16 August 2010

Realities of UK Energy Policy

The UK Coalition government is facing some difficult choices on energy policy and efforts to decarbonize the nation's economy:
The coalition is watering down a commitment to tough new environmental emissions standards, raising the possibility of dirty coal-fired power stations such as Kingsnorth going ahead.

Green groups are aghast that a flagship policy called for in opposition by both Lib Dems and Tories, and which they last year tried to force on the Labour government, will now not be implemented in the coalition's first energy bill to be published this year.

Their criticism of the government's commitment to green issues follows news last week that nature reserves could be sold off as countryside protection measures also bear the brunt of budget cuts in the Department for Environment.

Introducing a so-called "environmental performance standard" (EPS) for power companies would have restricted greenhouse gas emissions from coal and gas plants and encouraged companies wishing to build to use more efficient technology.

The introduction of an EPS was personally championed by David Cameron, George Osborne and Nick Clegg when in opposition; their opposition to Kingsnorth became something of a cause célèbre – and even features in the coalition agreement – but was opposed by energy companies and Tory backbenchers.

The chief executive at one coal-plant operating company warned that the UK's renewable energy technology – which would be used to help new plants meet the target – was too undeveloped to make the EPS feasible.

Now government sources confirm they will not be bringing forward legislation in the autumn and will instead spend the summer working on "the larger picture". They will open a consultation on the idea in the autumn with the results being presented to parliament as a white paper in the new year.
To understand why the Coalition is appearing to slow down, one needs to understand the policy context of decisions about energy policy.  A new report out by Arthur D. Little, a consultancy, clearly and concisely spells out the practical realities facing UK policy makers.  The issue of decarbonization is not so much about rhetoric and good intentions, but about the facts on the ground related to technology, costs and implementation.

The report first explains the nature of the challenge:
The [UK Low Carbon Transition] Plan set out how the UK would reduce greenhouse gas emissions by 34% below 1990 levels by 2020. This is a step along the path to the much more ambitious target of an 80% reduction in greenhouse gas emissions across the entire economy by 2050. Central to the plan is increasing the proportion of electricity from renewable sources to around 30% by 2020, up from the current level of 6.2% in the first quarter of 2010.
These targets are to be met through a plethora of initiatives and incentives ranging from the Renewables Obligation and feed-in tariffs, respectively aimed at bringing large- and small-scale renewable generation onto the system, through to increasing the share of renewable fuels in the transport sector to over 5% from 2013. There is also a plan to install smart meters in all 26 million UK homes by 2020, which, together with feed-in tariffs, are expected inter alia to speed-up the installation of small-scale heat and power generation in households, and to facilitate the development of smart grids to allow better system management and enable wider distributed generation growth.

Consumers are also expected to make large greenhouse gas reductions by both significant changes in behaviour, enabled by smart meters, and further energy efficiency improvements within the home. At the same time, the Government apparently favours the widespread adoption of electric vehicles, which will add significantly to the amount of power generation capacity required, and for which significant investment in a battery charging infrastructure will be needed.
The report then explains the practical realities shaping efforts to reach the emissions reduction targets set forth in UK law:
All of these measures, combined with reductions from many other initiatives in a range of sectors, are designed to help reach the Government’s ambitious targets. But governments in general tend to over-estimate the level of take-up of different policy measures. The growth in large-scale renewable generation, for example, has not been anywhere near as fast as successive government estimates have predicted, and has focused heavily on one technology, namely wind generation. This slow take-up is likely to continue, at least in the near term, and each year that passes without significant construction makes it more and more difficult to reach the 2020 targets. Recent estimates are that 7,000 offshore turbines will need to be constructed between now and 2020, nearly two per day every day of this decade. Even investors in this activity doubt that such a level of activity is achievable.

The rollout of smart meters will also be a Herculean task, with over 2.5 million meters having to be installed every year, from a near standing start, by 2020 at the latest. There is currently not enough capacity to install this number of meters, nor is it clear exactly what these meters will look like because there is, as yet, no agreed standard. It is also worth noting that there are different degrees of “smartness” in meters. They can range from meters that display real-time energy usage, to meters that allow two-way communication, enabling price signals to be sent to consumers or remote signalling of appliances to turn off during periods of high demand and high prices. It is not clear which level of “smartness” will be installed, although Ofgem proposes two-way communication as a minimum.

