UK Climate Change Policy:An Economically Compelling Example?

Dr John ConstablePolicy and Research Director

Amicus the Union Conference“What Price Manufacturing”

Edinburgh19 April 2006

UK Emissions in Global Context• World: 25,000 million

tonnes of CO2 p.a.• US: 5,800 mt

– 23%• W. Europe: 3,900 mt

– 16%• China: 3,500 mt

– 14%• UK: 560 mt

– 2.2%

Renewable Electricity and Emissions Reduction

• 2010 renewableelectricity target:– 33.6 TWh

• If met saves 9.2 mtCO2– 0.016 of UK emissions– 0.0024 of Europe’s

emissions– 0.0004 of global emissions

• RO cost:• £1 billion p.a.

in subsidyalone

• £108/tCO2

Ofgem: “the implied cost of carbon toconsumers for the Obligation is £198-515/tC, much greater than the £40-50/tC estimated for the allowance priceunder the EU-ETS”

Steven Smith to DTI, 23 June 2005

World Growth: China & Electricity

• UK: 390 TWh• China: 1,800 TWh• W. Europe: 3,000 TWh• US: 3,900 TWh• In 2020 China will need

11,000 TWh– From 2,400 GW of

power stations– UK: 78 GW– US: 933 GW

Zhang Guobao, vice-ministerof the National Developmentand Reform Commission,quoted in the China Daily,19.10.04

What Can the UK Do?The Prime Minister’s Opinion, 28 Feb. 2006

• “[…] the UK accounts for something like2% of greenhouse gases.”

• “By 2020 as the world economy continuesto grow, this proportion will have fallen to1.5%.”

• “Even the most extreme and unrealisticaction taken in the UK will have only a tinyimpact on global climate change.”

• “Even more crucially, it would do nothing to protect us fromits worst effects.”

• “I am afraid that, in this case, being virtuous alone will notbring much reward.”

» Letter to Stop Climate Chaos, 28 Feb. 2006.

Being virtuous…

• Quantitative Contribution?• No: Zero carbon UK will have no effect.• Qualitative contribution? Perhaps...• Economically Compelling Example• Are we on track?

The RenewablesObligation

• Subsidy stream of ca.£1 billion by 2010

• Unbanded: blind tointrinsic merit

• Market invests in leastcapital intensivequalifying ticket– Initially, Landfill Gas– Now, Onshore Wind

• 17 GW proposed inScotland alone

• Economicallycompelling?

E.ON Netz WindReport 2004 &

2005

• Germany has 17,000MW of wind

• E.ON Netz controls7,000 MW

• E.ON Netz controlarea roughly the sizeof the UK

• 20 million customers

E.ON Netz Wind Report 2005

• “The wind blows, when itwill.”

• “The wind blows as it will –despite increasinglyaccurate forecasts, it isdifficult to predict its actualstrength.”

• “The wind blows, where itwill – and sadly, it does notblow where large quantitiesof power are required.”

Martin FuchsCEO, E.ON Netz

E.ON Netz Concludes:Wind is a Supplementary Generator

• “Wind power plantswith a 48,000 MWoutput will onlyreplace a secured2,000 MW ofthermally generatedpower – theequivalent of justtwo new-generationcoal blocks.”

Professor Michael Laughton:Capacity Credit in the UK

• Conclusions from NGT data:– “Irrespective of the amount of wind

capacity installed in the system, theconventional capacity required will neverbe less than the peak load.”

– “[…] the 20% conventional plant marginneeded without wind will never bereduced to less than 9 or 10% regardlessof the added wind capacity.”

Professor Michael Laughton, “Power Supply Security with IntermittentSources Conventional Plant Capacity Requirements”, Power in Europe, 460(10 Oct. 2005).

Weaknesses inUKERC Desk Study

• Ignores overall systemcosts:– Maintaining

dispatchable plant =to peak load, atreduced load factor

– Grid expansion• Assumes distributed

wind carpet andsmoothing

• Insufficient regard toGerman and Danishexperience

• “[…] the total cost of intermittency at a 20%penetration […] in the range of a little under£5/MWh up to around £8/MWh.” (p. 47)

• 0.2 x 400 TWh x £5-8 = £400-640 millionp.a.

• But, these are not the total costs, and maybe optimistic…

Grid Expansion

• Non-firm renewablesneed grid.– Germany: 1,200 miles

of new grid (£2 billion)• Wind seeking Scottish

grid connection– 17,000 MW

• National Grid (2004 )estimate of cost:– £250,000 per MW– 5,100 MW x £250,000

= approx £1.3 billion.

Aluminium & CopperLondon metal market:

Aluminium: $2,600/tonne Copper: $6,000/tonne

Aluminium & Copper and prices, $/tonne,01.06.05-15.04.06Charts from BBC

Are Non-firm Renewables Economically Compelling?A German View

Professor WolfgangPfaffenberger.

University of Bremen,Director, Bremer Energie

Institut.

• “[…] investing in renewable energyplants creates employment inindustries producing these goods.”

• “[…] the extra cost of renewablesadds to the cost of energy and inthis way destroys purchasing powerthat could have created demandand employment in other areas.”

• “Whereas the gross effect ofspending on renewables isalways positive, the net effectmay be negative.”

(Report for REF, Dec. 2005)

An Effective Climate Change Policy:Realism about Alternative Energy

• Revise RenewablesObligation

• Favour firm renewables forelectricity, eg:– Biomass– Tidal

• Organic energy for transport& heat (biofuels)

• Domestic renewables forenergy efficiency

• Quality not Quantity

Tidal: Variable but Predictable

• Korea Water ResourcesCorporation now buildingSihwa Bay

• 254 MW• 550 GWh p.a.• Operational in 2009

CHP Biomass: Firm, Sustainable

• Potential values:– Firm– Distributed

generation– Local incomes– District heating– Incentive for

sustainableforestry

– Compatible withrural touristindustry

Community and Domestic Renewables:UK Industries, UK Benefits

Energy from Waste• UK produces 38 million tonnes

Municipal Solid Waste p.a.– 50 mt p.a. by 2020.

• Potential output: 25 TWh p.a.• 400 mt commercial and industrial

waste• Potential output: 40 TWh p.a..• Environmentalists are critical

– Tyseley: 15 self-reported breaches ofemissions regulations in 1999-2001

• Invest to improve standards. • Tyseley, Birmingham• Built 1996• 30 MW plant

Yes, wind doeshave a role,

offshore with storage

• Offshore benefits– High capacity factor– Closer to centres of load

• Storage to ensuresmoother output andhigher capacity credit

Power Policy Needed…• Demand oriented…• Energy when needed,

delivered at the required rate• Firm, team-working,

renewables• Clean, efficient, conventional

plant:– Fossil with CCS for EOR.– Decisive choice, either way, in

regard to nuclear.• We need a Power policy…

because economic self-harmis counterproductive.

“[…] being virtuous alone willnot bring much reward.”