Section 8 (Part I) - Gas Policy Issues

The IFI plant at Marino Point in County Cork consumes 230 m. therms p.a. of natural gas in the production of nitrogenous fertiliser.

IFI is jointly owned by the Irish Government (51%) and Imperial Chemical Industries (49%). They have been attempting to dispose of the business jointly, through Investment Bank of Ireland. The business includes, as well as the Cork plant, units at Arklow and Belfast which do not consume gas. IFI markets products throughout Ireland which contain ingredients from its Cork plant as well as constituents purchased from other suppliers. It also exports.

The production of fertiliser from gas has not been a profitable business for IFI, despite substantial investment in the plant in recent years. Product prices have been depressed, in part due to cheaper supplies from the former Soviet bloc.

The economics of producing fertiliser from natural gas depend on

Price of the product

Gas Cost

Operating Cost

Capital Recovery.

The first two items tend to be characterised by significant fluctuation, and plants such as that operated by IFI can experience periods of substantial loss.

In the recent past, certain product prices, such as that of urea, have been depressed, and Western European producers have experienced severe difficulties. This has led ICI to initiate a strategic withdrawal from the business, and other producers have been trimming capacity. Only plants which enjoy very low gas prices can survive in depressed market conditions, and this does not help producers in Western Europe, where alternative markets for gas are stronger than in other parts of the world.

In the case of IFI, the plant historically has enjoyed the benefit of cheap gas from the Kinsale Head field. In future, gas will have to be purchased on the open market at prices which reflect alternative uses.

In addition, depletion of Kinsale Head will mean that gas must flow North-South on the Dublin-Cork line to supply users in the Cork area. This requires capital expenditure on the line, the extent of which will depend on volumes required at Cork. These are new expenditures, and must be debited to Cork area users, including IFI, in any assessment of economics of continued production.

We understand that IFI have arranged gas supplies beyond December 1999, when their current arrangement expires. The new horizon for supply extends to September 2001.

In view of the economics of the business, the range of demand scenarios beyond this date should, in our view, include those with IFI no longer producing at Marino Point.

The Gas 2025 report works on the basis that energy prices will remain constant in real terms. The combination of this, the economic growth assumptions and the gas demand scenarios lead to implicit assumptions relating to the price and income elasticities of demand, as well as the energy intensity of economic activity.

Historically, price and income elasticities of demand for energy have been low, and only very large changes in energy prices have prompted behavioural changes in customers and changes in the efficiency of energy-using plant. On the other hand, the price elasticity of individual fuels can be high, if other fuels are close substitutes.

It is possible that prices will change significantly over the time horizon under consideration here. Large increases in prices are likely to encourage the development and adoption of more efficient technology. If this happens, the environment will benefit from the reductions in energy usage, but it is possible that some infrastructure could prove superfluous or obsolete.

Large changes in the relative prices of fuel could lead to a change in the relative attractiveness of the fuels in question. At the moment, Heavy Fuel Oil (HFO) and coal prices are low, but gas still has an advantage, if burned in CCGT plants. If gas were to become significantly more expensive, this might tip the balance in favour of the other fuels.

Changes in technology might do the same. At present, coal is out of favour, although there are very large reserves of coal in the world. It is possible that coal-burning technology might improve significantly, so that it would burn more efficiently, reducing CO₂ emissions, and more cleanly, reducing other emissions. Oil-burning technology could also improve. Low prices relative to gas would tend to encourage the technological developments for other fuels.

The introduction of an energy tax would have the same first round impact on the energy market as an increase in fuel prices. If the tax increase is large enough, it could have discernible impacts on the behaviour of energy users. Such a tax might be contemplated if, for example, Ireland was having difficulty in meeting its obligations under the Kyoto Treaty.

The difference between the price increase and the tax is that it is likely that the revenues would stay in the economy, and be recycled to businesses or citizens. This would inevitably blunt some of the impact of the tax.

It is possible, however, that the tax might be applied on an EU-wide basis, and the revenues might not necessarily be recycled to each country in proportion. The impact in such a case would more closely reflect the impact of a price increase, if the revenues collected in Ireland were not, at the margin, returned to Ireland.

8.3 Environmental Impact

The environmental impacts of the proposals under consideration here are less of an issue than might be the case, since all of the proposals involve the use of natural gas. Hence there is less difference in environmental impact of the various options, than would be the case if we were analysing the use of different fuel types.

Natural gas is the least environmentally damaging of the fossil fuels, particularly in terms of CO₂, SO₂ and NOx emissions.

