A 20:20 Vision for Reducing Carbon Emissions from the UK Electricity Sector

Introduction

The recent UK Energy White Paper accepts the Royal Commission on Environmental Pollution (RCEP) recommendation that the UK should put itself on a path to reduce carbon dioxide (CO2) emissions by some 60% from current levels by 2050. However, in so doing it tacitly acknowledges that the existing short-term target to reduce CO2 emissions by 10% below current levels by 2010 will be missed and only a medium-term “aspiration” of a 20% cut from current levels by 2020 is proposed. As the White Paper points out “leaving action until the last minute is not a serious option” but, by its very nature, this longterm policy commitment stretching half a century into the future has made it virtually impossible to commit to any short- and mediumterm action plan. If technological and geopolitical change over the next half century is as rapid as in the last then any decisions made today, for example on capital investment, will have little bearing on the status of any part of the UK energy system by 2050 – including CO2 emissions.

The central importance of electricity

This paper examines what practical steps need to be taken in the short and medium term, within the constraints of currently existing technology and energy demand use patterns in the electricity sector, assuming that the White Paper aspiration of a 20% reduction in CO2 emissions by 2020 is transformed into a firm commitment. Electricity has been chosen to highlight the policy issues because low carbon generation is a central plank of the policy prescription set out in the White Paper and because it will dominate any policy decisions made on coal, natural gas, nuclear, and renewables because of their role as major generation fuels. For oil, which plays only a minor role as a generation fuel, the major debate will focus on transport and is therefore outside the scope of this paper.

The impact of existing electricity generation technologies on carbon emissions in the UK is clear, as the following extract from the Digest of UK Energy Statistics 2001 (Annex B) illustrates:
In 2000, the main sources of carbon dioxide emissions (on an Intergovernmental Panel on Climate Change basis) were power stations (28 per cent), industry (24 per cent), transport (22 per cent) and the domestic sector (15 per cent).

In 2000, 152 million tonnes of carbon are estimated to have been emitted as carbon dioxide from the UK. Between 1990 and 2000, emissions fell by 7½ per cent, despite a small increase in emissions between 1999 and 2000. This increase was due to the increased levels of coal consumption by power stations to make up for a shortfall during maintenance and repair at gas and nuclear stations. Towards the end of 2000, coal prices were lower than gas prices causing coal-fired generation to be chosen over gas. Carbon dioxide emissions are directly related to the type of fuel used, gas emitting fewer emissions per unit of fuel than coal.

If the White Paper is to be taken seriously, then the 20% reduction aspiration for 2020 must be converted to a hard target. This would immediately impose an eighteen-year time horizon which is too short to allow politicians and business leaders to realistically postpone difficult decisions in the hope that technological innovation will deliver a magic bullet to deal with the issue. Given this constraint, only existing electricity generation technologies that are either already or very nearly commercially viable, coupled with incentives to reduce the rate of electricity demand growth, need to be considered.

Reducing electricity consumption

Growth in electricity demand is driven by economic growth rates and over the period 1990–2000 the amount of electricity consumed in the UK increased at an annually compounded rate of 1.5% and at a faster rate of 2.5% per annum during the economic boom since 1995. The White Paper suggests that energy efficiency can contribute around half of the CO2 emission reductions required by 2020. However, it is very unlikely that commercial and business sectors will be able to make a significant contribution because of the potential impact on competitiveness. In practice, that means the burden of achieving the hoped for efficiency gains are likely to fall mainly on household consumers. In the electricity sector, households account for approximately one third of demand, so they would have to reduce their current demand by some 30% in order to produce an average fall of 10% in electricity demand across the entire economy. This might be technologically achievable if there were, for example, more widespread installation of energy efficient electrical appliances such as low energy light bulbs. However, the willingness of households to invest their own capital to reduce national electricity demand and hence global CO2 emissions is an open question. On an average household electricity bill of £238 per annum, installation of new domestic lighting, heating, and cooking appliances sufficient to deliver a 30% reduction in household electricity consumption would create an annual saving of just £71.40 per annum. The present value of a saving of this magnitude every year, discounted at a typical household mortgage rate of 5% yields a capital sum of £1428. This will not cover the capital cost of implementing a fully comprehensive electricity efficiency programme for an average UK home**. The economic disincentive to invest in electricity efficiency for most households is therefore already significant. Moreover, if electricity prices are static, and discount rates are 10% then the potential discounted electricity cost savings that consumers could make will be only £714 and hence will further reduce the incentive to make significant investment in reducing their electricity demand.

Reducing consumer demand growth therefore can only be realistically achieved by either raising the cost of electricity through a significant carbon tax on generation fuels, subsidising investment in energy efficient equipment to promote replacement of the existing capital stock, and/or prohibiting the sale of appliances that fail to reach minimum efficiency standards. Since energy taxes hit the poorest consumers hardest, because they spend a higher proportion of their income on basic services, and they are also the least likely group to have sufficient financial resources to invest in new appliances it seems that subsidisation, rather than taxation will have the least damaging social impact and result in higher take-up rates. Subsidisation of energy efficient equipment and setting of mandatory minimum efficiency standards are confirmed in the White Paper but no commitment is made to extend current home insulation subsidy schemes beyond 2005 let alone introduce new ones aimed specifically at electricity. More worryingly, a 30% increase in efficiency would only be sufficient to offset about half of the demand growth up to 2020, not to produce a real reduction in demand below current levels. A more significant reduction in demand growth might be achievable if efficiency gains could be extended to the service sector of the economy, where demand growth is particularly high, and combined with a one-off public sector investment in energy efficient street lighting. However, this would require a long-term commitment to energy efficiency subsidy schemes up to 2020 and covering the entire economy. Given the inevitable fiscal constraints on every government this seems unlikely.

