Archive for the Energy markets Category

Energy 2020 Summit

Posted in Energy markets with tags , , on June 30, 2008 by Dan

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

Posted in Energy markets with tags , , , , , on June 17, 2008 by Dan

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?

Posted in Energy markets with tags , , , , on June 13, 2008 by Dan

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

Posted in Carbon markets, Energy markets with tags , , , , , , on May 7, 2008 by Dan

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

Posted in Climate policy, Energy markets with tags , , , on May 2, 2008 by Dan

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

Posted in Energy markets with tags , , , , on April 11, 2008 by Dan

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

Posted in Energy markets with tags , , , on March 7, 2008 by Dan

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.