The Future of London s Power Supply

Transcription

1 The Future of London s Power Supply SPECIAL INTEREST PAPER CITY OF LONDON CORPORATION REPORT PREPARED BY STEPHEN JONES ASSOCIATES AND SOUTH EAST ECONOMICS

2 The Future of London s Power Supply is published by the City of London. The author of this report is Stephen Jones Associates and South East Economic. This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the author, Stephen Jones Associates and South East Economic, and the City of London, give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein. April 2014 City of London PO Box 270, Guildhall London EC2P 2EJ

3 Contents 1 Executive Summary Introduction Approach Policy and Legislative Framework European Union 2020 package Climate Change Act Large Combustion Plant Directive (LCPD) and Industrial Emissions Directive (IED) Energy Act 2013 and Electricity Market Reform (EMR) Renewables Obligation and Feed in Tariffs (FIT) Climate Change Levy and Climate Change Agreements (CCAs) CRC Energy Efficiency Scheme (CRC) Renewable Heat Incentive (RHI) Consumer focused schemes: Green Deal and Energy Company Obligation (ECO) Rollout of smart meters RIIO-ED The Mayor s Climate Change Mitigation and Energy strategy Future Electricity Demand Electricity demand scenarios London specific demand growth London specific demand drivers Summary Potential Impact Electricity commodity prices Changing generation mix Peak electricity demand levels and network reinforcement Summary Risks and Opportunities for London The costs of inaction Minimising London s CO2 emissions: The Mayor s actions The London Plan Smart London Low Carbon London Summary... 37

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5 1 Executive Summary Purpose of the report In February 2014, the City of London Corporation commissioned Stephen Jones Associates and South East Economics to develop a road map setting out the issues that London s economy will face in meeting future rising power demands in a sustainable and reliable way. This report sets out the supporting materials for the road map which can be found at the end of this document and provides a summary of the wider policy issues, London-specific issues and a timeline of key events. Road map overview London faces considerable challenges in ensuring that energy demand can be met in a way that is both sustainable and reliable, especially as these demands continue to increase. Demand for energy is strongly linked with economic growth and as the economy in London grows, energy demand typically increases. The same patterns are being repeated globally and, as a result, we are seeing rising fossil fuel costs and more expensive energy prices. Historically a large proportion of our energy demands have been met through fossil fuels, both domestically produced and imported. In the UK, if no action is taken and such a trend were to continue, this would result in an increase in greenhouse gas (GHG) emissions and the associated environmental consequences. The UK government has committed to ambitious targets for the reduction of GHG emissions and has introduced a variety of policies to contribute towards meeting these. A consequence of these commitments to cutting GHG emissions is significant changes to our energy use. While this will impact on the entirety of the energy market, it is expected that the most significant impact will be on the electricity sector. Primarily, it is expected that the amount of carbon used in power generation will fall, as low carbon sources of electricity generation replace fossil fuel generation. Following such decarbonisation of electricity generation, it is predicted that there will be a significant increase in the use of electricity in both the transport and heating sectors, as electric vehicles and electric powered heat pumps gradually replace fossil fuel-based forms of heating and transport. It is expected that these factors will be even more significant in London where economic growth, and the growth in energy use, is likely to be greater than the UK in general. In the short term, overall demand for electricity in the UK is expected to decline, however by contrast in London, total electricity demand is expected to rise by over 5% by Further, it is expected that over the longer term London is likely to be an area with significant uptake of electric vehicles and the potential for significant non fossil fuel heating. 1

6 It is therefore anticipated that over the next thirty years there will be large increases in electricity demand in London. In the context of rising electricity prices, this may significantly impact end user bills. This is also likely to result in a need for considerable investment in the electricity network, to ensure that these higher demand levels (and different patterns of demand and supply) can be accommodated. While such a rise in demand is inevitable, and to some extent beneficial given the potential for electricity to be a low carbon source of energy, London is taking action to mitigate these upward pressures on electricity demand and prices. In response to the rapidly changing policy environment, a number of important initiatives have already been put in place in London that will directly affect energy demand and supply such as: The Mayor of London s action plan to minimise CO2 emissions which includes strategies to: Retrofit existing buildings with energy efficient measures. Reduce emissions through transport including a significant roll-out of electric vehicles. Maximise CO2 reductions from new developments by setting targets in excess of those contained in national building regulations. Promote clusters of low carbon businesses through initiatives such as the Green Enterprise District. The London Plan and the Smart London Plan, which include strategies and policies designed to support the deployment of decentralised energy in London, as well as demand management and development of suitable infrastructure. UK Power Network s (UKPN) Low Carbon London project which is carrying out a number of trials and investigations examining the impact of a wide range of low carbon technologies. Among other things, UKPN together with the project delivery partners, is examining: How demand profiles can be influenced to support the effective delivery of electricity. How smart grid technologies can be used to help meet the increased demand for electricity. The impact of a significant increase in heat pumps and electric vehicles. The influence that smart meters and local generation can have to help businesses and individuals to play an increasing role in reducing carbon emissions. The Low Carbon London project is due to conclude in December 2014 and should help to set the direction for how best to deliver and manage a sustainable, costeffective electricity network in London as we move towards a low carbon future. Despite these positive steps in the right direction, it seems clear that further work will be required from all stakeholders over the coming years to ensure that London, including the Central Business District (CBD), is prepared to meet this considerable challenge. Chapter 2 provides some additional context for this study including the objectives of the road map. 2

