William Chandler

Developing Countries & Global Climate Change : Electric Power Options in Argentina

Developing Countries & Global Climate Change : Electric Power Options in Argentina

Prepared for the Pew Center on Global Climate Change
May 2000

By:
Daniel Bouille, Institute for Energy Economics, Bariloche Foundation
Hilda Dubrovsky, Institute for Energy Economics, Bariloche Foundation
William Chandler, Battelle, Advanced International Studies Unit
Jeffery Logan, Battelle, Advanced International Studies Unit
Fernando Groisman, Institute for Energy Economics, Bariloche Foundation

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

The Republic of Argentina is positioning itself at the forefront of the climate change debate among non-Annex I countries. It initiated market reforms in the early 1990s that made the economy more efficient while providing mixed, but on balance, positive, environmental results. In 1999, Argentina set a voluntary target to lower greenhouse gas emissions to between 2 and 10 percent below the projected baseline emissions for 2012. Additional policy choices that it makes to improve economic growth and lower emissions could serve as important examples for others facing similar challenges.

Argentina's electric power demand is expected to more than triple over the next 15 years, expanding by 6 percent a year. Emissions of greenhouse gases, however, do not have to increase at the same rate. The successful implementation of the market-based reforms and increased competition in power generation could continue to play an important role in the near future in lowering emissions from projected levels. This report describes the context for new investments in this sector and identifies principal trends under three alternative policy scenarios. The report finds that:

  • Under a business-as-usual scenario, electric power generating capacity, primarily from large natural gas turbines and combined-cycle plants, is expected to increase 170 percent, growing from 17 gigawatts in 1995 to 46 gigawatts in 2015, at a cost of $26 billion. Carbon dioxide emissions are expected to nearly triple, growing from 4.8 million tons in 1995 to 14 million tons in 2015.
  • Natural gas combined-cycle plants have become the most competitive alternative over hydro and nuclear power, and are currently the main choice of private sector power developers in Argentina. These plants produce less than half the greenhouse gas emissions of similar coal-fired plants, and have essentially no emissions of sulfur dioxide and particulates. If low-cost natural gas resources become restricted due to shortages, however, investments would flow to nuclear and coal-fired power plants. This outcome could raise total costs to nearly $45 billion, although greenhouse gas emissions would remain essentially unchanged due to the offsetting characteristics of nuclear and coal-fired plants.
  • Adopting policies that favor renewable energy sources and nuclear power cost $32 billion by 2015 — about 23 percent more than the baseline — and would decrease carbon dioxide emissions from 14 million tons in the baseline to 11 million tons in 2015.
  • Increasing energy efficiency by end-users and demand-side management would reduce total costs by $6.3 billion and carbon dioxide, sulfur dioxide and nitrogen oxide emissions would all decline 20 percent compared to the baseline.

Developing Countries and Global Climate Change: Electric Power Options in Argentina is the last of a series commissioned by the Center for Climate and Energy Solutions to examine the electric power sector in developing countries, including four other case studies in Brazil, China, India, and Korea.

The Pew Center was established in 1998 by the Pew Charitable Trusts to bring a new cooperative approach and critical scientific, economic, and technological expertise to the global climate change debate. We believe that climate change is serious business, and only through a better understanding of circumstances in individual countries can we hope to arrive at a serious response.   

Executive Summary

Argentina boasts a distinctly market-oriented electricity generating system. Power sector reforms have progressed further than in most nations, including the United States, and hold important lessons for climate policy. Competition in Argentina has favored natural gas over hydropower and nuclear power, thus increasing emissions at the margin, but has also virtually eliminated coal from the market despite its abundance. While competition has lowered the price of electricity, and thereby increased demand, it has done so by reducing inefficiency that in turn reduced carbon emissions. Privatization and competition in the energy sectors of Argentina and several other South American countries is influencing power reform across the continent.

There are numerous trends driving growth in energy demand. The electric power sector consumes about 22 percent of Argentina's total energy supply. Today, overall energy demand growth is driven by transportation energy use, which increased by half since 1990. The residential sector grew by more than one-quarter over the same period. Abundant natural gas provides one-third of total energy use and continues to increase market share. Transportation and agriculture still rely on petroleum, but industry, commercial buildings, and residences have increasingly switched to direct use of natural gas. Argentina also exports petroleum and natural gas, currently about one-eighth of total production. The country has a relatively strong energy conservation and efficiency program focusing on cogeneration of heat and power, energy appliance labeling, and efficient lighting.

Argentina is emerging as a leader in environmental issues. In October 1999, Argentina announced a voluntary effort to restrict greenhouse gas emissions within a range of 2 to 10 percent below the projected baseline level during 2008-2012. Argentina became the first developing country under the United Nations Framework Convention on Climate Change to establish a voluntary target. The impact of this action on other developing countries is still not clear, but it could catalyze some of the relatively small emitters to take on similar voluntary targets.

While Argentinian power demand is expected to continue to grow rapidly at over 6 percent each year, growth will not necessarily mean a corresponding increase in emissions. Carbon emissions in particular can be offset by improving energy conversion efficiencies, promoting carbon-friendly renewable energy sources, and introducing policies such as the Clean Development Mechanism (CDM) or domestic actions to change fuel-choice decisions. This study explores these and other issues in four scenarios including a baseline of continuing policies and trends, an emissions mitigation case, a natural gas shortage scenario, and a scenario of end-use efficiency improvements.

