UK Energy policy. David Newbery Imperial College London & EPRG. IEFE Workshop on Energy Markets Bocconi, Milan 18 th May 2012

Transcription

1 UK Energy policy David Newbery Imperial College & EPRG IEFE Workshop on Energy Markets Bocconi, Milan 18 th May dmgn [at] cam.ac.uk 1

2 Outline UK energy policy - past and present secure, sustainable and affordable Electricity Market Reform contracts to de-risk low-carbon electricity Roles and prospects for nuclear and renewables in UK and EU Energy mix and energy security mix driven by renewables target case for capacity mechanism D Newbery Japan

3 Conservative Energy Policy Our task is rather to set a framework which will ensure that the market operates in the energy sector with a minimum of distortion.. (Lawson, speech to IAEE, 1982) Competitive markets provide the best means of ensuring that the nation has access to secure, diverse and sustainable supplies of energy in the forms that people and businesses want, and at competitive prices. (DTI, 1993, Prospects for Coal) D Newbery Japan

4 Labour Policy More objectives, less coherence Protect the environment and equity Protect coal and reduce CO 2 emissions Cut energy VAT rate to 5% but pass on environmental costs (e.g. for renewables) Retain independent regulators but increase ministerial guidance - Utilities Act 2000 D Newbery Japan

5 Energy White Paper 2003 Dodged the nuclear question little sense of urgency or direction Meeting the Energy Challenge 2008 accepts case for nuclear power Committee on Climate Change 2008 legally binding carbon targets Evolving energy policy UK Low carbon transition plan 2009 Electricity Market Reform (EMR) consultation 2010 White Paper for secure, affordable and low-carbon electricity, Technical update 2012 D Newbery Japan

6 Evolving energy policy securing cheap, reliable, and sustainable sources of energy supply has long been a major concern for governments (Tony Blair, 2002) ensure our energy is secure, affordable and efficient and bring about a transition to a low-carbon Britain (DECC web site, 2009) Note the change in emphasis from cheap to affordable Newbery IIB 1 6 D Newbery Japan 2012

7 Background to Electricity Market Reform (EMR) Security of supply: reserve margin falling fast 12 GW coal decommissioned by 2015 because of LCPD (20% of peak demand) 6.3 GW nuclear decommissioned by 2016 extra flexible generation needed to handle wind Climate change challenge: reach <100gm/kWh 2030 Renewables falling short of targets Nuclearnot attractive at current CO 2 price Cost rising: 2020 energy targets might cost 200 bn = 760 per household/yr, current energy bills = 1,100/yr 7

8 Development of GB generating capacity 110, ,000 interconnect or other RES 90,000 Crunch time 80,000 70,000 other biomass 60,000 offshore wind Start of ETS 50,000 onshore wind 40,000 gas 30,000 nuclear 20,000 10,000 new coal 2020 SKM (2008) mid-scenario 2020 projection D Newbery Cranfield middle old coal

9 EU climate change policy ETSto price CO 2 to support mature low-c options fixes quantity not price => poor guide for low-c Directive: demand pull for not-yet-commercial renewables justified by learning spillovers and burden sharing EU Strategic Energy Technologies-Plan to treble R&D spend R&D to support less mature low-c options D Newbery Cranfield

10 Carbon prices have crashed EUA price October 2004-December 2011 Euro/t CO Second period OTC Index First Period Second period Dec 2008 Second period next Dec 5 0 Oct- 04 Apr- 05 start of ETS Oct- 05 Apr- 06 Oct- 06 Source (2010) from IEA (2005) Source: EEX Apr- 07 Oct- 07 Apr- 08 Oct- 08 Apr- 09 Oct- 09 Apr- 10 Oct- 10 Apr- 11 Oct- 11 D Newbery Cranfield

11 % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Renewables support replaces R&D UK Electricity R&D intensity ROCs other power hydrogen and fuel cell nuclear fission and fusion Renewables fossil fuels D Newbery Japan percent electricity revenue

12 Failures of ETS Current ETS sets quota of total EU emissions Renewables Directive increases RES => increased RES does not reduce CO 2 => reduces carbon price => prejudices other low-c generation like nuclear Risks undermining support for RES Solution: fix carbon price instead of quota D Newbery Japan

13 Directive undermines ETS projections 2050 projected CO2 price Renewables depresses C-price 2009 projections after Renewables Directive and recession Euros/tonne CO with 12.5% renewables with 20% renewables 2009 projections Source: Committee on Climate Change, 2008 and 2009 D Newbery Japan

14 EMR White Paper 12/7/11 To de-risk and incentivise low-c investment => C-price floor to underwrite wholesale price ensures nuclear is not subsidized => Long-term contracts for credibility => Capacity payments - details delayed to 2012 => EPS 450gm CO 2 /kwh to deter unabated coal technical update Jan 2012 addresses capacity mechanism: to be general not targeted contracting institution should be System Operator Aim at law on statute book by spring

15 120 UK price movements: 2007 to 2009 in All prices relate to 2010 calendar year traded daily from Electricity forward 2010 ( /MWh) Gas cost forward (2010) + EUA Coal cost forward (2010) + EUA EUA price in /tco2 /MWhe Jan 07 1 Apr 07 1 Jul 07 1 Oct 07 1 Jan 08 1 Apr 08 Message: fossil fuel sets electricity price; reduce risk for fossil generators 15 Low-carbon generation exposes to full volatility of electricity price => risk 1 Jul 08 1 Oct 08 1 Jan 09

