Impact of Climate Change Policies & CCS Technologies on Australia’s Black Coal Industry

1. Impact of Climate Change Policies & CCS Technologies on Australia’s Black Coal Industry Bart Lucarelli LP Power Consultants, Ltd. Alternative Energy Thailand Forum 2010

2. Topics • Status of Australia’s Renewable Energy Law and Carbon Pollution Reduction Scheme (CPRS) • Potential Impacts of CPRS on Australia’s Black Coal Industry • Review of CO2 Capture and Storage (CCS) Technology Option • Summary and Conclusions Alternative Energy Thailand Forum 2010

3. Australia’s Renewable Energy (RE) Law and Acomplishments Renewable Energy (Electricity) Act Achievements Implementation of Amended RE Act started in Jan 2010; still to early to tell Wind Excellent potential for wind energy farms in coastal areas In 2009, installed wind capacity was only 1.5 GW but up to 15 GW of new capacity may be added as a result of the Amended RE Law Solar Solar Flagships Program (May 2009) will subsidize 1/3 of costs of 4 solar projects (1GW capacity): 2 solar PV projects; 2 solar thermal projects Total commitment: A$1.35 billion • Came into effect in 2001 with RE target of 9.5 TWh/yr. • RE Law amended in 2009 with RE target increased to 45 TWh/yr • RE now expected to contribute 20% of Australia’s 2020 electricity supply. • Other details of Amended RE Act: • State and territorial schemes subsumed into national renewable energy scheme • Duration of scheme extended from 2020 to 2030 • Shortfall Charges increased from A$40/MWh to A$65/MWh • Includes Waste Coal Mine Gas as an eligible source for generating RECs . Alternative Energy Thailand Forum 2010

4. Australia’s CPRS • Cap and trade scheme with liable companies given a choice: • Reduce your CO2 emissions to mandated levels or • Buy offsetting CO2 credits from either government agency or companies that have banked excess carbon credits • Three years in the making but unlikely to be passed into law anytime soon. • Has failed in Australian Senate twice, which may lead to early election • The “failed” COP 15 Climate Change Conference in Copenhagen has not helped the odds for CPRS becoming a law during 2010. Alternative Energy Thailand Forum 2010

5. Evolution of CPRS (cont.) White paper (issued in 2008) Current Legislation (as of Jan 2010) Start Date delayed until 1 July 2011; Application of emission caps delayed until FY 2012/13 2020 Reduction Targets Unconditional Target: unchanged Conditional Target: Increased to 25% from 15% Unchanged 2012 CO2 Permit Price: A$10/t w/85% of required permits free • Base year for targets: 2000 • Start date for CPRS: July 2010 • Sectors exempted: Agriculture • Affected entities: 1000 (accounting for 75% of CO2 emissions) • 2020 Reduction Targets • 5% unconditional commitment • 15% conditional on all developed countries entering into a binding agreement to substantially reduce CO2 emissions. • 2050 Reduction Target: 60% of 2000 CO2 emissions • 2010 CO2 Permit Price: A$40/tonne w/300 mt of CO2 permits free. Alternative Energy Thailand Forum 2010

6. CPRS (cont.) Objections of Australia’s Coal Industry • General objection • Why should Australia take any action at all when the rest of the World , except for the EU, appears to be sitting on the sidelines? • Australia should only act when a legally binding and verifiable international agreement on GHG reduction targets has been agreed among all developed countries. • Specific concerns • Ineligible for Emissions Intensive Trade Exposed Sectors (EITES) program, which was established to provide “transition support” to those export industries most severely impacted by the CPRS • Liable under CPRS for fugitive methane emissions from U/G mines • LNG perceived within the coal industry as receiving more favorable treatment than coal. Alternative Energy Thailand Forum 2010

7. Impacts on Australia’s Black Coal Industry if CPRS becomes a LawDomestic Market Impacts • In 2009, power market accounted for 95% of domestic sales of black coal. • If CPRS becomes a law, domestic power supply will transition over time from high reliance on coal to much greater reliance on gas and renewables • Short run: Expect more black coal to be consumed domestically as brown coal plants are shut down or run at lower capacity factors while plants running on black coal are dispatched at higher levels. • Long run: Expect many coal plants to be replaced by gas-fired CCGT plants running off of LNG or CBM with wind and solar plants playing a supplemental role. • Timing and details of this shift in domestic fuel usage will be determined by three factors: • The 2020 GHG emission reduction target • The price set for CO2 permits • The % share of permits that will be given for free to polluters. Alternative Energy Thailand Forum 2010

