A LOW CARBON FUTURE. MAKING IT HAPPEN.

ETI PUBLISHES INDUSTRY PERSPECTIVES ON HOW TO DELIVER EFFICIENT NETWORKS FOR A LOW CARBON FUTURE ENERGY SYSTEM.

The Energy Technologies Institute (ETI) has just published a number of perspectives on the issues that can be anticipated in moving the UK to a future low carbon energy system. The authors are Robert Hull of KPMG and formerly OFGEM, Keith Maclean Chair of UKERC, Co-Chair of the Energy Research Partnership and formerly Policy Director of SSE, Jorge Vasconcelos, Chair of New Energy Solutions, formerly Chair of the Portuguese energy regulator and founder and Chair of the Council of European Energy Regulators, and myself.

This stemmed from an ETI project to build understanding of options for reforming governance, market and regulatory arrangements to enable efficient investment in low carbon energy network infrastructures. The perspectives were all, in broad terms at least, built around the ETI’s projections of how, in terms of the technically possible, the UK might meet its ambitious targets for reducing carbon emissions. The intention was to identify the non-technological issues faced in transforming the energy sector from long established fossil fuel dependency to a complex mix of interrelated low carbon technologies.

The complex choices are discussed both in the ETI scenarios and in the perspectives. Inter alia they include the multiple links between:

·         A power sector struggling to accommodate its own mix of low carbon technologies – nuclear, renewables and carbon capture.

·         A heat sector looking to the development of district heating networks.

·         A transport sector looking at a future of electric vehicles or possibly hydrogen.

·         Possible options for energy storage, in electro-chemical form, as heat, or in other forms of chemical storage.

·         A combination of centralised and decentralised production, storage and decision making and markets

This formidable challenge is not just about trying to find workable combinations of the above. It is about creating the environment that can make it happen, in terms of market structures, regulation and the wider institutional arrangements that govern the conduct of the energy sector and the application of energy policy. In the widest sense this is something that we can describe as the institutional architecture. Ultimately this determines how decisions are made at all levels.

Particular questions that need to be addressed include:

·         Finding structures that make the necessary investments financeable at a reasonable cost.

·         Dealing with the very different technical characteristics of low carbon generation.

·         Implications of major changes in the heat sector for matters of consumer choice.

·         Finding the right balance between markets, as instruments for decentralised decision making, and policy interventions.

The ETI perspective make an interesting first shot at different aspects of this key task.

HINKLEY POINT. A FURTHER RECOGNITION THAT INFRASTRUCTURE DECISIONS BELONG WITH GOVERNMENT.

GOVERNMENTS CAN NO MORE STAND BACK FROM SYSTEMIC FAILURES IN THE ENERGY SECTOR THAN THEY CAN IN MONEY, BANKING AND FINANCE.

Recognition of the limitations of the market in the energy sector is rapidly becoming universal. The Comment in today’s FT by Martin Wolf, possibly the most widely respected economic commentator in the UK, hammers this point home. The immediate focus of Wolf’s article is the Hinkley decision, but his arguments have a much wider resonance. For the energy sector, and the power sector in particular, the problems (and the market failures) run even deeper than those for infrastructure projects in other sectors. And governments can no more stand back from systemic failures in the energy sector than they can in money, banking and finance.

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“This decision had to be taken by government. No competitive market process would have reached such a decision or even been allowed to reach such a decision. ….  But if government or its agencies are to take such decisions, they must also take them well. …  Regulatory regimes must be designed to address the complex attributes of sectors with significant externalities. Decisions in such sectors are often very lumpy and politically difficult. They cannot — and will not — be left to decentralised market processes.” [Martin Wolf. FT. 16^th September 2016]

This is an excellent summary of what I have argued at greater length in the page on low carbon power. The essential feature of infrastructure, from the perspective of any private or institutional investor, is that the asset is immobile, has few or no alternative uses, and depends on revenue streams over a long period. Moreover infrastructure usually relates to essential services whose management and conduct is subject to various forms of policy and regulatory intervention. It is no accident that the historical development of public utilities has been strongly associated with regulated monopoly, which protects the utility as much as the consumer, with vertical integration, and with long term contracts and government guarantees. These all offer the investor some protection against political or regulatory opportunism, and the temptations to expropriate the investment once the costs have been sunk.

