The impact of wind energy on UK energy dependence and resilience

Transcription

1 The impact of wind energy on UK energy dependence and resilience A report commissioned by RenewableUK 15 January 2015 Cambridge Econometrics Covent Garden Cambridge CB1 2HT UK ps@camecon.com

2 The impact of wind energy on UK energy dependence and resilience Cambridge Econometrics mission is to provide rigorous, accessible and relevant independent economic analysis to support strategic planners and policy-makers in business and government, doing work that we are interested in and can be proud of. Cambridge Econometrics Limited is owned by a charitable body, the Cambridge Trust for New Thinking in Economics. 2

3 The impact of wind energy on UK energy dependence and resilience Authorisation and Version History Version Date Authorised for release by /01/15 Philip Summerton 1.0 8/12/14 Philip Summerton Final report. Draft final report. Description 3

4 GWh The impact of wind energy on UK energy dependence and resilience 1 Introduction The UK electricity system will have to change substantially in the future North Sea gas production is falling 1.1 Background The UK electricity sector has changed substantially over the last thirty to forty years, moving from a coal-based system towards a more balanced portfolio mix encompassing nuclear and gas-fired power stations, as well as emerging renewable energy technologies. Over the next ten to twenty years, the energy sector will need to be re-shaped again if the UK s targets to reduce CO 2 emissions are to be met. This means that policy-makers will have to decide on what sort of energy sector will best meet the country s needs, and the role that policy should play in bringing that transition to bear. In the late 1980s and throughout the 1990s, gas-fired electricity generating capacity was built to make use of cheap and abundant North Sea gas. However, gas supplies from the North Sea have diminished and much of the UK s growing demand for gas now comes from imports (see Figure 1). Moreover, there has been substantial volatility in the gas price over the past ten to fifteen years (see Figure 2) leading to uncertainty about future retail prices and household bills. Figure 1: UK gas production and imports 1,400,000 1,200,000 1,000, , , , ,000 0 UK production Imports 4

5 p/kwh The impact of wind energy on UK energy dependence and resilience Figure 2: UK Wholesale Gas Price Cambridge Econometrics was commissioned by RenewableUK to assess the implications of wind capacity deployment on energy independence and gas price resilience In this context, Cambridge Econometrics was commissioned by RenewableUK to assess the impact of wind technology deployment to reduce the dependence of the UK economy on imported fuel, and to improve the electricity system s resilience to gas price volatility. This report highlights issues of energy dependence and of gas price resilience. 1.2 Report structure The next section of the report lays out the current and potential role for wind energy to reduce the UK s imported fuel dependency. Section 3 discusses the role of wind energy in improving resilience to gas price volatility, and concluding remarks are provided in the final section. All prices are in real terms 2013 price base. 5

6 thousand tonnes The impact of wind energy on UK energy dependence and resilience 2 Energy dependence Fossil fuels dominate UK electricity generation Without wind generation, demand for fossil fuels would have been even greater 2.1 The impact of wind on reducing energy imports in 2013 In 2013, around 63% of UK electricity generation (226.3 TWh) came from coal- (130.7 TWh) and gas-fired power plants (95.6TWh), while wind turbines provided around 7.9% 1 (28.4 TWh).The remainder was supplied by nuclear, hydro, solar, bioenergy, pumped storage, and other fuels. To provide the TWh and 95.6 TWh of electricity from coal and gas, respectively, a much greater amount of energy is required as fuel input (374 TWh of coal [50.0m tonnes] and 197 TWh of gas [20.2 bcm]) because of the efficiency loss involved in converting fuel to electricity. Had there not been electricity generated by wind in 2013, it is reasonable to assume that the electricity demand would have been met by additional coaland/or gas-fired generation. Based on the 2013 supply shares, in the absence of the 28.4 TWh of electricity supplied by wind (enough to power 6.8m homes 2 ), 16.5 TWh would need instead to be supplied by coal and 11.9 TWh would need to be supplied by gas. The additional fuel demand would be around 45.8 TWh of coal (6.1 m tonnes) and 24.8 TWh (2.5 bcm) of gas because of the efficiency loss in converting fuel to electricity. Since gas supply and, in particular, coal supply are heavily import-dependent we estimate that wind-powered electricity reduced required imports of coal (see Figure 3) and gas by 50.2 TWh in 2013 (4.9m tonnes of coal and 1.4 bcm of gas). Around 56% of gas supplies were imported in 2013 while as much as 79% of coal supplies were imported. Figure 3: Coal imports displaced by wind power relative to total coal imports Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Coal imports Coal imports displaced by wind 1 Department of Energy and Climate Change, Energy Trends. 2 Energy Consumption in the UK (July 2014), see: estic_factsheet.pdf 6

