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Risk managing cost-effective
decarbonisation of the power sector
in Germany
FINAL RESULTS
April 2013
This project is funded by the European Climate Foundation
1 E3G - Third Generation Environmentalism
• Objectives and the methodology
• Baseline analysis results
• Sensitivity analysis results
• New baselines based on Increased Ambition
• Annex – Assumptions and modelling
Contents
E3G - Third Generation Environmentalism
2
Objectives of the analysis
WHAT IT IS
• An attempt to change the way people think about technology choices from cost minimisation to risk management
• Something different from traditional ‘equilibrium’ modelling studies
• Credible and interesting from the member state perspective as well as at a European level
• Provides a focus on the role of RES and gas
WHAT IT IS NOT
• An attempt to forecast the future
• An assessment of market design choices (e.g. what drives investment, capacity mechanisms, welfare allocation)
• An analysis of the future role of ETS and 2030 carbon caps
• An evaluation of nuclear power
• An evaluation of interconnection and optimising resources across the EU
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The Modelling
• A new approach is needed to move the debate from least cost decarbonisation to cost-effective risk managed delivery of policy objectives. This model puts greater emphasis on uncertainty and risks than traditional equilibrium models which tend to focus only on finding a least-cost solution to a given set of constraints
• The Investment Decision Model developed by Redpoint is an agent-based investment model. It realistically captures investor behaviour by assuming no perfect foresight: Investors are considered to take decisions based on their expectations of returns according to their knowledge of the future at a given time, assuming a five-year market foresight.
• Focuses on the resilience and robustness of the decarbonisation pathways against unforeseen changes in key market drivers, electricity demand, natural gas prices, RES and CCS deployment.
• A similar analysis was carried out for Great Britain and Poland to represent different Member States’ circumstances and reflect European-wide issues
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Overview of the baseline scenarios
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5
Two baseline policy scenarios reflect competing approaches to delivering power sector
decarbonisation in line with the power sector carbon target of 95 MtCo2 pa in 2030 based on
the Leitstudie 2011A scenario.
Carbon Prices in the baseline scenarios Technology Support Scenario
– RES-E subsidy continues post 2020
– Carbon price trajectory of the EC’s Energy Roadmap 2050
Carbon Price Scenario
– Carbon price is the single driver of decarbonisation
– RES-E subsidy stops in 2015 – no further development of supply chains
Technology Support and Carbon Price baseline scenarios
were stress tested against a range of uncertainties
N.B. Further details of the
underlying assumptions can be
found in Annex
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6
Germany high level conclusions (1/2)
• German policy must simultaneously deliver decarbonisation, security, and affordability objectives. Our analysis shows that policies designed to manage future risks and uncertainties are able to meet this requirement.
• There remains significant on-going potential for coal to gas switching and steady deployment of renewables which increase resilience against failures to deliver electricity efficiency and CCS capacity.
• The carbon price is an effective driver in increasing or reducing power sector carbon emissions. However, the analysis assumed that lignite and hard-coal plants can continue to operate at low-load factors and this might not be technically feasible without significant investment. Technical constraints of this nature will make the impact of carbon price on emissions less predictable and introduce discontinuities.
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7
Germany high level conclusions (2/2)
• If the carbon price was the single driver of decarbonisation, i.e. renewable subsidies stopped in 2015, the market would deliver gas as the least cost option with the exception that CCS could be fitted at some point in the future. However, failures to deploy CCS would mean that very high carbon prices would be required to quickly attract significant level of renewable energy.
• German decarbonisation policy places high significance on improved energy efficiency, especially in buildings. As a consequence, if Germany fails to deliver electrical efficiency, an early phase-out of lignite and hard-coal plants and replacement with gas will be required to compensate for increased power sector emissions. At the same time, the ability for the power sector to compensate for efficiency failures in other sectors will require more extensive deployment of low-carbon technologies.
