Bringing new energy to Britain: Policies, pathways and challenges

Steven Fries, Chief Economist

UKERC Stakeholder Event

30 April 2014

2

Overview

Overview of UK energy use and emissions 1

Transition to lower carbon energy and greater efficiency

a. Electricity

b. Buildings and industry

2

3 Challenges

3

Electricity demand has been falling, with thermal

and nuclear plants the key supply sources

GB electricity demand, 2000-2013(p) Installed capacity by technology , 2000-12

Source: DECC, Energy Trends March 2014, Table 5.2

0

10

20

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012

Other renewables WindPumped storage Hydro natural flowOther gas NuclearCCGT Coal

GW

Source: DUKES 2013, Table 5.7

1 Overview

4

Source: DUKES 2013, Table 6.4; Energy Trends March 2013, Table 6.1 for 2013 provisional data 1 DECC Renewables Roadmap

Renewable installed Capacity (MW) • Since 2000, the UK has increased renewable capacity from approx. 3GW to 19GW

• Renewable electricity generation now supplies just under 15% of total generation, from 2.5% in 2000

• 2020 EU targets imply around 110 TWh of renewable electricity1

• This has been achieved by diversification of technologies with biomass CHP, onshore and offshore wind and solar PV all increasing

However, renewables have been growing, driven

by the 2020 European Union targets

1 Overview

5

North Sea oil and gas production has been falling

over the last decade

• Declining production from North Sea and increase in imports of crude oil, refined products and gas

• Gas imports through LNG and pipelines from Norway and European continent

• Increasing attention to domestic shale gas potential, but unlikely to be marginal source of supply.

• Marginal source likely to be LNG – new liquification facilities (Australia, Qatar) and Asian demand are key price drivers

• Medium term Henry Hub linked pricing possible, after allowing for liquifaction, transport and regasification costs

1 Overview

UK Continental Shelf vs. Imports

Source: Dukes 2013, Table 1.1.2; Energy Trends March 2014, Table 1.3

The Carbon Plan set out the Government’s broad

strategy to meet Carbon Budgets and 2050 goal

The Carbon Plan took a scenario-based approach, recognising uncertainty.

Emissions reductions are expected in all sectors:

- Electricity: Electricity Market

Reform, CCS commercialisation and new nuclear programme

- Buildings and industry: Efficiency and transition to low-carbon heat

- Transport: vehicle efficiency gains, biofuel blending and move to ULEV

- Agriculture and Waste

MtC

O2e/ year

1 Overview

6

Current policies put UK emissions on track to 2022

The latest published projections (September 2013) show that current policies put UK emissions are on track to meet the first three carbon budgets to 2022

0

100

200

300

400

500

600

700

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Mil

lio

ns

of

ton

ne

s o

f C

O2 e

qu

ivale

nt

Actual net UK carbon account September 2013 emissions projections (central scenario) Respective carbon budget indicative annual average target

CB 1 (3018 MTCO2e)

CB 2

(2782 MTCO2e) CB 3

(2544 MTCO2e)

CB 4 (1950 MTCO2e)

1 Overview

7

8

Overview

Overview of UK energy use and emissions 1

Transition to lower carbon energy and greater efficiency

a. Electricity

b. Buildings and industry

2

3 Challenges

9

Low carbon policies are a mixture of UK and EU

carbon pricing, regulation and direct support

• EU-ETS – Covers 45% of EU greenhouse gas emissions, power sector, manufacturing and now aviation. Prices currently under EUR 7/tCO2e

• Carbon price floor – introduced in April 2013 to provide more clarity on carbon price. Current level is £15.70/tCO2e. 2014 Budget capped carbon price support at £18/t from 2016-17 to 2019-20

• Renewables Obligation – RO provides top up on wholesale electricity price. Introduced in 2002 with a 3% obligation on suppliers. It will reach 15.4% in 2015/16. Technology specific ROC bands set in 2009.

• Feed-in-Tariff with Contracts-for-Difference (CfDs) – CFDs are seen as a more cost effective than RO and also can also be used by nuclear and carbon capture and storage.

