FLAWS IN EU CLIMATE POLICY BUT NO ENVIRONMENTAL CASE FOR A BREXIT.

The general case for carbon pricing as a major policy instrument in combatting climate change is very clear. So it is unsurprising that it should be the flagship policy in the EU’s efforts to assert a leadership role on climate issues. Unfortunately the policy has not to date lived up to its expectations, and the reasons behind its inadequacies mirror some of the more fundamental problems in the operation of the European Union itself. But does that mean concern to have effective climate policies should lead the UK, or other member states, to leave the EU? The answer is emphatically not.  We consider the balance of arguments.

The range of energy policy issues that will be affected by any UK decision to stay in or leave the EU have been explored in some depth in an impressive summary by David Buchan and Malcolm Keay, in  “The UK in the EU. Stay or Leave” published by the Oxford institute for Energy Studies.

The significance of the EU in carbon emissions.

Emission statistics show that the USA and China are the G2 of climate policy. Without their participation in a global agreement to limit emissions, any attempts elsewhere to limit CO₂ and greenhouse gas emissions (GHG) will have at best an extremely limited impact on climate outcomes. Fortunately both countries are starting to take climate policy very seriously indeed.

Moreover the ambition of the Paris agreement is for outcomes that essentially require “net zero” policies for CO₂. This implies very high levels of commitment that draw in virtually every country of any significance. But the EU as a block is still the third largest source of global CO₂ emissions. In consequence it remains hugely important in global terms, and together with the G2 accounts for well over half of emissions.

Source:chart prepared by the Union of Concerned Scientists

So if the UK wants to exert a maximum of influence in international climate negotiations, continuing to do that through the EU seems like an obvious choice. Buchan and Keay emphasise these points.  “The UK has prided itself in being, along with France and Scandinavian members of the EU, instrumental in sustaining the ambition of EU climate goals. With Brexit, this influence inside the EU would disappear, and probably outside the EU too. The global scope of the United Nations climate negotiations is such that only the big players or big blocs count, not a medium-sized European state by itself.” To put this argument in perspective from our statistics, the UK accounts for 1 to 2 percent of global emissions, while the EU accounts for about 10 times as much.

Problems in EU policy making.

The problems with the EU emissions trading scheme (the EU ETS) are well known. They began when a number of major large users succeeded in negotiating excessively large allowances in the early stages of the scheme. Problems were accentuated by the advent of recession in 2008 and failure to adjust targets downwards.  Finally the carbon price, which is implicitly one measure of the success of the scheme, was further undermined by a plethora of additional EU-wide and national policies. This is essentially the equivalent of assuming that the market will solve all the problems, while simultaneously putting in place a string of interventionist measures, on energy efficiency and promotion of renewables, which distort what a market might otherwise have achieved. The reality, as is argued elsewhere, is that successful policy relies on a combination of instruments that can work together.

One simple explanation of the perceived failure of the EU ETS is that it represented an elementary but unfortunate confusion of means and objectives, and that this was compounded by the unwieldy nature of the EU’s decision making procedures. Most of the early proponents of a European emissions trading scheme assumed that it would provide a realistic carbon price that would provide the incentive necessary to encourage the infrastructure and other investments that would transform the energy economies of Europe away from high fossil fuel dependence to one of a number of plausible low carbon alternatives. When this failed to happen, for the reasons given above, the response was to increase the level of intervention.

In fact the EU ETS can, in a technical sense, be viewed as a success. (Undemanding) emissions targets were met, and the scheme operated smoothly.  But the real objective had never been to meet an arbitrary short term target, but a bigger implicit and unstated objective of supporting wholesale transformation of the energy sector. Had the EU adopted a carbon tax, instead of tradeable quotas, or had it had sufficiently flexible mechanisms to adjust the quotas as a response to events (including the recession), the scheme might now be viewed as a success. But a carbon tax had been ruled out as politically unpalatable, and the cumbersome process of reaching agreement between 27 countries over quantity adjustments to the trading scheme, a flexible response to changing circumstances was all but impossible.

There are other problematic elements in EU policy. Earlier comments have drawn attention to actual or potential conflicts between climate objectives and competition rules, but in practice adverse or constraining influences on the UK’s approach to climate policy have been limited. Buchan and Keay state that: “… in practice, the UK has followed an energy policy of its own choosing and has had considerable influence on the development of EU policy.  It also benefits from the opening of EU markets, and the collective approaches to decarbonisation and energy security.”

Equally we should recognise some of the general successes of the EU in environmental regulation and the likelihood that it will necessarily play a vital role in enabling the changes necessary to decarbonise road transport and in measures for the transformation of the motor industry. And the interconnection measures that are increasingly seen as essential to the future of the power sector will also require cooperation on operating and other protocols, if they are to be done in an efficient and effective manner.

Consequences of Brexit for UK climate policies

The biggest damage to UK climate policies from a Brexit would undoubtedly be the loss of influence both in Europe, where the UK has been a prime mover in identifying climate risks and pressing for stronger policies, and globally. In a world where energy and climate challenges are increasingly important, these challenges will be correspondingly important in trade agreements, as no country will want to see its own industry out-competed by states that do not follow the same rules (eg on taxing or pricing of carbon). Membership of the EU gives us a better chance of being able to influence those rules, and for scientists and environmentalists to push for effective global policies.