In addition the power sector has some particular market failures of its own. The case for and value of almost all low carbon investment stems from its contribution to reducing emissions and hence limiting the damage of climate change. In the continuing absence of effective and reliable means of pricing CO2 at levels consistent with the policy imperatives of mitigating climate change, there is no way that any private investor can capture this value from any of the existing market processes.

Supply security might in principle be susceptible to a “market” solution, but the NETA reforms in 2000 effectively removed the previous mechanisms that had been designed to incentivise new capacity. Energy only wholesale markets, essentially the lynchpin of current market structures, cannot reward capacity properly, and their weakness is reinforced by the increasing proportion of plant on the system at zero marginal cost. Capacity markets may be part of the solution, but these have to be implemented by some party, the government or its agent, who can specify how much is required and then monitor, control and pay for its delivery.

Existing markets were largely designed by and for fossil fuel fuel generators, the CEGB and its successor companies. They depend on the particular technical and economic features of fossil generation – flexibility, and fuel driven marginal costs – to replicate the merit order in a market driven optimisation of plant scheduling and dispatch. The conditions for this to work successfully cease to apply in situations with more complex technical constraints, such as plant inflexibilities (nuclear) and intermittency (solar or wind).

And of course there are also the many questions linked to the operation of complex transmission and distribution networks, to the influence of external sources such as interconnection, to the use of storage technologies and to the much closer engagement of consumers within future systems. We should also add the strong possibility that technical factors, especially around renewable technologies and storage, will lead to a power sector with much more decentralised operations and decision taking, alongside a continuing need for large scale transmission and interconnection.

Identifying the need for some central and strategic decision making is just the first step. Improving the quality of those decisions, and their execution, is vital. There is a strong case for an agency at arms length from government, and hence more removed from political pressures. It is also easier to build the essential technical and commercial expertise within such a body than within a government department.

The wisdom of the Hinkley decision itself is a more controversial question. Entities such as the Committee on Climate Change or the Energy Technologies Institute, charged with examining approaches the UK’s low carbon targets, tend to positions that assume significant components of nuclear or carbon capture.  There may have been serious questions for EdF around the choice of Hinkley technology, and for the UK government around the negotiation of the price, but, assuming delivery, there is no hard evidence that this is a bad deal. The frequent comparison with current wholesale prices is largely irrelevant since it is quite clear that these are unsustainable as the basis for rewarding investment in a future low carbon power system. The government process may not have been impressive, and it may be quite seriously sub-optimal, but it has at least now made a pressing decision, and we should hope that the Hinkley venture is as successful as the French nuclear programme of the 1980s.

The wider questions, looking beyond Hinkley, are around what institutional changes may be required, in order to exploit rapidly changing technology options, implement the policy imperatives of sustainability and security, and make effective use of markets. All this is calling for a new “system architecture”, a comprehensive re-think of the way the sector is regulated, new market designs, and how networks are managed at local, national and trans-national levels. Expect to hear a lot more about system architecture!

POLICIES FOR DECARBONISING HEAT

A round table discussion last week on decarbonisation of the heat sector was a reminder of just how large and complex a question the future of UK domestic heating is set to become. A paradox of the sector is combination of major technology choices at one end of the chain, with all the potential concerns of parish pump politics (not intended as a disparaging term) at the other. Sourcing the heat in the first place has multiple competing options and poses huge strategic decisions across the power and gas industries; these include modular nuclear, heat and other storage technologies and linkages to carbon capture. But there are also distribution issues including the demand heat pumps can place on local power networks. And downstream distribution of heat in district heating schemes is dominated mainly by the relatively low tech problems of digging up streets, laying pipes, retrofitting homes, persuading or compelling householders, and a myriad of particular local issues and considerations which historically at least are associated firmly with local authorities and their skills and expertise. Our round table focused on the latter and on district heating in particular.

The Big Picture

Most scenarios for a low carbon future, and, post Paris, especially a zero carbon future, expect domestic heat needs to be met predominantly from innovations such as heat pumps installed for individual households, or through communal systems involving the sourcing of heat from combined heat power production, involving various thermal generation technologies. These include modular nuclear and fossil plant with carbon capture, combustion of waste products, and some geothermal and other sources. A fuller discussion of the heat sector from this perspective is given on the [DECARBONISING HEAT] page (button at the top of this page).

The future of heat delivery, in terms of these “big picture” options,  is very obviously bound up with the future of the power sector, but it also has a local scale at which the major transformation has to be implemented, potentially affecting every household in the country. Key points that emerged both from what was discussed at the round table, and what was not discussed, were several.