• Low energy demand scenarios provide higher system resilience against the risk of high power sector costs and failures to deploy CCS capacity. Thus managing energy demand is central to deal with uncertainties and secure the delivery of decarbonisation targets.
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• Objectives and the methodology
• Baseline analysis results
• Sensitivity analysis results
• New baselines based on Increased Ambition
• Annex – Assumptions and modelling
Contents
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9
Where technology are supported low carbon capacity is
deployed continuously, while in the Carbon Price Scenario
decarbonisation is driven by gas in 2020s
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Carbon Price Scenario baseline
Cumulative new build (GW)
Technology Support Scenario baseline
Cumulative new build (GW)
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
20
40
60
80
100
120
Cu
mu
lati
ve N
ew
Bu
ild
-G
W
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
20
40
60
80
100
120
Cu
mu
lativ
e N
ew
Bu
ild
-G
W
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
In the Carbon Price Scenario, there is no renewables build beyond 2015. New build consists of unabated gas plant and lignite CCS coming online from 2025
Unabated gas capacity remains a significant part of the capacity
mix in the Carbon Price Scenario
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Carbon Price Scenario baseline
Generation capacity (GW)
Technology Support Scenario baseline
Generation capacity (GW)
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
Cap
acit
y -
GW
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
Cap
acit
y -
GW
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
While coal, lignite and nuclear
capacity is replaced by solar and offshore wind, gas capacity does not change and CCS capacity is not required
Unabated gas capacity increases while hard-coal is squeezed out of the market due to the higher carbon price
Unabated hard-coal and lignite is replaced with
offshore wind and gas
Carbon Price Scenario baseline
Generation Mix (TWh)
Technology Support Scenario baseline
Generation Mix (TWh)
12
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
erati
on
-T
Wh
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
erati
on
-T
Wh
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Demand
E3G - Third Generation Environmentalism
Despite significant reductions,
lignite and, to a certain extent, unabated hard-coal remain in the mix up to 2030 and CCS capacity is not required
Unabated gas increases its share of the generation mix significantly, as a result of the higher carbon price and CCS capacity is required
Carbon emissions reduction follow a fairly linear
path in both scenarios
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Carbon Price Scenario baseline
Emissions by fuel (mn tonnes CO2)
Technology Support Scenario baseline
Emissions by fuel (mn tonnes CO2)
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
300
mn
to
nn
es
CO
2
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Target Line
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
300
mn
to
nn
es
CO
2
Solar
Offshore Wind
Onshore Wind
Biomass
GT
Oil
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Target Line
Cumulative emissions are slightly higher in the Carbon Price Scenario as most low-carbon capacity is only commissioned in the 2020s.
Power sector costs are higher in Technology
Support Scenario-baseline
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Carbon Price Scenario baseline
Breakdown of power sector costs, € bn 2012-30
cumulative
Technology Support Scenario baseline
Breakdown of power sector costs, € bn 2012-30
cumulative
464.7
109
141 16
140
59 0
50
100
150
200
250
300
350
400
450
500
Technology Support Scenario
Annuitised capital cost
Fixed operating
cost
Variable operating
cost
Fuel cost Carbon costs
Po
we
r se
cto
r co
sts
(€ b
n, 2
01
2-3
0 N
PV
3.5
%)
415.8
17
119 17
166
98 0
50
100
150
200
250
300
350
400
450
500
Carbon Price
Scenario
Annuitised capital cost
Fixed operating
cost
Variable operating
cost
Fuel cost Carbon costs
Po
we
r se
cto
r co
sts
(€ b
n, 2
01
2-3
0 N
PV
3.5
%)
Wholesale costs are lower where technologies
were supported compared to where carbon price
was the only driver for investment
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Carbon Price Scenario
Wholesale costs, € bn 2012-30
Technology Support Scenario
Wholesale costs, € bn 2012-30
529
400
91 37
0
50
100
150
200
250
300
350
400
450
500
550
600
Technology Support Scenario
Wholesale costs Low carbon support
