KEY POINTS:
It is the sleeping giant of New Zealand's energy resources, the billions of tonnes of lignite beneath the verdant downs of Southland.
Solid Energy, the state-owned coal miner, wants to build a plant to convert that low-grade coal to diesel.
Transforming coal into a liquid consumes a lot of the energy in the lignite mined, in order to upgrade the rest into a more valuable fuel.
So the plant would produce a lot of carbon dioxide, over and above what would come out of the exhaust pipes of vehicles it supplied.
In a warming world, where the costs of greenhouse gas emissions are increasingly being sheeted home to those responsible for them, the viability of the project is likely to depend on a technology still in its infancy: carbon capture and storage.
The idea is simple. Where a lot of CO2 is produced in one place, like a coal-fired power station or a synthetic fuel plant, instead of dumping it into the atmosphere where it will hang around for many years cooking the planet, you bury it in a suitable geological structure, where you can be reasonably sure it will stay put.
A lot of hopes are being pinned on this concept.
Coal is the most abundant fossil fuel, especially in the three countries which will have the most ravenous demand for energy over the coming decades: China, India and the United States.
For that reason, carbon capture and storage, if it can be made to work, is likely to be one of the key technologies which drive global prices of "carbon" (tradeable rights to emit greenhouse gases).
Few other technologies, if any, look like being able to deliver emission reductions on the scale required, over the time frame required.
There may be cheaper ways of reducing emissions (not least in New Zealand) but if they cannot bring global emissions down far enough, fast enough, they will not set the marginal price.
And the object of the emissions trading scheme the Government is in the throes of setting up is to expose the New Zealand economy to the international price of carbon.
So that is a reason to be interested in this technology, even for those who are indifferent to whether New Zealand gets a source of diesel that is not hostage to world oil prices and a volatile exchange rate.
The technology Solid Energy wants to use for a coal-to-liquids plant involves gasifying lignite to produce "synthesis gas" - a mixture of carbon monoxide and hydrogen - which is then reacted in the presence of a catalyst to produce diesel. Carbon dioxide is produced at the same time.
"The hard part of carbon capture and storage is capture," says Solid Energy chief executive Don Elder.
"But it is only hard for post-combustion capture. If you gasify the coal first, you capture around 75 per cent of the carbon for relatively little [marginal] cost."
The proposed plant would produce about 40,000 barrels of diesel a day. It is not intended to displace output from the Marsden Point refinery, but rather the growing proportion of diesel - about a third lately - which is imported as refined product.
At current prices its production cost would be about US$60 a barrel. With crude oil trading above $US100 a barrel, and refinery margins and transport costs on top of that, that leaves a fair amount of headroom to cover the cost of the plant's carbon emissions.
Solid Energy reckons it could produce diesel for about $1 a litre.
"That's a very round number, based on current costs," Elder says. "But it would certainly be competitive with diesel at $1.30 a litre."
The company has already gone looking for potential storage sites in Southland. "The sites nearby are either smaller, or would be harder, than we would prefer," says Elder.
But he is optimistic about the Great South Basin offshore, which is now being explored by the oil industry.
Internationally, places which were very prospective for oil and gas have also been very promising for carbon storage. Britain's North Sea fields, for example, are being investigated as potential storage sites for Co2 (see page 18).
"It is fortuitous the Great South basin is being explored. If they drill a dry hole it might still be good for CO2 injection. But it is probably 10 years too late as far as the Southland project is concerned," Elder says.
"So either we will need to find another storage site for the interim or use other means, like planting forests or buying offsets, to cover the emissions," he says.
Carbon capture and storage is not the sort of technology that will be developed in New Zealand.
Australia, on the other hand, is among the countries which has powerful incentives to try to make it work. Coal is one of its largest exports and dominates its electricity generation.
Australia Inc is investing $1.5 billion in research and development for clean coal technologies, a third from the Commonwealth Government, the rest from the private sector.
A key part of this effort is a co-operative research consortium called CO2CRC, which links corporates (including Solid Energy), state governments, universities and the research organisation CSIRO.
One of its projects, at Otway in southwestern Victoria, began injecting CO2 into a depleted natural gas field last week.
It is a first for the southern hemisphere.
The aim is to inject 100,000 tonnes of CO2 and monitor what becomes of it.
That will involve keeping tabs not only on the storage site but also the air, soil and groundwater around it.
Meanwhile, oil and gas company Santos is interested in the potential of its depleted gas fields in Moomba, central Australia, to store millions of tonnes of CO2 a year piped in from Queensland, New South Wales and South Australia.
