Energy 2020: Resource availability

Sir Ben Gill, Hawkhills Consultancy. Where is the resource going to come from? 3 places:

1. Virgin materials – there is an enormous untapped resource from forests. The most wooded area of the UK is the south-east, and these woods could provide woodchips for biomass plants. Energy crops still have high potential – for biomass energy and transport biofuels. Virgin materials also could be used much more extensively in construction and manufacturing.
2. Non-virgin materials – many things thought of as waste are useful resources. Up to 10m tonnes of timber are being put into landfill each year – this could easily be turned into energy. Energy from manure and the organic elements of packaging and other types of waste can be extracted through combustion, digestion etc. Food from wasteful processing, homes and supermarkets has a lot of embedded energy.
3. Other renewable sources – waves, tidal power, rivers etc. are abundant in the UK.

Energy 2020: Major infrastructure

Stephen Balint, RES. The UK has good natural resources and could even exceed the 2020 target, but revision of the UK’s infrastructure is a prerequisite.

The planning process must be driven by the renewable energy strategy. Many applications have been stuck for 6-7 year. Public buy-in is critical to making these plans work and is key to planning decisions.

The National Grid is not delivering for new renewable generation – there is a long queue for connection.

The price-cap regulation for energy is stifling investment. Ofgem needs to prioritise sustainability. These changes will affect consumers – but in the long term, the switch to renewable energy will reduce consumers’ exposure to volatile energy markets.

The 2020 targets are only a milestone and plans must look beyond this (other speakers echo this).

Energy 2020: Decentralised energy

Benet Northcote, Greenpeace. The energy system we have today is incredibly wasteful, because energy is generated a long way from where it is used. That means that a huge amounts of heat is lost from power stations. Some electricity is lost in transmission and a large quantity is wasted in the home. People are not aware of how much energy they are wasting.

It’s the heat being wasted at the point of generation that we need to look at. The vision for 2020 – where microgenerators are on every home and CHP plants are used everywhere – is within our reach. We just need the will!

Energy 2020: Transport

Brian Robinson, IMechE. (Note energy use by transport is included in the 15% target.) The main contribution that transport can make is through demand reduction. The government’s focus should be on the road vehicle fleet – the fuel consumption hasn’t gone down since the mid 90’s (“a national disgrace”). There is also a role for demand reduction in freight.

Investment is required for a modal shift, especially in freight. We could be using boats to transport goods round the country to much better effect, for example. These networks don’t exist so investment is required.

Biofuels are also an important area of development. Growth will be driven in part by the long term price of oil. They have been unfairly demonised – some are sustainable and they have an important role to play. 10% biofuels in transport is attainable.

Consumers must demand efficient cars – manufacturers will move fast to block legislation but even faster to meet their customers’ wishes.

Energy 2020: Central and local government

Andrew Cooper, REA. Local government is a big sector with a lot of potential for better energy management, but there are a range of barriers to it delivering energy efficiency. Councils are quite siloed and the departments often don’t feel they have control over the energy they use. Many large councils will be under the Carbon Reduction Commitment, but they have a poor understanding of what carbon is and their exposure to the mechanisms. The way investment decisions are made often only take account of the revenue impact of the project and exclude the environmental impacts. They’re limited by funding constraints (especially districts). Building control is not well enforced (perhaps the fault of building regulations rather than councils). There’s a lack of knowledge, skills and political will.

So with all that doom and gloom, what can they do?

A whole range of things, from free cavity insulation (Kirklees) to CHP (Southampton). There is a big overall potential – local authorities have a huge estate and broad channels to communicate with local communities, but they need direction from central government.

Energy 2020 – Bulk Energy Production

Gaynor Hartnell, REA. Bulk energy is unique in that is has been considered (at least the electricity side – less the heat side) in detail and we know the issues. The big issue is obvious: we have large, electricity only plants rather than heat and power plants integrated with the build environment.