The scenarios provided the following results:

Baseline Scenario. This scenario, which assesses power supply and demand based on current trends and fuel availability, projects installed power generating capacity to grow from about 17 gigawatts1 in 1995 to 46 gigawatts in 2015, an increase of 170 percent. The share of power provided by hydroelectric resources will fall from half of all generation in 1995 to about one-quarter, while nuclear power will drop from 10 percent of supply to only 3 percent in 2015. Gas-fired plants provided about 46 percent of power in 1995, a share that will grow to 72 percent over the next decade-and-a-half. Total cost in the baseline scenario from 1995 to 2015, including discounted capital, operations and maintenance, and fuel components, is estimated to be $26 billion. Carbon dioxide emissions from the power sector grow from 4.8 million tons of carbon in 1995 to an estimated 14 million tons in 2015, almost tripling.

Emissions Mitigation Scenario. This scenario tests the impact of policies to reduce the capital cost of power supply in order to favor non-carbon energy sources such as hydropower and wind. The reduction in capital costs is simulated by lowering the discount rate from 12 percent in the base case to 5 percent, and would require an outright social or environmental subsidy. This approach might simulate the use of domestic subsidies and soft loans or investments from the CDM. In this scenario, hydropower's share continues to fall but only to 39 percent, while nuclear's share drops to 4 percent. Power supply grows 7 percent more than in the baseline, thus requiring a total of almost 49 gigawatts of capacity in 2015. The value of the "subsidy" would amount to $6 billion over the 20-year period as total costs increase by 23 percent to $32 billion. Carbon dioxide emissions are around 11 million tons, or one-fifth less than baseline levels.

Natural Gas Shortage Scenario. This scenario assumes that low-cost natural gas resources are restricted — compared to the baseline scenario — for use in the power sector starting in 2005. Methodologically, the scenario applies the 12 percent discount rate used in the baseline but severely constrains gas supply to reflect the assumed resource depletion. Consequently, the least-cost model simulation predicts investment flowing to nuclear and coal-fired power stations. Total power capacity reaches 48 gigawatts, 4 percent above the baseline, although actual power generation remains the same. Nuclear power's share in generation rises dramatically to over 15 gigawatts by 2015. The scenario also applies environmental externalities to coal use, and this accounts for the marked increase in nuclear power. Power demand would exceed 181 terawatt-hours, compared to roughly 55 terawatt-hours today. Total costs would rise to nearly $45 billion, over 70 percent higher than the baseline. Carbon emissions would decline by 2 percent, but sulfur dioxide and particulate emissions would increase dramatically due to the increased use of coal-burning power plants. The likelihood of a natural gas shortage this severe is remote so the scenario results should be viewed as an upper-end outcome.

Efficiency Scenario. This scenario tests the effect of demand-side energy-efficiency policies, including strengthening standards for appliances and buildings, increasing competition in energy-using equipment by liberalizing trade, and providing informational or financial assistance to industrial consumers. Efficiency is assumed to reduce energy use in the buildings sector by 9 percent and by 7 percent in the industrial sector by 2015 compared to the baseline. Industrial cogeneration plays a significant role in this scenario. Total power costs are $6.3 billion lower than in the baseline and more than 50 percent below the natural gas shortage scenario. Carbon dioxide, sulfur dioxide, particulate, and nitrogen oxide emissions would all decline by approximately 20 percent compared to the baseline.

Several of the above scenarios raise questions about implementation costs. While the CDM might be one option in the mitigation scenario, this study makes no claim to describe how such a mechanism could be implemented to achieve the major shift in private discount rates. The efficiency scenario, similarly, depends on policies with uncertain effectiveness and does not indicate the level of effort that would be required. Achieving the potential revealed in these scenarios will depend on major new policy initiatives and on policy research to describe an effective set of policies that decision-makers can adopt.

The impact of increased use of market forces on the environment and specifically on greenhouse gas emissions in Argentina has been mixed but, on balance, positive. While hydropower and nuclear are seriously disadvantaged by market economics, gas is highly favored over coal. Because the environmental and social considerations of hydropower, nuclear, and coal are substantial, it cannot be said that the market produces an unfavorable environmental result. More to the point, the market in Argentina has provided a prudent path for energy development and environmental protection, one that sensible public policy can build on to further protect Argentina's environment and the global climate.

About the Authors

Daniel Bouille
Daniel Bouille is Senior Researcher at the Institute for Energy Economics/Bariloche Foundation in Buenos Aires, Argentina. An economist by training, his academic background includes post-graduate studies in Energy Economics at the University of Cologne in Germany.

His professional background presently focuses on research and technical assistance related to climate change issues. Professor Bouille was National Coordinator of the Argentine Report on Greenhouse Gas Mitigation in the Energy Sector. He has served as Coordinator of numerous projects including, "Study on Flexibility Mechanisms within the Context of the United Nations Framework Convention on Climate Change and the Kyoto Protocol;" "Study of the Andean Pact: the Benefits of the Integration on Greenhouse Gas Emissions;" Technical Assistance to the First Mitigation Study for El Salvador; and Energy Study to fix the Argentine Voluntary Commitment.

Professor Bouille is also a member of the expert roster of the GEF, and Lead Author of the IPCC Working Group III Third Report.