The reduced CO₂ emissions are important, given Ireland’s commitments arising from the Kyoto Summit. As part of the EU "bubble", Ireland is committed to restraining its growth of greenhouse gas emissions to 13 per cent over its 1990 level, by the year 2010. Since CO₂ is the most important greenhouse gas, and the burning of fossil fuels is the main source of CO₂, this requirement falls most heavily on fossil fuel users.

Ireland’s energy consumption has reflected its rapid economic growth in recent years, with the result that the country is already at or close to its 2010 targets. With further significant growth in energy consumption forecast for the next decade, a "business-as-usual" policy stance will see Ireland’s emissions of greenhouse gases increase to a levels significantly in excess of the targeted increase.

Similarly, Ireland is committed to reducing its SO₂ and NO_x emissions – the main causes of acid rain - in the coming years, under EU and domestic law, and international treaties. This can be achieved by burning low-sulphur oil and coal or installing de-sulphurisation equipment and low NO_x burners at power stations. Alternatively, combustion can switch to natural gas.

In this context it will be important that as much energy usage as possible is based on low CO₂ and SO₂ emitting fuels; this will encourage the use of natural gas to the maximum possible extent.

Apart from being environmentally more benign, natural gas is also the most efficient fossil fuel from which to generate electricity, due to CCGT technology. This gives gas a competitive advantage, even with the very low prices of HFO and coal at the moment.

As a result, if the market is left to itself, all new power stations are likely to be gas-fired for the foreseeable future. Furthermore, these new plants will be high on the "merit order" of generating plant. That is, they will tend to displace existing plants from generating the base load.

Notwithstanding the above, there are two issues that do need to be considered, in an environmental context -

The environmental impact of building and operating the infrastructures under the various options.

The conversion of existing power plants to gas usage.

Both will be discussed below, but first we consider the environmental impacts of using gas, comparing it with the alternative fuels, mainly oil.

As the following table shows, most of the extra gas that will be used in Ireland in the future, and hence most of the gas that will flow through any new interconnector, will be used for electricity generation. Therefore in this analysis we will consider only the environmental impacts of natural gas in this usage.

The main emissions from gas-fired power stations are NOx and CO₂. In power stations burning other fuels there are also significant emissions of SO₂. The following table shows the average amounts of the main pollutants from Irish power stations in 1997, per fuel type.

As can be seen, gas-fired power stations are significantly better than the alternatives in terms of emissions per unit of input energy. Since the above numbers are aggregated across all existing plant, they underestimate the performance of a new CCGT plant, because such plants are significantly more efficient than the existing stock, which includes thermal gas plants. They are also more efficient than plants using oil, coal and peat. Approximate efficiency rates are as follows:

A gas CCGT plant will generate roughly 400g of CO₂ per kWh of electricity output. The figure for thermal gas plant would be roughly 650 g/kWh. A thermal oil plant would be roughly 900g/kWh, while the equivalent figures for coal (Moneypoint) and peat are 850 and 1,500 g/kWh respectively.

Similar calculations can be carried out in respect of the SO₂ and NOx emissions.

Valuation of environmental impacts is always difficult, and there will inevitably be a large degree of uncertainty with the results. The most comprehensive attempt to evaluate the environmental impacts of energy usage in recent years is the ExternE project, funded by DG XII of the EU Commission.

This project looked at the environmental and other external effects of power generation from a range of fuels, and Volume 4, published in 1995, deals with oil and gas. Despite the detailed nature of the project, there are many gaps in its analysis, to the degree that aggregate comparisons are difficult.

The ExternE study does not attempt to value the global warming damage done by power generation. However, it does quote estimates from other studies, which only go to demonstrate the large scale uncertainties in evaluating global warming damage. For instance, with gas generation, the estimates range from 0.004 to 2.1 ecu/kWh.

Other attempts have been made to value the external costs. Scott (1997) made one such attempt, based on data in an earlier report by DRI (1994). The results were:

Another attempt to value environmental emissions was made by ECMT in 1998. The focus of this study was the transport sector, so the localised damage costs would be different, but the study gives some general indication of costs of the various emissions.

ECMT surveyed a number of studies of costs, and came up with the following "consensus" values:

The striking feature of these numbers is the very high prevention cost of CO₂ emissions vis a vis the damage cost thereof. A number of factors need to be kept in mind in relation to this:

The damage cost figures have a downward bias, because some damages are not included, due to the difficulty in evaluating them. For instance, damage from catastrophic events with a low possibility of occurring is ignored.

With greenhouse gas emissions, damage will be caused at points in the future, and the related cost has been discounted back to the present time. For the lower extreme of damage cost estimations above, discount rates of 3 to 5 per cent were used. The prevention costs relate to costs now, and therefore no discounting is applied.