Key issues for renewables are:

• Getting quick access to the National Grid – renewable generators must be connected when they need to be connected
• Getting planning permission – Merton (a required to include microgeneration with new developments) is a good development but much more is required
• Getting the right incentives in place. The Renewables Obligation should be seen as a temporary thing – the end game is for the economy to deliver clean energy

Energy 2020: National Action Plan

Ian Arbon, Engineered Solutions. Energy 2020 is a vision for how the UK can meet its commitment to supply 15% of all energy (heat, transport and electricity) from renewable sources by 2020. That’s a big jump – currently less that 2% of energy is supplied from renewable sources, a figure that is not growing at any great pace. We are well behind the rest of Europe in implementation.

BERR’s UK Renewable Energy Strategy Consultation is called a “good strategy but difficult to implement”. The worst outcome would be for the strategy to remain “just words”, and the Energy 2020 Manifesto will go a long way to meeting it.

The Manifesto follows the energy hierarchy – conservation is most important, followed by efficiency and then generation. If followed, Ian believes the UK can exceed its European renewables target.
The Action Plan is available from today on the RSA website (pdf) for review and comment.

Energy 2020 Summit

Last year industries and NGOs met at the first Energy 2020 Summit to work out what they had to do and what policies they should suggest the government put in place. They determined to produce a Manifesto, which was published earlier this month, for reaching the government’s target of 15% renewable energy by 2020.

The following posts will summarise some of the main points from today’s summit as they’re said.

Policy Exchange on CCS

Policy Exchange has published a report arguing that carbon capture and storage (CCS) is essential to meeting our emission reduction targets. The report explores various ways that the government could support CCS.

If there is a strategic case for CCS the mechanism that I believe to make most sense is:

5. Government underwrites the EU-ETS minimum base price.
This involves a risk for Government, to provide baseline funds of €30 to 60/ton CO2 if the EU-ETS market remains low. It is not clear how the Government recoups its money, except by waiting to sell EU-A at a high price some years later, or by cross-subsidy from the new Phase 3 Auction revenue.

I would argue that the base price be set by auction. The CCS developer that offers the lowest base price would be given by Ofgem the difference between that price and the EUA price for each tonne of CO2 it avoids. This approach is economically similar to the feed-in tariff that Policy Exchange favours but is more likely to determine an appropriate subsidy. Unlike Policy Exchange’s other preferred option – allocating one or two free EUAs to plants for each tonne of CO2 they capture – it maintains the environmental integrity of the EU ETS (see this post for more on multiple EUA allocation).

The government would risk depressing the EUA price by subsidising CCS and thereby inflating the subsidy it would pay for further CCS generation – but this cost would also be borne in the feed-in tariff model. The reduction in the EUA price would filter through to the wholesale energy market, making the feed-in tariff represent a larger subsidy.

The real question is whether there is a strategic case for CCS. New CCS will not create net emission reductions in the short term (unless CCS remains unrecognised in Phase 3 of the EU ETS), so it should only be supported if it is considered integral to decarbonisation in the long term. As Policy Exchange points out, it looks like we will be dependent on coal for decades to come. Perhaps our resources should be concentrated on reducing our dependence.

Renewables – what incentive is there to build back-up capacity?

E.ON is arguing that Britain will need lots of fossil fuels for a long time in the future, even if we hit our 15 per cent renewable energy generation by 2020 target (which will mean 30 – 40 per cent renewable electricity generation). Gas is a particularly good partner for renewables because it can be switched on and off quickly and balance out the volatility of renewable generation.

E.ON has a fair question about this: what incentive is there to build back-up capacity?

“If we are to meet the European target, we need to back that up with fossil fuel generation that can be turned on quickly when the wind does not blow,” explained a spokesman for the company. “But the issue is who pays for that. If we spend half a billion pounds on a gas-fired power station that is not turned on very often, we need to look seriously at how that investment is rewarded.”

Renewables generally have low marginal generation costs, so fossil fuels will lose when there is lots of electricity being generated by the new wind farms (assuming they ever get built).

Carbon capture and storage needs a kick start, but not through double crediting

Chris Davies, a Lib Dem MEP, is pushing the EC to adopt a directive that would require all coal power plants built from now on to have carbon capture and storage by 2030.

