Rising Coal Use Clouds Europe's Future

Updated Feb. 6, 2014 9:19 p.m. ET
The European Union sees itself leading the world in curbing carbon-dioxide emissions and doing more than any other region to mitigate climate change. But it is also increasing the share of electricity being generated by the most carbon-intensive energy source of all: coal.
Coal-fired electrical-generation plants are being started up in Europe—and comparatively clean gas-fired generating capacity is being shut down.
That is hardly what the climate doctor ordered—and it is part of what many experts see as an energy-policy mess that is weighing on the Continent’s industrial base. So who is to blame?
We could start with Americans. They have turned the energy world on its head by exploiting large amounts of shale gas—natural gas tightly embedded in rocks deep underground. As a result, natural-gas prices in the U.S. have fallen, displacing coal as the country’s least-expensive energy source.
Losing their home market, U.S. coal producers have sought buyers elsewhere. U.S. coal is now a cheaper fuel source than natural gas in Europe, so electricity generators are switching to coal.
According to one forecast cited at a Brussels conference on Thursday by Fabio Marchetti, head of government affairs in Brussels for the Italian energy company ENI ENI.MI -0.67% ENI S.p.A. Italy: Milan €16.35 -0.11 -0.67% Feb. 7, 2014 2:59 pm Volume : 10.40M P/E Ratio 8.13 Market Cap €59.06 Billion Dividend Yield 6.73% Rev. per Employee €1,611,870 01/17/14 Corruption Currents: From Sanc… 01/16/14 Audit Clears Firm of Corruptio… 01/10/14 Italy’s Eni Shuts Nigeria Pipe… More quote details and news » ENI.MI in Your Value Your Change Short position SpA, 10 gigawatts of gas-power plants will be dismantled in Germany by 2015—to be replaced with seven gigawatts of coal-fired plants. That is in Germany, the Continent’s leader in heavily subsidized renewable energy.
The other big cause is Europe’s faltering economy. That has contributed to a fall in carbon production and thereby to a drop in the price industry has to pay to emit carbon in the bloc’s carbon-emission trading system. Increased energy efficiency, thanks in part to European policy, has also reduced emissions. Bottom line: The low price of carbon has weakened incentives to avoid producing it.
The growth of coal-fired electricity generation may have another unwanted effect: undermining the stability of the electricity grid. Increasing the share of renewable energy in the generation mix—particularly from the sun and wind—means that a growing proportion of electricity output is intermittent.
To make sure there is always enough electricity when the elements don’t cooperate, generators have to keep other power plants ready to fire up. That is something gas-fired plants do. Coal-fired plants, on the other hand, need time to crank up. Thus, the combination of growing renewables and coal-fired generation could eventually reduce the reliability of the electricity supply.
Reducing gas use in electricity generation has a big impact on carbon emissions. An estimate from the oil major BP BP.LN -0.08% BP PLC U.K.: London GBp481.75 -0.40 -0.08% Feb. 7, 2014 2:00 pm Volume : 22.47M P/E Ratio 5.94 Market Cap GBp86.99 Billion Dividend Yield 4.82% Rev. per Employee GBp2,864,460 02/04/14 BP Must Stay on Target 02/04/14 Europe’s Stocks to Watch: UBS,… 02/04/14 BP’s Earnings Decline 25% More quote details and news » BP.LN in Your Value Your Change Short position PLC suggests that a 1% switch of electricity generation capacity world-wide to gas from coal would save as much carbon as an 11% growth in output from renewable sources.
These issues are on top of a lack of coherence of EU energy policy, guided in Brussels by two different departments, energy and climate change. In a recent report for the business association Business Europe, the Cologne Institute of Economic Research cited four often-conflicting policy instruments addressing climate change, renewables and energy efficiency. National policies also often aren’t joined up with EU-wide policy.
Some of these issues are likely to linger. Most forecasts suggest natural gas will still be significantly cheaper in the U.S. than in Europe in the long term. Gas is roughly three times as expensive now in Europe as in the U.S. The International Energy Agency’s central forecast scenario suggests “gas and industrial electricity prices in the European Union and Japan remain around twice the level of the U.S.” even in 2035.
Some manufacturers say this is a long-standing competitive disadvantage that is likely to create a creeping deindustrialization of Europe. To the extent it happens, it will be most marked in energy-intensive industries such as chemicals that use gas as a feedstock as well as an energy source. Given the importance of chemicals in the industrial value chain, this could have an impact on industry more broadly.
There are opportunities for change. Some renewable technologies now are close to the point where they can compete without subsidies, and many at Thursday’s Brussels conference argued subsidies should be reduced over time.
A new energy proposal in January from the European Commission, the EU executive, calling for further cuts in European carbon emissions by 2030, offers the opportunity for a broad EU policy discussion.
A summit of EU leaders is also due to discuss energy policy in March. Given the importance of manufacturing industry to Germany, for which exports account for more than half of economic output, the bloc’s leading economy has incentives to seek change.
But though energy is an area where economists see major gains from a true European common market, it has always been one where national governments have been least eager to yield influence.
Write to Stephen Fidler at stephen.fidler@wsj.com

Original post: Rising Coal Use Clouds Europe’s Future