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Energy pathways to 2030

An overview of choices for the
        government

   Clare McNeil with Adam Hutchinson
             March 2013
The government has published an Energy Bill to provide
      secure, affordable and low carbon energy for the UK

•    The Energy Bill will shortly reach report stage where MPs will discuss and amend
     the Bill. The main sticking point is the government’s decision to delay setting a
     target to decarbonise the power sector. Instead, they plan to take powers to set a
     target in 2016 i.e. after the next general election

•    Tim Yeo MP (Conservative) and Barry Gardiner MP (Labour) have tabled an
     amendment requiring the government to set a decarbonisation target for the
     power sector by 2014. This is in line with the advice of the government’s
     independent advisers, the Committee on Climate Change (CCC)

•    The CCC have recommended that the carbon intensity of the UK power
     generation sector should be reduced to 50gCO2/kWh from the current
     486gCO2/kWh by 2030. DECC’s modelling is based on a 100gCO2/kWh target
     while the recent gas generation strategy considers a 200gCO2/kWh target

•    In this presentation we illustrate the choices facing government in considering
     whether to set a decarbonisation target for the power sector
The power sector needs to provide enough low carbon
      energy to support economy-wide decarbonisation

•   If the UK is to meet its
    climate change targets,
    the power sector will
    need to largely
    decarbonise by 2030.
•   This will help other sectors
    - such as transport,
    buildings and industry - to
    speed up their
    decarbonisation after 2030
    (see chart, right)
•   A low carbon intensity
                                   Source: The Fourth Carbon Budget , Committee on Climate Change (CCC) 2010 (NAEI 2010, CCC
    pathway of 50gCO2/kWh          calculations)
    for the power sector is
    the level the CCC has
    recommended to
    achieve this
Government needs to guarantee the UK’s energy
      security as we move to a low carbon energy system
•   As we decarbonise, the UK
    needs to reduce exposure
    to risks associated with
    any individual technology
    such as nuclear, carbon
    capture and storage (CCS),
    or wind
•   This chart shows how a
    portfolio of low carbon
    technologies under a low
    carbon intensity target
    (50g/kWh) would hedge risk,
    rather than relying on any    Source: 2012 Progress Report to Parliament, Committee on Climate Change 2012 (CCC
    one particular technology     calculations)
Government needs to guarantee
                      value for money for taxpayers
•   The CCC have compared a low
    carbon investment strategy to a
    strategy for investment in gas
    (see chart right)
•   If gas prices hit the ‘central’
    estimate, £23bn would be
    saved by 2045 if Britain instead
    adopted a low carbon investment
    strategy
•   A low carbon intensity
    pathway (50g/kWh) for the
                                       Source: 2012 Progress Report to Parliament, Committee on
    power sector appears to be a       Climate Change 2012 (Redpoint modelling)
    ‘low regrets’ option based on
    cost
Government’s gas generation plan implies that a high
       carbon intensity pathway is being considered
•   The Government’s recent Gas Generation Strategy examined a 200g pathway. This would allow
    combined cycle gas turbine (CCGT) generation to rise to 181 TWh by 2030 (see chart, below)
•   DECC’s modelling is based on a 100gCO2/kWh pathway which would see CCGT generation peak in
    2027 and fall back to 89 TWh
•   Under the CCC’s preferred 50g/kWh pathway, CCGT generation would fall to 41 TWh by 2030




                                                                                     Source: DECC Gas
                                                                                     Generation Strategy
                                                                                     December 2012
A higher carbon intensity pathway (200g) would lead to
                 more volatile energy prices
•   DECC estimates that gas
    prices in 2030 will vary from
    41p per therm to 103p per                200g - 181TWh
    therm
•   As the graph shows, the more
    gas means the more volatility             100g - 89TWh                                                     103p/therm
                                                                                                               72p/therm
•   With a higher 200g target,
                                                                                                               41p/therm
    energy costs could vary by as
                                                50g - 41TWh
    much as £229 per household*
•   At a lower 50g target, costs                              0          5000         10000         15000
    are only likely to vary by                                                   £m
    around £51 per household*
                                             Source: IPPR analysis based on DECC Gas generation strategy annex B, Dec 2012


* Based on the projected number of
households in 2030 and assuming industrial
costs are passed onto consumers
Wind is getting cheaper and
                        gas is getting more expensive
•   The CCC show that the
    levelised cost of unabated       Costs of wind and gas 2018 -2035 (£/MWh)
    gas is increasing as a        160