He recognises that the market alone will not deliver CCS and public support will be required. The EU budget is locked down to 2013 and he thinks member states are unlikely to pay.

He supports a “double credit system” within the EU ETS. This means that each tonne of captured carbon dioxide is not counted as an emission and the power plant is allocated an additional allowance (or even two). The allowance has a market value and can be sold or used by another of the company’s power plants.

This type of intervention might make sense if there were fears of non-compliance and unenforceability in Phase 2 of the EU ETS, but there are not. If double crediting is sufficient to get CCS off the ground, it will cause a net increase in emissions and a reduction in the allowance price as the additional allowances are sold or used.

Other types of public support (such as a direct subsidy) for CCS would be likely to reduce the allowance price too, but they wouldn’t increase emissions – rather they would move reductions into coal from other sectors.

Coal generation accounts for an estimated 24% of European greenhouse gas emissions. This proportion will increase over the next 20 years. A successful double-credit scheme could more than wipe out the reductions that will be made in the EU ETS.

Feed-in tariffs defeated: not such a bad thing

The government got a bit of kicking on Wednesday night when 33 Labour MPs voted for feed-in tariffs to be included in the Energy Bill. The government did not want the amendment, and in the end, it got its way and feed-in tariffs were left out.

The amendment would have required energy suppliers to buy renewable electricity from homeowners and businesses at fixed, long term premium prices. The UK’s level of renewable generation is miserably low and many think (e.g. FoE – pdf) that a FIT is essential if the UK is to stand any chance of meeting its EU target of 15% renewable energy generation by 2020 (the proposed directive is at this pdf and is supported by the UK).

There is not much doubt that a FIT would increase microgeneration. But is it a good way to reduce emissions? Questions that need answering include: how will the new capacity work with core electricity supply? What are the capital emissions associated with manufacture and installation? What is the likely cost to energy consumers per tonne of GHGs avoided?

Because FITs are an intervention based on a type of solution (small scale renewables) rather than outcomes (lower emissions), questions like this must be addressed.

Windfall profits to power generators do not mean that the Emission Trading Scheme is not working

The WWF and Point Carbon published a report (pdf) earlier this week estimating that power generators in Germany, the UK, Spain, Italy, and Poland will make a windfall profit between 23 and 71 billion Euros in Phase 2 of the EU ETS.

The windfall is made when power generators pass the market value of freely allocated allowances onto their customers. They do this because the allowances have an opportunity cost: once the allowances have been allocated, one option open to the power companies is to shut down or scale back their trading and sell the surplus. Customers must pay the generators the value of the credits to persuade them not to do so.

Point Carbon is probably right about the windfall – the calculations look as good as any – and WWF is right to feel that the windfall is unmerited. Environmental Capital calls it a “cautionary tale about how not to fight climate change” and that it “undermines the fight to curb emissions”.

Actually, the windfall problem does not damage the environmental integrity of Phase 2 – the cap remains the same. The problem is around who the cost imposed on carbon ends up with. The government is probably the best we can hope for, which is where the money will go when allowances are auctioned.

One way out of the windfall profit problem while credits are still freely allocated would be to impose a fine on companies that reduce their trading activities. The fine would be based on an estimate of the market value of EUAs that would have been required to cover the reduced trading.

Green tariffs under fire … again

A clamber of quangoey energy/green groups – Energy Watch, the National Consumer Council, the Renewable Energy Association and the Energy Saving Trust – have written to Defra to suggest that electricity suppliers be required to provide information on the fuel mix used in each of their customers’ tariff. Their issue is that green tariffs are not transparent.

The real issue with green tariffs is that most suppliers allocate, or ‘match’, their renewable generators with green tariff customers. Because the suppliers purchase or generate a proportion of their electricity from renewables regardless of the tariffs their customers are on, they are able undertake this ‘matching’ exercise without building any new renewable capacity.