THE IMPORTANCE OF CARBON PRICING

It is an occasional fallacy that we can have a successful market-based policy for our energy needs and for tackling climate problems and that this can always be easily reconciled with continuous downward trends in energy prices.  Markets and prices are essential components of an effective energy policy, especially one designed to attack the large hidden costs of environmental damage and climate consequences. However the essence of markets is that they allow costs and prices to go up as well as down. Reflecting environmental costs in energy markets helps in stimulating low carbon investment, in promoting low carbon operation of the capital stock, and in encouraging lower and less wasteful consumption. But that will on occasions mean that prices rise as part of the natural process, market or otherwise, by which societies adjust to resource limitations and other constraints.

The Case for Carbon Pricing

A general and common sense principle of economics is that if commodities are produced and sold at a price below the cost of producing them, then this is a prime indication that something is wrong. Fortunately market economies do not usually allow this to happen.  Planned economies in which prices are set without reference to cost are a different matter. That is why so much of the former Soviet economies was characterised by waste, inefficiencies and shortages.

But market economies are also in trouble when the largest costs are not carried directly by either producers or consumers, but are imposed on the world at large. This prevents an efficient allocation of resources and will reduce human welfare. That is what is happening with fossil fuels and CO₂ emissions. It is an annoying and inconvenient truth that: “if damaging externalities are not internalised in prices, there is no basis to assume that free markets and free trade will improve human welfare”.[1] In other words market economies that fail to deal with environmental costs will also suffer the historically documented weaknesses of the Soviet system, with excessive and wasteful use of energy produced in an environmentally destructive way, inefficient choice between technologies, and ultimately a shortage of the common good that we call environment.  

When an activity is damaging to society, one option is to prohibit or limit it; we try to do this with dangerous drugs, excessive speed on our roads or various forms of water pollution, usually through regulation but occasionally through a price mechanism. Arguably, “health” taxes on tobacco or sugar also fall in this category. We are beginning to understand, collectively and globally, the scale of our problem with burning fossil fuels and emitting CO₂. Immediate cessation may be an impossibility, but limiting harmful CO₂ emissions through a price or tax penalty is widely seen as necessary and desirable.

The costs of not pricing carbon

A market-based approach that fails to incorporate adequate carbon pricing is unable to deliver low carbon investment or even to ensure the most carbon-efficient operation of an existing stock of plant.  In other words additional policy instruments become a necessity. This impacts on all the main economic features of the sector – incentives for investment, true costs against which the operation of existing plant can take place, and retail prices that encourage economic use of resources (allocative efficiency).

The largest adverse consequence of failure to internalise costs may be the effect on low carbon investment incentives, such as the failures to incentivise the carbon capture investments widely recognised as key, at least with known technologies, to decarbonisation of the power sector at a reasonable cost.  But it can also lead to perverse operational choices between fuels, an obvious recent anomaly (in Northern Europe) being the closure of highly efficient gas power stations, while coal stations continue to operate baseload due to cheap coal. To a significant degree this can be blamed on deficiencies in the EU ETS have given rise to very low carbon prices. In climate terms this is an expensive anomaly, even though the immediate financial implications for the utilities were relatively trivial.

Recent UK experience is an illustration of the scale of the issue at the operational level. Between 2009 and 2012 the substitution of coal for gas, induced by changes in gas/coal price relativities, increased UK coal consumption by about 15 million tonnes. This increased annual CO2 emissions by around 20 million tonnes, to which past Treasury guidelines [2] might have attached a notional “social cost of carbon” value of around £ 1.2 billion. Actual fuel savings to generators are likely to have been at most 10% of this amount.  In other words this single failure to price carbon will, on the basis of UK Treasury guidelines, have generated a real but hidden long term net “social cost” of up to £ 1 billion per annum over that period.

Conditions for a successful policies towards carbon pricing

In some senses carbon pricing is a transitional issue. Since the direction of travel is to a near zero carbon economy, the regulation and organisation of the sector in the very long term will not depend on carbon markets or taxes. Energy prices can then reflect only the cost of supply from zero carbon sources. But this is a very long term perspective. In the short and medium term, even comparatively modest levels of carbon prices can assist attainment of cumulative emission objectives in the timescales with which we are concerned, even if they remain insufficient to incentivise investment.[3]  An important role for carbon prices is to counteract the “rebound effect”, when higher energy efficiency induces (through lower costs to the consumer) additional use. This is particularly important for the heat sector, where energy efficiency programmes are a major instrument of policy.

If the cost of CO₂ emissions is at least partly internalised, explicitly through a tax or cap and trade regime, or implicitly in policy, then consistency matters. Inconsistent or incomplete coverage will lead to “leakage” between sectors or geographies, with perverse effects that can drive up total emissions and damage the competitiveness of more carbon-efficient producers.  Inter alia that implies a strong argument for regional carbon markets such as the EU ETS. The ETS has had many deficiencies which deserve a separate comment, and needs a serious overhaul, but the principle of a wider international market is an important one and should be retained.

It also implies that the coverage of the policies needs to be as wide as possible in sector terms, so that it covers all fuels giving rise to carbon emissions, in all parts of the economy, and not just particular sectors. Without this condition there is again a risk of distortions. 