Capacity support
Wh
ole
sale
co
sts
(€ b
n, 2
01
2-3
0 N
PV
3.5
%)
519
494 0 25
0
50
100
150
200
250
300
350
400
450
500
550
600
Carbon Price Scenario
Wholesale costs Low carbon support
Capacity support
Wh
ole
sale
co
sts
(€ b
n, 2
01
2-3
0 N
PV
3.5
%)
• Objectives and the methodology
• Baseline analysis results
• Sensitivity analysis results
• New baselines based on Increased Ambition
• Annex – Assumptions and modelling
Contents
E3G - Third Generation Environmentalism
16
E3G - Third Generation Environmentalism
17
Carbon Price Scenario
Required carbon price (€/tCO2)
Ranges of carbon
prices
(52 to 150 €/tCO2)
Coal to gas switching option allows carbon price to be an
effective instrument, but failure to deploy CCS and high
demand almost double required carbon price
High demand and failure to deploy CCS (due to cost or policy/technology failure)
requires much higher carbon prices to achieve policy
objectives
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Carbon Price Scenario
Required carbon price (€/tCO2)
Required carbon price in Carbon Price Scenario to
meet power sector decarbonisation target
High demand and failure to deploy CCS (due to cost or policy/technology failure)
requires much higher carbon prices to achieve policy
objectives
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Technology Support Scenario
Annual CO2 Emissions (mn tonnes CO2)
Carbon Price Scenario
Annual CO2 Emissions (mn tonnes CO2)
Renewables deployment produces steady abatement with
more predictable delivery
0
50
100
150
200
250
300
CO
2 e
mis
sio
ns
(mn
to
nn
es)
Technology Support Scenario High demand
Low demand
High gas
Low gas
High offshore wind Low offshore wind Lignite Load Factor 0
50
100
150
200
250
300
CO
2 e
mis
sio
ns
(mn
to
nn
es)
Carbon Price Scenario
High demand
Low demand
High gas
Low gas
High CCS
Low CCS
Expensive CCS
Lignite Load Factor
Renewables deployment produces steady abatement with
more predictable delivery
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Technology Support Scenario
Carbon intensity (g/kWh) Carbon Price Scenario
Carbon intensity (g/kWh)
0
50
100
150
200
250
300
350
400
450
500
Car
bo
n In
ten
sity
(g/
kWh
)
Carbon Price Scenario
High CCS
Low CCS
High Demand
High Demand EFF
Low Demand
High Gas
Low Gas
High Demand - Low CCS
Low Demand - Low CCS 0
50
100
150
200
250
300
350
400
450
500
Car
bo
n In
ten
sity
(g/
kWh
)
Technology Support Scenario High Demand
High Demand EFF Low Demand
High Gas
Low Gas
High offshore wind Low offshore wind
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21
Total power sector costs - Impact of sensitivities
(1/2)
Carbon Price Scenario
Power sector costs, € bn 2012-30, cumulative
Technology Support Scenario
Power sector costs, € bn 2012-30, cumulative
-40
-20
0
20
40
60
80
100
Po
we
r se
cto
r co
sts
(€ b
n N
PV
3.5
%)
Min
Max
Electricity Gas price Electriciity CSS demand demand and low CSS
-40
-20
0
20
40
60
80
100
Po
we
r se
cto
r co
sts
(€ b
n N
PV
3.5
%)
Min
Max
Electricity demand Gas price Offshore wind
Costs are more resilient to uncertainty especially to higher electricity demand and higher gas price volatility
Costs increase significantly if electricity demand is higher than expected. Costs increase even further when unexpected higher electricity demand is combined with failure of CCS deployment
Total power sector costs are more predictable
where technologies are supported (2/2)
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22
Cost range
+11% to -5%
Overall power sector costs can go up by 11% in the case that electricity demand is higher than expected
Overall powers sector costs can go up by 18% when electricity demand is higher than expected and CCS fails to be deployed
Cost range
+18% to -5%
0
100
200
300
400
500
600
Po
we
r se
cto
r co
sts
(€ b
n N
PV
3.5
%)
Technology Support Scenario
0
100
200
300
400
500
600
Po
we
r se
cto
r co
sts
(€ b
n N
PV
3.5
%)
Carbon Price Scenario
Technology Support Scenario
Power sector costs, € bn 2012-30, cumulative
Carbon Price Scenario
Power sector costs, € bn 2012-30, cumulative
Wholesale costs are more resilient to uncertainties and
show lower cost risks where technologies are supported
E3G - Third Generation Environmentalism
23
0
100
200
300
400
500
600
700
800
900
Wh
ole
sale
co
sts
(€ b
n N
PV
3.5
%)
Technology Support Scenario
Cost range
+20% to -10%
0
100
200
300
400
500
600
700
800
900
Wh
ole
sale
co
sts
(€ b
n N
PV
3.5
%)
Carbon Price Scenario
Cost range
+48% to -9%
Carbon Price Scenario
Wholesale costs, € bn 2012-30, cumulative
Technology Support Scenario
Wholesale costs, € bn 2012-30, cumulative