Mandatory disclosure of individual fuel mixes would not address this issue (and in fact wouldn’t really make much sense, given that electricity is delivered through a shared grid). Disclosure for the supplier as a whole would, and it would also make green tariffs unworkable. This might not be a bad option. A better option still would be to regulate green tariffs (or clearly accredit them, if regulation is not feasible) so that they must deliver extra investment in new generators.

Energy suppliers provide energy, not social security. Let’s keep it that way.

The government has been acting threateningly toward the energy suppliers over the past few days. Unless they donate more to consumers in fuel poverty (a household is in ‘fuel poverty’ when it spends more than 10% of its income on energy), the suppliers may face a windfall tax.

There is a feeling that the suppliers have been swindling customers by holding retail prices high while wholesale prices are low. It is possible that some of the recent bumper profits were generated at certain points in 2007 where the wholesale price dropped ahead of the retail price. This is normal – retail energy prices lag wholesale prices, so when the wholesale price drops suppliers profit; when it rises they lose out. As a trend, wholesale prices over the past 12 months have been rising and are almost certain to continue doing so during 2008.

Equity markets understand these ups and downs and the capitalisation of listed suppliers was indifferent to the high profits. The only real windfall the suppliers made over the past year was passing the market price of freely allocated EUAs on to their customers.

The government is using a temporary profitable situation to hold energy suppliers responsible for increasing fuel poverty – which is of course driven by rising wholesale prices. Demanding that suppliers address a social security issue will lead to a poorly designed cross-subsidy from wealthier customers, who would fund the fuel poverty contributions through their bills.

What is strange is that the suppliers’ response is that they need their windfall to invest in clean generation technology – tacitly accepting that they have made an unreasonable profit. Perhaps they feel this message play well with the public. Or perhaps they are trying to keep the debate focused on the relative directions of retail and wholesale prices, rather than that tricky EUA question.

Feed-in tariffs: a regressive tax?

Following the targets for renewable energy included in the recent Climate Change and Energy package, there has been debate about the role feed-in tariffs might play in the UK. Most environmentalists support a feed-in tariff, citing evidence from Europe that such schemes have increased renewable capacity. The government is going to investigate this summer.

Under a feed-in tariff, energy suppliers are obliged to buy surplus electricity from owners of small-scale generators at a premium fixed by the government, and share the marginal cost among their customers. This makes installing microgenerators on homes more attractive.

There are two issues with feed-in tariffs:

1. It tends to be wealthier people that install microgenerators on their homes – partly because they have the available capital (a feed-in tariff would not reduce the capital investment required to install a solar panel or wind turbine – it would reduce the time over it pays back) and partly because they are more likely to be the kind of people who worry about the environment. A feed-in tariff as outlined above is a regressive tool because the overall effect is that poor consumers subsidise wealthy ones.
2. Feed-in tariffs encourage microgeneration – not lower greenhouse gas emissions per se. Any intervention that is directed at a type of solution rather an outcome leads to inefficient and sometime counterproductive behaviour. It may be that the money could be better spent on large scale renewables or energy efficiency.

If private homes are a good site for small scale renewable generators, perhaps there is scope for the energy suppliers to make deals with homeowners. Suppliers could install, own and maintain generators on homes, and in return the homeowner would get cheaper energy. As owners of the generators, suppliers would be incentivised under the existing Renewables Obligation.

Stopgap legislation required to prevent energy generators holding consumers to ransom

Newpapers today reported a calculation by Ofgem that credits distributed free to energy generators in the second round of the EU ETS will net them £9bn. The Association of Electricity Producer’s denial did not actually deny it. Ofgem apparently then proposed that the Treasury levy some sort of windfall tax and redistribute it to poor consumers who have been hit by rising energy prices (which are mainly driven by wholesale energy prices, not the EU ETS).

But why should free distribution of the credits yield a windfall? The free credits do have a market value, but the generators cannot sell them because they need them to cover their own emissions. There is a highly inefficient reason behind the windfall: consumers have to bribe generators not to shut down. Once generators have been given credits, one option is to shut down and sell them. Consumers must therefore pay the generators the price of the electricity plus the price of the credits to persuade them not to do so. The credits need not be sold. Ofgem estimates that 17 per cent of retail electricity prices and 13 per cent of retail gas prices is accounted for by this cost.