HILDA SUSANA DUBROVSKY

CURRICULUM VITAE

NAME AND SURNAME: Hilda Susana Dubrovsky
CITIZENSHIP: Argentine
BIRTH DATE: September 6th, 1953
PRESENT POSITION: Instituto de Economía Energética Academic Researcher

MAJOR FIELDS OF STUDY:

Civil Engineer directed to hydraulic vocational guidance.
Researcher, Postgraduate in Economic and Energy Planning.

PROFESSIONAL AND RESEARCH BACKGROUND:

Experience obtained through different research-studies and works dealing with Economics and Energy Planning, requested by national and international agencies such as: PNUD, FAO, CEE (DG XVII), IDRC (Canada), IDB, OLADE, The World Bank, CIER (Commission of Regional Electricity Integration) and The Andean Promoting Corporation- CAF. Other institutions as the National Secretariat for Energy (Argentina) and different national and provincial public or private bodies: INVAP, CNEA, also with various universities and electricity companies.

SUBJECTS:

Electricity Planning, energy prices and tariffs, energy and agriculture-husbandry production techniques; projection methodology covering energetic requirements; integral energy planning at national level; energy integration; strategies dealing with national use of the energy, environment impacts of the energy systems.

Author and collaborating member in numerous research studies, covering the above mentioned areas.


WILLIAM CHANDLER

William Chandler is currently Senior Staff Scientist and Director of Advanced International Studies at Battelle Memorial Institute's Pacific Northwest National Laboratory in Washington, D.C. He is a member of the international energy panel of the U.S. President's Council of Advisors on Science and Technology, and an adjunct professor at Johns Hopkins University.

Mr. Chandler has authored or co-authored ten books, and has often published in both technical and popular journals, including Climatic Change and Scientific American. He occasionally appears on national radio and television, most recently in a Peter Jennings ABC special on climate change.

His international work has included institution building, policy development, and project finance. He led the creation of independent, not-for profit energy efficiency centers in six nations, including Russia and China. Chandler received the 1992 Champion of Energy-Efficiency Award from the American Council for an Energy Efficient Economy for his work. He has also led case studies of energy and climate in most of the transition economies and is lead author for the Intergovernmental Panel on Climate Change, currently focusing on technology transfer.

Mr. Chandler manages the U.S.-Ukrainian collaborative program on energy-efficiency investment under the Gore-Kuchma Commission and is a member of the National Committee on U.S.-China Relations. He holds a B.S. from the University of Tennessee, and an MPA from Harvard University.


JEFFREY LOGAN

Jeffrey Logan is a Research Scientist in the Advanced International Studies Unit of the Pacific Northwest National Laboratory in Washington, D.C. His work focuses primarily on the environmental and economic impacts of energy system decisions, with a heavy geographic focus on China.

He has published extensively on China's electric power sector, natural gas industry, energy conservation efforts, and renewable energy potential. He led a 1998 study entitled "China's Electric Power Options: An Analysis of Economic and Environmental Costs, " which received wide attention. He has also advocated greater natural gas use in China as a substitute for coal and published related articles in the Oil and Gas Journal and the China Business Review.

Mr. Logan began his career at General Electric modeling satellite orbits. He later joined the Peace Corps and taught applied science in rural Nepal. A growing interest in the rapid development of Asian economies and their associated environmental and social dislocations then took him to China where he worked with the United Nations. He has five years of field experience in Asia and speaks Chinese and Nepali.

Logan has a B.S. degree in Aerospace Engineering from the Pennsylvania State University. He also holds a joint Masters degree in Environmental Science and Public Administration from the School of Public and Environmental Affairs at Indiana University. He has also worked at the East-West Center in Hawaii researching the dynamics of Chinese energy and economic activity.


FERNANDO GROISMAN

CURRICULUM VITAE

NAME AND SURNAME: Fernando Groisman
CITIZENSHIP: Argentine
BIRTH DATE: June 30th, 1921
PRESENT POSITION: Instituto de Economía Energética Senior Researcher

MAJOR FIELDS OF STUDY:

Mechanical-Electrician Engineer, Senior. Expertise in Economics, Energy Policy and Planning. Methodologies and Applications directed to Energy Planning connected to the requirements, supply and environment impacts.

PROFESSIONAL AND RESEARCH BACKGROUND:

Experience and training in: Integral Energy Studies worked in different Argentine provinces and National regions, as well as in foreign countries. Studies covering the diagnosis, energy demand and supply scenarios, on medium and long term; environment impacts and mitigation sceneries related to environmental pollution. Studies dealing with the rational use of energy. Energy and environment policies patterns; assessment and supply by means of non-conventional energy sources. Various study-works referred to the different effects of technology. Advisor on subjects referred to Energy Legislation.

Author and collaborating member in numerous research study-works in the above mentioned fields.   

 

Daniel Bouille
Fernando Groisman
Hilda Dubrovsky
Jeffrey Logan
William Chandler
0

Developing Countries & Global Climate Change: Electric Power Options in Brazil

Developing Countries & Global Climate Change: Electric Power Options in Brazil

Prepared for the Pew Center on Global Climate Change
May 2000

By:
Roberto Schaeffer, Federal University of Río de Janeiro
Jeffery Logan, Battelle, Advanced International Studies Unit
Alexandre Salem Szklo, Federal University of Río de Janeiro
William Chandler, Battelle, Advanced International Studies Unit
João Carlos de Souza Marques, Federal University of Río de Janeiro

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Brazil is the fifth largest country in the world and its economy is roughly equal to that of all other South American countries combined. Yet, its greenhouse gas emissions are less than one-third of the continent's total due to the dominant role of hydropower. Total energy consumption is less than one-tenth the level in the United States and per capita carbon emissions are just 0.5 tons, compared to approximately 1.0 ton in Argentina and Mexico.