16 The case for a carbon tax Each country imposes a Carbon tax tax bads not goods as part of fiscal adjustment rebated by EUA price for covered sector can start low: 20/t CO 2 and escalate at 5% p.a. above RPI = 34/t by 2020 Tax can finance research and renewables Message: setting a carbon tax is better than trading carbon permits D Newbery Japan

17 UK s Carbon Price Floor - in Budget of 3/11 30 EUA price second period and CPS (2009)/tonne to 70/t by (2011)/EUA second period forward price Carbon Support Price Corrective tax 10 As at 1 Jun Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: EEX and DECC Consultation D Newbery Japan

18 Nuclear and RES Nuclear power seen as mature and commercial at an adequate carbon price UK Coalition will not subsidize nuclear resolved via the Carbon Price Floor Independent inspectorate for safety assurance UK public reassured after Fukushima disaster <= UK neither earthquake nor tsunami-prone RES driven by EU Renewables Directive considerable criticism of cost and on-shore wind D Newbery Japan

19 Rapid decarbonisation of electricity is possible French nuclear electricity shows what can be done CO2 emissions per kwh USA Italy UK Europe France gm/kwh Ten years => 80% reduction 19

20 Carbon price critical to decarbonising but not enough for new technologies Projected levelised generation costs 2017 NOAK =n th of a kind.mwh Nuclear looks cheapest when mature CCGT at 20/t CO 2 extra for DECC C02 central case extra for 10% interest CO2 costs 20/t CO2 T&S Decommissioning fuel costs 60 variable opex 40 Fixed Opex 20 Capital Cost 7.5% 0 Gas CCGT Nuclear PWR CCGT+CCS ASC Coal+FGD Source: DECC consultation on EMR ASC Coal +FGD+CCS Coal IGCC Coal IGCC+ CCS Onshore wind Offshore wind Offshore wind R3 20

21 Long-term contracts CO 2 price unpredictable, CPF not credible Electricity prices risky to non-fossil gen => long-term contract enforceable in courts but technologies differ and so should contracts => simple FIT for on-shore wind => tender auctions for wind? => CfD for nuclear and CCS? Need a contract body = System Operator (SO) Need to adapt contract to technology 21

22 CCC 09 UK 2020 target is 27,000 MW Installed wind capacity 30,000 25,000 20,000 UK wind very modest now at DE 2000 level UK s target looks feasible at German roll-out rate MW 15,000 10,000 5, Denmark Germany Spain UK 22

23 Security and energy mix Earlier concerns over gas import dependence resolvedby massive diversified import capacity New concerns about reserve margin high wind requires new flexible reserves Coalition will not subsidize nuclear resolvedvia the Carbon Price Floor Contracts to de-risk low-carbon electricity need careful design to minimise cost CCS programme falters because of cost Energy policy needs careful design D Newbery Japan

24 But gas import infrastructure has DECC been Energy forthcoming Markets Outlook 2009 Source: DECC Energy Markets Outlook in 20 winter 24

25 Capacity mechanisms Concern over backup needed for massive wind could have 7+ days of low wind at winter peak demand side unlikely to help much such events are hard to predict => without a contract no-one would build just for that System operator to propose best solution Reliability options, contracts or payments Capacity mechanisms need careful design drawing on best international practice 25

26 Criticisms of EMR Contracts mark return to Single Buyer Model butall IPPs in 1990s were long-term PPAs Bureaucrats, not markets choose investment butcurrent RES support Govt designed after intense lobbying by incumbents => tenders, auctions to create competition => contracts should incentivise efficient operation Wholesale price will be distorted by contracts fossil fuel will continue to set prices until 2020, high wind share will increase price volatility 26

27 Conclusions on EMR Central element is contracting by SO wind needs location-specific FIT => need careful contract design Carbon Price Floor justifies unsubsidized nuclear contracts but can distort trade need to argue for EU C-tax or equivalent Capacity contracts needed for peak and wind back-up EMR delivers the essential elements But electricity market may need more reform 27

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29 Average annual increment to nuclear capacity 5,000 France delivers 50 GW nuclear ,000 3,000 Japan consistent MW 2,000 1, ,000 US France Germany Sweden UK Japan 29

30 Equivalent increment in effective wind capacity previous five years MW equivalent (7000 hrs/yr) French nuclear investment 9 times high as as German wind for 15 years Denmark Germany Spain UK 30

31 How to decarbonise UK Delivered free from the heat pumps incl in blue part MacKay s estimates indicate the large role of low-c electricity in any future low-c UK-sized Economy: figures per head per day D Newbery Denmark

32 MacKay on science Windy on-shore average: 2W/m 2 = 2MW/km 2 UK pop density 250/km 2 10% of UK provides 20 kwh/d/p=25km/day car use Offshore 3W/m 2 Solar in UK av = 110W/m 2 south facing roof Los Angeles 225W/m 2 ; UK PV 20% eff = 22W/m 2 ; 10 m 2 all roofs 5kWh/d/p But making it uses 5 yrs worth of energy 10 m 2 solar thermal hot water = 13 kwh/d/p D Newbery Japan

33 A plan that adds up Composite of 5 plans with 35 GW onshore and 29 GW offshore wind 48 GW PV 50 GW CSP in Africa 45 GW nuclear Cap cost 1,020 bn = 17,000/hd D Newbery Denmark

34 CCGT Combined cycle gas turbine CCS Carbon capture and storage CfD Contract for Difference CPF/CPS Carbon Price Floor or Support EC European Community EMR Electricity Market Reform EPS Emission Performance Standard ETS Emission Trading System Acronyms EUA European Union Allowance = 1 tonne CO 2 PPA Power Purchase Agreement RES Renewable Electricity/energy Supply SET Strategic Energy Technology SO System Operator D Newbery Japan