Energy pathways to 2030

Energy pathways to 2030

An overview of choices for the government

Clare McNeil with Adam HutchinsonMarch 2013

The government has published an Energy Bill to provide secure, affordable and low carbon energy for the UK

• The Energy Bill will shortly reach report stage where MPs will discuss and amend the Bill. The main sticking point is the government’s decision to delay setting a target to decarbonise the power sector. Instead, they plan to take powers to set a target in 2016 i.e. after the next general election

• Tim Yeo MP (Conservative) and Barry Gardiner MP (Labour) have tabled an amendment requiring the government to set a decarbonisation target for the power sector by 2014. This is in line with the advice of the government’s independent advisers, the Committee on Climate Change (CCC)

• The CCC have recommended that the carbon intensity of the UK power generation sector should be reduced to 50gCO2/kWh from the current 486gCO2/kWh by 2030. DECC’s modelling is based on a 100gCO2/kWh target while the recent gas generation strategy considers a 200gCO2/kWh target

• In this presentation we illustrate the choices facing government in considering whether to set a decarbonisation target for the power sector

The power sector needs to provide enough low carbon energy to support economy-wide decarbonisation

• If the UK is to meet its climate change targets, the power sector will need to largely decarbonise by 2030.

• This will help other sectors - such as transport, buildings and industry - to speed up their decarbonisation after 2030 (see chart, right)

• A low carbon intensity pathway of 50gCO2/kWh for the power sector is the level the CCC has recommended to achieve this

Source: The Fourth Carbon Budget , Committee on Climate Change (CCC) 2010 (NAEI 2010, CCC calculations)

Government needs to guarantee the UK’s energy security as we move to a low carbon energy system

• As we decarbonise, the UK needs to reduce exposure to risks associated with any individual technology such as nuclear, carbon capture and storage (CCS), or wind

• This chart shows how a portfolio of low carbon technologies under a low carbon intensity target (50g/kWh) would hedge risk, rather than relying on any one particular technology

Source: 2012 Progress Report to Parliament, Committee on Climate Change 2012 (CCC calculations)

Government needs to guarantee value for money for taxpayers

• The CCC have compared a low carbon investment strategy to a strategy for investment in gas (see chart right)

• If gas prices hit the ‘central’ estimate, £23bn would be saved by 2045 if Britain instead adopted a low carbon investment strategy

• A low carbon intensity pathway (50g/kWh) for the power sector appears to be a ‘low regrets’ option based on cost

Source: 2012 Progress Report to Parliament, Committee on Climate Change 2012 (Redpoint modelling)

Government’s gas generation plan implies that a high carbon intensity pathway is being considered

• The Government’s recent Gas Generation Strategy examined a 200g pathway. This would allow combined cycle gas turbine (CCGT) generation to rise to 181 TWh by 2030 (see chart, below)

• DECC’s modelling is based on a 100gCO2/kWh pathway which would see CCGT generation peak in 2027 and fall back to 89 TWh

• Under the CCC’s preferred 50g/kWh pathway, CCGT generation would fall to 41 TWh by 2030

Source: DECC Gas Generation Strategy December 2012

A higher carbon intensity pathway (200g) would lead to more volatile energy prices

• DECC estimates that gas prices in 2030 will vary from 41p per therm to 103p per therm

• As the graph shows, the more gas means the more volatility

• With a higher 200g target, energy costs could vary by as much as £229 per household*

• At a lower 50g target, costs are only likely to vary by around £51 per household*

* Based on the projected number of households in 2030 and assuming industrial costs are passed onto consumers

50g - 41TWh

100g - 89TWh

200g - 181TWh

0 2000 4000 6000 8000 10000 12000 14000

103p/therm

72p/therm

41p/therm

£m

Source: IPPR analysis based on DECC Gas generation strategy annex B, Dec 2012

Wind is getting cheaper and gas is getting more expensive

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

0

20

40

60

80

100

120

140

160

Offshore wind Onshore wind

Unabated gas (CCGT)

Costs of wind and gas 2018 -2035 (£/MWh)• The CCC show that the

levelised cost of unabated gas is increasing as a result of rising fuel and carbon costs

• The cost of both offshore and onshore wind is falling

• Onshore wind becomes cheaper than gas in 2023

• Offshore wind becomes cheaper than gas in 2033 (central estimate) and possibly as soon as 2027 if costs come down faster.

Source: IPPR analysis based on CCC calculations, based on Mott MacDonald (2011) and Parsons Brinckerhoff (2011) in http://hmccc.s3.amazonaws.com/EMR%20letter%20-%20September%2012.pdf

Following a low carbon intensity pathway (50g) would save consumers money

• The government’s modelling is based on a 100g CO2/kWh central scenario

• Moving from 100g to 50g by 2030 would mean replacing 48 TWh of gas with low carbon fuel.

• We have modelled 24 TWh each of additional onshore wind and offshore wind

• This would save £163m with a ‘central’ gas price scenario and £249m with a ‘high’ gas price scenario

• Replacing offshore wind with nuclear to achieve a 50g/kWh target, could save more money according to CCC projections

Source: IPPR analysis based on CCC calculations NB These calculations compare the costs of gas against wind at the point of consumption and do not include wider systems costs

high gas price central gas price low gas price -

50

100

150

200

250

300

249.6

163.2

76.8

Replacing 48 TWh of gas with onshore and offshore wind (£m)

Following the gas generation pathway (200g) would put consumers in the red

• The government’s gas generation plan considers a 200g/kWh scenario

• Moving from 100g/kWh to 200g/kWh by 2030 would mean replacing onshore and offshore wind with an extra 92TWh of gas

• This would cost £312m with a ‘central’ gas price scenario and £478m with a ‘high’ gas price scenario

• This is the equivalent to £10 and almost £15 per household respectively

Source: IPPR analysis based on CCC calculationsNB These calculations compare the costs of gas against wind at the point of consumption and do not include wider systems costs

high gas price central gas price low gas price

-600

-500

-400

-300

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-100

0

-478.4

-312.8

-147.2

Replacing 92 TWh of onshore and offshore wind with gas (£m)

Summary

• The volatility of gas prices under a 200g CO2/kWh pathway is significantly higher than under a 50g CO2/kWh pathway

• If a 50g CO2/kWh pathway was adopted (for example, replacing gas with onshore and offshore wind), it would result in considerable savings for energy bill payers

• Conversely, a 200g CO2/kWh pathway with more gas would add costs for energy bill payers

• It would also require larger carbon savings to be made in other sectors (such as transport and heat) for Britain to stay on course. It is not clear if this is possible

Conclusions

• The government’s decision not to set a 50g CO2/kWh pathway in the Energy Bill (as recommended by the Committee on Climate Change) has created uncertainty about the government’s commitment to its legally binding carbon targets

• A 200g CO2/kWh pathway would not be compatible with the UK’s legally binding carbon targets and would require a ‘relaxation’ of targets

• To end this speculation, reassure investors, create the best conditions for jobs and growth in the energy sector, and put the UK on the most affordable pathway, the government should commit to a 50gCO2/kWh decarbonisation target for the power sector