Options, Costs and Strategies for CO2 Reductions in the European Power Sector

Abstract

Given its high share of total CO2 emissions power generation is a key sector for seeking CO2 reduction options. The purpose of this paper is to provide a power generator eye view of the European powersector'sCO2 compliance decision process under a mandatory emissions reduction program. The analysis indicates that in the medium term many European generators are likely to seriously consider options that are based on traditional power technologies such as converting existing coal-fired capacity to bum gas as well, extending the lives of nuclear capacity, and replacing old inefficient coal-fired plants with more efficient gas- or even coal-fired units. In the long-term the economic potential of future mitigation options are highly uncertain, and generators are likely to respond to this uncertainty by maintaining flexibility in fuel choices and avoiding large investments that lock them into a specific compliance method before new, more efficient technologies and fuels, have crystallized. Most notably, if the costs of carbon sequestration are expected to go down coal can be considered a sustainable energy source, and there may be weak incentives for generators to switch from coal to other fuels in the medium term. Given the multitude of possible CO2 mitigation options in the power sector, there is a strong case for emissions trading and for refraining from policies that build on mandatory fuel requirements, higher rates of capital stock turnover and technology standards.