Brazil is already considered an environmental leader among developing countries and plays a significant role in the international climate change debate. Whether it is able to stay on this path will depend in part on its energy choices over the next fifteen years. This report describes the context for new power sector investments and presents three alternative policy scenarios for 2015. The report finds that:

  • Construction of new hydroelectric plants is increasingly expensive and controversial due to social and environmental impacts. As a result, many new investors may favor natural gas-fired combined-cycle plants. Under a business-as-usual trajectory, carbon dioxide emissions will grow from 3.4 million tons in 1995 to 14.5 million tons in 2015, mainly due to this shift to natural gas.
  • Further tightening of local environmental regulations and adoption of renewable energy policies could reduce carbon dioxide and sulfur dioxide emissions by 82 percent and 75 percent, respectively, by 2015 compared to the baseline scenario, at little additional cost.
  • Creating a carbon-free power sector would require an additional $25 billion in cumulative costs by 2015 — about 15 percent more than the business-as-usual scenario — and would expand the use of renewable energy resources.
  • Wind power potential could be harnessed — increasing from zero to 2 percent of total installed capacity by 2015 — depending on the extent of government subsidies.

Developing Countries and Global Climate Change: Electric Power Options in Brazil is the fifth of a series commissioned by the Center for Climate and Energy Solutions to examine the electric power sector in developing countries, including four other case studies of Korea, India, China, and Argentina.

The Pew Center was established in 1998 by the Pew Charitable Trusts to bring a new cooperative approach and critical scientific, economic, and technological expertise to the global climate change debate. We believe that climate change is serious business, and only through a better understanding of circumstances in individual countries can we hope to arrive at a serious response.   

Executive Summary

Brazil generates over 90 percent of its electricity by capturing the energy in falling water. Per capita carbon emissions in Brazil are less than half the world average, largely because of the country's heavy reliance on hydropower, which produces few greenhouse gas emissions. Many of the country's new power plants, however, will likely use natural gas since many investors view hydroelectric plants as increasingly costly, controversial, and risky.

This study analyzes the options for meeting power demand in the Brazilian power sector through 2015. Meeting this demand at least-cost — including the estimated costs of environmental impacts — is a topic of great concern for decision-makers in government and industry. The electric power choices Brazil makes may influence the global response to climate change out of proportion to its emissions, as Brazil is considered an environmental leader among developing countries.

Current reforms in the power sector have been designed mainly to cut costs by introducing competition in electricity generation. Other objectives include reducing government investment in power plant construction and the risk of electricity shortages. These reforms have catalyzed institutional changes in Brazil: privatization, elimination of tariff equalization across regions, and the introduction of supply contracts between power generation and distribution utilities.

The authors begin with a brief review of Brazil's economic and energy situation, then turn to a detailed account of the nation's electric power sector. The report presents results of regional electric power demand forecasts through 2015 and assessments of available energy resources and technologies. An analysis using a linear programming model determines the least-costly combinations of power supply technologies that meet projected power demand.

Three policy cases were devised to test economic and environmental policy measures against a baseline: advanced technologies, local environmental control, and carbon elimination. Least-cost modeling simulated these scenarios through changes in emissions fees and caps, costs for advanced technologies, demand-side efficiency, and clean energy supplies.

The authors conclude that, without alternative policies, new additions to Brazil's electric power sector will shift rapidly from hydroelectricity to combined-cycle natural gas plants. Greenhouse gas emissions will thus increase rapidly, although the absolute quantities will remain relatively low. While combined-cycle natural gas plants generate power with 60 percent less carbon dioxide emissions than coal units, greenhouse gas emissions will still rise rapidly as the gas plants replace hydropower facilities that are nearly carbon-free. Specifically, the scenarios produced the following results:

Baseline Scenario. This scenario assumes that institutional reform such as privatization and increased competition among generators is successfully implemented over the coming decade. The installed capacity grows from 56 gigawatts in 1995 to 94 gigawatts in 2015, an increase of 68 percent. Natural gas plants increase from essentially zero to 11 percent of installed capacity over the period of analysis. Energy efficiency and cogeneration play important roles in limiting an even greater reliance on fossil fuel power generation. The total cost of meeting demand is $183 billion,1 which includes capital, fuel, and operation and maintenance costs. Carbon dioxide emissions rise more than four-fold from 3.4 million tons of carbon in 1995 to 14.5 million tons in 2015. However, the intensity of CO2 emissions in Brazil remains low, even in 2015, as hydropower still accounts for 74 percent of total generation. Sulfur dioxide and particulate emissions grow proportionately with power generation, while nitrogen oxides increase five-fold to reflect the greater use of natural gas in power generation turbines.

