The Economics of Transition in the Power Sector
Introduction - Global Context
Power generation from fossil fuels is one of the largest sources of greenhouse gas emissions, contributing 41% of global energy-related CO2 emissions. The power sector is a key target for reducing emissions, with scenarios like the 550ppm and 450ppm aiming to reduce its share of CO2 emissions from 40% to 32% and 25% respectively by 2030. This transition relies on a shift from unabated coal to carbon capture and storage, nuclear, and renewable technologies.
US Coal Case Study
The report focuses on the economics of transitioning from coal-fired power plants, which account for 73% of global power sector CO2 emissions. The U.S., Europe, and China are significant contributors, with each country accounting for 17%, 9%, and 24% of global power sector CO2 emissions respectively.
Plant Refurbishment Options
Upgrading coal plants to improve efficiency is crucial. Average plant efficiencies have increased steadily over the past 30 years, with non-OECD countries lagging behind by 5 percentage points. Upgrading these plants to best available technologies could save around 8% of global emissions.
Micro-Economics of Refurbish vs. Replace Decisions
The decision to refurbish or replace plants depends on several factors:
- Need for a Micro-Economic Perspective: Incorporating risk and the additional returns required by companies under uncertain conditions.
- Option Value of Waiting: Companies might delay investment due to uncertainty, leading to higher returns required.
- Key Drivers of Option Value: Factors such as plant age, investment cycles, and technological advancements.
- Implications for Refurbishment vs. Replacement: The cost-effectiveness of refurbishment versus replacement depends on the plant's age and expected lifespan.
Wider Power System Context
The transition to a low-carbon power sector involves dealing with coal plants, which are the largest contributors to power sector CO2 emissions. Local factors, such as natural investment cycles and technical constraints, play a significant role in determining the optimal time for plant upgrades or replacements.
Conclusion
The transition to a low-carbon power sector requires a detailed understanding of the micro-economics involved, particularly the risk factors and the additional returns required by companies. Plant replacement cycles are critical, and companies must consider these factors to make informed decisions about whether to refurbish or replace existing power plants.
Key Data Points
- Global CO2 Emissions from Power Generation: 41%
- Share of CO2 Emissions in 2030 (550ppm Scenario): 32%
- Share of CO2 Emissions in 2030 (450ppm Scenario): 25%
- Coal Plant Contribution: 73% of global power sector CO2 emissions
- Average Plant Efficiency Increase: 5 percentage points difference between OECD and non-OECD countries
- Potential Emission Savings: 8% of global totals by upgrading coal plants to best available technologies
- Key Factors for Decision-Making: Plant age, investment cycles, and technological advancements