• Feed-in Tariffs for small scale generation – supports decentralised generation, e.g, solar PV

• Emissions Performance Standards – Annual emissions cap of 450gCO2/kWh for new base-load plants

• Industrial Emissions Directive – European Directive that replaces the Large Combustion Plant Directive and cuts SOx and NOx emissions ; places a limit of 20,000 hours on coal power stations which do not invest in flue gas desulphurisation and low NOx burners

2 Transition to a lower carbon energy and greater efficiency

10

CfD renewables support set to 2018-19, moving

towards competitive allocation

Set on an equivalent basis to the RO after allowing for lower revenue risk with CfDs

CfD strike prices set in December 2013, £/MWh for selected technologies

Technology 2014/15 2015/16 2016/17 2017/18 2018/19

Biomass conv. 105 105 105 105 105

Landfill gas 55 55 55 55 55

Offshore wind 155 155 150 140 140

Onshore wind 95 95 95 90 90

Solar PV (>5MW) 120 120 115 110 100

Wave and tidal 305 305 305 305 305

Source: DECC, December 2013 “EMR Delivery Plan”

2 Transition to a lower carbon energy and greater efficiency

11

The future supply mix is projected to expand into

nuclear, wind and other low carbon

Projected future generation, 2012-30

Source: DECC, December 2013 “EMR Delivery Plan”, 100g 2030 scenario with central fossil fuel price projections and demand

2 Transition to a lower carbon energy and greater efficiency

CCS CCS

Unabated gas

Unabated coal

Nuclear

Onshore wind

Offshore wind

CCS

Projected future capacity, 2012-30

Unabated gas

Unabated coal

Nuclear

Onshore wind

Offshore wind

CCS

12

Proof of concept – eight renewable electricity

projects have been offered CfDs

2 Transition to a lower carbon energy and greater efficiency

• By 2020, the projects will provide up to £12 billion of private sector investment

• The projects could add a further 4.5GW of low-carbon electricity to Britain’s energy mix (or around 4% of capacity)

• Once built, the successful projects will contribute around 15TWh or 14% of the renewable electricity we expect to come forward by 2020 and will reduce emissions by 10 MtCO2 per year compared to fossil fuel power generation.

13

Security of supply must also be maintained in the

low carbon transition

• Security of supply is concern with 20% of current capacity expected to retire by 2020 and as intermittent and inflexible generation on system rises

• “Missing money” problem is a key problem; prices perceived not to be able to rise to VoLL levels at times of system stress

• Capacity Market is being implemented to solve “missing money” problem in energy only market. First auction to be run by end of the year for delivery of capacity in 2018/19.

• Pricing under the Capacity Market depends on eligible resources - bidding behaviour by existing coal and gas plants, new gas investment and availability of Demand Side Response

• Demand Side Response (DSR) – Capacity market to include eligibility for DSR aggregators, typically for non-domestic interruptible load; challenge in monitoring and verification regime.

• Electricity Demand Reduction (EDR) – pilot scheme to test whether additional energy efficiency measures able to play in capacity market. Under development.

2 Transition to a lower carbon energy and greater efficiency

14

Capacity margins are projected to tighten

significantly without a capacity market

Security of supply outlook to 2030

Source: DECC, October 2013

Derated capacity margin

• Reliability standard set at LOLE of 3 hours per year, equivalent to a derated capacity margin of ~ 5%

• In short term, Supplementary Balancing Reserve to be run by National Grid aimed at existing gas plants, outside of market to prevent mothballing.

