EN35 External costs of electricity production

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Electricity production causes substantial environmental and human health damages, which vary widely depending on how and where the electricity is generated. The damages caused are for the most part not integrated into the current pricing system and so represent external costs. The objective of the indicator is to assess the external costs associated with electricity production. When combined with information on environmental taxes and economic instruments, the indicator is relevant in assessing progress towards internalising external costs or 'getting the prices right'.

The external costs of climate change depend on the models or literature that is used. There are large uncertainties in climate change modelling. 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, which indicates that the values found in literature are only a sub-total of the full costs.

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 2004 in almost all Member States, despite rising electricity production. However, the average external costs still represented between 1.8-6.0 Eurocent/kWh in the EU in 2004. These costs are very significant and reflect the 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 external costs of CO2 emissions must thus be interpreted with care. The authors of a recent study on the impacts and costs of climate change (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 study concludes that the 'lower indicative estimate for the marginal damage costs for the full risk matrix might result in a minimum value of 15 EUR/t CO2, a central illustrative estimate of some 25 EUR/t CO2, and an upper indicative estimate of at least 80 EUR/ t CO2 and possibly much higher (for current, year 2000 emissions).' 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. 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, and because 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 c EUR/kWh (for advanced gas technologies using the lower bound estimate of damage costs cEUR/kWh) to 24.1 cEUR/kWh (for traditional coal plants using the higher bound estimate of damage costs). These fuels accounted for about 54 % of all electricity production in 2004 (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). The introduction of advanced technologies (such as combined cycle (CC) and pressurised fluidised bed combustion (PFBC)) can substantially reduce the external costs of fossil systems. This also applies to cogeneration, for which gas technology generates external costs one third lower than diesel technology. Renewable energy shows the lowest damages per unit of electricity.

Nuclear external costs are in the range 0.2-0.4 cEUR/kW. However, these external costs factors have to be treated with caution, as they reflect to a large extent the small amount of emissions of CO2 and air pollutants, and the low risk of accidents. The methodology to evaluate the impacts due to accidents is risk-based. Risk can be broadly defined as the probability of accident multiplied by its consequences. A low probability of an accident would therefore result in a low external cost. However, it would seem that in cases where risks have a very high damage but a low probability, the risk assessment of the public is not proportional to the risk. ExternE concludes that quantification of this risk has not been successful but that research is clearly needed to estimate the external-cost factors from nuclear energy production.

The fall in external costs observed over the period 1990 to 2004 was primarily due to a combination of 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 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 (see EN08). 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) whereas in the United Kingdom it was due primarily to economic factors whereby gas became the fuel of choice for new plant, which also led to higher overall generating efficiencies from the use of combined cycle gas turbines (CCGT).

Many of the new 10 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.

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 taxation increasing (see EN31 and EN32) and the introduction of the EU emissions trading scheme putting a price on carbon dioxide emissions. 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. It should also be highlighted that taxes or other economic instruments are not the only way to internalise external costs; regulation are a way of internalising the costs as they may have a feedback on production costs.