An example of such a potential distortion was the “twin track” approach implicit in UK Treasury guidelines, in which carbon prices differed as between “traded” sectors governed by the EU ETS, and “non-traded”, governed by an assumed “social cost of carbon”.

Finally, as in shown in a fuller discussion of the power sector, it is quite clear that carbon prices alone are unlikely to be a sufficient measure to achieve the low carbon infrastructure investments that are a necessary part of meeting emissions and climate related targets.

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[1] This expression of the idea is acknowledged to Michael Grubb, speaking at a BIEE Climate Policy Seminar.

[2] Valuation of energy use and greenhouse gas emissions for appraisal and evaluation.  October 2011.  DECC and HM Treasury.

[3] €15/ tonne may be sufficient to induce early gas for coal substitution in existing plant, for example. 

EUROPEAN ENERGY AND COMPETITION POLICY. AN OBSESSION WITH MARKET STRUCTURES THAT DO NOT WORK.

Europe is in an intellectual mess over several features of its energy and climate policies. This extends to a serious lack of comprehension of some of the most fundamental aspects of electricity economics.  Enthusiasts for competition and free market approaches to the power sector have a preference for what are called “energy only markets”. Unfortunately, and increasingly, these do not work. They do not act as a signal for sufficient investment, or, with non-fossil technologies, even as a useful signal to promote efficient operations. So nation states are increasingly turning to measures such as capacity markets to ensure secure supplies for their citizens. But the realities of national decision making on what is acceptable security further undermine the basis for an overly restrictive competition theorists’ concept of a single European market in electricity.

The European Commission on 13 April 2016 adopted an interim report of a sector inquiry into capacity mechanisms. Commissioner Margrethe Vestager, in charge of competition policy, said that:  "European consumers and companies should not have to face black-outs, and capacity mechanisms can help to reduce this risk. At the same time, consumers should not overpay for electricity and competition should not be undermined. The report published today shows that there is a lot of room for Member States to improve how they assess whether capacity mechanisms are needed, and how they design them. Mechanisms that are open to electricity providers across EU borders are key to building a true Energy Union in Europe."

In other words, energy-only markets are not working.  If they were, why would the market not ensure, as it does in most sectors of the economy, adequate supplies of what people need, when they need it?

Why energy only markets do not work.

A peculiarity of conventional wholesale electricity markets is that they are driven by the short run marginal (fuel and operating) costs of the marginal plant needed at any point in time, normally referred to as SRMC. But if prices are based on SRMC they cannot in normal circumstances provide an adequate reward that covers the full costs, including capital costs, of the capacity required for a secure system. This phenomenon has long been recognised as a fundamental feature of electricity economics.

This anomalous feature of the market can sometimes be masked during periods of technical change and strong fuel price differentials, of which one example was the period of very cheap gas combined with the growth of new combined cycle gas plant (CCGT). In these periods prices continue to be set by increasingly marginal high fuel cost generators, and new low fuel cost plant can earn large profits.  But such periods are exceptional.

What we are now seeing with the growth of renewables is an accentuation of this fundamental weakness in energy-only wholesale market mechanisms. With renewables, fuel costs are zero and as the share of renewables increases, joining other low carbon plant such as nuclear that also has a very low SRMC, the power system as a whole becomes increasingly subject to a zero wholesale price. Unsurprisingly this has led to fears of a capacity shortage and real threats to supply security.

Energy-only markets of this kind do of course have some advantages.  They are easy to grasp intellectually and they lend themselves naturally to a comparatively easy translation across borders. It is therefore not surprising that they should have been grasped with such enthusiasm by proponents of competition and the internal market, an enthusiasm captured tellingly in the above quote from the Commissioner. The increasingly evident distance from economic and financial realities is unfortunate.

Capacity markets are yet another remedy that constitutes a central intervention.

One market solution is to allow higher prices that reflect scarcity, and to choke off consumer demand rather than just depending on a SRMC mechanism.  This reliance on price spikes immediately hits political and regulatory problems, those implicit in the Commissioner’s statement that consumers “should not overpay”. An alternative was the UK approach adopted in 1990. The UK electricity market reforms, the model on which much of subsequent EU endeavour has been based, recognised the problem in the design of the new market structure. The new market rules set a penalty charge for failure to supply, constructed around a notional value of lost load (VOLL).

This was intended as a minimal intervention, and to mimic how a market might operate under conditions of capacity shortage, with the level of VOLL as the critical parameter in setting the security standard expected by consumers. It was a clever administrative device but suffered some of the same drawbacks as reliance on scarcity pricing. It was not well understood and provoked regulatory and political concerns, as well as accusations of market manipulation. At its best it remained an administrative intervention, supplementing a “pure” energy only market. However it demonstrated another important point very clearly, the fact that the issue of determining how much capacity the system should have is inextricably linked with the standard of generation security that is required. In other words it is a regulatory or political decision.

The market issue for capacity mechanisms is that they require some central authority, regulator or government, to conduct the auction, to decide how much capacity is needed, when and where it should be, how bids are to be compared and evaluated, how delivery is to be monitored, and also of course how the new capacity is going to be remunerated. In other words it draws the government into the role of a central purchaser and coordinator, acting over and above whatever else may be going on in the energy-only market.

