Carbon price won't push power sector away from coal

By Barbara Lewis and Daniel Fineren - Analysis

LONDON (Reuters) - Europe's main weapon against climate change, which makes industry buy rights to emit carbon dioxide, has not stopped power generators from using dirty coal because they can still make plenty of money from burning it.

The European Union launched a carbon market to try to make low-carbon sources of energy like gas, wind, biomass and nuclear more competitive against high carbon coal.

The problem is that soaring oil prices have dragged up gas prices in much of Europe too, making coal cheap by comparison and overwhelming the penalty that a carbon price imposes on burning coal.

"Energy price rises have driven more investment into coal and coal to liquids than into renewables, and have swamped carbon prices," said Nick Mabey, chief executive of the environmental and sustainable development group E3G.

The EU market has given utilities most of the emissions rights they need for free and allowed them to pass on these non-existent carbon costs to the power consumer, further diluting the effect of the carbon price on dirty generation.

"You could have carbon at 50 euros ($67.15), but as long as the power price makes it worthwhile to burn the coal and buy the emissions, then that will happen," a trader at a utility said.

Carbon emissions rights for 2008 delivery are now trading at around 21 euros per tonne.

Only a collapse in natural gas prices, not carbon, during the peak demand winter months last year led British power firms to burn all the gas they could, relegating coal plants to a supporting role.

Generators will not face the full carbon cost of burning fossil fuels under the EU scheme until 2013.

And coal could still be the cheapest option unless gas prices collapse again. Following the opening of the Langeled pipeline from Norway, there was so much gas in the system last winter that big consumers were briefly paid to use the fuel.

Otherwise, they would have used coal for baseload electricity while topping up supply with gas at peak times.

"Last winter everybody should have been running baseload coal. But because the gas came crashing off, things changed round," said one trader with a utility that has both types of power plant, adding that there was plenty of time for the economics of power generation to shift before autumn.

"Things can and will change many times before the winter."

COAL TO BURN

Coal still produced more of Britain's power last year because gas prices were relatively high in the first half of the year due to supply concerns over the two previous winters.