7 Policy and legislative framework Chapter 3 sets out a summary of the key aspects of the current policy and legislative framework relevant to this area: The UK government has committed to reduce greenhouse gas (GHG) emissions to at least 80% below 1990 levels by The most likely pathway to this commitment is decarbonisation of electricity generation and an increase in the use of electricity as an energy source in areas such as heating and transport. A raft of government policies and initiatives has been put in place to contribute towards improvements in energy efficiency and support low carbon generation. The Mayor of London has developed a number of strategies and action plans designed to deliver London s contribution to the targets. Electricity demand growth Chapter 4 assesses levels and drivers of electricity demand growth. Forecasting future electricity demand is inherently difficult, particularly over the longer term, however the following broad conclusions can made: To meet 2050 carbon targets there is likely to be a significant increase in UK electricity demand (29%-60%). The speed and extent of demand growth is likely to be driven by the expansion of electricity use to non-traditional sectors, such as domestic heating and electric vehicles. The main uncertainty relates to the timing of demand growth, with forecasts suggesting an initial decline in national electricity demand levels before an increase above current levels by (at the latest) the early 2030s. In contrast, in London demand growth is expected to increase in both the short and longer term with peak demand forecast to increase by 27% by Potential impacts Chapter 5 considers the implications of the expected approach to meeting GHG commitments and the shift towards a decarbonised electricity sector. These are likely to result in the following potential impacts: Wholesale electricity prices are forecast to rise significantly in the period to The move to a decarbonised electricity sector will require significant investment in new capacity, including back up generation for intermittent renewable sources. Increasing annual and peak demand levels in London are likely to result in a requirement for significant reinforcement of the UKPN London network. Household and business electricity bills are forecast to rise significantly in the next 15 years. 3

8 What does this mean for London? Evidence from studies looking at the economic implications of climate change suggests serious implications at both national and London level unless significant remedial action is undertaken. Chapter 6 provides a summary of the possible consequences of inaction, as well as an overview of the initiatives that have already been put in place within the London context to respond to the challenge and opportunities presented by the ambitious climate change targets. 4

9 2 Introduction In February 2014, the City of London Corporation commissioned Stephen Jones Associates and South East Economics to develop a road map setting out the issues that London s economy will face in meeting future rising power demands in a sustainable and reliable way. This report has been commissioned in support of the Greater London Authority (GLA) Long Term Infrastructure Investment Plan which will set out London s strategic infrastructure requirements to 2050 across the main aspects of infrastructure including energy. One of the consequences of the ambitious targets the UK government has committed to for the reduction of greenhouse gas (GHG) emissions is significant changes to our energy use. While this will impact on the entirety of the energy market, the greatest impact is likely to be on the electricity sector, where significant changes are expected to both the sources of electricity generation and the overall use of electricity. Primarily, it is expected that the amount of carbon used in power generation will fall as low carbon sources of electricity generation replace fossil fuel generation. Following such decarbonisation of electricity generation, it is predicted that there will be a large increase in the use of electricity in both the transport and heating sectors as electric vehicles and electric powered heat pumps gradually replace fossil fuel based forms of heating and transport. In contrast, in the other major energy market sectors, demand is expected to fall over the same period, through improvements in energy efficiency and conservation and the shift towards the use of low carbon electricity as an energy source. For instance, the use of natural gas for power generation and domestic heating is expected to decline. Similarly, the use of coal is also expected to decline as coal fired generation is projected to fall to very low levels by the mid 2020 s. These structural changes will require significant and costly investment in both electricity generation capacity and electricity networks. Furthermore, wholesale electricity prices are also projected to rise significantly over the next fifteen years. Within this context, and given that a successful climate strategy is expected to result in greater use of electricity, the objective of the road map is to deliver an overview of the challenges and opportunities in relation to London s power demands, both currently and looking to the future. 2.1 Approach We have approached this task by reviewing existing evidence from relevant studies and consultations commissioned by stakeholders such as the GLA, Ofgem, the European Commission, UKPN, National Grid, the Smart Cities Forum, the Department of Energy & Climate Change (DECC), the Smart Grid Forum, and Low Carbon London. 5

