Energy in a low carbon economy: new roles for … above RPI = > £22/t by 2020 ... => Separate...
Transcript of Energy in a low carbon economy: new roles for … above RPI = > £22/t by 2020 ... => Separate...
Energy in a low carbon economy: newroles for governments and markets
David Newbery8th BIEE Academic Conference
Energy in a low carbon economy: new roles forgovernments and marketsOxford 22nd September 2010http://www.eprg.group.cam.ac. uk
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UK Energy policy
‘ensure our energy is secure, affordable andefficient’ and ‘bring about a transition to alow-carbon Britain’ (DECC web site, 2009)
• What is needed to deliver low-C Britain?• What does that imply for energy policy• What kind of market for low-C electricity?
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EU climate change policy
• ETS to price CO2– fixes quantity not price => poor guide for low-C
• 20-20-20 Directive: demand pull for renewables– justified by learning spill-overs and burden sharing
• EU SET-Plan to double R&D spend– to support less mature low-C options
Are these policies consistent?
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EUA price October 2004-April 2010
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Oct-04 Apr-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
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o/t C
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Futures Dec 2007OTC IndexSecond period Dec 2008Second period next DecCER 09
start of ETS
Second period
CO2 prices are volatile and now too low
Actual emissions revealed
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Start of ETS
Costs of errors setting prices or quantities
Reductions in emissions
Correct MC
MC
Best estimate ofMarginal Cost ofabatement
MB, Marginalbenefit fromabatement
£/tC
efficiency lossfrom tax
efficiency lossfrom quota
t
Q* Q
t*
With tax wouldproduce here atlow cost
With quotawould produceup to hereat high cost
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Failures of ETS
• Current ETS sets quota of total EU emissions– Weitzman argues for tax/charge not quota
• Renewables Directive increases RES=> increased RES does not reduce CO2
=> reduces price of EUA=> prejudices other low-C generation like nuclear
• Risks undermining support for RESSolved by fixing EUA price instead of quota
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2020 projected CO2 price
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with 12.5% renewables with 20% renewables 2009 projections
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2009 projections after Renewables Directive and recessionRenewables
depressesC-price
Source: Committee on Climate Change, 2008 and 2009
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Reforming ETS• Reform EU ETS to provide rising price floor
– sufficient for nuclear or on-shore wind if cheaper=> Carbon Bank trades EUAs to stabilise price
• Commitment to raise CO2 price at 3% p.a. overlife of plant may suffice– ¤25/EUA 2010 => ¤34 in 2020, ¤61 in 2040 ...
• Making it credible: write CfD on this path– remove uncertainty for low-C generation investment
makes extra carbon savings additional
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UK’s Plan B if no ETS reform• Underwrite UK CO2 price
– for power sector? Cash negative
• Change CCL into Carbon Correction Levy– a tax carbon content of fuel Cash positive– rebated by EUA price for covered sector– starts at current CCL rate say £12/t CO2 and escalate at
6% above RPI = > £22/t by 2020– underwritten by CfD on path for commitment
Coalition supports C floor and full ETS auctioning
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Security• Will the lights stay on?=> will there be timely investment?• Investment will be delayed if policy is uncertain=> clarify energy policy as soon as possible=> reduce unnecessary risk=> replace ROCs by tendered FITs=> underpin and guarantee the carbon price
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Ofgem Project Discovery
Crunch time
Assuming plant is built according to scenariosSecurity
Under Ofgem’s scenarios reserve margin falls in 2016modelledde-ratedcapacity margin
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Domestic fuel bill breakdown 2009
Source: OfgemProportionately nearly 3 times higher on elec than gas
+ £24 via ETS incl in supplycost
£36£24
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Affordability (climate change)• Average domestic electricity bill £400/yr• Main programmes
• EU Emissions trading scheme £24• Carbon Emissions Reduction Target* £15• Community Energy Savings Programme* £1• Renewables Obligation £12• Total (annual cost) = £52
=13% of total bill• Subsidy from reduced VAT (£53)* allocated pro-rata to expenditure on electricity and gas
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UK Electricity R&D intensity
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
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perc
ent e
lect
ricity
reve
nue
ROCs
other power
hydrogen and fuel cell
nuclear fission and fusion
Renewables
fossil fuels
High rate ofgrowth littledelivery
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UK Renewables policy• ROCs are expensive
– reward scarcity, deter entry, discourage localism• The problem is planning
– coalition has abolished IPC (but that was not suitedto on-shore wind anyway)
=> Separate system planning (SP) from TSO=> SP finds optimal RES sites, secures consent=> runs tender auctions for least cost FIT
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UK ROC, EUA, and electricity prices
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it
ROC+RPD 1 yr centred MARPDROC
windfall profits
ROC price stable
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CCC’09 UK 2020 target is 27,000 MW
Installed wind capacity
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
MW
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UK’s target looks feasible at DEroll-out rate
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Financing low-C electricity
• ROCs rapidly escalating in cost– comparable to past R&D, mostly on nuclear– despite very modest renewables
• low-C subsidies paid by electricity consumers
This is an inefficient tax for a public good
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Simulation – more volatility, challenges market design
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Euro/MWh
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2015 2020
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Illustrative
Price duration schedule
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Efficiency in low-C market• Markets drive efficiency, innovation
– but volatility and policy risk raises capital cost• Low-C has high capital cost, low MC
– cheapest solution has long-term contracts=> pay wind for availability to avoid negative prices
=> removes increasing share from price setting– CCS and peakers have higher MC– but may need capacity payments or contracts
reform market design and transmission pricing
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Spatial and temporal optimisation=> nodal pricing + central dispatch• Nodal price reflects congestion & marginal losses
– lower prices in export-constrained region– efficient investment location, guides grid expansion
• Central dispatch for efficient scheduling, balancing• PJM demonstrates that it can work
– Repeated in NY, New England, California (planned)
Recreate a pool for liquidity, entry andcontracting
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Conclusions• CO2 price is too low
– new coalition supports floor price• RES Directive undermines ETS
– and risks bringing ETS into disrepute=> make RES additional, set CO2 price
• UK energy taxes lack logic– but offer simple scope for cash positive gains
• market and transmission access need reform