Again, there is an implicit assumption by policy makers that a large shift in consumer behaviour will occur once smart meters are installed e.g. responding to price signals and turning off appliances at times of high demand. However, there is little evidence that this will occur to anywhere near the expected degree: pilot studies may not reflect the real world. If parallels can be drawn, they would be with consumer switching behaviour in the face of energy market liberalisation. The UK has one of the highest rates of consumer energy switching, yet in a July 2008 survey Ofgem found that 44% of electricity and 40% of gas customers had never switched supplier, and that a further 44% of electricity and 31% of gas consumers had only switched once. This is despite high-profile advertising campaigns by retailers setting out how much money consumers could save, and very simple processes for switching, facilitated by internet sites.
 The report explains that costs of all of these proposed actions are high and may not even deliver the promised emissions reductions.  The report argues that new wind power costs 6 times as much as equivalent gas-fired energy (or as much as 18 times more, depending on the methods used, capital costs only).  The report has this bottom line:
What is really needed now will be a bitter pill for many to swallow: a slow-down in the drive for low carbon solutions.
A slow-down in UK decarbonization policy with respect to the targets of the 2008 Climate Change Act is inevitable.  I do the math in this paper.  In that paper, written in early 2009, soon after the Act was passed as law, I wrote that the UK would need to achieve the 2006 carbon efficiency of France by no later than 2015 if it was going to be on track to meeting its short-term emissions reduction target (France was at 0.30 in 2006, compare with implied decarbonization of the UK economy shown in the figure from the paper below).  I concluded that:
The failure of the UK Climate Change Act is yet to be broadly recognized, but when it is, it will provide an opportunity to recast carbon policies in a more effective manner.
We may now be at a point where the inevitable failure of the Act is being recognized and discussed.  If so, then UK energy policy today stands at a critical juncture.

30 comments:

  1. wind is 6 to 18 times as expensive as gas? That's a higher multiple than I thought.

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  2. The UK political situation is thus:

    In order to deal with massive public sector deficit huge cuts in public services are being proposed by the Coalition.

    In order to minimise the impact of those cuts the Coalition has to grow the economy as quickly as possible in a sustained way.

    Failure to grow the economy will lead to political, social and economic instability. The Coalition will either disintegrate or will be ousted as a consequence of failure.

    The UK economy needs cheap and reliable sources of energy to grow fast. The UK Climate Change Act will be the first policy casualty. It will be dumped.

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  3. Excerpt from the report on wind vs. gas:

    "The high cost of wind power compared to gas-fired generation plant can easily be demonstrated using public data. For instance, Centrica, a major investor in both wind- and gas-fired generation, has published figures for its recently completed 885 MW Langage plant, which cost around £400 million2, or £450/kW, and for its 270 MW Lincs wind power project, which is estimated to cost £750 million3 or £2,800/kW. In this example, the unit capital cost of the wind power project is over six times that of the gas-fired project. The figures look even worse when calculated on an effective capacity basis. A CCGT (Combined Cycle Gas Turbine) would expect to be available to generate over 90% of the time, increasing its cost of effective capacity to £500/kW. A wind plant, by contrast, might expect to be available to generate (at best) 30% of the time, lifting its cost of effective capacity to £9,300/kW, over 18 times the cost of a CCGT. These figures obviously do not address the greenhouse gas impact, nor do they account for the cost of fuel, but they do highlight the scale of the cost differences that exist."

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  4. Having read the report section on wind, I misunderstood what you wrote, and think it is misleading (the six and eighteen times) as they leave out the cost of fuel:

    ADL say: 'In this example, the unit capital cost of the wind power project is over six times that of the gas-fired project. The figures look even worse when calculated on an effective capacity basis. A CCGT (Combined Cycle Gas Turbine) would expect to be available to generate over 90% of the time, increasing its cost of effective capacity to £500/kW. A wind plant, by contrast, might expect to be available to generate (at best) 30% of the time, lifting its cost of effective capacity to £9,300/kW, over 18 times the cost of a CCGT. These figures obviously do not address the greenhouse gas impact, nor do they account for the cost of fuel, but they do highlight the scale of the cost differences that exist.'

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  5. Roger:
    It is great that someone has put all the details together and has done the needed calculations. However, is it not a fact that any back of the envelop calculation would have led to the same conclusion. If so, how did the UK end up with such an unrealistic set of targets and implementation plans? Isn't this a key question?

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  6. And that's neglecting that gas turbines generate electricity at twice the cost per kWh as coal!