7 GW The impact of wind energy on UK energy dependence and resilience with implications for imports of fossil fuels We developed scenarios to compare two alternative visions for the UK electricity sector Even assuming that indigenous UK production of coal and gas could increase proportionately to meet some of the additional demand, an extra 36.4 TWh (4.9 m tonnes) of coal imports and 13.7 TWh (1.4 bcm) of gas imports would still have been required. This is equivalent to around 2% of all gas imports and nearly 10% of all coal imports in If indigenous production was already operating at maximum capacity, then an additional 45.8 TWh (6.1 m tonnes) of coal imports and 24.8 TWh (2.5 bcm) of gas imports would have been required. It would have cost 579.5m to import the coal and gas which wind energy displaced, showing the extent to which wind energy is already enhancing the energy independence of the UK. 2.2 The future role of wind energy for energy imports It is not clear what the UK electricity sector will look like in the future and there are many competing visions, all with sets of positive and negative attributes that need to be considered. To understand the role that mass deployment of wind capacity might have on the UK s energy trade balance in the future, we constructed two scenarios for comparison: Gas; new gas CCGT is the dominant technology replacing end-of-life coal and nuclear plants and meeting the anticipated increasing demand for electricity to 2030 Wind; considerable wind capacity, both offshore and onshore, is deployed to replace end-of-life coal and nuclear plants, and to meet renewable targets and reduce emissions The capacity mix and generation mix for both scenarios are shown in Figure 4 and 5 below. Each mix provides the same total electricity generation in both 2020 and Figure 4: Capacity mix GAS WIND GAS WIND Gas Wind Peaking (OCGT) Other 7

8 TWh The impact of wind energy on UK energy dependence and resilience Figure 5 Generation mix GAS WIND GAS WIND Gas Wind Peaking (OCGT) Other The scenarios were tested in the National Grid s Electricity Scenario Illustrator (ELSI) model to ensure that there was sufficient dispatch capacity to maintain electricity supply at times of peak demand and low intermittent supply. The Wind scenario envisages 32 GW of wind capacity by 2020 increasing to 66 GW by By comparison the Gas scenario is dominated by Combined- Cycle Gas Turbines (CCGT) and over two-thirds of total generation comes from gas in The Wind scenario requires more supporting infrastructure and could be more expensive, but The Wind scenario requires more investment in supporting infrastructure than the Gas scenario to ensure that demand can be met at all times, specifically: 8.4 GW of OCGT (peaking) plant by 2020 increasing to 13.6 GW by 2020 an increase in interconnector capacity to 15.5 GW by 2030 compared to 7.6 GW in the Gas scenario an additional cumulative investment of 3.3bn in the period 2015 to 2030 to reinforce the transmission network compared to the Gas scenario However, these costs may be reduced using measures such as Demand Side Response and increased storage which could both provide peaking services in the future. Also, interconnection provides other benefits in addition to allowing the management of more variable generation, as it can reduce the overall cost of electricity supply at times of peak demand. This additional investment in supporting infrastructure is sufficient to ensure that the Wind scenario can deliver electricity at times of low wind and peak demand according to the National Grid s ELSI model and so it is reasonable to compare on a like-for-like basis with the Gas scenario. It is worth noting that there are also costs associated with relying on gas especially if the EU ETS price and Carbon Price Support levied by Government on each unit for fossil fuel increases in the years ahead. 8

9 The impact of wind energy on UK energy dependence and resilience it dramatically reduces dependence on imported fuels The Wind scenario would require less fossil fuel based electricity generation, produce fewer emissions and would significantly reduce energy dependency on imported gas. The additional demand for gas required by the electricity sector in the Gas scenario is, not surprisingly, substantial. In 2020, the Gas scenario requires an additional 157 TWh (16.1 bcm) of gas than the Wind scenario, and by 2030 this increases to just under 300 TWh (30.7 bcm). Since UK gas supplies are falling at the same time as UK and European demand increases, the entire additional demand from the power sector envisaged in the Gas scenario would probably have to be met by imports. Under DECC s Central gas price projections, the additional cost of gas imports would be 3.1bn in 2020 and 7.4bn in 2030 under the Gas scenario. 9