Overall wholesale costs can go up by 20% e.g. when electricity demand is higher than expected
Overall wholesale costs go up by 48% e.g. when electricity demand is higher than expected and CCS fails to be deployed
Large gas demand uncertainties, in particular in Carbon
Price Scenario, raise questions as to the level of new
investment required in gas infrastructure (1/2)
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24
Technology Support Scenario
Power sector gas consumption (bcm)
Carbon Price Scenario
Power sector gas consumption (bcm)
0
10
20
30
40
50
60
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Gas
co
nsu
mp
tio
n (
bcm
, an
nu
al)
Technology Support Scenario
Range of gas demand
0
10
20
30
40
50
60
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Gas
co
nsu
mp
tio
n (
bcm
, an
nu
al)
Carbon Price Scenario
Range of gas demand
Future value of new gas investments remains uncertain
E3G - Third Generation Environmentalism
25
Technology Support Scenario
Power sector gas consumption (bcm)
Carbon Price Scenario
Power sector gas consumption (bcm)
Power sector gas consumption – Impact of
sensitivities (2/2)
0
10
20
30
40
50
60
Gas
co
nsu
mp
tio
n (
bcm
, an
nu
al)
Technology Support Scenario
High Demand
High Demand EFF
Low Demand
High Gas
Low Gas
High offshore wind
Low offshore wind
Lignite Load Factor
0
10
20
30
40
50
60
Gas
co
nsu
mp
tio
n (
bcm
, an
nu
al)
Carbon Price Scenario High CCS
Low CCS
High Demand
High Demand EFF Low Demand
High Gas
Low Gas
High Demand - Low CCS Low Demand - Low CCS Expensive CCS
Lignite Load Factor
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26
-
5
10
15
20
25
30
35
40
45
50
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Ne
w g
as b
uild
(G
W)
Technology Support Scenario
-
5
10
15
20
25
30
35
40
45
50
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Ne
w g
as b
uild
(G
W)
Carbon Price Scenario
Range of new gas build
Technology Support Scenario
New gas capacity (GW)
Carbon Price Scenario
New gas capacity (GW)
Range of new gas build
New gas capacity - Impact of sensitivities (1/2)
Similar to results regarding gas consumption in the power sector, new built gas capacity shows large variation under different scenarios and sensitivities
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27
New gas capacity - Impact of sensitivities (2/2)
Technology Support Scenario
New gas capacity (GW)
Carbon Price Scenario
New gas capacity (GW)
-
5
10
15
20
25
30
35
40
45
50
Ne
w g
as b
uild
(G
W)
Technology Support Scenario High Demand
High Demand EFF
Low Demand
High Gas
Low Gas
High offshore wind
Low offshore wind
Lignite Load Factor
0
5
10
15
20
25
30
35
40
45
50
Ne
w g
as b
uild
(G
W)
Carbon Price Scenario High CCS
Low CCS
High Demand
High Demand EFF
Low Demand
High Gas
Low Gas
High Demand - Low CCS Low Demand - Low CCS Expensive CCS
Lignite Load Factor
Generation in Carbon Price Scenario –
Impact of sensitivities (1/2)
28
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
Shifting Momentum
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - High Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - Low Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - High Gas
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - High Demand - Low CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - Low Demand - Low CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - Low Gas
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - High Demand EFF
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
SM - Low CCS
E3G - Third Generation Environmentalism
Carbon Price baseline
Generation in Carbon Price Scenario –
Impact of sensitivities (2/2)
29
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - HighCCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Expensive CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Lignite Load Factor
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Increased Ambition
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - High OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Low OffWind
E3G - Third Generation Environmentalism
Generation in Technology Support Scenario -
Impact of sensitivities (1/2)
30
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
Policy Momentum
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - High OffWInd
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - Low OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - High Gas
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
hPM - High Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - Low Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - Low Gas
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - High Demand EFF