    At $14,000/kW, and a generous market price for electricity of $0.1/kWh, it will take 140,000 hours or 16 years for the wind turbine to pay for the cost of its own construction, and that's making the unrealistic assumption of zero operating costs. I don't know what fraction of the costs of a wind turbine end up in carbon dioxide-generating processes (smelting aluminum, fabricating parts, transporting materials and workers, etc.), but I suspect it's quite large. The 'cleanness' of wind energy is largely chimeral.

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  7. Roddy, you make a fair point but you focus on only one additional cost element. What we know is the capital costs. Life-cycle costs and operational costs are needed for apples to apples comparison. I am sure these have been estimated using existing data and I would be interested in seeing a detailed cost comparison. Does anyone have a reliable reference?
    I would also add that judging from our local wind turbine in windy Newburyport, 30% is on the high side - but this has motivated me to make a few calls.

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  8. "The report explains that costs of all of these proposed actions are high and may not even deliver the promised emissions reductions. The report argues that new wind power costs 6 times as much as equivalent gas-fired energy (or as much as 18 times more, depending on the methods used, capital costs only)."

    Good night Willy! This is what happens when the wind industry rent seekers can't provide a cost effective and reliable alternative to proven fossil fuel technologies. Politicians are very good at recognizing the trendy fashion of the moment and coming up with high cost alternatives favored by powerful constituencies.

    It is nice to see the scam running into trouble. The Spanish leadership on this issue is to be applauded.

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  9. "If so, how did the UK end up with such an unrealistic set of targets and implementation plans? Isn't this a key question?"

    That answer is simple. The targets were the result of a political process and were politically acceptable. Any result that comes out of a political process is first and foremost politically acceptable, otherwise there would be a different result. Reality plays a limiting but secondary role.

    When setting targets that are a decade or more in the future this is particularly true as facing reality can be avoided until well after the next election.

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  10. There is plenty material around on the costs (econonic and co2) of different energy technologies.

    The AR4 has a chapter http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter4.pdf
    Figs 4.19, 4.27, 4.28, Table 4.7, and lots others

    And there is a recent review
    http://www.mdpi.com/1996-1073/3/3/462/

    I think the pay-back time of the latest wind turbines is of the order months, not decades as stated above.

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  11. bernie said... 7

    "If so, how did the UK end up with such an unrealistic set of targets and implementation plans? Isn't this a key question?"

    IMHO It is pretty much standard operating procedure in politics to attempt magical solutions even though the outcome is pretty much predetermined.

    I.E. The Neville Chamberlain approach has to tried before the Winston Churchill approach can be considered.

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  12. @Glen

    There seems to be a major discrepancy between the AR4 estimate of capital cost of wind power construction ($3333 - $6666 /kW @ 30% capacity) and the current report's $14580 /kW. But in any case, if we take the AR4 mid-range estimate of $5,000 /kW at 30% capacity, and a very generous energy price to supplier of $0.10/kWh, the number of hours to pay-off is 5000/.1 = 50000 or almost 6 years. You understand I'm being very generous here. The price of electricity delivered to industrial customers here in Nebraska (which is still much greater than would be the return to a wind power supplier) is currently less than 6 cents per kWh.

    Under real life conditions, factoring in the cost of raising capital, transmission losses, etc., it looks to me that wind power capacity will actually never pay itself off, but would in fact be a money sink.

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  13. "If so, how did the UK end up with such an unrealistic set of targets and implementation plans? Isn't this a key question?"

    It wasn't that long ago that the Guardian and BBC were telling us that we were all going to die, every single day.

    It was incumbent on the world's premier banking nation to follow a near suicidal trajectory of escape from that disaster. A fictional path to support a fictional problem, that involved the transfer of trillions of dollars from consumers to big business, principally the banking sector by means of carbon trading.

    The instigator of the policy, little Tony Blair is now earning millions of dollars a year promoting global warming for banks like JP Morgan Chase.

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  14. bernie... 7

    Those who refuse to do a little of the most simple arithmetic are doomed to talk nonsense. And apparently to make the most stupid climate / energy policies.

    The climate / energy policies of the USA have provided an unlimited number of proofs of the first sentence above. :: QED

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  15. @Gerald

    You may be right on the capital costs, although I got the impression from the reports that wind and gas were comparable normalized to kWh. I don't pretend to be an expert on this, just pointing to some references.

    I was thinking of the energy payback which is the order of months (the time to "pay back" the emissions from producing the various bits and pieces).