Advanced Technology Scenario. The advanced technology scenario simulates capital cost reductions for power plant equipment due to technological progress driven by government incentives. Environmental costs are also at least partially accounted for in the least-cost analysis by including some of the external costs of emissions, hydropower construction, and nuclear decommissioning that are normally ignored. Wind power increases from zero to almost 2 percent of total installed capacity by 2015 due to the environmental fees imposed on fossil-fuel use. The total cost of this scenario is $181 billion, 1.6 percent less than the baseline, mainly due to the cheaper costs of building and operating combined-cycle power plants in the later years. This figure does not include the research, development, and deployment costs needed to improve technologies. Carbon dioxide emissions drop slightly from the baseline, reaching 13.3 million tons of carbon in 2015. Sulfur dioxide emissions decline by approximately 50 percent due to the elimination of diesel generators after 2005.

Local Environmental Control Scenario. In this scenario, renewable energy policies and the use of higher environmental externalities influence the technologies employed. The environmental costs of pollution are assessed at a higher value than in the technology scenario, and cost reductions for cleaner, advanced technologies are also assumed. Hydropower plays a larger role in this scenario, rising to over 88 percent of total installed capacity. The environmental and social impacts of expanding hydroelectric power production this much are difficult to estimate, but could be significant. Biomass capacity rises from 2 percent in the 2015 baseline case to 5 percent. The cost of this scenario is $179 billion. Carbon dioxide emissions drop from 3.4 million tons of carbon in 1995 to 2.6 million tons in 2015. Sulfur dioxide emissions decline substantially, while particulate emissions increase due the growth in biomass combustion for power generation.

Carbon Elimination Scenario. In the carbon elimination scenario, Brazil installs electric power generation technologies that produce no net carbon dioxide emissions and only minor impacts on watersheds and landscapes. Installed capacity in 2015 reaches 97 gigawatts, and hydropower continues to account for over 80 percent of installed capacity. Renewable energies account for 97 percent of power generation in 2015, with biomass accounting for over 16 percent. The remaining 3 percent is generated from existing nuclear power plants. The total cost of the expansion is $208 billion, 14 percent above the baseline scenario. Carbon emissions cease and sulfur dioxide emissions drop, but particulate emissions rise five-fold due to the heavy reliance on biomass.

Conclusions

Brazilian power supply will continue to rise at appreciable rates over the next two decades regardless of the country's current economic difficulties. Reforms under way in the power sector, however, will greatly influence how power demand is met and the emissions that result. Hydropower will continue to play a dominant role through 2015, although its relative share will most likely decrease.

Carbon emissions more than quadruple in the baseline scenario to 14.5 million tons, but remain extremely low in absolute terms. (For comparison, the U.S. power industry released approximately 550 million tons of carbon dioxide in 1998.2) This output is equivalent to the emissions from 10 large coal-fired power plants. Biomass and wind power might play a larger role in Brazil's power future if the government focuses on developing advanced technologies and accounts for at least some of the costs to the environment. Coal-based technologies are not competitive with other forms of power generation, allowing Brazil to largely avoid the tradeoff between improving the quality of the local environment and reducing global greenhouse gas emissions.

In the local environmental control and carbon elimination scenarios, there is a strong interdependence between electricity generation based on sugar cane bagasse and ethyl alcohol production for automotive use. By accounting for the environmental impacts of local pollutants or restricting power generation options to those with no carbon dioxide emissions, sugar cane bagasse becomes feasible, making it the power generation technological option that is most widely used in both scenarios after hydropower. This indicates that Brazil has the potential to service the electricity market without carbon emissions if the market or the international community can support the 14 percent higher costs.

In all four scenarios, energy efficiency and cogeneration play an important role in the least-cost power solution. Saving electricity through increased efficiency offsets the need for new supply and has enormous potential in Brazil's industrial sector. Efficiency also reduces the environmental burden associated with electricity production and transmission (most likely via natural gas combined-cycle plants) without compromising the quality of services that end users demand.

Carbon dioxide emissions from Brazil's power sector will remain low in absolute terms over the next two decades. Brazil appears able to play a unique role within the context of the UN Framework Convention on Climate Change by fostering economic growth that does not sacrifice local or global environmental quality. Achieving cleaner development would serve as a powerful example for other developing countries. 

Alexandre Salem Szklo
Jeffrey Logan
João Carlos de Souza Marques
Roberto Schaeffer
William Chandler
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Developing Countries & Global Climate Change: Electric Power Options in China

Developing Countries & Global Climate Change: Electric Power Options in China

Prepared for the Pew Center on Global Climate Change
May 2000

By:
Zhou Dadi, Beijing Energy Efficiency Center
Guo Yuan, China Energy Research Institute
Shi Yingyi, Beijing Energy Efficiency Center
William Chandler, Battelle, Advanced International Studies Unit
Jeffrey Logan, Battelle, Advanced International Studies Unit

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

With annual releases of over 918 million metric tons of carbon dioxide into the atmosphere, the People's Republic of China takes center stage among developing countries in the climate change debate. If China could achieve significant emission reductions from the business-as-usual scenario, particularly within the electric power sector, it could be considered a major advance in addressing climate change. Yet the task is daunting. Decision-makers must have a better understanding of the paths that are possible for electric power investment in China, and the impacts of these investments.

This report is designed to improve that understanding. It describes the context for new power sector investments and presents five alternative policy scenarios through 2015. The report presents concrete policy strategies that could enable China to meet growing electricity demand while continuing economic growth, and reducing sulfur dioxide and greenhouse gas emissions.