Now is not the point to comment on the pros and cons of such a development. Clearly such interventions can be done competently or incompetently. The point at issue for the competition authority is that it is national governments that set the national standards of security with which they are comfortable.  But, in the context of an EU internal energy market based on energy-only principles, any decision on security and capacity by any one member state necessarily impacts on every other national market in the EU. Some of these impacts may be trivial, but if a country like Germany (say), close to the centre of gravity of Europe, opts to increase its security standard, it induces additional capacity. This will automatically tend to undermine the energy-only prices on which generators in other countries across the EU are relying.

To take this point to its logical conclusion, the competition and state intervention issues with which the Commission is wrestling cannot be resolved without a single central EU authority determining a common security standard across the EU. This is not going to happen any time soon. Moreover the capacity issue is far from being the only aspect of low carbon imperatives that will challenge the competition authorities.

MORE ON INNOVATION. VITAL BUT EXTREMELY CHALLENGING.

A lecture last week at the Oxford Martin School, by Dan Kammen, climate adviser to President Obama, touched on the issue of negative carbon technologies, and emphasised its importance, a point made strongly in my blog a week earlier. And a reader commented that I had previously understated the task of introducing new technologies. Their observations have emphasised, for me at least, the research priority attaching to negative carbon options, and also the dangers of excessive reliance on a “silver bullet” to resolve the problems of climate policy.

The need for negative carbon

Professor Dan Kannen pointed to a particular category of research. Particle physics was fundamental in its character but not always obviously useful in an immediate way. Developing Edison’s light bulb had been usefulness driven but not fundamental. But sometimes we need use-inspired basic research. (The lecture at the Oxford Martin School can be viewed on Youtube.)

The very challenging objectives set in Paris, even if aspirational rather than obviously attainable, set a clear premium on negative carbon technologies. Although there are known processes that extract carbon dioxide, the most promising to date are those that form part of the natural carbon cycle, or derive from finding means to enhance it.  The task is to replicate or improve on a process with which nature and evolution have experimenting for hundreds of millions of years, to speed it up, and then to convert to an industrial scale of operation.  All this suggests that some research into basics, and some fundamental breakthroughs, are indeed going to be needed.

The value of finding a means of sequestrating carbon directly from the atmosphere is immense.  It is a backstop technology, as Myles Allen has also argued, that provides at least a partial insurance against the worst consequences of excess GHG and climate change. But in the absence of carbon pricing regimes that come remotely close to matching the value we should be attaching to carbon concentration reduction, it also hard to see how it translates into a product of immediate commercial value. It shares the characteristics of other forms of basic research but is essentially use inspired.

Moving from innovation to realisation

A visit to the Ecological Laboratory at Wytham Woods, and discussions with biologists there, reminded me of the complexity of biological processes and hence of “bio-solutions”.  Bill Gates’ optimism over the breakthrough that will “save the planet” is a natural extrapolation from the world of information technology, where a new algorithm can sometimes translate almost instantly into a new solution for an old problem. The biological world is both more complex and much less completely understood, by an order of magnitude. This reinforces concern for reliance on a single “silver bullet” drawn from development of processes in the natural carbon cycle. A biological approach to carbon capture may be a major contribution but it may well turn out to carry its own baggage in terms of unforeseen side effects, unanticipated costs, competition for land use, and public acceptability.

The second comment simply drew attention to the relatively slow pace of change  that typically accompanies major technical changes in energy technologies. Developments in solar energy and battery technology have been remarkable, but progress to effective deployment will still be a lengthy process. The world of energy, unfortunately, is more physical and less virtual. Its stranded assets have longer lives, central solutions with quantities of energy in concentrated form are almost by definition intrinsically dangerous, and the solutions need to penetrate every aspect of energy use. For these reasons we cannot depend on a single simple solution.

SAVING THE PLANET. RELYING ON INNOVATION IS NOT ENOUGH.

Bill Gates has predicted researchers will “discover a clean energy breakthrough that will save our planet and power our world” within the next 15 years.  The Gates’ open letter is a thoughtful and accurate diagnosis of where we are, but we should ask whether innovation on its own is enough.  We already have, or are close to, many of the scientific breakthroughs we need, but the challenges lie in the hard grind of making them viable in terms of cost. In some cases this involves major expenditure in developing new infrastructures and new production facilities, and also stranding existing assets. And time is not on our side. We need other policy instruments, including markets and regulation, both to limit emissions while we get to low and zero carbon, and to force the pace with key technologies whose application is already within our grasp. Reliance on belief in a single and as yet unknown “silver bullet” risks a dangerous complacency and is surely not what is intended.

So what might a “clean energy breakthrough” might look like.  After all we already have quite a number of low carbon contenders: nuclear, carbon capture, wind, solar etc.

A single breakthrough or multiple developments in known technologies?

The answer is surely and emphatically the second. The energy sector is extremely diverse both in relation to production and consumption. Geography has a profound influence on the potential for low or zero carbon renewable energies, most obviously so for solar, wind and hydro-electric power, but also for biofuels.  In terms of distribution and consumption, the very different needs between and within the transport, heat and industrial sectors also tend to require a multiplicity of solutions. And in reality we already have a very wide range of options in terms of many forms of renewable energy, nuclear and carbon capture, as well as in the technologies for using energy. This diversity is also reflected in growing decentralisation of many aspects of energy production and consumption, which further argues for a wide variety of solutions.