10 By evaluating this research we have been able to synthesise the existing state of knowledge in relation to power sustainability, apply this to London s specific circumstances and identify the key implications for London and the decisions that face policy makers. This report sets out the supporting materials for the road map in which we summarise: The current policy and legislative framework. The impact of future electricity demand forecasts. An assessment of some potential outcomes. A review of the risks and opportunities as they apply to London. This framework has enabled us to develop a road map that sets out the various challenges to London s energy requirements in a diagrammatic form, highlighting areas where changes to the current approach may offer opportunities to meet these demands in a more competitive and sustainable way. 6

11 3 Policy and Legislative Framework This chapter sets out a summary of key policies relating to energy and the environment that are likely to have a significant impact on the UK and London s future energy requirements. Key points: The UK government has committed to reduce GHG emissions to at least 80% below 1990 levels, by The most likely pathway to this commitment is decarbonisation of electricity generation and an increase in the use of electricity as an energy source. A raft of government policies and initiatives has been put in place to contribute towards improvements in energy efficiency and support low carbon generation. The UK government has committed to a set of ambitious climate and energy targets through the European Union 2020 energy package and the Climate Change Act Most significantly, the UK government has committed to reduce UK GHG emissions to at least 80% below the 1990 base level by While these commitments could be met through various combinations of actions and policies 1, the core scenario used by the UK government forecasts that this target will be met through: Significant increases in energy efficiency, reducing the amount of energy needed to be consumed (for example through domestic appliances and building insulation). An almost total decarbonisation of electricity generation (i.e. electricity generation primarily from non-fossil fuel sources or fossil fuel sources with carbon capture and storage (CCS)). A subsequent increase in the use of (decarbonised) electricity as an energy source, displacing GHG-emitting fossil fuel in a variety of sectors. This is likely to result in fundamental changes to electricity supply (the shift towards decarbonised generation), end user behaviours (energy efficiency) and an overall increase in electricity demand as electricity is used (as a cleaner energy source) in more sectors. In section 3.1 and 3.2 we set out the UK government s high level commitments. The remainder of the chapter summarises key policies which seek to implement these (and some wider) aims. 1 See the DECC 2050 pathways calculator: 7

12 3.1 European Union 2020 package 2 The European Union Climate and Energy package enacted in 2009, commits the European Union (EU) to the targets: A 20% reduction in EU GHG emissions from 1990 levels; A 20% share of EU energy consumption produced from renewable resources; and A 20% improvement in the EU's energy efficiency. These targets were set in place through four pieces of legislation: Reform of the EU Emissions Trading System (ETS) to put in place an EU wide cap reducing GHG emissions in sectors covered by the ETS by 21% by 2020 relative to 2005 levels 3. National targets for reductions in GHG emissions in sectors not covered by the ETS (16% reduction by 2020 relative to 2005 for the UK) 4. The Renewable Energy Directive 5 setting national targets for the share of renewable energy in national energy consumption by 2020 (15% target for the UK). The Carbon Capture and Storage (CCS) Directive 6, providing a legal framework for geological storage of CO2. In March 2011 the European Commission set out A Roadmap for moving to a competitive low carbon economy in The main proposal of the Roadmap is an 80% reduction in GHG relative to 1990 by 2050, with interim targets of a 40% reduction by 2030 and a 60% reduction by In January 2014 the European Commission set out a Green Paper for a 2030 framework for Climate and Energy policies 8. The key proposals are a binding target of a 40% reduction in GHG relative to 1990 by 2030, and a 27% share of EU energy consumption produced from renewable resources by These further policy proposals require agreement at the European level between the Member States, the European Parliament and Commission. At the time of writing there has been no political decision in relation to these proposals

