CAMERON HEPBURN UK Energy System and Policy Overview* UK Energy Policy Day 31 May 2013 Grantham Research Institute New College *With thanks to Ben Merle and Gavin Kader for Research Assistance Agenda 1. UK energy policy objectives 2. UK energy system: results so far 3. Challenges ahead 2 What is the point of an energy system? What objectives should energy policy achieve? 1. Security • • • 2. Costs • • 3. Electricity: Do the lights stay on? Gas: Can we survive extended cold winters? Petroleum: Are there queues at the petrol pumps? Does the energy sector support industrial competiveness? Are energy prices affordable, especially for poorer people? Clean Environment • • Does the energy system minimise local pollution and health impacts? Does it minimise climate impacts? 3 The objectives of UK energy policy have shifted notably over time (see Helm and others) 4 Since the 1980s we have moved from central control to liberalised markets, and is now shifting back somewhat 1970-80 1990 Dep. Energy DTI 2000 DECC BERR Dep. Trade DTI Dep. Industry Energy Act (1983) Liberalisation Gas Act (1986) Privatisation DTI Dep. Trade & Industry BIS The rise of the environment Electricity Act (1989) Privatisation Electricity Pool ———— NETA — BETTA 5 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 3. Challenges ahead 6 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 1. 2. 3. 4. 5. 3. Shifting needs and system properties Security Costs Environment The Future (Investment and R&D) Challenges ahead 7 The end use of energy has shifted over time, mainly from industry to transport UK final energy consumption by sector Thousand tonnes of oil equ. 70,000 Transport 60,000 50,000 Domestic 40,000 Industry 30,000 20,000 Other 10,000 Industry Transport Domestic Other final users - 1970 Source: DECC ECUK, 2012 1975 1980 1985 1990 1995 2000 2005 2010 8 UK energy is largely “carried” by petroleum, gas and electricity (with electricity on the rise) UK final energy consumption by fuel carrier 60% 50% Petroleum 40% Coal Solid Fuels Gas 30% Gas Electricity Electricity 20% Petroleum Other 10% 0% 1970 1975 Source: DECC ECUK, 2012 1980 1985 1990 1995 2000 2005 2010 9 UK energy fuels (in 2007) were dominated by gas, petroleum and coal; note how much is wasted Unit: PJ Source: Smith, Belles and Simon (2011, Lawrence Livermore National Lab.) “Estimated international energy flows” 10 The global energy system (in 2007) was not vastly different to the UK — less gas, more coal / biomass Unit: PJ Source: Smith, Belles and Simon (2011, Lawrence Livermore National Lab.) “Estimated international energy flows” 11 The UK fuel of choice for electricity generation went from coal to gas in the 1990s UK Fuel input for electricity 60.00 Million tonnes of oil equ. 50.00 Coal Oil 40.00 Natural gas 30.00 Nuclear Hydro 20.00 Wind 10.00 Other (incl. renewables) 0.00 1970 1975 1980 1985 1989 1994 1999 2004 Source: DECC Energy Statistics, 2012, Ministry of Power Statistical Digest 1959-1965 2009 12 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 1. 2. 3. 4. 5. 3. Shifting needs and system properties Security Costs Environment The Future (Investment and R&D) Challenges ahead 13 UK energy import dependency has risen dramatically since 2000, arguably reducing security 2011 Imports Coal: 63% Gas: 44% Oil: 26% Source: DECC (2012), UK Energy in Brief, from ONS data 14 Over 50% of UK gas needs imported in 2012… Source: Daily Mail (2013, 24 May); DECC (2013) state 2012p numbers are (from left to right) 18%,2%, 9% and 34%. 15 Gas and electricity margins have looked reasonable so far… Source: DECC (2012), UK Energy in Brief, from ONS data 16 …but Ofgem is forecasting electricity capacity margins to fall from 15% to below 5% by 2015 Source: Ofgem (2013) 17 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 1. 2. 3. 4. 5. 3. Shifting needs and system properties Security Costs Environment The Future (Investment and R&D) Challenges ahead 18 Prices fell over the 1990s, following liberalisation in the 1980s Source: Social Indicators, Research Paper 08/76, House of Commons Library, October 2008. 19 Domestic electricity prices in the UK are still below most OECD countries Average EU and G7 Domestic Electricity Prices in 2011 30 Tax Component 25 Price (excl tax) pence per kWh 20 15 10 5 Source: IEA Energy Prices and Taxes, 2011 Denmark Germany Spain Italy Austria Belgium Japan Ireland Sweden Portugal Netherlands Luxembourg Finland UK France Greece US 0 20 Yet so-called “fuel poverty” is on the rise Number of households spending more than 10% of their income on energy Source: Pearson and Watson (2012), UK Energy Policy 1980-2010 21 And the UK is towards the middle in industrial electricity prices Average EU and G7 Industrial Electricity Prices in 2011 18 16 Tax Component 14 Price (excl tax) pence per kWh 12 10 8 6 4 2 Source: IEA Energy Prices and Taxes, 2011 Italy Japan Germany Ireland Spain Portugal Belgium UK Greece France Netherlands Luxembourg Denmark Finland Sweden USA 0 22 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 1. 