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  16. I suspect the reason for the change in direction is the abject failure of Copenhagen and the American climate bill.

    I can't see how the EU can disadvantage itself by going it alone, plus the system has been shown to be corrupt several times. Carbon trading could have been designed by the mafia, it is so open to criminality. It was of course created by corporate death star, Enron.

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  17. Glen,

    I suspect the payback time you are thinking of includes substantial subsidies.

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  18. The quoted study indicates that the British smart meters are likely to contain the capacity for two way communication to send price signals to consumers and to turn off appliances in times of high demand and high prices. This may be an effective way of reducing peak demand but I find it hard to understand how this will affect CO2 emissions.

    Is it not the peak demand that affects CO2 emission but the base load. An effective strategy would to be to have people sue lower wattage bulbs routinely rather than turn off some lights at peak demand. The peak demand control is like using brown-outs to control peak load. I do not see how it can effect CO2 emissions significantly.

    In Ontario, the introduction of smart meters lead to an increase in the price of off peak electricity. Peak load prices stayed about the same. The increase in the base price of electricity is the strategy. It will encourage more efficient lighting etc. The smart meters are just a smoke screen to let consumers think that they are in some sort of control.

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  19. The folly of choosing CO2 over responsible environmental policies will always result in this sort of choice being made.

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  20. Another data point regarding costs of wind power.

    http://www.capegazette.com/storiescurrent/201006-1-15/15001-ud-wind.html

    $5 million for 2 MW. That's $2500/KW, or ~$8300/KW at 30% utilization.

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  21. I have been troubled when trying to make sense of governments setting completely unrealistic objectives. If the planners don’t know the targets they set are unrealistic, aren't they naïve or incompetent? If they know the targets are unrealistic and don’t tell the public, aren’t they behaving unethically? If a US publicly traded company published similarly unrealistic financial projections, the SEC and the firm’s auditors would be all over them for making misleading statements.

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  22. "If so, how did the UK end up with such an unrealistic set of targets and implementation plans? Isn't this a key question?"

    erm.. maybe its because Mr's Cameron has allegedly recently joined the board of a wind generating company and her father has allegedly applied for a wind generator on his estates..

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  23. This is high school stuff.

    You sight one report, with an anecdotal assessment of the capital cost of two technologies.

    And then you don't assess any other method of comparison, i.e. delivered cost of power, just as important, if not more so.

    I expected a more sophisticated level of analysis...

    I'd recommend checking out some Goldman Sachs material on renewable energy, i.e. the men with the money.

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  24. Carbon Rich could himself, of course, have given us an actual comparison of the delivered cost of power.

    But it's also highly unfavorable to wind energy.

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  25. Carbon Rich:
    I checked Goldman Sachs' web site. I could see nothing that laid out comparative full costs of alternative power generation technologies. Do you have a specific reference in mind?
    At the same time I did see a quote about manipulating demand for renewable energy as a means of creating the equivalent of Moore's Law for renewable technologies. In mature markets, this is not a good sign.

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  26. -25-Carbon Rich

    The ADL report and UK actions are important not because they offer (yet another) theoretical analysis of the costs of various technologies. They are important because they reflect on-the-ground actions.

    Given the state of the UK government budget, economy and energy security, I am certain that low-cost and secure energy technologies will be preferred regardless of what those technologies are -- wind, nuclear, coal, solar, whatever.

    Thus, the actual decisions being made tell us something about how policy makers see costs and security of supply -- in the real world. Perhaps they have erred in their judgments -- however, I am pretty sure that you won't counter their experiences with abstract analyses.

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  27. The emphasis countries place on wind power to provide low carbon electrical power demonstrates the gross stupidity inherent in the majority of global warming policies. The capacity value of wind is so low (10% at high penetration) that such a policy is patently unsustainable economically. The policy is followed not because it makes sense, but because global warming policy is about appeasing environmental concerns.

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  28. arbon Rich said... 25

    "This is high school stuff."

    Correct, comparing the cost of a good that provides time utility to the cost of a good that doesn't provide time utility is a false comparison.

    Bonneville Power Administration 7 day rolling wind generation statistics.
    http://www.transmission.bpa.gov/Business/Operations/Wind/baltwg.txt

    The wind doesn't blow when it's is abnormally hot or abnormally cold. Wind provides no time utility. The coal, natural gas etc plants have to be built anyway in order to provide 'time utility'.

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