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
era
tio
n -
TW
h
PM - Low CCS
E3G - Third Generation Environmentalism
Technology Support baseline
31
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - High CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Lignite Load Factor
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Increased Ambition
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - High OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Low OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
Policy Momentum
E3G - Third Generation Environmentalism
Generation in Technology Support Scenario -
Impact of sensitivities (2/2)
• Objectives and the methodology
• Baseline analysis results
• Sensitivity analysis results
• New baselines based on Increased Ambition
• Annex – Assumptions and modelling
Contents
E3G - Third Generation Environmentalism
32
Increased Ambition –
Carbon intensity of 100 g/kWh and 50g/kWh
E3G - Third Generation Environmentalism
33
700
//
Driving Increased Ambition through only carbon price would require unsustainably high carbon prices
Carbon Price Scenario
Required carbon price (€/tCO2)
Delivery of doubling ambition to 100 g/kWh would require
higher deployment of RES and CCS gas
E3G - Third Generation Environmentalism
34
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - High CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Lignite Load Factor
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Increased Ambition
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - High OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
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100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
PM - Low OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
Policy Momentum
Technology Support– Increased Ambition (100 g)
Generation mix (TWh)
Carbon Price– Increased Ambition (100 g)
Generation mix (TWh)
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
Gen
erati
on
-T
Wh
Solar
Offshore wind
Onshore Wind
Biomass
Oil
GT
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Demand
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
Gen
eratio
n -
TW
h
Solar
Offshore wind
Onshore Wind
Biomass
Oil
GT
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Demand
• Coal and lignite phased out and replaced by a significant increase in unabated and CCS-gas instead of CCS-lignite
• CCS-gas becomes part of the mix • Lignite and coal are significantly
pushed out • Higher deployment of
renewables
Matching UK ambition would require near phase out of
coal/lignite, deployment of CCS and offshore wind
35
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - HighCCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
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100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Expensive CCS
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
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100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Lignite Load Factor
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
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100
200
300
400
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600
700
Gen
eratio
n -
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h
SM - Increased Ambition
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - High OffWind
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
100
200
300
400
500
600
700
Gen
eratio
n -
TW
h
SM - Low OffWind
Technology Support– Increased Ambition (50 g)
Generation mix (TWh)
Carbon Price– Increased Ambition (50 g)
Generation mix (TWh)
• Very high deployment of renewables would be needed to meet the target
• Need both CCS-gas and lignite
• Very high deployment of renewables would be needed to meet the target
• Higher ambition and very high carbon prices push out most fossil-fuel based generation
• CCS-gas instead of CCS-lignite becomes economical
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
-
50
100
150
200
250
Gen
erati
on
-T
Wh
Solar
Offshore wind
Onshore Wind
Biomass
Oil
GT
Hydro / PS
Gas CCS
Coal CCS
Lignite CCS
Gas
Coal
Lignite
Nuclear
Demand
E3G - Third Generation Environmentalism
Increasing ambition costs more, but additional
power sector costs are less significant where RES
was supported
E3G - Third Generation Environmentalism
36
Technology Support Scenario baselines
Power sector costs, € bn 2012-30 annual
Carbon Price Scenario baselines
Power sector costs, € bn 2012-30 annual
Overall, additional cost of higher ambition is €121 to 391bn between 2012-30