13 3.2 Climate Change Act The Climate Change Act introduced a legally binding target to reduce the UK s GHG emissions to at least 80% below the 1990 base level by It also introduced carbon budgets that restrict the total amount of GHGs that the UK can emit in a fixed five year period. The first four carbon budgets 10 have been set by the government on the advice of the Committee on Climate Change 11. Table 3.1: UK government carbon budgets First carbon Second carbon budget (2008- budget ( ) 17) Carbon budget level (million tonnes carbon dioxide equivalent (MtCO2e)) Percentage reduction below base year levels Source: The Carbon Plan, Dec 2011, HM Government Third carbon budget ( ) Fourth carbon budget ( ) 3,018 2,782 2,544 1,950 23% 29% 35% 50% As Table 3.1 shows, the fourth carbon budget for the period , will result in a reduction of 50% of total GHGs relative to 1990 levels. There is however some uncertainty in relation to whether the UK government will revise (upwards) the fourth carbon budget in by-2050/supporting-pages/carbon-budgets The government stated that the fourth carbon budget was conditional upon EU progress towards GHG emission reductions and that it would review the budget in In particular, it stated that if UK domestic commitments (i.e. the carbon budgets) place it on a different emissions trajectory than the EU ETS trajectory then it would, revise up the fourth carbon budget to align it with the actual EU trajectory. We note that the current EU ETS trajectory is for a 20% reduction in GHG emissions by 2020, while the UK trajectory is for approximately a 30% reduction in GHG emissions by th-carbon-budget-policy-statement.pdf (para 17) 9

14 3.3 Large Combustion Plant Directive (LCPD) and Industrial Emissions Directive (IED) The LCPD 13 is a European Directive that sets Emissions Limit Values (ELVs) for certain air pollutants (i.e. maximum levels of emissions). Power stations 14 with an installed capacity of greater than 50MW must comply with these standards or opt-out of the requirements of the LCPD and cease operation by the end of In the UK it is expected this will result in the further closure of a number of coal fired generation plants that have opted out of the application of the LCPD. The IED 16 is a European Directive that consolidates a range of European environmental legislation, including strengthening the provisions of the LCPD. Of particular importance for energy supply is that from 2016, ELVs will apply to gas fired generation plants commissioned prior to 2002, which would include most of the UK s current gas fired generation plants. These plants will either have to comply with IED requirements or limit their operation post Energy Act and Electricity Market Reform 18 (EMR) The Energy Act 2013 provides a statutory basis for EMR, a programme to support investment in electricity networks and generation to replace retiring plants, and to meet the expected increases in electricity demand as a result of the Carbon Plan and the increased electrification of the transport and heat sectors. Key features: Contracts for Difference (CfDs) to provide stable, guaranteed revenue streams to developers, to support investment in low carbon generation. Introduction of a Capacity Market to provide payments to capacity owners 19 who guarantee to provide energy to the system in periods of system stress. An Emissions Performance Standard (EPS) setting a maximum annual limit on carbon emissions from new fossil fuel plants. A carbon floor price 20, creating an effective minimum price for GHG emissions Gas fired generation commissioned prior to 2002 are excluded from the LCPD 15 or after 20,000 hours of operation Demand Side Response i.e. demand turn down (including generation turn down_ are eligible to participate in the Capacity Market). Capacity receiving support through the Renewables Obligation (RO), Contracts for Difference (CfDs), or small scale Feed in Tariffs (FIT) are not eligible to participate. 20 In effect from April

15 EMR provides direct support for low carbon generation (through CfDs) and indirect support by decreasing the attractiveness of fossil fuel generation, through a carbon floor price and the EPS. Overall this is expected to increase the relative economic attractiveness of low carbon generation and, in combination with rising global fossil fuel prices, result in fundamental changes to the make-up of our electricity generation (see section 5.2). One likely consequence of a decarbonisation of electricity generation is that there will potentially be a greater need for generation flexibility. While there has always been a need to have flexible sources of supply to ensure security of supply, this is likely to be of particular importance if electricity supplies are decarbonised, as this will likely result in a system with a higher proportion of intermittent wind generation and inflexible (always running) nuclear generation. As a consequence, there may be a lower proportion of flexible fossil fuel generation available to the system and the combination of these factors could result in a system with limited flexibility to meet peak demands in particular when there is limited wind on a given day. The introduction of a capacity market is intended to secure system security of supply, even at times of peak demand, by providing payments to flexible plants (e.g. gas fired generation), that otherwise may not be economic 21 given their potentially low periods of operation. 3.5 Renewables Obligation 22 and Feed in Tariffs 23 (FIT) The Renewables Obligation and FIT schemes provide support to renewables generation, by incentivising demand for electricity generated from renewable sources and providing direct payments for electricity generated from renewable sources. The Renewables Obligation was introduced in 2002 and places an obligation on electricity suppliers to source an increasing proportion of their electricity from accredited 24 renewable sources, or pay a buy-out charge for any shortfall. The FIT scheme was introduced in 2010 to provide support to smaller sources of renewable generation, and provides a payment to eligible generators for every unit of electricity generated and for every unit exported to the grid. 21 Low carbon plants typically have lower operating costs than fossil fuel plants. This means that if available, a low carbon plant will be ahead of a fossil fuel plant in the merit order of available generation. This means that fossil fuel plants are likely to need to recover their total costs from shorter operational periods, which is only likely to be economic if prices in these periods rise to high levels Renewables generation above 5MW capacity is eligible for accreditation, smaller renewables units may not be eligible as they will receive support under the FIT scheme. 11