The principal drivers of the technology choices for the next fifteen years are:

  • Growing awareness that under a business-as-usual path, carbon emissions from thermal plants will increase from 189 million tons in 1995 to 491 million in 2015, and sulfur dioxide emissions from 8.5 million to 21 million due to the heavy reliance on coal-fired power generation.
  • Increasing demand-side energy efficiency by 10 percent from business-as-usual projections could reduce carbon dioxide and sulfur dioxide emissions by 19 and 13 percent, respectively, in 2015, while lowering cost to 12 percent below the baseline.
  • Expanding the availability of low-cost natural gas through market reforms could reduce emissions of carbon dioxide and sulfur dioxide in the power sector by 14 and 35 percent, respectively, and increase cost by only 4 percent relative to the baseline.
  • Accelerating the penetration of cleaner coal technologies could help China reduce sulfur dioxide and particulate emissions, but the associated impact on carbon emissions would be minimal and would increase costs by 6 percent relative to the baseline.

Developing Countries and Global Climate Change: Electric Power Options in China is the fourth of a series commissioned by the Center for Climate and Energy Solutions to examine the electric power sector in developing countries, including four other case studies of Korea, India, Brazil, and Argentina.

Executive Summary

China plays a leading role among developing nations in the field of energy and climate policy. The nation now ranks second in the world in energy consumption and greenhouse gas emissions. The electric power sector alone could consume as much as one billion tons of coal in 2015, and emit 300 million additional tons of carbon per year. Chinese decisions affecting energy development and emissions mitigation will significantly impact world climate. However, China currently has no formal plans to reduce its greenhouse gas emissions for their own sake.

China has changed dramatically since the country adopted economic reforms in the late 1970s. The nation's economy has grown and living standards have improved for over two decades. Although income per capita remains far less than in industrialized countries, its gross domestic product is large enough to affect the global economy. As the country's economy improves, China's influence will continue to grow.

China has fueled this robust growth with plentiful supplies of domestic coal. In 1997, the country consumed nearly 1.3 billion tons of coal, (accounting for three-quarters of all commercial energy demand), the highest in the world. Heavy reliance on coal has also caused severe environmental problems, including acid rain in southern China, deadly particulate levels in most cities, and increasing concentrations of greenhouse gases in the global atmosphere. Yet, for two decades energy use has grown only half as fast as the economy. According to official statistics, China has recently been far more successful than the United States in improving energy efficiency.

The power sector currently accounts for more than one-third of China's annual coal consumption. Coal-fired thermal power plants generate over 75 percent of the nation's electric power and are among the largest sources of air pollution in China. Continued growth in economic output and living standards implies that electric power demand will grow rapidly in the foreseeable future. How to meet demand at least cost — including local environmental impacts — is a topic of great concern for decision-makers in government and the power industry.

This analysis, which explores China's electric power options, has three primary goals:

  • Assess the current and future state of the power sector
  • Determine the least-cost combination of technologies to meet projected power demand through 2015 under various scenarios
  • Evaluate policies that could minimize both economic and local environmental costs.

This report begins with a brief review of China's economic and energy situation, then turns to a detailed account of the nation's electric power sector. The paper assesses available energy resources and generation technologies, and results of regional electric power demand forecasts through 2015. Results are presented from an analysis using a linear programming model to determine least-cost combinations of power supply technologies that meet projected power demand in 2015. The authors constructed a baseline and five policy cases to test economic and environmental policy measures, including sulfur dioxide and carbon dioxide controls, natural gas reform, clean coal investment mechanisms, and increased energy efficiency. The model simulated these scenarios by applying emissions caps, fees, cost reductions, increased fuel availability, improved plant performance, or lower demand estimates that then influence the selection of alternative technologies.

The authors conclude that without a strong environmental policy, China's electric power mix will become even more coal-dependent, with dramatic increases in emissions of sulfur dioxide, oxides of nitrogen, particulates, and carbon dioxide. These emissions would have serious effects on human health, property, and ecosystems.

When policy measures such as fuel availability, technical performance, and full-cost accounting are considered, however, the mix of electric power generation technologies — if not necessarily the fuels — changes significantly. The six scenarios produced the following results:

Baseline case. Power generating capacity and power consumption are expected to nearly triple by 2015 from their values in 1995, requiring some $449 billion in total costs. In the baseline scenario, coal then provides 85 percent of power, and coal use for power generation alone would reach 1 billion tons per year. Emissions of sulfur dioxide and carbon dioxide from the power sector would reach roughly 20 million tons and one-half billion tons per year, respectively. This scenario assumes that the current environmental policy remains the same, which appears increasingly unlikely.

Sulfur emissions control case. Annual sulfur dioxide emissions from the power sector could be cut to 12.7 million tons by 2015 — a 40 percent reduction from the baseline level — by imposing fees ranging from $360-$960 per ton of sulfur released. Total costs using the sulfur fees would rise by 4 percent. Sulfur control policies would reduce total coal use very little but greatly increase coal washing and flue gas desulfurization. These options cost less in China than alternatives such as nuclear power, hydropower, and advanced coal technologies that reduce sulfur emissions by a comparable amount. Achieving sulfur reductions would also require stricter regulatory enforcement. However, greenhouse gas emissions would change little as a result of stricter sulfur dioxide emissions control.