8. Impacts on Australia’s Black Coal Industry if CPRS becomes a LawExport Market Impacts • CPRS impact on Australia’s black coal export markets: ↑ in production and transport costs→ an ↑in export floor price. • But this cost impact should be, at worst, moderate in its effect. • The real risk to Australia’s black coal industry will occur if/when Japan, Korea, Taiwan , China and India impose their own CPRS programs . • In 2009, Australia’s black coal producers exported 85% of their washed coal with 90% - 95% of those exports going to Asian countries. • Domestic sales of black coal represented only 15% of total sales; Alternative Energy Thailand Forum 2010

9. New Technology to the Rescue? Maybe, but definitely not if Carbon Capture and Storage (CCS) is the most important new GHG reduction technology. Alternative Energy Thailand Forum 2010

10. CCS Defined • CCS refers to a set of technologies that: • Remove CO2 from the gas streams of gases produced when either combusting coal (post combustion process) or transforming it into a gaseous fuel (pre-combustion process) • Convert the CO2 into a liquid by compression • Transport the liquid CO2 to a storage site – most likely by pipeline • Inject the liquid CO2 deep into impermeable geological formations where it will remain “sequestered” for thousands of years. • International Energy Agency (IEA) provides excellent reviews of CCS : • “Technology Road Map for Carbon Capture and Storage” – available for free from (http://www.iea.org/papers/2009/CCS_Roadmap.pdf). • “CO2 Capture and Storage: A Key Carbon Abatement Option, 2009” which is available from the IEA for a fee. Alternative Energy Thailand Forum 2010

11. CCS Hope vs. CCS Reality The Hope The Reality Markets that reuse CO2 : are limited in size (EOR) or rely on immature and unproven technologies (algae & cement). 2a. New CCS systems are in either the test or early demo phase. 2b. 90% CO2 capture comes at a very high price even w/new technology: Power plant output reduced by 12%-30% and efficiency by 15% - 30% Extra capex ranging from $1319/kW to $1649/kW ($2006 ) LCOE increases range from $.03 - $.07/kWh (based on 2006 EPC prices) • Cost of CCS can be defrayed by putting CO2 to productive use: • Enhanced oil recovery (EOR) • Producing biomass (microalgae) • Making cement • New technologies will soon lower CCS costs and improve efficiency of carbon capture process. Alternative Energy Thailand Forum 2010

12. Carbon capture technology can capture 90% of CO2 emissions but will only achieve an 85% net reduction (abatement) in CO2 emissions Source: NETL “Carbon Dioxide Capture from Existing Coal-fired Power Plants: Final Report” Nov 2007 Alternative Energy Thailand Forum 2010

13. Impact of Retrofitted MEA Carbon Capture System w/ 90% CO2 Capture on cost and technical performance of Coal-fired Power Plant² • New coal fired power plant estimated to have LCOE of 6.4¢/kWh in 2006. • AEP Conesville #5 Unit used as case study, 434 MW capacity and 35% plant efficiency Source: NETL “Carbon Dioxide Capture from Existing Coal-fired Power Plants: Final Report” Nov 2007 Alternative Energy Thailand Forum 2010

14. Retrofit Example (cont.)90% CO2 capture will lead to a 30% loss in plant output & 25% loss in net plant efficiency Alternative Energy Thailand Forum 2010

15. … and will require additional capex of $1300 - $1650 per kW and for power cost to increase by 7¢/kWh Alternative Energy Thailand Forum 2010

16. Table 7-3 Recent Cost Estimates for CO2 Abatement & Impacts on Price of Coal-fired Electricity (Supercritical PC Plant) IEA ,“CO2 Capture & Storage: A Key Carbon Abatement Option, 2008 Harvard/McKinsey Studies Demo plants (2010-20) $80 - 120/t CO2 abated (McKinsey) $120 - $180/t CO2 abated (Harvard) ↑ in Electr. Price - $0.08 -$0.10/kWh (Harvard, 2008 prices) Mature Commercial Scale Plants (2020+) $40 – 60/t CO2 abated (McKinsey) $35 – 70/t CO2 abated (Harvard) ↑ in Electr. Price - $0.02 -$0.05/kWh (Harvard, 2008 prices) Demo Plants (2010) • $60-75/t CO2 abated • ↑ in Electr. Price - $0.08 -$0.10/kWh (2008 prices) Mature Commercial Scale Plants (2030+) • $55 -65/t CO2 abated • ↑ in Electr. Price (2030-50/ Blue Map Scenario) • Average ↑ 90% • Range ↑ 65 - 163% Alternative Energy Thailand Forum 2010

17. Reasons for Optimistic View on CCS Costs by Harvard & McKinsey • Innovation and Technological Breakthroughs • Economies of scale • Optimization of Plant Performance through Improved Integration • Replication economies • Learning about individual components • Learning about total plant Alternative Energy Thailand Forum 2010