The South African mining giant Anglo-American has a coal-to-liquids project at Monash in Victoria, similar to what Solid Energy is proposing.
How much difference might the technology make to mitigating climate change?
A major report on carbon capture and storage by the United Nations' Intergovernmental Panel on Climate Change (IPCC) concluded that the technology could deliver between 15 and 55 per cent of the global effort required by the end of the century to mitigate global warming.
"In most scenario studies the role of CCS in mitigation portfolios increases over the course of the century and the inclusion of CCS in a mitigation portfolio is found to reduce the costs of stabilising CO2 concentrations by 30 per cent or more."
According to CO2CRC estimates, the cost of capturing and storing CO2 from an Australian power station today would be between A$30 and $45 a megawatt/hour, depending on the type of coal used and where the storage was sited.
That would roughly double the wholesale price of electricity.
But it would only increase power prices for the domestic Australian consumer by 25 to 30 per cent.
To put that price rise in context, New Zealand consumers have faced a 42 per cent increase in electricity prices over the past five years.
And CO2CRC's chief technologist, Barry Hooper, believes the costs can be halved.
"My perspective on capture technology is that the issues are solvable and we will be able to drive those costs down," he says.
Elder indicatively puts the cost of capturing and storing CO2 from a new coal-fed integrated gas combined cycle power station at something between $30 and $50 a tonne.
But that does not mean that if carbon prices rise above that level, such projects will automatically go ahead, he warns.
"Boards look at the risks of investing and need a much bigger margin. Capture costs will need to be in the $10 to $20 range for it to be truly attractive," he says.
"But that is where other people are saying it should trend down to."
There is a first mover problem here. The pioneers help to bring the cost down for those who follow, but risk getting stuck with plant that is out of date for most of its life.
And these are expensive and long-lived assets.
CO2CRC director Peter Cook says it is a classic chicken and egg problem and it has been difficult to engage the electricity generators.
"But I was in the United States last week. They are increasingly engaged. There are seven projects under way that will inject a million tonnes a year."
However Greens co-leader Jeanette Fitzsimons sees no place in New Zealand for the technology being proposed by Solid Energy.
It is being developed basically for electricity generation, she says, though carbon capture might also be applicable to other large industrial sources of emissions such as cement works or steel mills.
"We are not going to have any more coal-fired electricity generation once Huntly is phased out because we have got enough alternatives," she says.
In a lignite-to-diesel plant, even if carbon capture worked perfectly as planned, it would only capture maybe 85 per cent of the carbon.
"So you will still get some emissions from the conversion process. And you will then get 100 per cent of the emissions from the burning of the fuel [in vehicles]," she says.
"You have got to use a lot more coal if you use carbon capture and storage because you use a lot of energy to drive the process. So it is pretty inefficient. And you still have higher tailpipe emissions than we have now. We can't afford to go there."
Biodiesel is a better option, she says.
Solid Energy, as it happens, is getting into the business of producing biodiesel, using oilseed rape as the raw material.
Fitzsimons says that while it is true that increased costs at the front end of electricity generation are diluted by the time they reach the consumer, what matters to the generator is how it stacks up against other fuel sources.
"Coal is barely competitive now with geothermal and wind according to [New Zealand] generators I have talked to," she says.
And carbon capture and storage is no use for transport emissions, which in New Zealand are a much larger problem than the electricity sector.
"But internationally I hope it works, because it is very hard to see what else China is going to be able to do to get its emissions down far enough, fast enough."
Not just China, she says, but it is a prime example of a country hell-bent on development, which has an enormous amount of coal-burning plant and which is not going to be able to replace it with renewables fast enough.
"Globally we will be better off if this technology is developed - provided there is enough awareness around it to realise that is is not just a licence to go mad on coal."
Fitzsimons harbours serious doubts, however, about how long the CO2 will stay where we put it, and about our ability to monitor that.
"If you have pressurised a natural gas field to get the gas out faster, you may have affected the cap. If you have had water drive running into the field, that has come from somewhere and maybe the CO2 can go back there," she says.
"Deep saline aquifers are probably better, but I am not confident we can monitor them well enough to know how long it is staying there."
Don Elder accepts that carbon capture and storage is a transitional solution.
But this may be one of those cases where the best is the enemy of the good, he argues.
"The real issues are not technical or economic but regulatory. Will you have to provide an absolute assurance that 99.99 per cent of the gas will still be down there in 10,000 years or 100,000 years? How can you?" he says.
"But this is not radioactive waste. If we are serious about climate change and we can be confident that 99 per cent of it will still be there in 100 years, then that's good enough."