10 index The impact of wind energy on UK energy dependence and resilience 3 Resilience to gas prices The cost of electricity generation is more resilient to changes in the gas price in the Wind scenario 3.1 Analysing the resilience to gas prices Building on the scenarios described in Section 2, this section assesses the resilience of electricity costs to changes in the gas price. Gas prices have been quite volatile in recent years (Figure 2) which can lead to uncertainty in energy bills. Clearly the annualised cost of electricity generation will be more resilient to changes in the gas price under the Wind scenario, than the Gas scenario. By 2030 in the Gas scenario, we estimate that the cost of electricity generation would increase by 8% for a 41% increase in the gas price 3. In the Wind scenario, the cost of electricity generation would increase by less than 4% for the same gas price increase. This result is to be expected: the more gas in the system the larger the effect of a change in the gas price on the costs of generation. Figure 6 shows the annualised cost of electricity generation in each of the scenarios for DECC s Low, Central and High gas price assumptions 4, (normalised to one in each scenario and year for the Central gas price assumptions) and displays the same key result of a wider spread of electricity prices in the face of DECC s gas price range under the Gas scenario than the Wind scenario. Since households place a value on reducing risk (exposure to uncertainty), this improved resilience of the electricity cost to future gas price uncertainty in the Wind scenario can be considered a benefit in producing more stable electricity prices. Figure 6: Annualised electricity system costs under low, central and high gas prices GAS WIND GAS WIND The 41% increase is the difference between DECC s High and Central gas price projections in 2030, which is taken as a representative range of possible prices. 4 See DECC s Updated Energy and Emissions Projections. 10

11 The impact of wind energy on UK energy dependence and resilience Capital intensive technologies might be more expensive, but the costs are known up-front, providing a cushion against future volatility A further point about resilience can be drawn. Unlike fossil fuel-based power generation, most of the lifetime cost of many renewable technologies (and especially wind) is known once installation is complete and this provides a cushion against volatility in future variable costs (fuel and non-fuel). Future energy and technology costs remain uncertain, but if generation from offshore wind remained more expensive than gas, a choice to invest more in wind would amount to paying an insurance premium to reduce exposure to future gas price volatility. It is worth noting that average costs of generation do not necessarily translate to wholesale electricity prices. Instead, prices are determined by the functioning and the regulation of the market. As a result, the range of costs across these two scenarios in terms of the annualised cost of electricity generation may not be reflected in an equivalent range for wholesale electricity prices. 11

12 The impact of wind energy on UK energy dependence and resilience 4 Concluding remarks The analysis focusses on the trade-off between wind power and traditional fossil fuel based electricity generation and finds that the deployment of wind capacity would improve the UK s energy independence and resilience to future gas prices 4.1 Conclusions The scope for this analysis was focused on the trade-off between wind power and fossil fuel-fired electricity generation on the energy dependency of the UK electricity system and its resilience to variation in future gas prices. In summary we find that: the value of the estimated coal and gas imports displaced by windpowered energy in 2013 is 579.5m under the Wind scenario, imports of gas valuing 3.1bn in 2020 and 7.4bn in 2030 can be avoided compared to the Gas scenario by 2030, in the Gas scenario, we estimate that the cost of electricity generation would increase by 8% for a 41% increase in the gas price but, in the Wind scenario, the cost of electricity generation would increase by less than 4% for the same gas price increase because wind technology costs are dominated by capital costs, the costs are known up-front and so there is resilience against future volatility in variable (fuel) costs It is clear that the deployment of wind capacity has, and will continue to, reduce the demand for fossil fuel, most of which is likely to be sourced from imports. Today, wind-powered electricity is displacing imported coal and to a lesser extent gas, but in the future the alternative to wind is much more likely to be more (imported) gas and the trade-off could be substantial. Since the costs of wind energy are known once installation is completed, while the costs of gas-fired generation in the future depend on the future gas price, the installation of wind capacity will improve the resilience of electricity generation costs to future volatility in the gas price. Future energy and technology costs remain uncertain, but if generation from offshore wind remained more expensive than gas, a choice to invest more in wind would amount to paying an insurance premium to reduce exposure to future gas price volatility. Reduced reliance on energy imports and improved electricity generation cost resilience to future gas price uncertainty are two benefits that come with wind capacity deployment. Although there are many other factors to consider when choosing the next generation of electricity power supply technologies, this analysis shows that there would be clear benefits in terms of energy independence and resilience to fossil fuel prices. 12