18. Hope vs. Reality (cont.) The Hope The Reality Distance of such reservoirs from power plant sites will limit applications. No definitive studies have been completed to confirm: capacities of deep saline formations worldwide or liquid CO2 can be permanently sequestered at these sites. Private companies unlikely to take “long-term sequestration risk” without some form of government-backed indemnity. • CO2 can be sequestered in deep saline aquifers (>1500 m deep) and depleted oil wells • Transport & injection technology well-understood and commercial Alternative Energy Thailand Forum 2010

19. IEA Roadmap for CCS Deployment • Despite these high costs and shortcomings, CCS is still seen by many, including the IEA, as the least cost option for GHG reduction. • The IEA has prepared a series of “roadmaps”, which lay out the analytical basis for development and worldwide deployment of GHG reduction technologies • Overall goal: • Reduce 2050 CO2 emissions to a level equal to 50% of CO2 emission in 2005 • This level of CO2 reduction should limit global temp ↑ to 3° C. • The IEA has adopted a specific technology deployment scenario titled “BLUE Map Scenario” as its analytical basis for achieving this level of CO2 reduction. • This scenario was created using the IEA’s in-house MARKAL model. It specifies the “least-cost” mix of GHG reduction technologies that will achieve a 50% GHG reduction by 2050. • The Blue Map Scenario assumes a $200/t CO2 abatement price. Alternative Energy Thailand Forum 2010

20. IEA Roadmap for CCS Deployment (cont.) • The CCS Roadmap that resulted from the Blue Map Scenario is an ambitious plan for deploying CCS worldwide”. Key points: • Over 200 commercial scale CCS plants are needed by 2020 and over 3000 commercial scale CCS plants by 2050 if GHG reduction goal is to be achieved. • By 2050, CCS plants will be capturing and storing 10.4 GT/yr of CO2. • Total required investment: US$ 2.5 – 3 trillion over the period 2010 -50. • Extensive collaboration required between governments and ample government grants for R&D and grants + concessionary funding for demonstration projects. • CCS is important to the overall roadmap because, according to the IEA: • CCS is “the only technology available to mitigate GHG emissions from large-scale fossil fuel usage”. • If CCS is not commercially available by 2030, the cost of achieving a 50% reduction in GHG emissions by 2050 will be 70% higher than projected under the BM Scenario. Alternative Energy Thailand Forum 2010

21. Challenges to successful commercialization of CCS by 2030(in IEA’s Own Words) • The next decade (2010-20) will be a key “make or break” period for CCS. • CO2 capture technology is commercially available today but the associated costs need to be lowered and the technology still needs to be demonstrated at commercial scale. • Urgent need to advance the state of global knowledge of CO2 storage prospectivity. Only a few regions have adequately mapped the storage potential of deep saline formations, which offer the highest potential for long term storage. • Need to develop near-term regulatory approaches to facilitate: • CCS demonstration efforts • large-scale deployment of CCS. • To date only 4 fully integrated commercial-scale CCS projects are in operation. Nearly 100 commercial-scale demo projects are needed by 2020 and 3000 by 2050 in a number of countries and settings Alternative Energy Thailand Forum 2010

22. Summary & Conclusions • CPRS was viewed as inevitable by the coal mining industry in 2008. • Today, its eventual passage into law is in doubt due to: • Strong industry opposition on competitiveness grounds • Failure of UN Copenhagen Climate Change Conference (COP 15) to achieve legally binding limits to CO2 emissions • Debate has now shifted to finding alternatives and making political compromises that may “gut” the CPRS of its CO2 reduction potential. • Renewable Energy Law, as amended in 2009, is likely to lead to a large increase in renewable energy projects- particularly wind projects – between 2010 and 2030. Alternative Energy Thailand Forum 2010

23. Summary & Conclusions (cont.) • The IEA along with many other energy agencies are placing a very high priority on the commercial development of CCS in order to achieve GHG reduction targets. • But CCS is unlikely to prove the silver “technology” bullet that many proponents make it out to be. • The best argument that has been offered for supporting CCS is that it is cheaper – on paper - than many other GHG reduction options. • But that claim is not supported by operating CCS plants. Instead proponents seem to be relying on speculative forecasts based on: • Large increases in CCS plant efficiency, on the assumption that new technologies still at the test stage of development are successfully commercialized • Large decreases in CCS plant capital costs that may result from economies of scale and replication. • As of 2010, these expected improvements are based on hope and not demonstrated results. Alternative Energy Thailand Forum 2010

24. Summary & Conclusions (cont.) • The IEA CCS Roadmap, if fully implemented, may negatively impact renewable energy initiatives by reducing the level of subsidies and other resources that could have been used to support solar, wind, and other renewable technologies. • But there may be one silver lining to the CCS cloud. It may benefit both the renewable energy industry by: • establishing a strong price floor for CO2 permits • barring the discovery of huge, low cost oil and gas deposits, creating a much higher price for electricity that will strongly support the commercial development of renewables. Alternative Energy Thailand Forum 2010