EN35 External costs of electricity production
Assessment made on 01 Nov 2008
ClassificationEnergy (Primary theme)
- ENER 035
Policy issue: Are environmental costs better incorporated into the pricing system?
The external costs that arise from the environmental impact of electricity production are significant in most EU countries and reflect the dominance of fossil fuels in the generation mix. In 2005 the average external costs of electricity production in the EU were between 1.8-5.9 Eurocent/kWh. Despite progress, these external costs are still not adequately reflected in energy prices. Consumers, producers and decision makers do not therefore get the accurate price signals that are necessary to reach decisions about how best to use resources.
The external costs used to calculate this indicator are based upon the sum of three components: climate change damage costs associated with emissions of CO2; damage costs (such as impacts on health, crops etc) associated with other air pollutants (NOx, SO2, NMVOCs, PM10, NH3), and other non-environmental social costs for non-fossil electricity-generating technologies. Based on the methodology used in this fact sheet (see e.g. note to figure 1 and metadata section), the external costs of electricity production have fallen considerably between 1990 and 2005 in almost all Member States, despite rising electricity production. However, the average external costs still represented between 1.8-5.9 Eurocent/kWh in the EU in 2005. These costs are significant and reflect the continued dominance of fossil fuels in the generation mix.
External costs for electricity are those that are not reflected in its price, but which society as a whole must bear. For example, damage to human health is caused by emissions of particulate matter (including both primary particles and secondary aerosols). SO2, NOX and VOC emissions also lead to human health impacts (which are considered to be the largest externality) through the formation of secondary pollutants. NOX and VOC emissions have health impacts through the formation of ozone. SO2 and NOx emissions form secondary particles in the atmosphere (which have similar effects to primary PM). There are also costs associated with non-health impacts. SO2 is the main pollutant of concern for building-related damage, though ozone also does affect certain materials. The secondary pollutants formed from SO2, NOX and VOC also impact on crops and terrestrial and aquatic ecosystems.
Damages from climate change, associated with the high emissions of greenhouse gases from fossil fuel based power production, also have considerable costs. However, given the long-time scales involved, and the lack of consensus on future impacts of climate change itself, there is considerable uncertainty attached to the damage costs. The uncertainty in the costs of climate change (external costs) concerns not only the 'true' value of impacts that are covered by the models, but also the uncertainty about the impacts that have not yet been quantified and valued. Moreover, none of the current estimates of the external costs include all the effects of climate change.
The external costs of CO2emissions must thus be interpreted with care. Watkiss et al (2005) stress that there is no single value and that the range of uncertainty around any value depends on ethical as well as economic assumptions. The damage factors for CO2 used in this factsheet range from 19 EUR/t CO2 (low estimate, based on ExternE-Pol) and 80 EUR/t CO2 (high estimate, based on Watkiss et al., 2005). These two values are common to all countries.
The overall level of these externalities will depend upon a number of factors including:
- the fuel mix for electricity generation (e.g. the use of coal releases far more CO2 and air pollutants than gas);
- the efficiency of electricity production (as the higher this is the less input fuel, and hence output emissions, are required to produce each unit of electricity);
- the use of pollution abatement technology, and;
- the location of the plant itself with respect to population centres, agricultural land, etc.
Environmental and social externalities are highly site specific and so results will vary widely even within a given country according to the geographic location. Results from the CAFE (Clean Air for Europe Programme) have highlighted that the highest damages are found from emissions in the central parts of Europe and the lowest from countries around the borders of Europe. This reflects variation in exposure of people and crops to the pollutants of interest - emissions at the borders of Europe will affect fewer people than emissions at the centre of Europe, due to the degree of urbanisation and population density. In addition, the analysis did not account for non-European bordering countries.
Traditional fossil systems (coal, oil and to a lesser extent natural gas) exhibit the highest external costs for electricity generating technologies, in the range of 1.1 Eurocent/kWh (for advanced gas technologies using the lower bound estimate of damage costs Eurocent/kWh) to 25.9 Eurocent/kWh (for traditional coal-lignite plants using the higher bound estimate of damage costs). These fuels accounted for about 54 % of all electricity production in 2005 (see EN27 for more details). The majority of these external costs occur during the production of the electricity itself (i.e. from the burning of coal and release of specific pollutants to air, etc), although there is a small component associated with other parts of the fuel cycle (e.g. due to the mining and transport of the fuel). Co-generation reduces external costs2 and gas technology cogeneration gives external costs that are only two-thirds of lower than diesel technology. The introduction of advanced technologies (such as combined cycle (CC) and pressurised fluidised bed combustion (PFBC) can also reduce substantially the external costs of fossil energy systems. Renewable energy shows the lowest damages per unit of electricity.
Nuclear external costs are in the range 0.5-0.7 Eurocent/kWh. However, these external costs factors have to be treated with caution. There are small amount of emissions of CO2 and air pollutants associated with nuclear power but there are difficulties in assessing the risk and damage from nuclear accidents (in operation and waste disposal) associated with radioactive release (see footnote to Figure 2 for further information).
The fall in external costs observed over the period 1990 to 2005 was primarily due to a combination of (see EN09 for further information):
- fuel switching away from coal to natural gas (and a smaller component from the increased use of renewable energy, which in general leads to far lower external costs than fossil fuels);
- the ongoing improvement in generation efficiency (in part due to the use of higher efficiency gas plant), and;
- and the use of pollution abatement technology, such as Flue Gas Desulphurisation in coal plants.
In some EU countries, the decline in the external costs per unit of electricity produced was mainly the result of the closure of old and inefficient coal-fired plants and their replacement with either newer, more efficient coal-fired plants or new gas-fired plants and the implementation of emission abatement measures. In Eastern Europe this was triggered primarily by economic restructuring and a decline in heavy industry (in Germany this occurred in the early part of the 1990s due to reunification). By contrast, in the UK it was due primarily to economic factors whereby gas became the fuel of choice for new plant. This also led to higher overall generating efficiencies from the use of combined cycle gas turbines (CCGT).
Many of the new Member States still have some of the highest external costs on a per kWh basis. The externalities also vary between the EU-15 Member States, as a result both of the fuel mix and location. Higher damages typically occur from emissions in countries in Western Europe because of the large population affected. Countries with lower mean externalities are Austria, Finland and Sweden, reflecting their low population density (in the two latter) and greater use of nuclear and renewable energy and, in particular, hydropower. Luxembourg is also particularly low due to a high share of imported electricity, with the remainder provided largely by natural gas and renewables.
At present, energy prices and taxation often do not reflect the full extent of external costs. However, progress is being made; with the absolute level of some taxation increasing (see EN31 and EN32) and the introduction of the EU emissions trading scheme (Directive 2003/87/EC) putting a price on carbon dioxide emissions (for electricity production and large parts of industrial emissions in the EU). Full cost pricing (incorporating all environmental costs) is a long-term goal, but there are difficulties, notably the lack of consensus about the acceptability and validity of damage cost values, and the complex interaction with the existing policy landscape. In particular, the interaction with energy subsidies, which distorts the absolute and relative prices of different fuels (see EN34 for more details). It should also be highlighted that taxes or other economic instruments are not the only way to internalise external costs; regulation is a way of internalising these costs as it may have a feedback on production costs.
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