Overall, additional cost of higher ambition is €20 to 49bn between 2012-30 and is cheaper than the CPS
Wholesale costs soar under Carbon Price when
ambitions are increased
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37
Technology Support Scenario baselines
Wholesale costs, € bn 2012-30 annual
Carbon Price Scenario baselines
Wholesale costs, € bn 2012-30 annual
Increasing ambition would increase gas consumption in
general
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38
Carbon Price Scenario baselines
Power sector gas consumption (bcm)
Technology Support Scenario baselines
Power sector gas consumption (bcm)
• Gas consumption increases more than 50% to deliver 100 g/kWh policy objective
• On the contrary, delivering 50 g/kWh would require less gas consumption as significant renewables replace lower emission fossil fuel gas
Gas consumption increases about 33-50% to deliver increased ambition
• Objectives and the methodology
• Baseline analysis results
• Sensitivity analysis results
• New baselines based on Increased Ambition
• Annex – Assumptions and modelling
Contents
E3G - Third Generation Environmentalism
39
Redpoint Investment Decision Model (IDM)
• The Redpoint IDM constructs detailed market outlooks in the GB power market covering the period of 2012-2030.
• The IDM is based on an agent simulation engine that aims to mimic players’ decision-making with regards to their investment decisions in new plant as well as their decisions to retire existing plants.
• The model contains a list of potential new-build projects according to their size, cost and earliest possible year of operation. Total investment in a particular technology is limited by the technology’s maximum annual and cumulative build constraints. If the constraint is binding, the projects with the highest expected returns are built.
• Technology costs (capex and opex) can be varied over time and if required set endogenously within the model dependent on levels of deployment, which may affect rates of learning and position on the supply curves.
• For each year, the levelised cost of energy (LCOE) of potential new-build projects are compared against their expected revenues (given assumed load factors, future price expectations, capacity payments and support levels) and where costs are less than expected revenues, projects are moved first to a planning stage, and subsequently, if still economic, to a committed development phase.
• Additionally, retirement decisions for existing plants are also made on the basis of near term profitability expectations.
• A 5-year forward-looking view for investing in a new plant is assumed and a 1-year forward-looking view for plant retirement decisions.
• Where applicable, the model can include full representation of Contracts for Difference (CfDs) and a universal capacity mechanism.
40 E3G - Third Generation Environmentalism
Investment modelling – Non perfect foresight
• The model has a 5 year forward view of commodity prices and demand supply (1)
• Rolling through each year, the model estimates power prices and dispatch for the forward view horizon. The resulting expected gross margin is compared to the expected levelised costs (2).
• On that basis the model decides whether a project should enter the planning stage (3) and then rolls forward to the next year (4). During planning the project can still be cancelled. Once the planning period is over the model will decide whether to move to the construction phase at which point the project is committed.
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Generator decisions: new build and retirement
• Generator build decisions: For new plants the levelised non-fuel cost includes capital costs and annual fixed costs. The gross margin is calculated as the expected margin from power revenues, capacity payments and financial support less fuel and carbon costs and non-fuel variable costs. There are two trigger points which a project must pass to progress to construction. If a project is “in the money” it enters planning. If it continues to be in the money at the end of the planning period, the project is committed to the construction phase, and will become operational after a defined number of years.
• Generator retirement decisions: The logic for closure decisions of existing generators is analogous to that for new investments. The key difference, however, is that the capital already invested is ignored as this is considered to be a sunk cost. As a result, total annual fixed costs are compared against the expected gross margin and, when these are higher for a pre-defined number of years, the plant retires.