    result of rising fuel and     140
    carbon costs                  120
•   The cost of both offshore     100
    and onshore wind is falling
                                   80
•   Onshore wind becomes
                                   60
    cheaper than gas in 2023
                                   40
•   Offshore wind becomes
                                   20
    cheaper than gas in 2033
    (central estimate) and          0
    possibly as soon as 2027 if
    costs come down faster.                Offshore wind        Onshore wind         Unabated gas (CCGT)
                                  Source: IPPR analysis based on CCC calculations, based on Mott MacDonald
                                  (2011) and Parsons Brinckerhoff (2011) in
                                  http://hmccc.s3.amazonaws.com/EMR%20letter%20-%20September%2012.pdf
Following a low carbon intensity pathway (50g)
                   would save consumers money
•   The government’s modelling is
    based on a 100g CO2/kWh                  Replacing 48 TWh of gas with onshore
    central scenario                                and offshore wind (£m)
•   Moving from 100g to 50g by         300
                                                      249.6
    2030 would mean replacing 48       250
    TWh of gas with low carbon
                                       200
    fuel.                                                                        163.2
                                       150
•   We have modelled 24 TWh
                                       100                                                                   76.8
    each of additional onshore
                                        50
    wind and offshore wind
                                         -
•   This would save £163m with a                 high gas price            central gas price            low gas price
    ‘central’ gas price scenario and
    £249m with a ‘high’ gas price        Source: IPPR analysis based on CCC calculations
                                         NB These calculations compare the costs of gas against wind at the point of consumption
    scenario                             and do not include wider systems costs

•   Replacing offshore wind with
    nuclear to achieve a 50g/kWh
    target, could save more money
    according to CCC projections
Following the gas generation pathway (200g)
                    would put consumers in the red
•   The government’s gas
                                                  Replacing 92 TWh of onshore and
    generation plan considers a
                                                    offshore wind with gas (£m)
    200g/kWh scenario
                                       0
•   Moving from 100g/kWh to                      high gas price             central gas price             low gas price
                                     -100
    200g/kWh by 2030 would
    mean replacing onshore and       -200                                                                     -147.2

    offshore wind with an extra
                                     -300
    92TWh of gas                                                                  -312.8
•   This would cost £312m with       -400

    a ‘central’ gas price scenario   -500             -478.4
    and £478m with a ‘high’ gas
                                     -600
    price scenario
                                       Source: IPPR analysis based on CCC calculations
•   This is the equivalent to £10      NB These calculations compare the costs of gas against wind at the point of consumption
                                       and do not include wider systems costs
    and almost £15 per
    household respectively
Summary

• The volatility of gas prices under a 200g CO2/kWh pathway is
  significantly higher than under a 50g CO2/kWh pathway

• If a 50g CO2/kWh pathway was adopted (for example, replacing
  gas with onshore and offshore wind), it would result in
  considerable savings for energy bill payers

• Conversely, a 200g CO2/kWh pathway with more gas would add
  costs for energy bill payers

• It would also require larger carbon savings to be made in other
  sectors (such as transport and heat) for Britain to stay on course.
  It is not clear if this is possible
Conclusions

• The government’s decision not to set a 50g CO2/kWh pathway in
  the Energy Bill (as recommended by the Committee on Climate
  Change) has created uncertainty about the government’s
  commitment to its legally binding carbon targets

• A 200g CO2/kWh pathway would not be compatible with the UK’s
  legally binding carbon targets and would require a ‘relaxation’ of
  targets

• To end this speculation, reassure investors, create the best
  conditions for jobs and growth in the energy sector, and put
  the UK on the most affordable pathway, the government
  should commit to a 50gCO2/kWh decarbonisation target for
  the power sector

