Progress with The Energy Policy Review: A Perspective
OIES Seminars 7 October 2003
John Bower Overview
What the White Paper Said
Reality Dawns
An alternative 20:20 Vision
John Bower Progress on UK Energy White Paper 2 What the White Paper Said UKEWP refocused energy policy away from a UK driven liberalisation agenda… GOALS AND POLICIES
1. Reduce CO2 emissions by 60% by 2050 Reduce amount of energy we consume Central to future market and policy will be emissions trading Raise efficiency standards in home appliances and housing Encourage low carbon fuels and renewables through grants and subsidy 2. Maintain reliability of energy supplies Right infrastructure / regulatory systems in UK and liberalisation of Europe Pursue regional stability and economic reform in producing areas Promote understanding of markets and conditions for FDI in producing areas Forward prices will signal the need for investment Improve contingency planning in dealing with major incidents
John Bower Progress on UK Energy White Paper 3 What the White Paper Said …. towards an EU driven multifaceted agenda GOALS AND POLICIES
3. Promote competitive markets in UK and beyond Raise rate of sustainable economic growth Support business and competitiveness through reliable / affordable energy Encourage firms to innovate, reduce cost, deliver better goods and services Use market based instruments to deliver policy goals Work with business to prepare them for the low carbon economy of the future 4. Ensure that every home is adequately and affordably heated Reduce poverty by lowering prices and raising social security payments Improve quality of housing stock via insulation and energy efficiency grants
John Bower Progress on UK Energy White Paper 4 What the White Paper Said UKEWP relied on carbon trading and uneconomic/unproven technology… ENERGY SYSTEM IN 2020
1. More diverse than today 2. Much of our energy will be imported from or through the single market 3. Grid will balance supply of large plants including offshore wave, tidal and wind 4. Market will need to handle intermittent supply with backup capacity 5. More local generation from biomass, waste, wind, tidal, feeding local networks 6. More microgen from CHP, fuels cells, photovoltaics, and surplus sold to main grid 7. Energy efficiency will reduce overall demand even as new demand comes on 8. New homes will achieve low or zero carbon emissions 9. Many buildings will reduce demand with solar heating
John Bower Progress on UK Energy White Paper 5 What the White Paper Said …. while policy on existing technology was passive or assumed it would close down ENERGY SYSTEM IN 2020
10. A large part of energy mix will be gas 11. A smaller role for coal possibly linked to CO2 capture and storage 12. Existing nuclear plant will all be closed and new plant subject to a later decision 13. Greater role for fuel cells using hydrogen from non-carbon electricity 14. In transport more hybrid vehicles and low carbon biofuels 15. Public service vehicles and private cars will increasingly use hydrogen 16. By then nuclear fusion will be at an advanced stage of research 17. People will be more aware of climate change and reducing carbon emissions 18. Carbon content will be a differentiator as cost of carbon is reflected in prices
John Bower Progress on UK Energy White Paper 6 Reality Dawns During summer recess it appears a major shift in position has quietly begun … A SHIFT IN EMPHASIS OR A MAJOR RETHINK?
“Britain's future energy mix will be dominated by gas power generation with nuclear power likely to make a comeback and renewables only playing a limited part”
"I wouldn't put much money on there being much of a coal generation element by 2015.”
