Identifying cost-effective strategies for CO2 reductions in Denmark: Policies and methodologies

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Ivar Thøgersen
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1 Identifying cost-effective strategies for CO2 reductions in Denmark: Policies and methodologies Morten Boje Blarke M.Sc. Eng. Ph.D. Sustainable Energy Planning Assist. Prof. Department of Development and Planning Aalborg University

2 Intended learning objectives - to know how global agreements on reducing CO2 is influencing Danish institutions and markets. - to understand the principles for evaluating environmental costeffectiveness. - to apply techno-economic methods for preparing cost-effective strategies on environmental policies specifically to prepare a CO2 reduction-cost analysis.

3 EU s CO2 quota sharing and trading scheme Denmark must reduce total CO2 emissions by 21% compared to the 1990 level according to the Kyoto Protocol and the EU Burden-Sharing Agreement. This is translated as: reduced to an average 54.8 million tonnes of CO2 equivalents annually for the period (disagreement on reference year compensation for unusual electricity imports). A primary measure: EU scheme for greenhouse gas emission allowance trading - ETS - (Danish law since start of 2005). Over 10,000 production units are affected by the scheme throughout the EU. 380 Danish production units are covered, mainly generators of power and heat, the rest are industrial enterprises plus a few production units within the offshore sector.

4 Free CO2 allowances allocated for the period in Denmark Others 21% List of installations, DEA March 2010 TOP 22 79% Installation ID in register Name of installation Operator Installation location Period allocation Max for use of credits DK-342 Aalborg Portland A/S Aalborg Portland A/S Rørdalsvej 44, 9220 Aalborg Øst DK-48 Asnæsværket DONG Energy Pow er A/S Asnæsvej 16, 4400 Kalundborg DK-42 Avedøreværket DONG Energy Pow er A/S Hammerholmen 50, 2650 Hvidovre DK-71 Studstrupværket DONG Energy Pow er A/S Ny Studstrupvej 14, 8541 Skødstrup DK-76 Enstedværket DONG Energy Pow er A/S Flensborgvej 185, 6200 Aabenraa DK-69 Vattenfall A/S Fynsværket Vattenfall A/S Havnegade 120, 5100 Odense C DK-52 Vattenfall A/S Amagerværket Vattenfall A/S Kraftværksvej 50, 2300 København S DK-78 Vattenfall A/S Nordjyllandsværket Vattenfall A/S Nefovej 50, 9310 Vodskov DK-80 Esbjergværket DONG Energy Pow er A/S Amerikavej 7, 6700 Esbjerg DK-72 Skærbækværket DONG Energy Pow er A/S Klippehagevej 22, 7000 Fredericia DK-370 Dan feltet omfattende anlæg på platfomærsk Olie og Gas A/S, 6710 Esbjerg V DK-373 Tyra feltet omfattende anlæg på platf Mærsk Olie og Gas A/S, 6710 Esbjerg V DK-371 Gorm feltet omfattende anlæg på platmærsk Olie og Gas A/S, 6710 Esbjerg V DK-306 Shell Raffinaderiet Fredericia A/S Dansk Shell Egeskovvej 265, 7000 Fredericia DK-307 Statoil Raffinaderiet Statoil A/S Melbyvej 17, 4400 Kalundborg DK-49 Stigsnæsværket DONG Energy Pow er A/S Holtengårdsvej 24, 4230 Skælskør DK-54 Svanemølleværket DONG Energy Pow er A/S Lautrupsgade 1, 2100 København Ø DK-53 H.C. Ørsted Værket DONG Energy Pow er A/S Tømmergravsgade 4, 2450 Københav DK-68 Silkeborg Kraftvarmeværk A/S Silkeborg Kraftvarmeværk AKejlstrupvej 239, 8600 Silkeborg DK-375 Siri feltet omfattende anlæg på Siri pladong Efterforskning & Produ, 6710 Esbjerg V DK-376 Syd Arne feltet omfattende anlæg påhess Denmark ApS, 6710 Esbjerg V DK-45 Vattenfall A/S Hillerød Kraftvarmevæ Vattenfall A/S Hestehavevej 1, 3400 Hillerød

