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Risk Managing Power Sector Decarbonisation in the UK: Avoiding a new ‘dash for gas’
[16 October 2012] Analysis by E3G highlights the costs and risks of a gas-heavy power sector for the UK. The study is published as the Quad of senior Government Ministers prepare to meet on Wednesday to finalise the UK gas strategy and key elements of the forthcoming Energy Bill. The full briefing paper, full results pack and key figures are attached for download. A press release is available here. Summary E3G commissioned Redpoint Energy/Baringa Partners to carry out an analysis of alternative policy approaches to delivering power sector decarbonisation in the UK. The objective of the study was to understand the underlying risk landscape of different policy approaches to incentivising investment in the UK power sector, in order to identify means of effectively managing those risks to achieving key policy objectives. The modelling established and compared two baseline policy scenarios that reflect competing approaches to delivering power sector decarbonisation in line with the 50g/KWh intensity target proposed for 2030 by the Committee on Climate Change. The Technology Support Scenario continued subsidies for renewables, while the Carbon Price Scenario used a variable carbon price as the only driver for investment. Drawing on this analysis, this study suggests that: A policy approach that solely uses carbon prices to drive investment would tend to underestimate cost and policy delivery risks to delivering low-carbon investment in the UK power sector. Such an approach would lead to a gas-heavy decarbonisation pathway. The carbon price on its own is not an attractive instrument to drive investment in the UK: in some instances the carbon price would need to rise to very high levels of around €350 t/CO2 to attract the additional investment necessary to meet the decarbonisation objective. Furthermore, the decarbonisation objective is missed in some gas-heavy pathways, in particular when large scale deployment of carbon capture and storage technology (CCS) in the early 2020s fails to materialise. There are potentially larger risks to industry and consumers under a gas-heavy decarbonisation pathway. Under central assumptions, power sector costs in a gas-heavy pathway are lower, but there are higher cost and policy delivery risks. The analysis included scenarios where power sector costs increased by up to 98% by 2030 driven by very high carbon prices. Similarly, costs to consumers also tend to be more subject to asymmetric risks in a gas-heavy electricity system. The study modelled scenarios where wholesale costs more than doubled in more extreme cases. In comparison, where technology specific support to renewables continued, power sector costs were more predictable with a maximum increase of 8%. The analysis also showed large uncertainties as to the level of gas demand under a carbon price approach, raising questions of the level of investment required in gas infrastructure. The UK power system seems to be more vulnerable to overinvestment in gas than Germany and Poland. A combination of continued renewables deployment, a proactive strategy to secure large scale CCS and the rapid expansion of electrical efficiency help reduce delivery and cost risks. Delivering electrical efficiency is a key ‘risk reducer’ and can save consumers between £57 and 166bn between now and 2030. Our findings reaffirm the need for a broad approach to risk-managing the UK’s power sector decarbonisation. This approach needs to include the following elements: It is critical that policy is designed to deliver UK decarbonisation goals in an affordable and secure manner under all plausible futures. New forms of analysis are needed to explore the cost and price risks inherent in building large scale unabated gas capacity. Consistent and steady deployment of renewable technologies is a valuable asset to the system in risk managing cost and price volatility. Managing the risks of power sector decarbonisation in a cost-effective way would require a balanced package of measures which should include: Delivering electrical efficiency is key for reducing costs and risks, and can generate significant savings for consumers. The upcoming Demand Reduction consultation should set out clear options, such as Energy Efficiency Feed in Tariff arrangements, which can be integrated into the heart of the Electricity Market Reform legislation. Technology specific support will need to continue in order to maintain a steady deployment of renewables. Setting a clear power sector decarbonisation target for 2030 of around 50 g/KWh in the upcoming Energy Bill would provide a strong signal. More aggressive strategies are needed to deliver reliable large-scale deployment of gas CCS in the 2020s. The CCS Commercialisation Programme needs to bring forward CCS on both coal and gas and proactively develop clustered infrastructures for the transport and storage of CO2. The Energy Bill should also set out clearly how the proposed Emissions Performance Standard will be reviewed in future under the five-yearly operational planning process. Electricity market reform arrangements and the Gas Generation Strategy must ensure that market is investible for new gas generation for security of supply reasons (particularly if new nuclear is not forthcoming). Currently discussed policy options (e.g. capacity markets, 2045 grandfathering) would need to be compatible with proper management of risks.