16 3.6 Climate Change Levy and Climate Change Agreements (CCAs) 25 The Climate Change Levy is a tax on energy usage by non-domestic users of energy in the UK. As well as raising tax revenues, by increasing the cost of energy usage, the CCL provides an incentive for companies to reduce their energy consumption. Energy intensive users can receive a significant reduction in the rate of the Climate Change Levy if they enter into a binding CCA with the Environment Agency to meet energy efficiency and carbon saving targets. 3.7 CRC Energy Efficiency Scheme 26 (CRC) The CRC scheme was introduced in 2010 and places obligations on large consumers of electricity to improve their energy efficiency. The main obligation is to report energy usage and to purchase emissions allowances to offset the CO2 emissions associated with their energy usage Renewable Heat Incentive 28 (RHI) The RHI scheme was introduced (for the non-domestic sector) in 2011 and incentivises heat generated from renewable sources. It provides long term (20 year) financial support for heat generated from renewable technologies. The scheme is due to expand to the domestic sector from spring Consumer focused schemes: Green Deal 29 and Energy Company Obligation 30 (ECO) The Green Deal scheme and ECO are intended to facilitate investment in energy efficiency improvements to buildings by individuals and some small businesses. The Green Deal allows investment to be made at no initial cost, with the costs of investment recovered from future electricity bills. The Energy Company Obligation places a legal obligation on energy suppliers to improve the energy efficiency of domestic consumers buildings, and is intended to focus on vulnerable households and hard to treat buildings (those buildings where the Green Deal would not be effective) Does not apply to emissions covered by the ETS or Climate Change Agreements

17 3.10 Rollout of smart meters 31 The UK government has placed an obligation on energy suppliers to replace existing electricity meters with smart meters. It is intended that these meters will provide customers with near real-time information on energy use and potentially allow for greater customer ability to manage their energy use. It is expected that this will result in a reduction in overall end user demand, as customers respond to the information available to them. It is also expected to lead to a shift in demand away from peak periods as customers respond to potential time of use tariffs 32. It is intended that the main roll out will take place between 2015 and 2020, when smart meters will be fitted as standard RIIO-ED1 In October 2010, Ofgem published its formal decision document 33 to implement a new regulatory framework, known as the RIIO model (revenue = incentives + innovation + outputs). The RIIO model was the culmination of Ofgem s RPI-X@20 project under which it undertook a detailed review of energy network regulation. The review looked at how best to regulate energy network companies to enable them to meet the challenges and opportunities of delivering the networks required for a sustainable, low carbon energy sector. RIIO is designed to encourage network companies to: Play a full role in delivering a low carbon economy and wider environmental objectives; Invest efficiently to ensure continued safe and reliable services; and Innovate to reduce network costs for current and future consumers. The RIIO model will be applied to the electricity and gas transmission owners (TOs), the Distribution Network Operators (DNOs) and the gas distribution networks (GDNs). Ofgem is currently in the process of carrying out the first suite of DNO (RIIO-ED1) price reviews under the new framework. The RIIO-ED1 price control will set the outputs that the 14 electricity DNOs need to deliver for their consumers and the associated revenues they are allowed to collect for the eight-year period from 1 April 2015 to 31 March A time of use tariff is a tariff structure that has different prices in different time periods (e.g. lower prices overnight)

18 3.12 The Mayor s Climate Change Mitigation and Energy strategy 34 The Mayor s Climate Change Mitigation and Energy strategy is part of a series of strategies 35 that together set out actions and policies designed to deliver London s contribution to the ambitious climate and energy targets. Of particular relevance to the road map, the Climate Change Mitigation and Energy strategy (2011), focuses on reducing CO2 emissions to mitigate climate change, securing a low carbon energy supply for London. The Mayor has set four objectives for this strategy: To reduce London s CO2 emissions to mitigate climate change; To maximise economic opportunities from the transition to a low carbon capital; To ensure a secure and reliable energy supply for London; and To meet, and where possible exceed, national climate change and energy objectives. The Mayor has set targets to reduce CO2 emissions in London which aim to drive the scale of activity required to deliver his objectives, as set out in Table 3.2. Table 3.2: The Mayor s CO2 emissions reduction targets in London Target year Target CO2 emissions reduction on 1990 levels 2015 (interim target) 20% 2020 (interim target) 40% % 2050 At least 80% Source: The Mayor s Climate Change Mitigation and Energy Strategy, October 2011 The London Plan 36, which is updated regularly, supports the Mayor s strategies for tackling climate change particularly in relation to the built environment. We explore this further in chapter The Mayor has also produced a strategy for Climate Change Adaptation as well as strategies related to Waste Management, Air Quality, and Water and Biodiversity all related to improving London s environment. 36 The London Plan is the overall strategic plan for London, and it sets out a fully integrated economic, environmental, transport and social framework for the development of the capital to see more at: 14