Carbon control case. This scenario tested the effect of reducing carbon emissions in the power sector by 10 percent, or 50 million tons per year, by 2015. The study simulates these reductions by assuming the construction of new, less carbon-intensive power plants; it does not consider alternatives to lower emissions in existing plants. A 10 percent reduction from the baseline would add an additional $20 billion to total costs by 2015, an increase of about 4 percent. Greater reliance on washed coal, hydropower, nuclear power, and fuel switching to natural gas would be the cheapest ways of reducing emissions. Moderate carbon taxes were also tested in this analysis, but they were not found to be particularly effective in encouraging fuel switching. Only very high taxes — over $75 per ton of carbon — produced significant emissions reductions.

Natural gas case. China currently uses very little natural gas for power generation. For change to occur, the government would need to establish new policies and reforms to increase the availability of natural gas. This scenario simulates the impact of policies to boost gas use in the power sector. Increased availability of low-cost natural gas in the power sector — combined with improved turbine efficiency and a $300 fee per ton of sulfur dioxide emissions — could cut carbon and sulfur dioxide emissions by about 14 and 35 percent, respectively, from the baseline. Natural gas power in this scenario is cheaper than coal-fired power only along the coastal regions (where coal is relatively expensive), but gas would need to be available for $3 per gigajoule. This value is lower than some forecasts, but still higher than gas prices in Europe and North America. The power sector would consume approximately 65 billion cubic meters of gas, accounting for roughly half of China's total gas demand in 2015.

Clean coal case. A set of scenarios tested the effect of reducing the cost of advanced coal technologies such as integrated gasification combined-cycle (IGCC) or pressurized fluidized bed combustion (PFBC) to help them capture additional market share relative to the baseline. A 40 percent reduction in capital costs for IGCC and PFBC, combined with a mid-level sulfur dioxide emissions fee of $300 per metric ton, would reduce carbon dioxide and sulfur dioxide emissions by 9 and 75 percent, respectively. However, approximately $140 billion in additional investment — perhaps through international cooperation on technology transfer and clean development — would be required to subsidize the cost of building these plants.

Efficiency scenario. This scenario tested the effect of reducing electric power use by 10 percent compared to the baseline. Such a reduction would lower carbon and sulfur dioxide emissions by 19 percent and 13 percent, respectively, in 2015, and save $55 billion in investment and fuel costs by postponing the need for 52 gigawatts of coal-fired generation capacity. The analysis did not consider the required policies or costs to lower power demand.

These scenarios revealed two important findings:

1. Policy options exist to reduce carbon emissions substantially in the Chinese power sector at relatively low incremental cost. Emissions reductions of more than 10 percent compared to projected baseline emissions in 2015 can be achieved for less than 5 percent of the total cost of power. Continued improvement in demand-side efficiency is a particularly attractive option to lower carbon emissions.

2. Not all of these reductions will be achieved for reasons that are in China's own interest, such as reducing sulfur dioxide emissions. Consequently, cooperation with other countries would be required to achieve more dramatic results.   

Guo Yuan
Jeffrey Logan
Shi Yingyi
William Chandler
Zhou Dadi
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Developing Countries & Global Climate Change: Electric Power Options in India

Developing Countries & Global Climate Change: Electric Power Options in India

Prepared for the Pew Center on Global Climate Change
October 1999

By:
P.R. Shukla, Indian Institute of Management, Ahmedabad
William Chandler, Battelle, Advanced International Studies Unit
Debyani Ghosh, Indian Institute of Management, Ahmedabad
Jeffrey Logan, Battelle, Advanced International Studies Unit

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Foreword

Eileen Claussen, Executive Director, Pew Center on Global Climate Change

The electric power sector in India is characterized by low per capita energy use, rapid growth in demand, heavy losses in transmission and distribution, and tariffs well below average costs. Coal dominates usage, which combined with hydropower represents 85 percent of generated power. The power sector is responsible for half of India's carbon dioxide emissions, which were 92 million tons in 1995. Even with the prospect of market and industrial reforms, the 'business-as-usual' path for India in 2015 increases both generating capacity and carbon dioxide emissions by around 150 percent over 1995 levels. But the scenarios modeled in this study show that growth in emissions can be reduced to only 60 percent greater than 1995 if progressive sustainable development policies are implemented.

What are the drivers that will influence future technology choices in India?

  • The ability of India's power producers to fuel-switch and lower carbon dioxide emissions is heavily dependent on the availability and cost of alternative fuels (especially natural gas). In the scenario simulating stricter local environmental controls, this restriction steers decision-makers to sulfur control equipment and does not necessarily lead to reductions in coal use. On the other hand, striving to attain sustainable development goals can reduce costs and capacity needs, and achieve the most dramatic reductions in carbon dioxide emissions.
  • Market reforms can lower costs by 11 percent and carbon emissions by 7 percent through a reduction in the need to build more power plants through increased supply efficiency and earlier availability of new technologies.
  • More widespread adoption of cost-effective energy efficiency measures could also reduce carbon emissions by 23 percent and sulfur dioxide emissions by 60 percent, by reducing demand for power by around 15 percent.

Developing Countries and Global Climate Change: Electric Power Choices in India is the third in a series examining the electric power sectors in developing countries, including four other case studies of Korea, China, Brazil, and Argentina. The reports findings are based on a lifecycle cost analysis of several possible alternatives to current projections for expanding the power system.

The Pew Center was established in 1998 by the Pew Charitable Trusts to bring a new cooperative approach and critical scientific, economic, and technological expertise to the global climate change debate. The Pew Center believes that climate change is serious business and a better understanding of circumstances in individual countries helps achieve a serious response.