But there are perhaps two high priority areas where further breakthroughs are potentially the most profound in their impact.  Most policy scenarios[1] emphasise early decarbonising of electricity generation, by whatever means, and then using the low or zero carbon power to penetrate and substitute fossil fuels in other applications like heat and transport.  The still largely unresolved problem is not production of “primary electricity” per se, but balancing supply and demand in real time, and with intermittent or inflexible resources (eg wind/solar). [2]   So the first area is energy storage; advances that can either store surplus output or provide a low cost energy reserve are a potential game changer. The second area is carbon sequestration - actual removal of CO₂ from the atmosphere. The Paris ambition for zero carbon puts a big premium on any breakthroughs that are carbon negative in operation, offsetting the effects of residual emissions elsewhere.

Energy storage. A critical challenge.

This was the subject of a recent April 2016 seminar, described in my comment of 3 May. The crucial requirement is for storage of energy generated in the first instance as electricity. Presentations and discussion suggested that battery technologies are moving very rapidly, and will be extremely important in creating flexible and reliable power networks based on zero carbon generation. In this context, the relevant scales range from the smallest local networks or off-grid operations up to large national systems.

But an even bigger prize, across countries with strongly seasonal heating or cooling needs, would be seasonal storage at reasonable cost and on a large scale. The economics of storage indicates this is unlikely to be batteries (high capital cost for a relatively small number of charging cycles). That leaves heat, which is a potentially useful but essentially localised form of storage, or conversion of electricity into a chemical energy store, eg hydrogen or ammonia. The ideal would be a route that led to chemical storage as a gas or liquid fuel, natural gas or diesel. This resolves the problems of spilling surplus power, and overcomes the seasonal storage problem. It could have the added cost and other advantages of compatibility with existing infrastructure, notably in the gas network.

Negative Emissions

A realistic carbon sequestration technology with a known cost (at least as an order of magnitude) is a real game changer for the economics of a low carbon economy and our approach to policy.  The necessity for this technology is a corollary of the “net zero” approach on which a UK energy minister has said that the government intends to legislate. It was also emphasised in a recent article by Myles Allen.

Bio-energy with carbon capture and storage (BECCS) is a known technology, of which Drax might have been an early demonstration. One problem is scale and the potential competition bio-crops may face for land in a world also facing possible food security problems. But new GM crops, suitable for arid or marginal lands, might provide one route to an answer. These of course simply constitute an enhancement of the natural carbon cycle, and other artificial methods based on chemical processes may be possible. This looks like one of the biggest outstanding challenges, but if there were a breakthrough it would be game changing. Knowledge that we have a viable backstop technology "if all else" fails, reduces the risk and uncertainty in decision taking and, arguably, provides a simpler approach to pricing carbon emissions.

Reliance on innovation alone may be a dangerous mistake.

The Stern Review described the main instruments of energy and climate policy in the mutually interdependent and complementary categories of markets and pricing, regulation, and innovation. There is a danger of putting too much faith in technology and innovation on their own to solve our problems.  And the clean energy breakthroughs, when they come, may bring their own unanticipated political and practical issues. If we are to avoid the worst outcomes we also need to be making better use of the technologies we already have at our disposal, and other policy options that are already open to us.

Attaching more urgency to what we can do now has a huge potential benefit. This includes pressing ahead faster with known technologies like conventional carbon capture (CCS), but it also includes using the tools of markets and of regulation. We know that better pricing of carbon, and regulation, can discourage unnecessary and wasteful use, and reduced emissions now help us buy time.  Not only does this give us more time to find solutions.  It also improves our global future independently of what eventually emerges as the best solution and mix of technologies . This is because we will reach any given climate milestones (such as 2^oC) later or, if we are lucky, avoid some of the more dangerous outcomes altogether.

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[1] See for example the UK Committee on Climate Change

[2] This is one of the important questions being addressed by the Oxford Martin School Programme on Integrating Renewable Energy.

ELECTRIC VEHICLES. KEY TO THE FUTURE. AND FRIDAY NIGHT IN NORWAY.

WHY ELECTRIC VEHICLES WILL POSE SOME NEW PROBLEMS AS WELL AS SOLUTIONS.

This comment is the third of three short pieces highlighting particular questions for the road transport sector.  The first dealt with the role of regulation in shaping energy efficiency, using US experience as an example. The second dealt with lessons to be learned from the London congestion charge in the context of the environmental benefit of lower congestion.

Electric vehicles provide what is prima facie the perfect solution both to removing fossil fuel use from the transport sector and providing a convenient outlet for low or zero carbon electricity generation which is intermittent or inflexible. The reason is they use batteries and this potentially allows the timing of recharging to be fitted to the needs of the power system. But they also pose some potential problems and new challenges for power distribution networks, an example being the Norwegian  “Friday night” problem, the subject of an interesting anecdote.

Electric vehicles (EVs) are widely seen as the innovation that allows decarbonisation of road transport. A prior condition is that the electricity itself is produced from sources other than conventional fossil fuel generation, ie from nuclear, renewables or thermal plant with carbon capture and storage (CCS). This is already broadly true for countries like France and Norway, but is also the clear ambition for the UK, anticipating a more front-end loaded reduction in carbon intensity for power generation than heat and transport, both of which will also depend on low carbon electricity. We can expect this pattern to be repeated in many countries approaching the commitment to the recent Paris (COP21) agreement.