19 4 Future Electricity Demand This chapter sets out an overview of the drivers for future electricity demand at a national and London level and a base case range for future electricity requirements. Key points: To meet 2050 carbon targets there is likely to be a significant increase in UK electricity demand (29%-60%). The speed and extent of demand growth is likely to be driven by the expansion of electricity use to non-traditional sectors, such as domestic heating and electric vehicles. The main uncertainty relates to the timing of demand growth. At a national level electricity demand may decline in the short term, however it is likely to increase above current levels by (at the latest) the early 2030s. In contrast, in London demand growth is expected to increase in the short term with peak demand forecast to increase by 27% by Below we examine a range of scenarios for future electricity demand growth, examine the underlying assumptions and consider their application to the future requirements of London. 4.1 Electricity demand scenarios Our starting point for an assessment of long term future electricity demand is the work undertaken by DECC, in its Pathways Document 37, and in the 2011 Carbon Plan 38. For more immediate short and medium term forecasts for electricity demand (to 2030) we have examined DECC s annually updated Energy and Emissions Projections 39 and the most recent National Grid Future Energy Scenarios 40 document, which sets out the scenarios and assumptions that National Grid uses as a reference point in its modeling of future network requirements Carbon Plan scenarios The DECC pathways project sets out a range of indicative projections for the UK to meet its commitment to reduce GHG emissions in the UK by at least 80% by 2050, relative to 1990 levels. The subsequent Carbon Plan sets out a core or reference scenario for meeting these commitments and three additional scenarios or futures 41 to stress test the core results Higher Renewables, more energy efficiency, Higher CCS, more bioenergy, Higher nuclear, less energy efficiency. 15

20 These scenarios though differing significantly in underlying assumptions have a number of common features: Almost total decarbonisation of electricity generation by 2050; Significant increases in energy efficiency; A significantly increased role for low carbon domestic heating (including electric powered heat pumps); Low emission transport (including electric vehicles); and Overall, a significant increase in electricity demand (29%-60% increase by 2050 relative to 2007 levels). 16

21 Table 4.1: UK government 2050 carbon plan scenarios All figures in Measure 2050 Core MARKAL (market allocation model) Renewables; more energy efficiency CCS; more bioenergy Nuclear; less energy efficiency Energy saving per capita, Electricity demand increase, Buildings Transport Industry Electricity generation Solid wall insulation installed Cavity wall insulation installed House-level heating Networklevel heating Ultra-low emission cars and vans (% of fleet) Greenhouse gas capture via CCS 50% 54% 43% 31% 38% 39% 29% 60% n/a 7.7 million 5.6 million 5.6 million n/a 8.8 million 6.9 million 6.9 million 92% 100% 50% 90% 8% 0% 50% 10% 75% 100% 65% 80% 69% 48% 48% 0% Nuclear 33 GW 16 GW 20 GW 75 GW CCS 28 GW 13 GW 40 GW 2 GW Agriculture and land use Renewables 45 GW 106 GW 36 GW 22 GW Bioenergy use Source: The Carbon Plan, Dec 2011, HM Government ~ 350 TWh ~ 180 TWh ~ 470 TWh ~ 460 TWh While any forecast of this duration has to be treated with considerable caution, these scenarios cover a range of potential developments and are a useful starting point for planning future infrastructure requirements. 17