A measure which might be achievable without subsidies, and which would be consistent with a more general household energy efficiency programme would be to reduce the amount of electricity lost as it is transported. Transmission and distribution system losses amount to around 9% of total UK electricity generated and if this could be reduced by half then it would offset a further quarter of the expected growth in consumer demand to 2010. The most obvious way for losses in transmission and distribution to be eliminated is by locating generation plant close to load. In this respect the increasing demand for electricity in the South East of England and generation by coal-fired plant in the Midlands and North of England, creates most of the losses on the high voltage system. Replacement of coal plant by new Combined Cycle Gas Turbine (CCGT) plant in the South East of would make a significant contribution. Regulated transmission connection charges are already used to act as an incentive to build new power stations in regions where generation capacity is in deficit. However, despite being in place for a decade these incentives have resulted in too little new capacity being built, especially around London, because of planning restrictions, the high cost of land, and the relatively high variable cost of transmitting natural gas compared with electricity. Under the BETTA arrangements locational transmission price signals are to be made stronger, and the regulator (Ofgem) is looking at ways of reducing transmission and distribution losses, but the White Paper contains no new proposals to provide incentives for the optimal location of new power stations in order to minimise losses.

Assuming that the necessary incentives could be put in place, it appears that demand growth could only realistically be reduced to a rate of 1% per annum over the period up to 2020. However, there does not seem to be any prospect of eliminating demand growth completely without a long lasting economic downturn or through the imposition of very high levels of carbon taxes whose main effect would be to force the rapid closure of most of the remaining manufacturing and heavy industrial base of the UK. The inevitable social and political consequences that this would entail make itan unlikely scenario. Any meaningful reduction in carbon emissions below current levels must therefore come from changing the mix of generation technology used to produce electricity.

Reducing carbon emissions per unit output

Since natural gas contains less carbon per unit energy than coal, a modern CCGT plant running optimally at full capacity in baseload mode can produce electricity at a 55% delivered thermal efficiency compared with a conventional coal or oil plant operating at 35% efficiency. A modern CCGT plant therefore only produces 40% of the CO2 that a conventional coal-fired power station produces, and 75% of that produced by a conventional oil-fired power station, for the same amount of electricity output. In 2000, UK power plants produced 28%, or 42.5 million MT-C of the total from coal-fired plants running at a delivered efficiency of 34%, oil-fired plants at 25%, and gas-fired plants at 42% (including CCGT and conventional plants running on natural gas).

Assuming that all conventional coal-fired, gas-fired, oil-fired, and nuclear power stations were replaced with new CCGT plant by 2020 the overall delivered thermal efficiency would rise to around 55% assuming advances in CCGT efficiency continued. If this were the case CCGT would be producing 97% of the electricity output of the UK, renewables would remain at the current 3% level and carbon dioxide emissions would fall by 24%. However, this reduction could only be gained if demand growth was constrained to zero. If efficiency gains on the demand side already discussed were only able to deliver a 1% compound annual growth rate over eighteen years all but 5% of the entire reduction in CO2 emissions that a switch to 97% CCGT generation output could deliver would be offset by demand growth. If demand growth were to continue at 1.5% then CO2 emissions would entirely displace the reduction delivered by a switch to CCGT and result in a net increase in CO2 emissions of 7% over current levels.

Within the constraints of existing technologies it therefore appears that the only way to achieve a 20% reduction in emissions from electricity generation would be to replace all current nuclear plant with renewable energy, replace all conventional fossil fuel generation with CCGT, and constrain demand growth to 1% per annum. In this case, the generation output mix would be 25:75 renewables:CCGT and would deliver a 40% reduction in carbon emissions, under a zero demand growth scenario, and a 22% reduction under a 1% per annum demand growth scenario. It therefore appears that there is a feasible mechanism for achieving a medium-term target reduction of 20% by 2020 although it is an open question whether the UK can ever build sufficient renewable energy capacity to reach a level of 25% of generation output or be able to manage the grid instability that a high level of inherently intermittent renewables penetration would create. Though CHP could in theory take the place of some of the renewable output, it suffers from inherent operational inflexibility, is not commercially viable at low electricity prices, and has had a low rate of take-up in the UK despite being a proven technology. It therefore seems unlikely it will take significant output share without the same level of incentives as are being proposed for renewables and should therefore be viewed as an alternative to renewables rather than an alternative to CCGT.

Achieving this outcome will not be easy, and would require significant investment backed up by an outright ban on the use of conventional fossil-fuel power plants after 2015, a massive increase in renewables obligations on electricity suppliers, and/or a punitive carbon tax that makes conventional generation technology so uncompetitive that it is consistently priced out of the market compared with CCGT at all but peak demand levels. Not only that, the tax would have to be sufficiently high to be able to encourage new investment in renewable and CCGT plant and ensure nuclear power remained viable in the medium term while the new capacity was being built. Unfortunately, even an aggressive investment programme aimed at replacing 65% of the existing UK generation capacity stock with renewables and CCGT would not guarantee success unless it was simultaneously implemented with a comprehensive energy efficiency programme aimed at cutting electricity demand growth by at least a third. The White Paper contains no measures capable of achieving either outcome.

*John is Senior Research Fellow at the Oxford Institute for Energy Studies (OIES), with primary responsibility for leading the electricity market research programme, and contactable at john.bower@oxfordenergy.org. The views expressed in this article are those of the author, and do not necessarily reflect those of OIES.

** Since there is relatively little use of electricity for space heating in UK homes, the capital cost of installing double-glazing and comprehensive insulation of cavity walls, roof space and hot water tanks is not included in these estimates. Any incremental investment in home insulation would tend to reduce natural gas and oil demand for space heating and is therefore outside the scope of the discussion in this paper on the electricity sector.

By: J. Bower

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