terms of the losers from this, Drax is top of the list by a long way," said an analyst who follows several UK power companies. He said an expected rise in the cost of carbon allowances, as envisaged by the EU's climate change draft directives unveiled yesterday, will force the UK's biggest polluter to drastically reduce its generation activity and that it ultimately will be picked off by a larger rival better suited to operate within a new energy order. "Eventually, [Drax] will only be able to operate about 40 per cent of the time. Over the longer term, they won't be able to survive as an independent entity. They will probably be bought by a large, integrated power company," he added.
The EU yesterday revealed how it plans to cut carbon emissions by 20 per cent by 2020 and to increase renewable energy production to one-fifth of overall supply for the 27-nation bloc over the same period. Central to the plan is its proposal to force power generators to buy permits to cover the amount of carbon dioxide they emit from 2013.
Under the current phase of the EU's Emissions Trading Scheme (ETS), nearly all permits are given away for free. Full auctioning under "phase three" is designed to make older, dirty power generation techniques, such as coal-burning, prohibitively expensive and thus spur a wave of new investments across the European power sector in new, cleaner technologies such as wind, biomass and carbon capture and sequestration.
Drax's total dependence on coal, the dirtiest fuel, makes it particularly vulnerable to the new regime. Provider of 7 per cent of the UK's power, in 2006 the company generated 17.7m tonnes of carbon dioxide emissions from its massive site in Selby, Yorkshire. Under the current scheme, which runs until 2012, the company is granted 9.5m tonnes of free carbon allowances each year. Anything beyond that it must pay for. Carbon is now trading at around 20 per tonne. Once Phase 3 comes into effect, analysts expect carbon to rise by as much as twice the current price.
For Drax, a carbon price of 40 would mean its annual pollution bill would be about 700m, or more than four times what it paid in 2006. A Drax spokesman said: "We recognise the challenge regarding carbon emissions, and we have created a framework to address the issue."
Drax may be the hardest hit, but the entire UK power sector - the country's largest source of CO2 emissions - will be the industry most directly affected by the EU's climate change plan. David Porter, head of the Association of Electricity Producers, cautioned that the initiative may go too far: "Large companies like to invest in a portfolio of technologies, including renewables, but they also have to remain competitive. Strengthening the EU Emission Trading Scheme post-2012 is good. More auctioning is welcome - however, we are concerned that 100 per cent auctioning from 2013 in the power sector will create a cliff-edge, and countries with no experience of auctioning are in danger of a painful landing on the other side."
Indeed, for the UK, near the very bottom in terms of renewable energy production, the goals would translate to an increase of nearly 40 per cent renewable energy production by 2020, a massive eight-fold increase from the current 5 per cent. The directives must be approved by EU member states. Retail energy prices are projected to rise by between 10 and 15 per cent to account for plant-building costs.
Apart from addressing the climate, the scheme would also reduce the reliance on coal, oil and gas, the cost of which can fluctuate wildly. The price of gas has skyrocketed in recent months while coal has doubled over the last year. The appreciation of coal in particular adds to the cost base of Drax and other power companies with big coal-fired plants, including Scottish and Southern Energy and International Power. As the latter two are vertically integrated groups with operations in transmission, distribution and supply, they are better positioned to cope with the impacts of the coal price and the anticipated jump in carbon costs.
British Energy, operator of country's entire nuclear fleet and emitter of minimal amounts of CO2, will benefit from the push to cut greenhouse gas reduction targets.

About the author:
Velimir Lackovic runs internet portal "Energetika" ( http://www.energetika.co.yu )
dedicated to renewable energy sources,oil gas and energy efficiency. Velimir has
completed gratuadte studies in power systems engineering and
has industry experiance of over 20 years in this field.

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