Clive Moffatt founded Moffatt Associates in 1988, and has over 30 years experience in international research, marketing and communications. He was the founder and chairman of the UK Energy Security Group between 2017-19.
The recent Energy White Paper sets out an ambitious UK agenda for the COP26 conference in Glasgow. The scale, complexity and the costs to industry and consumers of what is intended are unprecedented, and much of it has not been thought through.
Right now, there are too many unknowns on the road to 2050. The focus should be on the next 15 years, with policy options evaluated in terms of their likely economic and welfare impact before specific actions are confirmed. Otherwise, there is a huge political risk that the “Green Revolution” will backfire.
Pricing carbon – reducing investment risk
The EU experience showed that using emissions trading to set a carbon price there was a risk that politicians would not stick to the national annual allocation plans and be tempted to adjust the supply of C02 certificates to satisfy energy intensive users. This led to uncertainty over the likely level of the C02 price and a higher cost of capital.
Setting an initial 15-year gradually rising trajectory for the price of carbon would reduce the risk to investors in “green” technologies. It would also underpin a more affordable decline in the use of unabated natural gas and support new investment in renewable generation and provide much-needed tax revenue to finance subsidies and new infrastructure.
To help industry to adjust and protect the competitiveness, consideration should be given to; (a) implementing on a sector and/or company level a system of carbon tax rebates and/or energy efficiency grants based on an agreed plan to reduce industry’s CO2 footprint and (b) imposing a carbon equalisation tax on imports from countries where competing manufacturers operate under a less onerous carbon emissions regime.
Electricity market – looming generation gap
There are simply too many unknowns (eg scale and roll-out of electrification in transport and heating) to allow any sensible 30 year prediction of the future level of electricity demand and its profile.
What we do know is that we face an impending shortage of both baseload and flexible capacity prompted by the demise of coal (2024), the retirement of old nuclear and gas plant aggravated by low operating margin (below the historical 10 per cent ratio of available capacity to demand).
And the answer is not simply more wind.
System balancing – more wind equals more gas
Covid-19 restrictions this year have resulted in a sharp drop (15 per cent) in electricity demand and environmental lobbyists have been quick to highlight that wind has increased its share.
But these figures obscure the fact that the location and variability of wind generation means that more gas generation is required to balance daily demand and supply – i.e: keeping the lights on when either there is too much wind (which has to be paid not to produce) or too little power is generated because the wind is not blowing.
Before any level of additional wind capacity target and auction details are confirmed, more work is needed to evaluate costs and benefits, in particular:
(a) assess the cost to consumers in levies to finance the subsidies required.
(b) the need for significant additional flexible gas generation and
(c) whether the UK supply chain supporting wind power is robust enough to deliver.
Right now, no one knows for certain how much additional baseload and peaking capacity will be needed to support an extra 40GW of wind on the network but these balancing costs will rise sharply and more gas will be needed. (see below)
Nuclear power – no more reactors?
The Government is keen to support a second new EDF reactor at Sizewell because it sees every GW of baseload nuclear power as saving subsidies on weather-dependent renewable energy – but nuclear is more expensive, and wind not the only alternative.
Technological problems and delays have meant that Hinkley Point C with an estimated completion cost of £25bn is the most expensive in the world and the contracted price (set for 35 years) is more than double the current price of electricity. Government support in funding construction of another large reactor could reduce energy output costs, but only marginally. Meanwhile, the technology for smaller modular reactors is only a prototype, and the UK cannot deliver to scale and at an affordable Cfd contract price compared with falling cost of renewables.
While nuclear power offers a long-term baseload nil carbon supply of electricity, the costs to the taxpayers and consumers cannot be justified, and the time has probably come to withdraw support for any more nuclear power and explore other options.
Transitional role for natural gas
More analysis is needed to (a) quantify the UK’s likely requirement for base and peaking natural gas assuming various optional targets for new wind (b) introducing a long term C02 price (see above) (c) no new nuclear after Hinkley (see above) and (d) devise a new capacity auction/s to underpin targeted new investment in gas generation over next 15 years.
Eventually, with the falling cost of renewables and a gradual rising trajectory for C02, it would make a lot of sense to try and reduce overall capacity incentive and distribution costs by setting staged quantum targets for C02 emissions, and allowing wind with battery storage to compete with large-scale gas with CCS to contract to deliver reliable and flexible energy.
However, this approach now might not attract sufficient new wind and Carbon Capture and Storage (CCS) is still a prototype. What we do know is that CCS is likely to consume more gas, increases electricity costs significantly and that the disposal or utilisation of the CO2 poses costly logistical problems. More work is needed to evaluate the feasibility and costs of CCS before it is made compulsory.
Initial auction bids for gas only could be made CCS compatible with additional capacity incentive contracts available when required eg indexed for capex and opex and with preferential rules for despatch. CCS and carbon intensity targets should not be applied to smaller (localised) flexible gas plant required for only short-term system balancing.
Gas – underpinning physical and price security
Natural gas will be needed for power and heat for the next 20 -30 years, and possibly as source for hydrogen for possible heating and transport. Viability of a hydrogen network has still to be proven, but producing it from natural gas looks in principle to be more cost-effective than electrolysis using masses of additional wind power.
In the debate about electrification – i.e: heat pumps v gas decarbonisation for domestic heating – there are currently too many unknowns and subsidies for energy efficiency and regulations which would force 25 million consumers to undergo the expense of replacing their gas boilers should be deferred pending a detailed economic and welfare analysis.
What is certain is that natural gas has key transitional role to play but the UK will be dependent on imported gas from 2025.
So, policies are urgently required to underpin new investment in gas storage capacity to ensure the integrity of the gas network (inc meeting the expected growth in hydrogen production to fuel heat and transport) and mitigate both wholesale gas and electricity price volatility and sharp rises in consumer energy costs at times of system stress.
COP26 and next steps – four suggested policy principles
(a) What we do should be based on what others do to meet the global challenge;
(b) The transition to net-zero must underpin energy security and affordability;
(c) All net zero policies must have clear domestic economic and welfare benefits ;
(d) Need to encourage market competition in the delivery of least cost solutions.