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Risk Managing Power Sector Decarbonisation

The role of gas in the UK, Germany and Poland

It is important to identify the risks of different policy approaches when it comes to incentivising investment in the power sector. The debate is often polarising, and leads to irreconcilable opinions on gas prices, the potential impact of shale gas extraction, technology costs and deployment rates, as well as levels of electrification in other sectors. This is the wrong debate and will lead to the wrong outcome if it is resolved by governments picking a single view of the future and optimising policy around this.This requires a new and more neutral approach to looking into the economics underpinning short term versus long term choices and the associated risks.

From this perspective, E3G commissioned Redpoint Energy/Baringa Partners to carry out an analysis based on their agent-based investment decision model. The objective of the analysis was to provide a more robust understanding of the costs of different decarbonisation pathways under a number of major uncertainties, such as level of CCS deployment and gas prices within the 2030 timeframe in major European countries, including UK, Germany and Poland.

Key conclusions from cross-cutting country analysis are as follows:

  • The policy delivery risks and costs differ markedly between countries, largely due to different levels of ambition in decarbonising power sector, and different capital stock and retirement plans.
  • Optimal carbon prices to drive investment are country specific and very vulnerable to structural risks. Even with a strong carbon price, additional instruments will be needed at national level to deliver investment and energy security.
  • Price and policy delivery risks can be managed. Steady build out of renewables across the EU emerges as a useful risk management tool for all countries. The biggest value to the EU consumer would come from building effective demand reduction and demand response markets across Europe.
  • Gas plays a different role in power sector decarbonisation in different countries. Compared with Poland and Germany’s currently coal-heavy electricity system, UK faces higher risk of overinvesting in a gas-heavy electricity system. 

The briefing papers and full results packs of country case studies are available for download in English, German and Polish in the library.