But the big problem for power systems based on renewables and other intermittent sources is the non-storability of electricity and the need to balance supply and demand in real time. This poses problems both because of the intermittency of supply and the seasonal nature of some new loads such as electricity provided for the heat sector.  The answers are likely to include storage as well as more active maangment of consumer loads.  However electricity for transport has been widely seen as part of the solution rather than as part of the problem, simply because vehicle batteries have the potential to operate as a major source of storage.

Norwegian Experience

Norway is a world leader in EV take-up. Its conditions are particularly favourable because it has what is essentially an all hydro-generation power system. This implies that the electricity generation is non-fossil fuel and essentially carbon free; and it also makes for great flexibility in the way the power system can be operated.

A useful case study is Norway, which is the world leader in per capita take-up of electric vehicles (EVs).  A third of new car registrations are EVs, which now exceed 3% of the total fleet. The great majority of these are all-electric, of which there are now some 75,000.  EVs  have been strongly promoted by the Norwegian government, offering tax incentives and also allowing local authorities to prioritise EV owners for both road use and parking.  As with the London congestion charge, over enthusiastic promotion of EVs in this way may have had some unforeseen consequences that defeated some of the original objectives (by increasing local congestion), but these have not detracted from what overall is a success story.

The Friday night problem[1]

Many Norwegians drive quite long distances to their country retreats at weekends and on arrival seek to re-charge their vehicles. Since a Tesla can require a charge of around 75 kWh, or about a full week of typical household consumption, this creates some big loads on the power network. Over six hours it would create a load of about 12 kW, when the average household loading is usually less than 1 kW. Delivery of recharging over a few hours, when many people may choose the same time slot, has the potential to constitute a major and problematic peak load even for national systems. This would certainly be the case if EV penetration continued at its current rate.  As there are also high geographic concentrations, typically in popular weekend destinations, this also has major implications for thermal and voltage constraints necessary to maintain stability in local distribution systems, and hence for investment in and management of those networks. These are unanticipated demands for large amounts of energy and power, often concentrated at particular parts of the distribution network. In a UK context we can imagine the effect of Bank Holiday “get away” traffic to Devon and Cornwall for example, Cornwall already being a county with potential connection problems in relation to the National Grid.

Solutions

Norwegians are clearly aware of the general issue and an article by Karolin Spindler describes attempts to analyse it in particular contexts and to anticipate possible load shapes posed in particular conditions. But the more general question is one for future operational management of battery or other storage options in the context of low carbon power systems, and for the investment in local systems. Although it may be possible to adopt a “predict and provide” approach, this may imply a high level of potentially wasteful investment in banks of local batteries.  This may be part of the answer but a complete answer almost certainly requires that the conventional utility business model for the supply of power has to change. Offering consumers a choice between:

·         having the right to instant recharging but only at a premium price,

·         rationing demand by local peak charges,

·         organised pre-booking of charging slots

·         or some combination of the above

The Norwegian example will set some interesting challenges. None of these should be insurmountable, but the transport sector, and other factors, will require a radical re-think of the ways we buy electricity. And these rather technical considerations will also be relevant to the ultimate balance between EVs and the other low carbon option - hydrogen powered vehicles.

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[1] I have not been able to verify this anecdote, but in this case I am inclined, in mitigation, to plead what I shall call the Boris Johnson defence.  It may not be true, but something like it is very likely to have happened or to happen in the future. In this context, and unlike the case of the recycled teabags or the Euro-coffin discussed by Mr Johnson with the Treasury Select Committee , it is a useful illustration of the kind of unexpected consequence that needs to be covered in thinking through the technicalities of a system with major electric vehicle penetration.

UK AND EUROPE. IMPLICATIONS FOR THE PARIS AGREEMENT ON CLIMATE

One question that may arise in the UK’s referendum debate is the effect of EU membership on the continuing force of the Paris COP 21 agreement, if the UK votes to leave the EU. Will the UK still be bound by the agreement if it leaves? The answer, unsurprisingly perhaps, is relatively simple to state but perhaps more complex in practice.

First, both the EU and the UK separately became signatories (link provides a full list) on 22 April 2016, among 175 parties signing on that day. This in itself is a surprising story, with a previously recalcitrant Russia as one of the signatories, but not Saudi Arabia. The EU’s internal decision making processes are complex and the official Council decision authorising the EU signature to the Paris agreement was only published on 19 April.

It is likely that there will be significant further internal negotiation before the EU is able to ratify the agreement. Definition of competence is relevant here. In "economic" areas such as trade in goods and the internal market the EU has exclusive competence, but in areas such as environment and climate, competence is shared with member states. In these areas they conclude "mixed agreements" – where both EU and individual member states sign. But in any case significant negotiations are likely to be involved. It is unlikely that the EU would be able to sign up to a commitment without a clear understanding of how it would impact on the individual member states.

Prima facie the position is very simple. If the EU signed an agreement and the UK or any member state subsequently left, then that state would not be bound by the agreement unless it had also signed the agreement itself. If it had not signed it would not be so bound. If it had signed and the EU had not, it would also be bound.