7 Kyoto Mechanisms Emissions Trading System (ETS) The Clean Development Mechanism (CDM) Joint Implementation (JI) An example of how it also works: The Danish state has decided to compensate the delegates at United Nations Climate Change Conference (COP15) emissions from transport in particular air travel through a CDM project. The Brick Kilns project in Bangladesh will replace 20 outdated brick kilns with new efficient brick kilns. The project will cut tones of CO2 emissions each year and improve air quality in one of the world s most polluted cities. This project is set to ensure that COP15 will be climate neutral

8 A CDM project example Lusakert (70,000 ton CO2) Biogas plant, which extracts and exploits methane gas to produce electricity and heat. The project is a major improvement in the conventional treatment of chicken waste. It is expected that the project will result in a significant reduction in the amount of methane gas released compared with the gas released in traditional industrial chicken farms. In addition will there be an improvement in the quality of the discharged water. The excrement was previously stored in big open lagoons, where the powerful greenhouse gas, methane, could freely evaporate up into the atmosphere. The project is based on a well tested technology from Denmark. Bigadan A/S has designed and supplied the equipment for the new biogas reclamation system. The new plant extracts the methane gas and burns it in a large gas-powered generator that produces electricity and heat. The outcome of the project is the heat and electricity, which is recycled in the chicken farms, while any surplus is transferred to the local grid. It is expected that annual production will be 5500 MWh for the local grid; energy which otherwise would have been produced at coal-fired plants.

9 A JI project example New boiler houses at Kirov Oblast (1 mill. ton CO2) Danish Energy Agency, Nordic Environment Finance Corporation and two Russian partners launched a JI project. The project involves converting 100 boiler houses from coal and oil. Of these, 64 boilers are to run on natural gas and 36 will run on biomass (wood, wood chips and sawdust) and natural gas. The old plants use large amounts of coal and tar oil and therefore cause a great deal of pollution. The existing heating plants are between 40 and 50 years old and are considerably run-down and inefficient. The project will provide the entire Kirov Oblast region with more reliable, efficient and environmentally friendly heating. This local improvement has resulted in more efficient and reliable heating for the residents of Leningrad Oblast as well as a drop in heating costs.

10 Ministry of Finance 2003: Cost-effectiveness priorities

11 EPA 2007: Cost-effective measures in non-ets sectors

12 FV The only formula in engineering economics! FV PV( 1 i) T FV: Future Value PV: Present Value i: Interest Rate T: Planning period (typically years) Years

13 NPV Net present value NPV t T B t C (1 i) 0 t t NPV: Net Present Value T: Planning period i: Interest rate t: Year within T Years

14 Economic Costs Fiscal Costs Financial Costs Factor prices x x Tax and VAT x x Government grants x x Internalized environmental costs x x Eksternalities x Economic discount rate x x Financial discount rate x

15 Grant for energy efficiency heating systems when scrapping existing oil boiler Existing oil boiler versus Air-water heat pump

16 About the grant scheme 1. From March 1st, When scrapping existing oil boilers, home owner gets grant DKK 10,000 to district heating DKK 15,000 to air-water heat pump DKK 20,000 to water-water heat pump 25 % to solar heating 3. Total fiscal budget: DKK 400 mill.

17 Method and assumptions

18 Results Without grant With grant Economic NPV Fiscal NPV Financial NPV Financial IRR 21% 26% Financal simple payback 6,4 5, Without grant With grant Economic NPV Fiscal NPV Financial NPV

19 CO2 reduction cost P CO 2 T t 1 T t 1 Bt C (1 t i) CO2 (1 i) O t t t C O : Costs excluding CO2 costs CO2: Change in CO2 emission from reference to alternative i: Interest Rate T: Planning period (typically years) t: Year within T

20 Group task 1. Calculate the economic and fiscal CO2 reduction costs for replacing oil boiler with air-water heat pump (plenary case-study and model) 2. Identify ONE appealing domestic measure in energy or transport, that may reduce CO2 emissions 3. Calculate economic, fiscal, and financial consequences. 4. Calculate the economic and fiscal CO2 reduction costs. 5. Calculate or estimate the implemented measure s annual reduction potential (tons CO2 per year)

21 Every group brings result back into plenary for next lecture Next lecture is Wednesday April 7th! We create a step diagramme on CO2 reductions and costs and discuss each group s measure. And move on to discuss atmospheric emissions in an energy system with high penetration of intermittent resources and co-generation.

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