From 2012, more credits will be auctioned. That will not reduce retail energy prices, but it will put the price of credits in the government’s pocket rather than the generators’. In the meantime, stopgap legislation should be passed to allow the government to repossess credits or fine an EU ETS installation if it scales down or ceases trading. Competition should then push retail prices back down so that they do not include the market value of freely distributed credits.

ASA’s ruling on Npower’s Wembley ad questions all green electricity packages

The Advertising Standards Authority today upheld a complaint about an Npower advert. The ad claimed that Npower, Wembley’s electricity supplier, “powers the arch and stadium with renewable energy”. This was considered confusing by the watchdog because what Npower (and every other supplier with a green product) really does is ‘match’ the stadium’s electricity with renewable power supplied to the grid. As Wembley is connected to the grid, it is impossible to control the source of the energy that the stadium actually uses.

RWE Npower must have been surprised by the ruling, because it has been supplying retail customers on Juice, its green electricity package, on exactly this basis for six years.

The reason that many green electricity products, including Juice, are confusing is not that they match energy through the grid, but that they do not lead to any additional investment in renewables. Npower already purchases sufficient renewable electricity under its Renewables Obligation to match the electricity used by Wembley.

The ASA’s decision questions the concept of matching different types of generator with end users and pricing their energy accordingly. And – short of a huge expansion in local generation – suppliers do not have any other option for harnessing consumer demand for green electricity.

Two reasons why you might not want to switch to a green electricity supplier

Miles Brignall castigated us in Guardian over the weekend for not switching to green electricity, pointing out that electricity generation is the single biggest source of greenhouse gases yet only 350,000 homes (1.3%) are on a green tariff. There are two reasons why a rational consumer might decide not to switch at the present time:

1. It is an expensive way to reduce emissions. In Balance calculates the average cost to consumers of avoiding one metric ton of greenhouse gas emissions by switching to a green electricity supplier to be £32. This is quite high. As a crude comparison, Climate Care sells offsets for £7.50 per ton. Most of the things you can do to improve your home’s energy efficiency will cover their costs very quickly.
2. It might not do anything anyway. Although there are only 1.3% of households on green tariffs, 4.6% of electricity generated in the UK comes from renewable sources. Some of the difference is sold to customers on standard tariffs (with the rest being sold to businesses). In many cases, when you switch to a green tariff, the retailer simply repackages the mix of electricity that it already generates or purchases on the wholesale market. Generation, and hence greenhouse gas emission, is not affected at all.

In Balance talked to some of the main suppliers on the second point. EDF Energy, which supplies over five million households, told In Balance that “renewable supply offerings have only a modest impact on overall new renewable capacity. The main driver for new renewable capacity is the Renewable Obligation which places an obligation on electricity suppliers to purchase a growing percentage share of renewable electricity or pay a buy out price.”

Scottish Power, with a retail base of around 3.5 million households, said that “when a customer signs up to Green Energy H20 [Scottish Power’s most popular green tariff], we align the electricity that they consume with renewable power that we are already generating”.

(Note – the Renewables Obligation currently requires suppliers to source 7.9% of electricity that their customers use from renewable generators or pay a fine of £34.30 per megawatt hour to Ofgem, which is redistributed to suppliers according to the volume of renewable electricity that each supplied. The gap between the obligation and the proportion that is actually generated, which grows every year, demonstrates that suppliers often prefer to pay the fine than invest in new renewable capacity.)

Consumers should think carefully about where their money is going when they decide to switch suppliers. Many new green tariffs spend a proportion of the premium on offsets or a fund that is invested in renewable projects. It would be prudent to decide for ourselves how this money is spent, rather than handing it over to the utilities.

Green tariffs lack transparency. Switch anyway.

Switching to green electricity is a complex decision. You probably get all of your power from the national grid, which makes your electricity exactly the same as everyone else’s. So how can your electricity be greener?

There are two types of company involved: suppliers and generators. Generators own the power stations, wind farms and other plant that provide