"The emergence of carbon trading will slightly penalise gas, but it will punish coal, and it could begin to favour nuclear“
“Renewables will be limited -- nuclear will come back"
Martin O'Neill, Chairman of the UK Parliament's Trade and Industry Select Committee. 29 September 2003
John Bower Progress on UK Energy White Paper 7 Reality Dawns Gas has been the subject of much Parliamentary debate and questions of late… GENERATION TECHNOLOGY CAPACITY SHARE IN ENGLAND & WALES (Apr 1990 – Mar 2004)
100% OCGT
90% Oil ogy 80% Pump Store 70% on Technol ti
a Small Coal 60% Medium Coal 50% and Gener
40% CCGT e by Fuel 30% Large Coal ty Shar 20% Magnox
Capaci 10% AGR/PWR
0% Apr Oct-99 Apr Oct-00 Apr Oct-01 Apr Oct-02 Apr Oct-03 Apr Oct-90 Apr Oct-91 Apr Oct-92 Apr Oct-93 Apr Oct-94 Apr Oct-95 Apr Oct-96 Apr Oct-97 Apr Oct-98 Hydro ------99 00 01 02 03 90 91 92 93 94 95 96 97 98
John Bower Progress on UK Energy White Paper 8 Reality Dawns …BP Amoco objections have just been brushed aside to get Ormen Lange pipeline built… ORMEN LANGE PROJECT
Ormen Lange Trondheim Vesterled: 10 BCM Kristiansund
Statfjord Gullfaks Troll Oseberg Kollsnes Frigg
Kårstø Europipe II: 21 BCM Sleipner St. Fergus Draupner Europipe I: 13 BCM
Ekofisk
Norpipe: 14 BCM
Zeepipe: 13 BCM Franpipe: 15 BCM Dornum Emden
Zeebrügge Total capacity: 86 BCM Dunkerque Source: Norsk Hydro
John Bower Progress on UK Energy White Paper 9 Reality Dawns … and electricity security a high priority after NYK, London, Sweden, Italy blackouts
BRITISH ENERGY HEADLINES
28 Aug 02 British Energy drained by low prices-minister
01 Sep 02 British Energy ponders US sale
06 Sep 02 Nuclear firm British Energy begs for bailout
07 Sep 02 British Energy shares suspended as company warns of insolvency
08 Sep 02 Ministers offers £410 million loan to British Energy
09 Sep 02 British Energy falls almost 80 pct after LSE lifts trading curbs
26 Sep 02 Ministers extend loan to British Energy and increase it to £500m
18 Sep 03 Government sets deadline on British Energy restructuring
22 Sep 03 Nuclear plants may get new lease of life
02 Oct 03 British Energy rescue complete subject to approval by parties and the EU
03 Oct 03 Ministers switch on to winter power fears
John Bower Progress on UK Energy White Paper 10 Reality Dawns To get back on 2050 target track CO2 emissions must fall 35% from 1990 level by 2020 A POLICY VACUUM 180
160
140
120
100
80
60 Annual CO2 Emissions (MtC) Annual CO2 Emissions 40 ? 20
0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Power Stations Domestic Services Industrial Transport Other 2050 Target
John Bower Progress on UK Energy White Paper 11 Reality Dawns Right now DEFRA is designing the UK mechanism for EUETS and LCPD …
EU EMISSIONS TRADING SCHEME AND LARGE COMBUSTION PLANT DIRECTIVES
Precursor Phase I Phase II EU 2003 – 2004 2005 – 2007 2008 – 2012 Emissions Trading National Plan CO2 only CO2 + other gases Scheme Formulation Allocation only Allocation + Auctions
Precursor Phase I Derogation Phase EU 2002 - 2003 2004 – 2007 2008 – 2015 Large Combustion National Plan SOx, NOx, dust SOx, NOx, dust Plant Directive Formulation ELV or NP ELV or 20k hr derogation
Source: EIA
John Bower Progress on UK Energy White Paper 12 Reality Dawns … with 75% of CO2 reductions coming from closure of coal fired power stations…
EUROPEAN ELECTRICITY GENERATION OUTPUT 2000 900
800
700
600
500
400
300
200 Annual Generation Output (TWh) Annual Generation 100
0 a a a a a a m UK ijan aria iu and nds avi Italy a a dova bani Malta l lg nl Other Spain Latvi TFYR o Russia Turkey France Ireland Poland Greece Austria Croatia Iceland jikistan Fi thuani Al Norway Estoni Ukraine Belarus a, Georgi Sweden Belg Armenia Bu a Hungary Slovakia Portugal M Slovenia Romania Denmark Germany Li T Azerb Uzbekistan Yugosl Kyrgyzstan Kazakhstan Switzerland Netherl Turkmenistan Bosnia and HG Czech Republic acedoni M