At present it may seem unlikely that either the EU or the UK will ultimately fail to ratify the agreement before the date set for UK exit from the EU after triggering Article 50 of the Treaty on European Union. However given the political correlation between scepticism over Europe and over climate policies, it is possible that the EU could ratify and the UK could leave before ratification, and that the UK could refuse to ratify. The converse, the UK ratifying while the EU did not, currently seems much less likely, but cannot be ruled out if other tensions within the EU continue to multiply.

If, as seems most likely, the momentum from Paris continues to grow, a failure to ratify could make life very difficult for the UK in future post Brexit trade negotiations both with the EU and with other countries. If this is appreciated by ministers, the possibility of non-ratification may seem a little academic.

ENERGY STORAGE. CENTRAL TO THE LOW CARBON REVOLUTION

Energy storage is a critical technology for a low carbon economy, reflecting the need to substitute use of electricity in transport and heat, and the less flexible nature of low carbon power generation. A recent Oxford Energy seminar brought this together in a way that emphasised the profound importance of all three main pillars of energy and climate policy – innovation, markets and regulation. The discussions also brought out the fundamental importance of context in determining the choice and application of storage technologies. Key issues will be managing the future of the heat sector, resolving the problems of longer term or inter- seasonal storage, and using regulation and markets to incentivise the solutions we need.

Energy storage is a critical technology for a low carbon economy largely because most of the alternative options we have for low carbon energy rely on electricity as the main vector to carry the energy output from its source (primary energy) to the point of use.  It is also widely assumed that fossil fuels can be displaced from the very large heat and transport sectors by low carbon electricity.  Electricity itself is an instantaneous non storable commodity, so without some form of storage we cannot easily match production with the times we actually want to use our energy for heat, light or power. This is especially so for less flexible low carbon resources such as wind and nuclear, and a zero carbon commitment will further limit the use of what is traditionally the easiest source of flexibility, fossil fuel generation.

Innovation and context.

The pace of recent advances in battery technology has been staggering, and this advance currently looks set to continue with research and development continuing to drive big improvements both in technical performance and in production costs that parallel the advances made in photovoltaics over recent decades. But the complexities of power systems and the energy sector make it very clear that different solutions are required for different problems.  

There is no “one size fits all” for battery technology.  The key parameters for performance may include capital and energy costs, mobility, speed of response and battery life (in years or cycles). The importance of each depends on the application – weight and volume for transport applications, scale and capital cost for large scale systems, and so on. Li-ion battery costs are falling at a rate that could very soon have a transformative effect of electricity markets, according to one of Europe’s leading battery experts, but they function best when delivering all of their stored energy over a few hours. Redox flow batteries have cycle lives and storage capacities that could be much greater than Li-ion cells, and are one of the few battery candidates for longer-term storage at a utility scale.

For power systems, storage options are increasingly useful both at grid and system levels, but also in relieving thermal and voltage constraints in much more local distribution networks. They will become increasingly important in the context of future electrical loads. For transport this includes coping with unforeseen peaks that reflect personal transport habits (a later comment on Norwegian experience will expand on this).  For heat the scale and seasonal character of heat loads (in temperate climates) poses particular problems and choices.

But this choice extends beyond simply making choices between different types of electric battery. Batteries are in competition with other forms of storage, including heat storage, “gravitational storage” in large hydropower dams, compressed air (for some purposes) and so on. In the key area of seasonal storage, batteries seem  unlikely to provide useful solutions, with conversion to storeable energy vectors such as hydrogen a more practical answer.

Nor can storage questions be separated from their geographical context, with very different answers for hot or tropical climates with high solar potential and cooling load. And they cannot be separated from technology choices in energy use. One speaker emphasised the potential use of “cold” as opposed to “heat” storage, an exciting but neglected possibility, given the increasing proportion of energy use devoted to air conditioning and food storage. Similar options can be discussed in relation to storage of heat, and the provision of cheap battery back-up within individual consumer premises.

Behind this discussion lies the growing realisation that the four options to balance supply and demand in an electricity system can be considered at all levels of scale, from an individual household with solar and batteries, and its own load, up to national or larger systems. The options are more flexible generation or management of consumption, storage, and reliance on external interconnection with an outside source. Flexible generation is becoming much more problematic in a low carbon context, but the future choices that need to be made will involve competing claims from means to store and balance energy at highly decentralised or much more aggregated levels; at its extreme this choice is between smaller scale household heat or battery stores and large scale hydro or other methods.

Markets and Regulation

It is sometimes assumed that markets can or should be the sole determinant of what technologies succeed or fail. But reliance solely on markets is a questionable strategy in determining approaches to storage, for three main reasons:

·         first there is currently no adequate approach to putting a price on the key element of cost, that of the environmental and climate damage imposed by CO₂ emissions. Unless these costs are internalised, markets are unlikely to find optimal or even acceptable solutions

·         second, many storage and energy system solutions have the character of infrastructure investment – investment that is long life, has no alternative uses, and is not mobile. Infrastructure investors will not put up the very large sums required for these without secure long term contracts or other guarantees

·         third, conventional electricity markets were designed to suit the technical and economic characteristics of fossil fuel based power generation. It was observed that any value that storage options can earn by arbitraging electricity markets is likely to be a fraction of their real economic value to the energy system.