• Also, transitional auctions for

Demand Side Response

2 Transition to a lower carbon energy and greater efficiency

15

Energy efficiency and low carbon heat for

households and businesses

• Energy Company Obligation – requirement on energy suppliers to provide energy efficiency measures to households (loft and cavity insulation, solid wall insulation)

• Green Deal for households - government initiative to offer various measures for residential properties at no upfront cost and eventually paid back through energy bills

• Commercial energy efficiency schemes – series of measures, including Enhanced Capital Allowances (ECA), Carbon Reduction Commitments (CRCs), Climate Change Agreements (CCAs)

• Smart meters – requirement on energy companies to roll out standardised smart meters by 2020

• Regulations – products and policy standards mainly from European Directives

Support for low carbon heat

• Non-domestic Renewable Heat Incentive – renewable heat tariffs for businesses and public sector organisations to generate and use renewable energy to heat their buildings.

• Domestic Renewable Heat Incentive – renewable heat tariffs for domestic consumers, targeted at but not limited to, homes off the gas grid

Measures to reduce energy demand

2 Transition to a lower carbon energy and greater efficiency

Changes to ECO and Green Deal cash-back

incentive

16

Deployment of cavity wall insulation

Deployment of adequate loft insulation

Source: Government’s response to the Fifth Annual

Progress Report of the CCC

Transition to a lower carbon energy and greater efficiency 2

The Government has recently consulted on several changes to the ECO. Major proposals include: • Allow ETT CWI and LI to be delivered under the

main ECO carbon target, and reduce this target by 33%;

• Increase the eligibility criteria for the carbon target earmarked for low income areas;

• Introduce ECO targets for a further two years to 31 March 2017; and

• Incentivising delivery to low income and vulnerable households who are off the gas grid.

We are currently analysing consultation responses, with a Government Response in due course. Also new incentives for Green Deal Cashback Scheme, e.g. SWI changes from £650 up to £4,000.

Changes to non-domestic RHI and launch of

domestic RHI to improve support & increase uptake

Non-domestic

• Increased support for renewable CHP, large biomass boilers (over1MW), deep geothermal, GSHP, solar-thermal and biogas combustion

• Support introduced for air-water heat pumps and commercial and industrial energy from waste

• Updated approach to budget management, tariff certainty

Domestic

• Launched 9 April 2014 and open to homeowners, private landlords, social landlords and self-builders

Projected renewable heat deployed in GB by 2020/21 is 29-59 TWh.

17

Transition to a lower carbon energy and greater efficiency 2

18

Overview

Overview of UK energy use and emissions 1

Moving towards lower carbon energy and greater efficiency

a. Electricity

b. Buildings and industry

2

3 Challenges

19

Levy control framework sets affordability and

allocation framework for low carbon generation

Evolution of the Levy Control

Framework (£bn, real 2012 prices)

2.35

7.60

0

1

2

3

4

5

6

7

8

LCF 2012/13 LCF 2020/21

Source: DECC

• The EMR package will allow the UK to meet its 2020 renewables and carbon budget targets

• Coalition government agreement on the amount of support available to low carbon projects: £7.6bn (2011/12 prices) in 2020/21

• Allocation framework seeks to balance least cost deployment v. development of technologies that can be scaled in future

• Diversifies across significant technical and non-technical risks

3 Challenges

20

Significant challenges remain on buildings and

industry

Deployment of solid wall insulation.

2008 – 2022 • Significant technical performance

and consumer choice barriers still to be overcome with SWI

• Renewable heat tariffs have potential spur deployment of low carbon technologies, but policy instrument still new

• The balance between heat networks and decentralised low carbon heat remains uncertain

• Experience with deployment of decentralised low carbon heat will be key

3 Challenges

Source: Government’s response to the Fifth Annual Progress

Report of the CCC

21

Balancing decarbonisation, security of supply

and affordability is key political challenge

• Affordability increasing concern – Energy prices have become a significant political issue in UK and recent steps have been take on ECO and carbon price support to ease the impact of policies on bills

• A robust approach to energy efficiency – key to mitigating the impact of lower carbon energy on energy bills of households and businesses

• Policies to mitigate fuel poverty and loss of competitiveness of energy intensive industries also central

• Economic growth and supply chain – investment, jobs and growth associated with energy infrastructure. Supply chains for offshore wind and new nuclear.

• Role of gas in UK market – shale gas and gas generation to back up low carbon generation, but current low spark spreads

3 Challenges