Immense scale of what is involved, compared to UK experience to date.

DECC evidence suggests there are at present some 1750 district heating networks in the UK, with two thirds of these classified as small (less than 100 households), with an average of 35 households per scheme. There are only some 75 “large” networks with more than 500 households, and the total number of households connected to a network is around 220,000, or less than 1% of all households. So the UK does have some experience in developing and maintaining these networks, but the scale is tiny compared to our expectations for the future.  Even defining “large” as 500 households is revealing in this context. In Denmark the CTR scheme for central Copenhagen serves 275,000 households.

To put this in perspective there are some 27 million households in the UK, so the full decarbonisation of the heat sector by 2050 is likely to require installation or retrofitting  of low carbon solutions (heat network or individual property solution) to around 20,000 households a week over about 25 years, assuming a starting at some point in the 2020s.  In other words this implies an entirely different scale of operation from anything of which the UK has any past experience.

A future district heating industry will develop a very different culture.

The dominant culture in the management of heat networks reflects (mainly) a history of post World War II local authority reconstruction schemes, together with some opportunistic exploitation of specific sources of waste heat from power station or other industrial schemes. The positive benefits of utilising “waste” heat combine with some of the social objectives associated with local authority schemes, including keeping the costs to householders as low as possible. One of the benefits of “waste” heat is that it has frequently been provided at very low or no cost to the scheme.

The low carbon objectives which will underpin the future of district heating will create some very different economic conditions. The supply of waste heat per se is really very limited, although the future will most likely include purpose built installations built specifically with the dual purpose of providing city-wide heating and power to the national system. But schemes will have to fund significantly higher heat costs, as well as infrastructure, and the cost of heat is likely to be significantly higher than it is for today’s householders who enjoy a gas supply.

The economics of large schemes depend on scale. Getting to a reasonable average cost will depend on achieving near universal penetration in high density urban populations. This will accentuate the problems of collective choice for heating and may introduce elements of compulsion.  

Taken together with the sheer scale of the district heat undertaking, the challenges for traditional management structures and assumptions in the heat sector will be immense.

Cost of capital again a critical issue.

Once again, and as in the power sector, the capital requirement will be very large. I have emphasised on many occasions the fact that infrastructure projects “ought” to be considered as low risk, low cost of capital investments. But this requires careful attention to the structuring of the funding arrangements and may require substantial public sector guarantees and significant local government borrowings, another major cultural shift. This is increasingly accepted but it is a necessary condition for the transformation of the sector at a reasonable and affordable cost.

Roll out in conjunction with energy efficiency

One of the most fundamental obstacles to introducing large scale district heating is the physical disruption to the householder. The same issues promote inertia in introducing household level measures for energy efficiency. Given that energy efficiency is a necessary part of overall heat strategy anyway, in order to bring heat loads down to manageable levels, then coordinating and integrating the rollout of low carbon district heat with energy efficiency measures makes a lot of sense.

Regulation

Finally we can foresee some new and challenging questions for energy regulation, and a considerable political overlay.

First, this is another sector dominated by fixed infrastructure, ie network, costs. There is considerable scope for alternative approaches to how those are recovered from consumers, eg a fixed charge per household or an averaging over all kWh of energy consumption. This will include the question of whether heat metering is feasible and desirable.

Second there will almost certainly be a huge variation in actual costs between different schemes and geographies. This may provoke political demands to “even” out the costs to householders, avoiding the “postcode lottery”.

Third, initial concentration on high density urban housing will ensure that social policy issues come rapidly to the fore. Will this lead to new approaches to fuel poverty questions?

RATIFICATION OF THE PARIS AGREEMENT. A MAJOR LANDMARK

The BBC reports today that both the US and China - together responsible for 40% of the world's carbon emissions - have now ratified the Paris global climate agreement.  Members of China's National People's Congress Standing Committee adopted "the proposal to review and ratify the Paris Agreement" on Saturday morning at the end of a week-long session.