42
Expected gross
margin
Forward
looking stack +
prices
Anticipated low
carbon support
Capital and
fixed O&M
costs
Expected
transmission
charges
Expected
levelised non-
fuel costs
Planning Under Construction OperationalCommit
Compare
Trigger 1 Trigger 2
Anticipated
capacity
payments
Expected gross
margin
Forward
looking stack +
prices
Fixed O&M
costs
Expected
transmission
charges
Expected fixed
costs
Plan closure Close
Compare
Trigger 1 Trigger 2
Anticipated
capacity
payments
E3G - Third Generation Environmentalism
The model allowed policy intervention to correct
deviation from the policy objective
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43
• High demand + low CCS -> Increased carbon price to €150/t and push out all lignite and hard-coal generation • Low CCS; Expensive CCS; High demand; High electricity demand (low efficiency) -> Increased carbon price between 90€/t and €100/t • Low demand + low CCS -> Increased carbon price only to €75/t
Under delivery
Over delivery
Carbon Price scenario
• Low demand; Low gas price; High CCS -> Increased carbon price only to €65/t or maintained baseline carbon price
Technology Support scenario
Under delivery
Over delivery
• High demand; Low offshore wind -> Increased offshore wind (between 30 and 35 GW by 2030)
• High electricity demand (low efficiency) -> Subsidy for lignite-CCS
• Low demand; Low gas price; High offshore wind -> Reduced offshore wind deployment rate
Capital cost assumptions
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Nuclear CCGT Gas CCS Coal & Lignite
CCS
Onshore Wind Biomass Solar PV
2011 3582 703 1335 2837 912 2005 3316
2015 3451 692 1273 2700 912 1943 2824
2020 3287 678 1196 2528 911 1866 2209
2025 3236 653 1058 2219 903 1850 1791
2030 3184 629 920 1910 895 1833 1372
Offshore
Wind (Low)
Offshore
Wind
(Base)
Offshore Wind
(High)
2011 2142 2535 2964
2015 1933 2288 2675
2020 1672 1979 2314
2025 1602 1896 2217
2030 1532 1813 2120
Capital costs (£/kW, real 2011)
• All capital costs except offshore wind are based on the Energy Roadmap 2050
• Offshore wind capital costs (Base/High/Low) are based on the study by ARUP for DECC
• The costs evolve over time reflecting learning curves and economies of scale. In particular solar and CCS are not yet mature technologies and can therefore follow steep learning curves.
Long run marginal cost of electricity
assumptions in baseline scenarios
45
Nucl
ear
CC
GT
CC
GT
CC
S
Coal
CC
S
Lig
nite
Lig
nite C
CS
Onsh
ore
Win
d
Offsh
ore
Win
d
Nucl
ear
CC
GT
CC
GT
CC
S
Coal
CC
S
Lig
nite
Lig
nite C
CS
Onsh
ore
Win
d
Offsh
ore
Win
d
Nucl
ear
CC
GT
CC
GT
CC
S
Coal
CC
S
Lig
nite
Lig
nite C
CS
Onsh
ore
Win
d
Offsh
ore
Win
d
2012 2020 2030
0
20
40
60
80
100
120
140
160
180
200
LR
MC
(€
/MW
h -
real
2011)
Carbon
Fuel
VOM
Fixed
Capital
The chart on the right shows the development LRMC of various technologies, split into their various components.
E3G - Third Generation Environmentalism
Other cost assumptions
46
Technology Hurdle RateVariable Operating &
Maintenance (€/MWh)
Fixed costs (% of
capital costs)
Gas 8.2% 1.40 3.0%
Coal 9.0% 2.50 3.0%
Lignite 9.0% 3.50 3.0%
Gas CCS 12.0% 3.50 3.0%
Coal CCS 12.0% 5.50 3.0%
Lignite CCS 12.0% 5.50 3.0%
Nuclear 11.5% 5.00 2.0%
Onshore Wind 9.0% 0.40 4.0%
Offshore Wind 11.0% 0.40 5.5%
E3G - Third Generation Environmentalism
Baseline commodity prices
• The Base commodity prices are based on the 450 scenario from the IEA World Energy Outlook 2011.