22 In the 2050 timescale, the overall impact on electricity demand of an increase of between 29% and 60% is likely to significantly increase the exposure of consumers to electricity prices, and to place a requirement for significant investment on the electricity network by electricity demand forecasts For more immediate forecasts of electricity demand (and the potential pathway to 2050), we have examined the most recent DECC Energy and Emissions Projections. The projections assume that while the targets set in the first three carbon budgets ( ) are met, no further action is taken to meet the targets set for the fourth carbon budget ( ) 42. Overall the reference scenario shows an initial decline in electricity demand in the short term (6% reduction in demand 2020 relative to 2012), before a subsequent increase, with demand increasing above 2012 levels from 2025 with an 11% increase in demand in 2030 relative to We have also examined the scenarios used in the National Grid Future Energy Scenarios. National Grid sets out two core scenarios, Gone Green and Slow Progression. The outputs of these scenarios (set out in Table 4.2) differ quite significantly due to the differing assumptions used. 43 For the purposes of electricity demand, the most significant assumptions are that in the Gone Green scenario it is assumed that UK government environmental targets (carbon emissions & renewables, including the fourth carbon budget) are met, economic growth returns to the historic rate of 2.5% by 2020 and in general there is a higher take up/greater success of green policies. In contrast in the Slow Progression scenario, environmental targets are not met, economic growth is weak and there is a lower take up/less success of green policies. We note that in the context of government policy and current economic growth projections 44 this scenario is in our view less plausible than the Gone Green scenario. Of particular interest in the Gone Green scenario are the assumptions that National Grid makes in relation to the impact of smart technology on energy demand and the improvements assumed in energy efficiency. 42 We recognise that it is likely that additional measures will be taken to ensure that the targets set in the fourth carbon budget are met. The earlier decarbonisation required could increase electricity demand in the post 2022 period. It is therefore our view that the Energy and Emissions Projections are more likely to underestimate than overestimate electricity demand. 43 In appendix 2 of its document, National Grid sets out 30 key scenario axioms which describes in detail the difference between the scenarios. 44 See for example OECD forecast of UK growth rate of 2.5% by

23 In relation to smart technology it is assumed that smart meter rollout is completed by (in line with government policy) and that consumers respond to the enhanced information and price signals that they will receive. National Grid forecasts that this will result in a 4% reduction in total demand and an immediate 5% reduction in peak demand, as customers respond to time of use tariffs and shift their consumption from a peak to non-peak period. It is further assumed that there is scope for a further 5% reduction in peak demand as smart appliances (i.e. appliances that can automatically response to time of use tariffs) become more prevalent. It is also assumed that users of electric vehicles will (to some extent) be influenced by smart meters and time of use tariffs to minimise charging that occurs at times of peak demand. The Gone Green scenario also assumes significant energy efficiency savings in a variety of areas: Approximately 1% reduction in total electricity demand due to improvements in residential insulation by Approximately 2% reduction in total electricity demand due to reductions in residential lighting demand due to continued improvements in the energy efficiency of lighting. Significant decreases in heating demand from new homes due to changes in building standards and the introduction of zero carbon homes. High fuel prices and government policies drive commercial energy efficiency improvements at above historic levels. 45 National Grid assumes that at this stage smart meters are rolled out to 95% of households. 19

24 Table 4.2: Key statistics National Grid Slow Progression and Gone Green scenarios Slow Progression Gone Green Electricity Peak demand/gw Annual demand/twh Total capacity/gw Low carbon capacity/gw Residential Heat Pump (HP)/Millions Electric vehicles number/millions Residential gas demand/twh Annual gas demand/twh Renewable energy % Greenhouse gas (GHG) reduction% 26 >34 <60 26 >34 ~60 Source: UK Future Energy Supplies, National Grid (July 2013) As can be seen in Table 4.2, both peak and annual electricity demand is higher in the Gone Green scenario than in the Slow Progression scenario. In addition while peak demand and average demand decline in the Slow Progression scenario, in the Gone Green scenario they fall but then increase, exceeding 2012 peak demand in 2028 and exceeding 2012 annual demand in London specific demand growth As well as national trends in electricity demand growth, we have also looked at similar patterns at the local London level. UKPN owns and operates London Power Networks (LPN) 47 the DNO which is responsible for the electricity distribution network in the capital including the CBD. 46 National Grid Future Energy Scenarios 47 LPN s distribution network supplies over two million customers within an area of 665 square kilometres. It is almost entirely urban and serves the most densely populated region in the country. Almost the entire network is underground. 20