The US has long been regarded as in thrall to the fossil fuel industry lobbyists, and Trump and the Republican party platform aim to “forbid” the regulation of carbon pollution and “reject” global efforts to tackle climate change. Trump wants to “scrap” environmental regulations and “cancel” the Paris Agreement.[1] And Republicans may well mount further legal challenges to ratification. However this climate denial is now clearly at odds with public opinion in the swing states that will decide the outcome of the election. In Colorado, North Carolina, Florida, Virginia, and Pennsylvania, at least 75 percent of surveyed adults support regulating carbon dioxide as a pollutant. Over 60 percent of respondents in those same states said that global warming will harm future generations. The marked increased incidence of “once in 500 years” events has also played its part. The New York Times noted the Baton Rouge flood was the eighth once-in-500-year event to occur since May 2015.  To quote a landmark  report of the 214 National Climate Assessment: “Climate change, once considered an issue for a distant future, has moved firmly into the present.”  All this suggests that, despite some of the wilder aspects of the Presidential campaign, a major reversal of US policy, while still a risk, is a less likely outcome.

So what might we conclude from these momentous events?

First, it is increasingly improbable that other countries enjoying or aspiring to global significance or standing will be able to hold back from ratification. The agreement comes into force legally after it is ratified by at least 55 countries, which must also account for 55% of global carbon emissions. With the US and China alone accounting for 40%, and the third largest economy in the world, that of the EU, having been a prime mover in demanding action on climate, the Paris ratification conditions will, one assumes, be met easily and soon.  However the US and Chinese announcements will also put pressure on G20 nations to move faster with ratification and, inter alia, with pledges to phase out subsidies to fossil fuels. In UK domestic politics it no longer credible to argue that UK emissions reduction will have no effect “because the biggest emitters are doing nothing”.

Second, this may be an event that finally marks the end of an era of damaging and irrelevant debate and denial over the fundamental validity of the underpinning science. The science has been very clear for a long time that persistence with high levels of CO₂ and other GHG emissions is an unacceptable risk to the future of humanity. But we are now seeing, perhaps, the collapse of continuing political resistance to these inconvenient realities. That is not to say that further understanding of our climate systems may not throw up some further nasty surprises, or more positively hitherto undetected effects that go some way to mitigating the worst outcomes. But the basic features of the climate risks we are running are now an established, and essential, part of any serious policy debate. And the upward statistical trend lines on global temperature are starting to look remarkably stable. Despite a weakening el Nino, July 2016 set a new record for the highest global temperatures on record.

Third, the challenge of actually meeting the ambitions of Paris remain huge, both in the context of individual national economies and in terms of reaching binding international agreements. At some point we can expect a resumption of debates about historic responsibilities, collective or national, and more hard bargaining over who is going to meet the costs either of mitigation or of adaptation to a warming world.

Finally, and turning to some of the specific issues for the UK, it seems unlikely that that the UK’s commitment to emissions reductions will be reduced by its prospective exit from the EU.  There will be some interesting questions to address, including how the UK motor industry seeks to influence patterns of regulation and technology choice for a low carbon road transport sector in the EU. There will also be the question of continuing membership of the emissions trading scheme, and indeed the future of that scheme within the remaining EU. But some of the more important impacts may well be felt through changes in the tone of domestic economic policy within the UK. The abandonment of austerity targets is likely to change the political and economic climate for infrastructure development, with more willingness to engage in lower cost of capital public borrowing to support investment, and policies that are more friendly towards the UK’s industrial heartlands and the “left behind” voters and regions who swung the vote towards Leave. Exactly how all this will play out remains uncertain, but there is no doubt that energy policy is now being framed against some very different policy priorities, both economically and politically.

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[2] according to Think Progress

HINKLEY C. LINKS TO TRADE ISSUES OR A CHANGE IN POLITICAL PHILOSOPHY?

Normal service is resumed, as the author is again connected to this site after three weeks of very limited broadband access.

My last comment, on the subject of Hinkley C, failed to anticipate just how much the issue might be linked to broader diplomatic and trade issues. I focused on what I thought were the big technical and economic questions, and the position of EdF as one of the main contracting parties. Shortly afterwards, the UK announced that it would be reviewing the matter, and postponing its final decision to the autumn. It emerged that this was not because of doubts over the economic and strategic case, or concerns over the technology, but on broader grounds of national security.

Prima facie this episode represents a remarkable change in political philosophy. Under the prevailing globalisation and neo-liberal paradigms, and under Thatcher and subsequent governments, the UK has been remarkably relaxed about allowing foreign control not only of major British companies but also of key elements of infrastructure in the power sector, water, ports and airports. This has happened to a much greater degree than in other major economies such the US, France and Germany. But Chinese involvement in Hinkley seems to be the issue that is provoking a degree of doubt, and one of the concerns is national security. Or does this represent a high water mark for the philosophy of unfettered global markets?