2. 3. 4. 5. 3. Shifting needs and system properties Security Costs Environment The Future (Investment and R&D) Challenges ahead 23 Emissions had gradually declined due to the coal to gas switch and to deindustrialisation Million tonnes of carbon equivalent UK CO2 emission since 1970 Source: UK Government, 2013, available at: www.parliament.uk/briefing-papers/SN03950.pdf 24 Low-carbon (nuclear, bioenergy) energy has increased recently, with modest increases in wind Source: DECC (2012), UK Energy in Brief, from ONS data 25 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 1. 2. 3. 4. 5. 3. Shifting needs and system properties Security Costs Environment The Future (Investment and R&D) Challenges ahead 26 Investment in the UK energy sector has historically been relatively low, but has recently increased Investment in the Energy Sector Source: Ernst and Young: Powering the UK, 2012 27 UK has recently increased public spending on energy R&D to around 0.02% of GDP Governmental energy R&D spending in % of GDP 0.20 0.18 0.16 Japan % of GDP 0.14 Netherlands 0.12 Italy 0.10 USA 0.08 Germany 0.06 UK France 0.04 Spain 0.02 Source: IEA Energy R&D Statistics, 2013; OECD, 2013 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 0.00 28 Nuclear R&D received most support until the early 1990s, but collapsed with liberalisation… UK public energy R&D spending nuclear vs total budget Million US$ (2005 prices & exchange rates) 1400 1200 1000 800 Total Budget Nuclear 600 400 200 0 1974 1978 1982 1986 Source: IEA Energy R&D Statistics, 2013 1990 1994 1998 2002 2006 2010 29 …and has only been partially replaced recently by R&D into energy efficiency and renewables UK public energy R&D spending (excluding nuclear) Million US$ (2005 prices & exchange rates) 800 700 600 500 Energy Efficiency Fossil Fuels 400 Renewables Other 300 Power and Sotrage 200 100 0 1974 1978 1982 1986 Source: IEA Energy R&D Statistics, 2013 1990 1994 1998 2002 2006 2010 30 UK renewable R&D spend in 2011 was $100m (2005 prices) largely on wind, biofuels and solar UK public renewable R&D spending Million US$ (2005 prices and exchange reates) 250 200 Wind 150 Biofuels Solar Ocean Geothermal 100 Hydro Unallocated 50 0 1974 1978 1982 Source: IEA Energy R&D Statistics, 2013 1986 1990 1994 1998 2002 2006 2010 31 Agenda 1. UK energy policy objectives 2. UK energy system: results so far 3. Challenges ahead 32 There are major challenges coming on all three objectives of energy system policy 1. Security • • • 2. Costs • • 3. Electricity: fears that generation margins may fall to below 5% Gas: Headlines that we were “6 hours from freezing” last winter Petrol: Main security problems appear to be protests etc. EU energy costs have risen relative to the US, due to several factors Costs must rise due to decades of underinvestment Environmental • • EU requirements of local pollution (LPCD) may close plants in 2015 Carbon markets have collapsed, rescue attempts have so far failed 33 And there are UK and/or EU policy actions that affect (positively or negative) each of these challenges 1. Security • • 2. Costs • 3. UK capacity mechanism; EMR; strategic reserves;… EU Integrated Energy Market UK EMR, retail tariff Environmental • • EU LCPD, EU RD, EU EED, EU ETS etc… UK CPF, CCA, RO, EMR etc… 34 The three objectives do not always align, and policies aimed at the same objective counteract each other Here are just a few examples from the environmental arena: 1. EU ETS and EU Renewables and Energy Efficiency Directives 2. UK Carbon price floor and EU ETS 3. LPCD and security / EU ETS 4. UK EMR and EU IEM 35 EU ETS aimed at cutting CO2, but “complementary policies” have forced > 50% of the intended abatement Abatement from RD and EED in EU ETS scope Source: CDC Climate Research, 2008; CITL, 2011; MS National Renewable Action Plan, 2011 36 …the result (not helped by the economic crisis) has unsurprisingly been an EUA price crash 35 EUR/t 30 Daily price 25 Moving Average (30 day) 20 15 10 5 Phase 1 0 04-08-05 04-08-06 Phase II 04-08-07 04-08-08 Source: Datastream, Aurora Energy Research 04-08-09 04-08-10 04-08-11 04-08-12 37 Concluding remarks 1. Security: not terrible now, but risks are mounting; security remains likely to be assured but at high cost / inefficiency; 2. Costs: low due to liberalisation and underinvestment, but will likely rise as capacity is replaced and 1. and 3. are achieved 3. Environmental objectives cannot be met in the medium term while the system remains overwhelmingly fossil-fuel driven; the real challenges of the low-carbon transition are just beginning and political strain is already evident 38