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An alternative 20:20 vision of the UK energy sector
ENERGY TRADING SOLUTIONS IN A CARBON FREE WORLD
SmartestEnergy One Day Seminar
10 June 2004
John Bower
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Alternative 20:20 Vision 2John Bower
Overview
What the White Paper Implies
Decision Drivers
Reality Will Dawn
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Alternative 20:20 Vision 3John Bower
What the White Paper ImpliesUK EWP refocused energy policy away from a pure liberalisation / competition agenda…
GOALS AND POLICIES
1. Reduce CO2 emissions by 60% by 2050 - REDUCE 30% BY 2020
2. Maintain reliability of energy supplies - DIVERSE OF SUPPLY
3. Promote competitive markets in UK and beyond - LOW PRICES
4. Ensure every home is adequately / affordably heated - LOW PRICES
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Alternative 20:20 Vision 4John Bower
What the White Paper Implies… with power generation squeezed between a hard objective and soft implementation
IMPLIED UK ENERGY POLICY ASPIRATION FOR CO2 EMISSIONS 1990 - 2020
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 5John Bower
What the White Paper ImpliesUK energy policy in power generation is now really driven by EU ETS and LCPD….
EU EMISSIONS TRADING SCHEME AND LARGE COMBUSTION PLANT DIRECTIVES
Precursor
2003 – 2004
National Plan
Formulation
Phase I
2005 – 2007
CO2 only
Allocation only
Phase II
2008 – 2012
CO2 + other gases
Allocation + Auctions
EU
Emissions Trading Scheme
Phase I
2004 – 2007
SOx, NOx, dust
ELV or NP
Derogation Phase
2008 – 2015
SOx, NOx, dust
ELV or 20k hr derogation
Precursor
2002 - 2003
National Plan
Formulation
EU
Large Combustion
Plant Directive
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Alternative 20:20 Vision 6John Bower
What the White Paper Implies.… with UK policy providing weak and diverse signals on marginal CO2 abatement costs
UK ENERGY TAXES AND PERMITS: IMPLIED MARGINAL CO2 ABATEMENT COST
Nominal Unit Price Marginal CO2 Price
EU ETS (2005 mid) £ 6.00 / MtCO2 on marginal CO2 abated = £ 6.00 / MtCO2
Electric (CCL + VAT) £ 7.30 / MWh on domestic ‘follow on’ units = £ 10. 60 / MtCO2
UK ETS (subsidy) £15.00 / MtCO2 on all CO2 abated = £ 17.50 / MtCO2
ROCs (buyout) £ 30.00 / MWh on marginal unit = £ 33.30 / MtCO2
Petrol (Duty + VAT) £ 0.60 / litre on all units supply = £300.00 / MtCO2
Source: Author’s estimates
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Alternative 20:20 Vision 7John Bower
Decision DriversAt EU ETS €15/MtCO2 old coal will delay new CCGT entry until LCPD bites in 2011 - 12
EXPECTED MINIMUM MARGINAL COST OF GENERATION IN 2008 - 12
Key Decision
Axis
Baseload Price
Source: Author’s estimates
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Alternative 20:20 Vision 8John Bower
Decision DriversAt EU ETS €45/MtCO2 prices spike, dash for gas and CHP/nuclear/onshore wind interest
EXPECTED MAXIMUM MARGINAL COST OF GENERATION IN 2008 - 12
Key Decision
Axis
Key Decision
Axis
Baseload Price
Source: Author’s estimates
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Alternative 20:20 Vision 9John Bower
Decision DriversLow CO2 prices mean UK will buy JI/CDM/ETS permits and cut CO2 only 20% by 2020
UK EMISSIONS IN A LOW EU ETS PRICE SCENARIO
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 10John Bower
Reality Will DawnEven a 20% cut will need a massive CCGT investment but price signals are not clear yet
ACTUAL AND LIKELY FUTURE PLANT MIX 1990 - 2020
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 2000 2010 2020
OCGTOilPump StorageOther Thermal (mainly CHP)Dual FuelCoalCCGTNuclear (Magnox)Nuclear (AGR/PWR)Renewable (mainly Wind)Hydro
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 11John Bower
Reality Will Dawn…. and renewable will only reach 10% of generation output but CHP will grow rapidly
ACTUAL AND LIKELY FUTURE OUTPUT MIX 1990 - 2020
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 12John Bower
Reality Will DawnFuture demand growth will offset falling CO2 emissions intensity in power sector…
ACTUAL AND LIKELY FUTURE PLANT MIX 1990 - 2020
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 13John Bower
Reality Will Dawn…. so HMG must stop pretending power generators can deliver the UK EWP at zero cost
ACTUAL AND LIKELY FUTURE POWER SECTOR EMISSIONS AND INTENSITY 1990 - 2020
Source: DEFRA data and author’s estimates
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Alternative 20:20 Vision 14John Bower
Speaker
John Bower is a Senior Research Fellow at the Oxford Institute for Energy Studies which is an independent research charity affiliated to Oxford University and dedicated to advanced research in the social science aspects of energy. John joined OIES in November 2001 and his research interest is in the emergence and evolution of integrated cross-border electricity and gas markets. Specifically; the development of efficient pricing and investment mechanisms for energy, transmission capacity, and emissions.
Before joining the OIES, John completed his PhD at London Business School and his previous career was in the commodity industry. His experience ranges from energy trading, at Marc Rich & Co, to risk management consultancy, with Coopers & Lybrand, advising commodity traders, producers and processors in base metal, precious metal, ‘softs’ and energy markets. Immediately prior to his PhD he was Global Controller Metals/Commodities at Deutsche Morgan Grenfell.
Oxford Institute for Energy Studies
57 Woodstock Road
Oxford OX2 6FA
United Kingdom
Telephone: +44 (0)1865 889 125
Facsimile: +44 (0)1865 310 527
Email: [email protected]
URL: http://www.oxfordenergy.org