25 UKPN s published demand forecasts for the LPN region are set out in its July 2013 business plan 48. In developing its projections, UKPN notes that one of its key challenges in the 2015 to 2023 planning period is the need to adapt to the requirements of a low carbon environment in light of government targets for carbon reduction. UKPN considers that there is significant uncertainty about the rate of consumer uptake of low carbon technologies (LCT), such as electric vehicles, solar panels and heat pumps, to support the government s objective of reducing greenhouse gases. UKPN is also planning for growth in a range of distributed generation technologies, including onshore wind farms, to impact its network. Depending on the rate of uptake, these LCTs could significantly impact the future network capacity requirements, and therefore investment requirements. In light of this, UKPN developed a range of possible scenarios for the take-up of low carbon technologies, having regard to a number of factors including DECC s UKwide scenarios, stakeholder feedback and historical trends. The key LCT input assumptions included in the central scenario which underpins UKPN s July 2013 business plan are set out in Table 4.3. Table 4.3: UKPN planning inputs and assumptions for July 2013 business plan Forecasts for 2023 Heat pumps domestic (000 s) 37 Heat pumps non-domestic (MW) 62 Electric vehicles (000 s) 41 FIT eligible generation (000 s) 67 Onshore wind (MW) 10 Offshore wind (MW) n/a Source: LPN July 2013 business plan core narrative The LPN region is largely dominated by industrial and commercial demand, reflecting the make-up of inner London. This is expected to rise over the period between 2015 and 2023 and beyond. Electric vehicle take-up is expected to be modest with heat pumps only being adopted in significant numbers later in the 2020s. Notably there is a high degree of uncertainty around many of these assumptions. UKPN s latest forecasts set out in Table 4.3 have been significantly revised downwards since the original plan in July For example, the 2012 plan assumed the take up of 61,000 heat pumps and 130,000 electric vehicles compared to 37,000 and 41,000 respectively in the latest plan. UKPN notes that these revisions take into account improved modelling, feedback from stakeholders, and changes in the policy environment _Narrative.pdf 21

26 Figure 4.1 and Table 4.4 show UKPN s forecast of network peak demand from the period 2010 to Figure 4.1: UKPN London peak demand forecast Peak demand (Mva) Source: LPN July 2013 business plan Table 4.4: UKPN forecast of peak demand growth Annual growth rates % % % Source: LPN July 2013 business plan As well as peak demand projections, Figure 4.2 shows UKPN s forecast of units distributed over its network in the RIIO-ED1 period. 22

27 Figure 4.2: UKPN forecast of LPN units distributed (Gwh) Units distributed (Gwh) Source: LPN July 2013 business plan It is notable that, in comparison to the national level forecasts of both National Grid and DECC referred to earlier in this document, London demand exceeds 2012 levels by 2014 and that by 2023 demand is already approximately 10% higher than 2012 levels. In summary, in relation to London UKPN expects: Traditional domestic demand growth to continue (but not diminish) as future growth is offset by energy efficiency improvements; Industrial and commercial demand growth to return to historic levels from 2015 as the economy recovers from the current downturn; and The penetration of low carbon technologies e.g. heat pumps to ramp up through the ED1 period. 4.3 London specific demand drivers As well as its business plan forecasts, UKPN also produces a long term development statement (LTDS) 49 which provides stakeholders such as developers with network data, forecasts and commentary to carry out initial assessments of project feasibility. The statement also informs existing users of the distribution network of development proposals Nov2013-V1.pdf 23

28 LPN s 2013 statement sets out forecasts for load-related network reinforcement investment for the period 2013/14 to 2018/19. These forecasts are based on expectations of load growth, taking account of anticipated new-build activity, increases in uptake of distributed generation (domestic and large scale) and increased use of low carbon technologies such as electric vehicles and heat pumps. The statement also identifies a number of trends that have developed over recent years that UKPN considers will also have an influence on demand: Growth in air conditioning / cooling: This is a general growth area, particularly in town centres and commercial / leisure developments which is having a noticeable impact on summer demand levels. Lifestyle changes resulting in a flattening of load profiles: A further area of load shift is associated with lifestyle changes. These include increasing social and commercial activity in the evenings, late night and Sunday shopping, more flexible working hours and an increase in leisure activities. Growth in distributed generation and Combined Heat and Power (CHP): Increasing levels of embedded generation will tend to reduce the growth of units distributed and increase the system fault levels, which may then require the system to be reinforced. Larger and taller buildings: Space limitation within central London is leading to a trend for the construction of taller buildings in order to provide companies with the amount of office accommodation that they require on a single site. The increased floor area in these buildings combined with higher specifications, the density of IT equipment and the associated requirement for additional air conditioning is producing developments with extremely high demand. UKPN s demand forecasts indicate a significant growth in the central London area and major reinforcement schemes are already underway to meet the new demand with further schemes planned for the short to medium term. 4.4 Summary Forecasting of future electricity demand is inherently difficult, particularly over the longer term. As can be seen, there are significant differences in electricity demand forecasts, even when (broadly) the same policy assumptions are made. We can however draw the following broad conclusions: If 2050 policy targets are to be met it is highly likely that there will be a significant increase in electricity demand (29%-60%) the key uncertainty is the timing of this demand increase. UK electricity demand may decline in the short term, however it is likely to increase above current levels by (at the latest) the early 2030s. In London, demand growth is expected to increase in the short term with the rate of growth in demand gradually increasing out to In the period , UKPN expects units distributed over its network to grow on average by 1.2% per annum. From our examination of the various forecasts, the following are identified as key drivers for the speed of electricity demand growth: 24