Markets do not develop in a vacuum. They are established within an institutional and regulatory framework. One lesson from the discussion was that this framework now needs  to address some fundamental questions around energy storage and other features of a low carbon economy. Storage, the associated choices, and the implications for regulation and markets, sit at the centre of the low carbon energy revolution.

THE LONDON CONGESTION CHARGE. LESSONS TO BE LEARNED.

 SUCCESS FOR A PRICE BASED APPROACH. BUT ALSO A FEW LESSONS.

The London congestion charge addressed a clear objective, to reduce congestion within the relatively small well defined area of Central London, with an approach that reflected the principles that transport economists had been recommending for decades, congestion pricing. Despite imperfections, it was broadly successful and an important bye-product will have been reduced emissions, both of local pollutants and of CO₂. However the attempt to extend the scheme to a significantly larger area failed to impress, and was abandoned, at least partly because it undermined the gains of the initial scheme. This was the result of an important flaw in its design. We can argue that the exemption of “green” vehicles from the charge may also have been a mistake, in relation both to congestion and environmental objectives.

Traffic congestion is a major factor in increasing both journey times and fuel consumption. Attention has usually focused on the first, the economic cost in terms of the time wasted by travellers and their personal inconvenience. But congestion is also, along with higher vehicle speeds, an important source of preventable fuel consumption and hence vehicle fuel emissions.

The standard economic argument for congestion pricing.

The economic case for road or congestion pricing in general is that as the level of traffic builds up the risk of congestion and delay increases with each additional vehicle coming in to a busy road network. The marginal vehicle, in consequence, as well as facing delays itself, also imposes delays and their consequential costs (in time and fuel) on all the other road users in the network at that time.  The amount of additional delay tends to rise disproportionately faster as the total number of vehicles on the road increases - an important factor. The total cost, possibly amounting to several vehicle/ hours of delay, that an additional incremental user imposes on the population of other users on the road, when this is aggregated over all users, may well exceed the value that the incremental user attaches to their own journey. The argument therefore is that a charge for road use can actually benefit everyone.

Some 40 years after economists had first proposed the idea of road pricing to reduce traffic congestion, London’s first scheme was introduced in 2003. It is widely seen as having been effective in reducing congestion, even though journey times have gradually increased again for other reasons[1], and there has been no serious attempt to get rid of the original scheme. As predicted many road users initially welcomed the introduction of the congestion charge because of the benefit to their own journey times. But the Western Extension was much less successful and was abandoned. This comment considers some of the lessons that can be learned.

Flaws and Limitations

There were a number of ways in which the London scheme deviated from a theoretical ideal. Limitations of technology meant that it was not a full blown road pricing scheme, but a simple per day fixed charge on any vehicle moving within the zone for however short a time or distance. The charge applied during working hours but was otherwise not differentiated by time of day. It was therefore not necessarily closely related to the additional congestion any particular vehicle caused. Also, and most importantly, residents in the congestion zone were themselves exempt from the charge. This was very understandable in selling the scheme politically, but a pure economic logic might have argued that the road was public space and there was no reason for charges to discriminate in favour of residents (free) over non-residents, who often had to travel in to the centre to work. The former were often wealthier than the latter.  But the key point is that the factor of charge-free movement for residents was to prove crucial in the extension of the scheme.

In spite of these practical and political limitations the Central London scheme worked well.  So the Western Extension of the scheme should prima facie have been a relatively simple matter and enjoyed the same degree of success. But a significant mistake was made. The same principle of charge-free movement for residents was applied. But instead of creating two zones, with residents enjoying this privilege only in their own zone, the extension merely created a single zone, thereby doubling the numbers not subject to any charge. Inevitably this weakened the impact on congestion. The extension survived for a few years from 2007 to 2011 and was then abandoned.

The Green Exemption. A confusion of objectives.

I believe that a further weakness of the scheme has been the exemption of qualifying low emissions vehicles. To encourage non-polluting vehicles is a praise-worthy objective. But we need to remember that the scheme was designed to deal with congestion. Returning to the original principles behind congestion charging, any additional vehicle, regardless of its fuel source and emissions characteristics, has the potential to add significantly to the journey time of all the other vehicles on the road, the great majority of which will be higher fuel consumption and higher emissions vehicles. It will then undermine both the original economic objective of relieving congestion and reducing travel time, and also the further objective of reducing pollution.

Eventually, if electric or other zero pollution vehicles become the norm, the traffic congestion objective will be lost altogether.

And what lessons should be drawn.

An earlier comment in this blog noted the effectiveness of relatively simple measures of regulation in the transport sector.  This comment notes the success of an economist’s more market and price based approach to rationing the scarce commodity of road space. But the real lessons perhaps are the importance that other policies, eg other lifestyle choices or for land use, can have as an incidental impact for a low carbon objective. In this case we are talking about congestion, but speed is another clear example in the transport sector. The lesson is clear. Rigorous analysis, and focus on objectives, are especially important for market based approaches to transport, and to escape (as far as possible) the law of unforeseen consequences.

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[1] These include factors such as traffic calming measures, pedestrianisation, and increasing population and demand for travel. It is hard to evaluate the counterfactual, what would have happened but for ….