Source: EIA Thermal Nuclear Hydro Geothermal and Other
John Bower Progress on UK Energy White Paper 13 Reality Dawns … but Domestic and Transport emissions are caused by voters so reductions difficult SECTOR CARBON DIOXIDE REDUCTIONS ACHIEVED BY 2002 20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
C02 Emissions Reduction Achieved C02 Emissions Reduction -35% -35% 2020 Interim Target -40.00%
-50.00% Power Stations Domestic Services Industrial Transport Other
John Bower Progress on UK Energy White Paper 14 Reality Dawns Electricity and Industrial sector will trade CO2, increase efficiency, or shut plant down… TONNAGE OF CARBON DIOXIDE REDUCTIONS REQUIRED 2002 - 2020 14 13.0
12
9.9 9.9 10
7.9 8
6
4 3.1
2 CO2 Emissions Reduction Required (MtC) CO2 Emissions Reduction
0 -0.3
-2 Power Stations Domestic Services Industrial Transport Other
John Bower Progress on UK Energy White Paper 15 Reality Dawns … but DTI effectively admits no real progress in Services, Domestic, Transport sector PROGRESS ON DELIVERING THE WHITE PAPER
SERVICES/ DOMESTIC (Energy efficiency and CHP) • Defra has announced a budget of £ 268 m for spending on energy efficiency and fuel poverty programmes in 2003/04 – £10 for each home or business address! • Working party to establish how to create an effective market in energy services has been set up to provide initial advice by 30 Sep and final advice by 31 Dec 2003; • a Better Buildings Summit to improve energy efficiency will be held on 21 Oct 2003; • Ministers started talking to the industry on heating aspects of building regulations.
TRANSPORT • an ultra low carbon car competition was launched on 29 April 2003.
Source: www.dti.gov.uk/energy/sepn/index.shtml#del_wp
John Bower Progress on UK Energy White Paper 16 Reality Dawns Renewables lobby admit value of carbon not be enough to cover cost of renewables build EXPECTED MARGINAL COST OF GENERATION IN 2005 - 2010 £80 DTI Focus £70 Firm Focus £60 HMT Focus £50
£40
£30 Marginal Cost (£/MWh) £20
£10
£0 Old Nuclear Old CCGT Old Coal New CCGT New Onshore New Nuclear New Coal New Offshore Wind Wind
Fuel O&M LCPD EUETS Capital Source: Author’s own estimates. See also www.oxfordenergy.org Oxford Energy Comment “UK Offshore Wind Generation Capacity: A Return to Picking Winners”
John Bower Progress on UK Energy White Paper 17 An Alternative 20:20 Agenda Energy security will increase if DTI stops ‘picking winners’ and lets price direct investment GENERATION OUTPUT MIX 100% Renew (Other) 90%
P. Store 80%
Hydro 70%
60% Other
50% Renew (Therm) 369.8 505.3 505.3 40% TWh TWh TWh Nuclear
30% Gas Gross Generation Output Mix Gross Generation Output
20% Oil
10% Coal 0% 2002 Actual UKEWP 2020 20:20 Agenda
Source: Author’s own estimates applied to Digest of UK Energy Statistics Table 5.6 Electricity Fuel Use, Generation and Supply www.dti.gov.uk/energy/inform/energy_stats/electricity/
John Bower Progress on UK Energy White Paper 18 An Alternative 20:20 Agenda Electricity CO2 reduction greater with 20% nuclear or growth slows to 0.75% p.a. 2002 ACTUAL VERSUS 2020 FORECAST CO2 EMISSIONS FROM ELECTRICITY 45
40 Other 2020 Interim Target 35.2 35.2 35 MtC MtC Gas 30
25 Oil 20
15 Coal Annual CO2 Emissions (MtC) Annual CO2 Emissions 10
5
0 2002 Actual UKEWP 2020 20:20 Agenda
Source: Author’s own estimates applied to Digest of UK Energy Statistics Table 5.6 Electricity Fuel Use, Generation and Supply www.dti.gov.uk/energy/inform/energy_stats/electricity/