• Where applicable, the lignite fuel price is assumed to be 1.7 €/GJ (real 2011) throughout the modelling horizon.
47
2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
0
10
20
30
40
50
60
70
80
90
100
110
120
130
cu
rr/u
nit
-real
2011
ARA Coal ($/t) Brent Oil ($/bbl) Gas ($/mmbtu) EUA Carbon (€/t)
E3G - Third Generation Environmentalism
Gas price shocks were introduced overnight with
no foresight for beginning or ending of the event
• Baseline gas price is based on the 450 scenario from the IEA World Energy Outlook 2011.
• High and low gas price shocks are 75% higher or lower than the baseline price.
• Gas price shocks introduced overnight in early 2020s and lasts for 4-5 years
0
20
40
60
80
100
120
2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Base
Low Shock
High Shock
Gas
pri
ce -
p/t
he
rm (
real
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Electricity demand: baseline and
sensitivity assumptions
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HIGH DEMAND
BASELINE DEMAND
LOW DEMAND
• Overall electricity demand is 490 TWh. This is based on the Leitstudie 2011A scenario (incl. ca 25 TWh demand for electric vehicles and 10 TWh for hydrogen production). The Leitstudie scenario is consistent with the government’s long term target of a 25% reduction in electricity demand by 2050 compared to 2008.
• Overall electricity demand is 575 TWh. This was due to a combination of failing to deliver demand reductions in the domestic, SME and industrial sectors (only half of the demand assumed in the Leitstudie 2011A is realised). In addition there is higher demand from electric vehicles compared to baseline (ca. 56 TWh in 2030). The additional EV demand is consistent with the Leitstudie 2011C scenario which specifically looks at higher long term electrification of the transport sector in Germany.
• Overall electricity demand is 441 TWh. This is also based on the Leitstudie 2011A demand but with no demand from electric vehicles or for hydrogen production.
Investment decisions were taken with the expectation of
base electricity demand but then were subject to higher or
lower electricity demand
• Investment decisions were made with the expectation of a base demand. The model illustrates how uncertain demand development works.
• Every five years, investors readjust their expectations in line with a base demand (red) trajectory (green and purple dotted lines); however, the demand remains higher or lower than their expectations (yellow and blue lines). For example:
– In the High Demand case, the expectation in 2015 follows the green dashed line, although outturn demand follows the yellow line.
– In 2019 expectations still follow the downward path (smaller green dashed line).
– In 2020 expectations are reset but again follow the downward gradient as illustrated by the green dashed lines.
• This 5 year cycle continues throughout the modelling horizon.
Germany - Annual electricity demand trajectories
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2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
400
450
500
550
600
650
700
An
nu
al E
lectr
icit
y D
em
an
d -
TW
h
Low
Base
High
Base-Low
Base-High
• High deployment: 50% higher than the baseline deployment (ca. 30 GW by 2030)
• Baseline: No CCS built under Technology Support scenario baseline; Max. 15 GW of combined CCS capacity across all fuels (gas, hard-coal, lignite) in Carbon Price scenario baseline
• Low deployment: CCS technology fails a year into construction of the first commercial plant and there is no subsequent CCS deployment.
Technology deployment assumptions
and maximum levels
51
CCS
Onshore wind • High deployment: maximum potential of 50 GW by 2030
• Baseline: Capacity is currently ca. 30GW. Maximum potential of 45 GW by 2030
• Low deployment: maximum potential of 40 GW by 2030
• High deployment: maximum potential of 35GW by 2030
• Baseline: as per government target trajectory of 10GW by 2020 and 25GW by 2030.
• Low deployment: no further offshore wind build beyond the 10 GW in 2020
• Consistent with current government policy we assume that existing nuclear plants are phased out as planned an there is no new nuclear build
Offshore wind
Nuclear
E3G - Third Generation Environmentalism
