Oil & Gas UK breakfast briefing

Gareth DaviesRichard Sarsfield-Hall

22 September 2010

Gas: At the centre of a low carbon future

Moving to a low carbon future will need a fundamental change in the way we produce and use energy

Sources: DECC, CCC

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1990 2008 2020 2050

MtC

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Other Industry Electricity Transport Residential Projections

Government faces a difficult balancing act between conflicting priorities

�Any low carbon future will require

– high and sustained rates of

deployment

– successful and timely innovation

– dramatic changes in customer

behaviour

�Different paths affect the risk of meeting other policy targets

– security of supply

– affordability (fuel poverty and

competitiveness)

Security

AffordabilityClimate Change

How is government anticipating we achieve this?

�Some variation in long-term energy pathways proposed by DECC

– sensitivities on technologies

– focus on energy intensity

versus carbon intensity

�On reflection many similarities

– importance of electrification

of heat and transport

– rapid grid decarbonisation

– no role for gas in the mix

� Little flexibility or optionality across pathways

Total energy consumption

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AlphaBetaGammaDeltaEpsilonZetaReference

Source: DECC 2050 Pathways

Total gas consumption

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2010 2015 2020 2025 2030 2035 2040 2045 2050

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h AlphaBetaGammaDeltaEpsilonZetareference

Electrification is a high risk way to achieve policy targets

�Deployment issues

– very large upfront funding

– supply chain

• heat pumps

• offshore wind

– facilitating infrastructure

• grid expansion

� Innovation challenge

– rapid commercialisation and deployment of CCS (5-6GW by 2025)

– smart grids/metering to provide flexibility

– electric vehicles

�Consumer behaviour

– accepting new technologies

– altering behaviour patterns to provide flexibility

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Nuclear Biomass CCSCoal Coal CHPCCGT Other renewables Demand Peaking plants Imports

Pöyry model of UK power system in 2030 with large wind output

Gas need to fill the gap

Dash to electrification has implications for security ….

�Security

– intermittency

– uncertainty over policy

… and dash to electrification has implications for affordability

�Affordability

– fuel poverty targets rely on success of

energy efficiency measures

– industrial competitiveness

Source: DECC

Estimated impact on energy bills-

2010 2015 2020

Percentage increase in unit price of domestic gas

4% 10% 18%

Percentage increase in unit price of domestic electricity

14% 26% 33%

Impact of policies on the domestic energy bill

4% 0% 1%

Impact of policies on the non-domestic energy bill

14% 11% 26%

Gas has been a major contributor to a greener, more secure and competitive UK in recent decades …

Sources: IEA for gas consumption, DECC for CO2 emissions

… in parallel with both economic and electricity demand growth

Gas consumption CO2 emissions

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Transport Residential

Services GDP index (RHS)

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There is clear evidence that gas can kick-start the transformation...

� Significant carbon savings in the short term

� Facilitating renewable deployment while maintaining security and balancing the intermittent nature of wind

� Existing infrastructure and supply chains, especially for heat, mitigate deployment risk and postpone funding requirements

Pöyry model of Evolution of the power sector gas

demand in GB markets

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2009-10

2029-30

...and provide room for manoeuvre in the longer-term

�Breathing space to prove new technologies

– coal CCS deployed from 2020 in all DECC scenarios

– gas CCS likely to be cheaper than coal

– biomethane

� Time to establish new supply chains

– gas-based heating options do not ‘lock-in’ trajectories in the long-term

• 15 year turnover on boiler stocks

• heat distribution networks can incorporate lower-carbon sources in the future

– deployment of renewables supported over a more manageable timeframe

� Future industrial growth will require gas feedstock in any case

– DECC 2050 ‘Alpha’ pathway shows industrial gas demand at 40TWh in

2050 (27% of 2010)

– can industry make such an adaption without risking competiveness?

Why is the playing field biased against gas?

� All DECC projections show declining gas forecasts

– no gas CCS options

– inability to consider ‘collective’ solutions in modelling framework

– annual basis only

� Drive for renewable energy deployment is being made at the expense of overall carbon savings

– RHI focused on standalone technologies

� Full value of gas’ flexibility and reliability is not realised

� Misplaced ‘perception’ of rising gas security risk

Pöyry model of carbon savings compared to a composite benchmark dwelling

-1,000 0 1,000 2,000 3,000 4,000 5,000 6,000

Individual Biomass Boilers

Ground Source Heat Pumps

Air Source Heat Pumps

Solar Thermal

Small Biomass Air turbine CHP

Small Engine Natural Gas CHP

Community Boiler Natural Gas

Community Boiler Biomass

Anaerobic digestion CHP

Large Engine Natural Gas CHP

Medium Biomass Steam turbine CHP

Small CCGT Natural Gas CHP

Medium CCGT Natural Gas CHP

EFW Incineration CHP

Large Biomass Steam Turbine CHP

Waste heat

kg pa

DHN - Large Scale

DHN - Medium Scale

DHN - Small Scale

Stand alone renewable technologies

This review’s conclusions

� Too many targets and uncertainty over prioritisation

– government needs a more considered approach to meeting its long-term

goal of 80% lower emissions by 2050

�Greater risk of lights going out through insufficient power generation than of gas interruptions through a shortage of gas

�DECC pathways will cost all consumers more unless dramatic energy efficiency improvements happen

�Highly ambitious deployment targets and massive reliance on new technology happening

�Don’t reinvent the wheel

– gas infrastructure already there and is best option for providing flexibility

Recommendations for Government

�Keep options open

– a more realistic alternative plan would introduce the option for more gas in

the transition and in the end-game

– give gas an equal chance of being part of the energy mix in all longer term

energy projections e.g. gas CCS.

– allow more contingency in future pathways so that the market can deliver

the emissions targets securely and without costing the earth

�Review the 2020 renewables energy target as it appears to be a distraction from longer term carbon targets

�Ensure that electricity market reform signals true value of gas as back up to intermittent renewables

Pöyry Energy ConsultingKing Charles HousePark End StreetOxford, UKOX1 1JD

+44 (0)1865 722660www.poyry.comwww.ilexenergy.com

Richard Sarsfield-HallRichard.sarsfieldhall@poyry.com01865 812266

Gareth DaviesGareth.davies@poyry.com01865 812204

Pöyry Energy (Oxford) Ltd. Registered in England No. 2573801. King Charles House, Park End Street, Oxford OX1 1JD.