John Bower Progress on UK Energy White Paper 19 An Alternative 20:20 Agenda Transport CO2 emissions will only fall if car marginal commuting cost exceeds train cost MARGINAL DAILY COMMUTING COSTS OXFORD - LONDON Train Car Car Oxford - London Peak Return + Return Journey Commuter 2003 Commuter 2020 Zone 1 Pass Railway Charge £17.50 £0.00 £0.00 Motorway Toll £0.00 £0.00 £20.00 Congestion Charge £17.00 £5.00 £10.00 Fuel £0.00 £1.30 £1.30 Fuel Tax £0.00 £4.25 £0.00 Office Parking £0.00 £0.00 £10.00 SR Marginal Cost £34.50 £10.55 £41.30 Season Ticket -£18.70 £0.00 £0.00 Insurance £0.00 £1.15 £1.15 Road Tax £0.00 £0.30 £0.30 Maintainence £0.00 £1.50 £1.50 Depreciation £0.00 £3.00 £3.00 Capital Cost £0.00 £0.40 £0.40 LR Marginal Cost £15.80 £16.90 £47.65
John Bower Progress on UK Energy White Paper 20 An Alternative 20:20 Agenda Domestic / Service CO2 emissions will only fall if property is made more energy efficient DOMESTIC + SERVICE SECTOR EMISSIONS TREND AND TARGET 30
+ 0.75% p. a. 25
20
- 1.5% p. 15 - 3.0% p. a.
10
Annual CO2 Emissions (MtC) Annual CO2 Emissions - 2.0% p. a.
5
0
2 7 1 2 6 7 02 06 991 996 000 011 015 1990 1 199 1993 1994 1995 1 199 1998 1999 2 200 20 2003 2004 2005 20 2007 2008 2009 2010 2 201 2013 2014 2 201 201 2018 2019 2020
Domestic - Trend Service -Trend Domestic - Target Service -Target
John Bower Progress on UK Energy White Paper 21 An Alternative 20:20 Agenda Poverty will increase if EUETS/LCPD effect not offset with changes to tax/benefit system FUEL POVERTY
1. There is no such thing as fuel poverty – only poverty itself!
2. Eliminate VAT, RO costs, fuel duty before introducing emissions taxes
3. Mandate minimum emission standards for social and ‘low cost’ housing
4. Stamp duty rebate on all private house sales where emissions standards met
5. Increase fuel component of benefits and pensions
6. Prevent market abuse in retail energy sector using new competition powers
7. Do NOT load the cost on the energy industry or impose a retail price cap
John Bower Progress on UK Energy White Paper 22 Conclusion These issues go far beyond the UK and similar debates will be had elsewhere OECD IMPLICATIONS
1. Hard decisions on how to trade-off between security, competition and environment
2. Security is now the dominant theme with environment and competition subsidiary
3. Existing technologies will deliver medium term goals – not emerging technologies
4. Market designs may be modified or reinvented to create a ‘price signal’ for security
5. Politicians are being pressed for subsidies to counter perceived ‘market failures’
6. Swing back to central planning by proxy through formerly independent regulators
John Bower Progress on UK Energy White Paper 23 Speaker
John Bower is a Senior Research Fellow at the Oxford Institute for Energy Studies which is an independent research charity affiliated to Oxford University and dedicated to advanced research in the social science aspects of energy. John joined OIES in November 2001 and his research interest is in the emergence and evolution of integrated cross-border electricity and gas markets. Specifically; the development of efficient pricing and investment mechanisms for energy, transmission capacity, and emissions. Before joining the OIES, John completed his PhD at Oxford Institute for Energy Studies London Business School and his previous career was 57 Woodstock Road in the commodity industry. His experience ranges from energy trading, at Marc Rich & Co, to risk Oxford OX2 6FA management consultancy, with Coopers & Lybrand, United Kingdom advising commodity traders, producers and processors in base metal, precious metal, ‘softs’ and energy markets. Immediately prior to his PhD he was Telephone: +44 (0)1865 311 377 Global Controller Metals/Commodities at Deutsche Morgan Grenfell. Facsimile: +44 (0)1865 310 527 Email: [email protected] URL: http://www.oxfordenergy.org
John Bower Progress on UK Energy White Paper 24