The prevention costs are the average of an estimation of the CO₂ tax necessary to cause the required reduction in emissions among energy users, and of the cost of a number of technical measures in the transport sector. The latter may not be a good indicator of the cost of technical solutions in the energy sector. This point is returned to in Section 8.3.4 below, which indicates that the prevention cost for the energy sector in Ireland is much lower, at perhaps ECU 4.50 per tonne.

Converting these to £s per terajoule of input energy, gives the following:

As can be seen, the costs derived are comparable to those derived from Scott (1997), if CO₂ damage costs are used, though coal appears to cause higher damage in the latter. Assumptions about desulphurisation may account for the difference.

Where CO₂ prevention costs are used, however, costs are much higher for all energy sources.

To summarise, there is such a degree of uncertainty in relation to valuations of emissions, and the range of valuations is so wide, that we do not believe it is beneficial to attempt to value the emissions in this study. Since all options under consideration relate to gas as opposed to other fuels, it is less of an issue.

The above discussion does however, serve to demonstrate the environmental superiority of gas-fired electricity generation over alternative fossil fuels, given the current state of technology.

A sizeable amount of energy will be used in the construction of the gas infrastructure, involving gas extraction facilities, pipelines, compressors, gas offtake stations, and power stations. However, this energy usage will be once-off, and the infrastructure will be in place for a number of decades in most cases. Hence, when spread over the lifetime of the infrastructure in question, the amount of energy used to construct the infrastructure is likely to be modest.

The same point can be made about other environmental impacts from the construction of infrastructure. In addition, all large infrastructure projects must go through the planning process, producing environmental impact assessments, and so on. This will help to keep the environmental impact of putting the infrastructure in place to a minimum.

Apart from the power stations themselves, the only infrastructure that will have a significant environmental impact after construction are the compression stations. These have substantial energy requirements, and the resultant emissions will be significant.

Different options will involve different amounts of compression, and even within individual options there are trade-offs between compression and pipeline size.

Information from Dr. Tom McManus of the Department of Public Enterprise indicates that the gas usage of a compressor station, expressed in scf/hour, is

12.19 x compressor station power (in kW)

Therefore, a 10MW station running at full capacity would use 122,000 scf per hour. This incorporates a 28 per cent efficiency, which is about half as efficient as a CCGT power station.

The final amount of compression installed, and the power usage per annum if the peak:average ratio is 1.5, and excluding 20 per cent for back-up facilities, for the various options, is as follows:

There is quite a range of gas consumption, depending on the configuration of compression in the infrastructure. Therefore the various options will have different environmental impacts, in the form of emissions of CO₂ and Nox

However, as with emissions from the power stations themselves, it is not practicable to put reliable valuations on the damage caused by these emissions.

The forecasts of gas usage in the Gas 2025 report are mainly concerned with fuel for new power plants. There is one exception – the conversion of Moneypoint to gas in the second half of the next decade - which leads to the Gas World B demand scenario.

This is being driven by the concern that Ireland may not be able to meet its Kyoto obligations for controlling greenhouse gas emissions. It would involve the scrapping of the existing plant before the end of its useful life, which in commercial terms would be inefficient. The replacement of coal-fired capacity with gas-fired capacity given existing technologies is beneficial for the environment, which counter-balances, to some degree at least, the loss in commercial terms.

A recent report by the ESRI examined the impact of the Kyoto obligations on Ireland, and concluded that one way of meeting the targets was to convert all existing electricity generation plant to gas-fired CCGT plant. This would be an extreme approach, and would be likely to give an upper limit on the cost of meeting the targets. The ESRI also admit that it would have significant security of supply implications, and would necessitate the construction of a second gas interconnector with Britain. The increased costs would necessitate a 5 per cent increase in the cost of electricity, made up of 2.5 per cent to switch to CCGT generation and 2.5 per cent to construct a new pipeline.

The report estimated the cost of conversion of all power plants to CCGT, in terms of cost per tonne of CO₂ avoided. This worked out at £3.50 per tonne (roughly ECU 4.50 per tonne).

The ESRI report estimated that, with unchanged policies, CO₂ emissions would increase by 53 per cent over the period 1990 to 2010, and overall greenhouse gas emissions would increase by 28 per cent. A complete conversion to CCGT, paid for by a 5 per cent increase in non-transport fuel prices, when accompanied by the Department of the Environment and Local Government’s estimates for reductions in methane and nitrous oxide, leads to an overall increase of 14.3 per cent in greenhouse gases. This is within Ireland’s target pre-Kyoto (15 per cent), but outside the Kyoto target of 13 per cent.

So, to meet the Kyoto target, it appears that converting electricity generation to CCGT, on its own, is not sufficient. More or other measures will be needed, which will possibly be more expensive.

Next Page