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Energy pathways to 2030

  • 1. Energy pathways to 2030 An overview of choices for the government Clare McNeil with Adam Hutchinson March 2013
  • 2. The government has published an Energy Bill to provide secure, affordable and low carbon energy for the UK • The Energy Bill will shortly reach report stage where MPs will discuss and amend the Bill. The main sticking point is the government’s decision to delay setting a target to decarbonise the power sector. Instead, they plan to take powers to set a target in 2016 i.e. after the next general election • Tim Yeo MP (Conservative) and Barry Gardiner MP (Labour) have tabled an amendment requiring the government to set a decarbonisation target for the power sector by 2014. This is in line with the advice of the government’s independent advisers, the Committee on Climate Change (CCC) • The CCC have recommended that the carbon intensity of the UK power generation sector should be reduced to 50gCO2/kWh from the current 486gCO2/kWh by 2030. DECC’s modelling is based on a 100gCO2/kWh target while the recent gas generation strategy considers a 200gCO2/kWh target • In this presentation we illustrate the choices facing government in considering whether to set a decarbonisation target for the power sector
  • 3. The power sector needs to provide enough low carbon energy to support economy-wide decarbonisation • If the UK is to meet its climate change targets, the power sector will need to largely decarbonise by 2030. • This will help other sectors - such as transport, buildings and industry - to speed up their decarbonisation after 2030 (see chart, right) • A low carbon intensity Source: The Fourth Carbon Budget , Committee on Climate Change (CCC) 2010 (NAEI 2010, CCC pathway of 50gCO2/kWh calculations) for the power sector is the level the CCC has recommended to achieve this
  • 4. Government needs to guarantee the UK’s energy security as we move to a low carbon energy system • As we decarbonise, the UK needs to reduce exposure to risks associated with any individual technology such as nuclear, carbon capture and storage (CCS), or wind • This chart shows how a portfolio of low carbon technologies under a low carbon intensity target (50g/kWh) would hedge risk, rather than relying on any Source: 2012 Progress Report to Parliament, Committee on Climate Change 2012 (CCC one particular technology calculations)
  • 5. Government needs to guarantee value for money for taxpayers • The CCC have compared a low carbon investment strategy to a strategy for investment in gas (see chart right) • If gas prices hit the ‘central’ estimate, £23bn would be saved by 2045 if Britain instead adopted a low carbon investment strategy • A low carbon intensity pathway (50g/kWh) for the Source: 2012 Progress Report to Parliament, Committee on power sector appears to be a Climate Change 2012 (Redpoint modelling) ‘low regrets’ option based on cost
  • 6. Government’s gas generation plan implies that a high carbon intensity pathway is being considered • The Government’s recent Gas Generation Strategy examined a 200g pathway. This would allow combined cycle gas turbine (CCGT) generation to rise to 181 TWh by 2030 (see chart, below) • DECC’s modelling is based on a 100gCO2/kWh pathway which would see CCGT generation peak in 2027 and fall back to 89 TWh • Under the CCC’s preferred 50g/kWh pathway, CCGT generation would fall to 41 TWh by 2030 Source: DECC Gas Generation Strategy December 2012
  • 7. A higher carbon intensity pathway (200g) would lead to more volatile energy prices • DECC estimates that gas prices in 2030 will vary from 41p per therm to 103p per 200g - 181TWh therm • As the graph shows, the more gas means the more volatility 100g - 89TWh 103p/therm 72p/therm • With a higher 200g target, 41p/therm energy costs could vary by as 50g - 41TWh much as £229 per household* • At a lower 50g target, costs 0 5000 10000 15000 are only likely to vary by £m around £51 per household* Source: IPPR analysis based on DECC Gas generation strategy annex B, Dec 2012 * Based on the projected number of households in 2030 and assuming industrial costs are passed onto consumers
  • 8. Wind is getting cheaper and gas is getting more expensive • The CCC show that the levelised cost of unabated Costs of wind and gas 2018 -2035 (£/MWh) gas is increasing as a 160 result of rising fuel and 140 carbon costs 120 • The cost of both offshore 100 and onshore wind is falling 80 • Onshore wind becomes 60 cheaper than gas in 2023 40 • Offshore wind becomes 20 cheaper than gas in 2033 (central estimate) and 0 possibly as soon as 2027 if costs come down faster. Offshore wind Onshore wind Unabated gas (CCGT) Source: IPPR analysis based on CCC calculations, based on Mott MacDonald (2011) and Parsons Brinckerhoff (2011) in http://hmccc.s3.amazonaws.com/EMR%20letter%20-%20September%2012.pdf
  • 9. Following a low carbon intensity pathway (50g) would save consumers money • The government’s modelling is based on a 100g CO2/kWh Replacing 48 TWh of gas with onshore central scenario and offshore wind (£m) • Moving from 100g to 50g by 300 249.6 2030 would mean replacing 48 250 TWh of gas with low carbon 200 fuel. 163.2 150 • We have modelled 24 TWh 100 76.8 each of additional onshore 50 wind and offshore wind - • This would save £163m with a high gas price central gas price low gas price ‘central’ gas price scenario and £249m with a ‘high’ gas price Source: IPPR analysis based on CCC calculations NB These calculations compare the costs of gas against wind at the point of consumption scenario and do not include wider systems costs • Replacing offshore wind with nuclear to achieve a 50g/kWh target, could save more money according to CCC projections
  • 10. Following the gas generation pathway (200g) would put consumers in the red • The government’s gas Replacing 92 TWh of onshore and generation plan considers a offshore wind with gas (£m) 200g/kWh scenario 0 • Moving from 100g/kWh to high gas price central gas price low gas price -100 200g/kWh by 2030 would mean replacing onshore and -200 -147.2 offshore wind with an extra -300 92TWh of gas -312.8 • This would cost £312m with -400 a ‘central’ gas price scenario -500 -478.4 and £478m with a ‘high’ gas -600 price scenario Source: IPPR analysis based on CCC calculations • This is the equivalent to £10 NB These calculations compare the costs of gas against wind at the point of consumption and do not include wider systems costs and almost £15 per household respectively
  • 11. Summary • The volatility of gas prices under a 200g CO2/kWh pathway is significantly higher than under a 50g CO2/kWh pathway • If a 50g CO2/kWh pathway was adopted (for example, replacing gas with onshore and offshore wind), it would result in considerable savings for energy bill payers • Conversely, a 200g CO2/kWh pathway with more gas would add costs for energy bill payers • It would also require larger carbon savings to be made in other sectors (such as transport and heat) for Britain to stay on course. It is not clear if this is possible
  • 12. Conclusions • The government’s decision not to set a 50g CO2/kWh pathway in the Energy Bill (as recommended by the Committee on Climate Change) has created uncertainty about the government’s commitment to its legally binding carbon targets • A 200g CO2/kWh pathway would not be compatible with the UK’s legally binding carbon targets and would require a ‘relaxation’ of targets • To end this speculation, reassure investors, create the best conditions for jobs and growth in the energy sector, and put the UK on the most affordable pathway, the government should commit to a 50gCO2/kWh decarbonisation target for the power sector