Executive Summary

Electricity consumption in India has more than doubled in the last decade, outpacing economic growth. The power sector now consumes 40 percent of primary energy and 70 percent of coal use. This sector is the single largest consumer of capital, drawing over one-sixth of all Indian investments over the past decade. Despite these huge expenditures, electricity demand continues to outstrip power generating capacity, leaving a 12 percent electricity deficit and a 20 percent peak power shortage.

The government has assumed the predominant role in electricity supply in the post-independence era. State electricity boards (SEBs) and power corporations plan and govern power plants financed with state funds. SEBs in particular are wide open to political influence and tariff distortions. Operational inefficiencies grew in the absence of competition and financial discipline, undermining the power sectors financial health. By the early 1990s, the sector was overdue for sweeping reforms to enhance revenues and mobilize investment in the short run, and to change ownership and the regulatory structure in the long run. Reforms underway fall broadly into the categories of SEB corporatization, privatization of power corporations, unbundling (vertical divestiture), and regulatory restructuring.

Despite enhanced competition from other fuels, coal remains the mainstay of power generation in India. The present power technology mix relies on domestic coal to provide three-fifths of the countrys power; large hydroelectric dams provide about one-quarter. Gas-fired power has grown from almost nothing to one-twelfth of total generation in the last decade due to the reduced risk associated with lower capital requirements, shorter construction periods, diminished environmental impacts, and higher efficiencies. Nuclear power contributes less than 3 percent to total generation and renewables (other than large hydro) just over 1 percent. India has a significant program to support renewable power, exemplified by wind power capacity that rose from 41 megawatts in 1992 to 1,025 megawatts in 1999.

Power transmission and distribution has suffered from losses amounting to over one-fifth of generated electricity, more than double the level of most countries. An institutional restructuring process began in 1989 to consolidate various suppliers and distributors under an agency called "Powergrid." Faced with unreliable power supply, many industries have invested in on-site power generation that now accounts for 12 percent of total capacity.

The phenomenal rise in agricultural electricity consumption is due to greater irrigation demand by new crop varieties and the very low price of electricity provided to that sector. The average electricity tariff in India is 20 percent below the average cost of supply. The gap is mainly due to subsidized rates for agriculture. Industrial consumers pay higher costs and provide a cross-subsidy that was worth over US$5 billion in 1997, equal to almost half of power sector investments that year.

Concerns about the environmental impacts of power plant projects have grown in the past twenty years. The power sector contributes about half of Indias carbon, sulfur, and nitrogen oxide emissions. Hydroelectric projects also have generated social concerns. Dam construction has forced the relocation of many Indians, a problem the government has handled poorly. Managing environmental and social impacts has therefore drawn considerable attention in policy-making, project development, and operations. 

Debyani Ghosh
Jeffrey Logan
P.R. Shukla
William Chandler
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Developing Countries & Global Climate Change: Electric Power Options in Korea

Developing Countries & Global Climate Change: Electric Power Options in Korea

Prepared for the Pew Center on Global Climate Change
October 1999

By:
Jin-Gyu Oh, Korea Energy Economics Institute
Jeffrey Logan, Battelle, Advanced International Studies Unit
William Chandler, Battelle, Advanced International Studies Unit
Jinwoo Kim, Korea Energy Economics Institute
Sung Bong Jo, Korea Energy Economics Institute
Dong-Seok Roh, Korea Energy Economics Institute

Press Release

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Foreword

Eileen Claussen, Executive Director, Pew Center on Global Climate Change

The Republic of Korea straddles the line between developed and developing countries. Power demand is expanding rapidly - a "business-as-usual" path doubles consumption by 2015 - and the economy is driven largely by basic, energy-intensive industries. In addition, Korea imports over 90 percent of its fuel. Because of this, the energy choices Korea makes are complicated and may have ramifications for the global environment that outstrip the nation's size. They could leave Korea's greenhouse gas emissions virtually unchanged - or more than double them.

What will be the likely drivers of the technology choices for the next twenty years of new power generation?

  • Economic forces pulling Korea toward additional restructuring of the power sector and reform of industrial policy can reduce emissions of carbon dioxide by 9 percent relative to the baseline, with slightly lower costs per unit of electricity generated. Increasing the supply of natural gas and reducing import tariffs on that fuel have similar impacts.
  • Economic concerns also might lead to more widespread adoption of cost-effective energy efficiency measures and, by reducing demand for power by 15 percent, could also reduce carbon and sulphur dioxide emissions by almost 25 percent.
  • Further tightening of local environmental requirements might shift technology choices toward natural gas and nuclear and achieve reductions in the emissions of sulphur dioxide (59 percent) and carbon dioxide (28 percent), with only a small increase in costs. Developing Countries and Global Climate Change: Electric Power Options in Korea is the second in a series examining the electric power sectors in developing countries, and will be followed by four more case studies of India, China, Brazil, and Argentina. The report's findings are based on a lifecycle cost analysis of several possible alternatives to current projections for expanding the power system.

The Center was established in 1998 by the Pew Charitable Trusts to bring a new cooperative approach and critical scientific, economic, and technological expertise to the global climate change debate. The Pew Center believes that climate change is serious business and a better understanding of circumstances in individual countries helps achieve a serious response.   

Dong-Seok Roh
Jeffrey Logan
Jin-Gyu Oh
Jinwoo Kim
Sung Bong Jo
William Chandler
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