A lot of features of the project remain unclear. If the Chinese involvement were purely a matter of debt finance, with EdF taking primary responsibility for construction, then it is hard to see why security should be a matter of major concern. However it has already been anticipated that the Chinese will play a much bigger role in subsequent development of the UK nuclear programme, at Bradwell, using Chinese technology, so we must assume that the Hinkley financing arrangements go beyond a simple matter of providing funds. No doubt all will be revealed when the final decision is announced.

Moreover, in the context of the referendum vote, and UK prospects for expanding its non-EU trade, the diplomatic significance of postponing the decision is also considerable. Government ministers are already wrestling with the problems of whether the EU exit vote implies leaving the customs union and the single market, and no clear position has emerged. In early July the UK also received a substantial rebuff from the US, with the US trade representative making it clear that trade discussions could not even begin until relations with the EU had been settled. There is no real reason that this, ie no discussion even in principle, should necessarily be the case. But it is a reminder that when US presidents offer formal diplomatic advice to an ally, they deserve to be taken seriously; this is something of an object lesson for the hapless ministers charged with steering a path to an EU exit that does not seriously damage the UK economy.   

Hinkley point has now caused a serious upset to the prospects for closer trading relationships with China. That is not to say that security concerns are unjustified, but just that trade relations are a complex matter, and may involve very serious compromises over sovereignty. The bottom line though is that in the space of a few short weeks, the UK has undermined its trade and business links with the three largest economies in the world, the US, EU and China.

Expect more trade related issues for the energy sector. One very substantial issue will be the UK’s continued membership of the EU emissions trading scheme. Prima facie this could sit outside the customs union and the internal market. Moreover trading emissions, in principle, and like other theoretical and practical benefits from trade, should allow UK emissions targets to be met at lower total cost. This has to be set against the deficiencies of the actual scheme that is in place. But this remains a large topic for the future, and one to which I suspect this author will return.
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I have learned a great deal about the history of the UK nuclear programme, and some of the background to the Hinkley story, from listening to talks given by Simon Taylor of the Judge School at Cambridge. Simon has a blog at http://www.simontaylorsblog.com/

His new book on the subject is now available: http://www.amazon.co.uk/Fall-Rise-Nuclear-Power-Britain/dp/1906860319/ref=sr_1_1?s=books&ie=UTF8&qid=1456993863&sr=1-1

HINKLEY POINT. DILEMMAS FOR TWO GOVERNMENTS AND BRITAIN’S NUCLEAR SAGA CONTINUES.

Britain’s nuclear saga continues. The UK appears to be committing itself to a new generation of nuclear stations. It is making use of a French design and Chinese finance, and confidence ought to be inspired by the huge success of Electricite de France (EdF) in decarbonising the French power sector in the 1980s and 1990s, a generation ago. Public opposition to nuclear has declined with a growing awareness of its potential contribution to reducing CO2 emissions and mitigating climate change, and its importance is reinforced in the studies and reports coming from bodies such as the Committee on Climate Change and the Energy Technologies Institute. So what is going wrong? Why are there now doubts over EdF’s commitment to the project, its financial viability and the apparently very high cost of the Hinkley Point project to the UK consumer?

First, let us summarise some of the fundamentals.

Decarbonising the power sector remains a first priority in meeting UK climate policy and targets for reduction of greenhouse gases and carbon dioxide emissions. The importance of the emissions objective was underlined by the Paris agreement in December 2015, and despite the pre-eminent position of many climate sceptics in the Leave campaign, there is no sign of Theresa May’s new government reneging on those commitments. To do so would be wholly antithetical to the image of an outward looking Britain that the government is trying to restore.

The most influential energy projections point to a necessary and substantial role for nuclear in decarbonising the economy. These include those from the Committee on Climate Change and the Energy Technologies Institute. It needs to be said that they also generally assume development of carbon capture and storage (CCS). CCS funding was withdrawn as part of Osborne’s austerity programme in November 2015, to the distress of the energy industry and some justified outrage. If anything that merely increases the importance attaching to the nuclear contribution in future. Obviously future developments, eg in renewables, interconnection and storage, could in principle change these perceptions, but that is not yet a mainstream position.

The referendum vote changes nothing. It does not change commitment to carbon targets. Nor does it alter in any fundamental way the commercial interests of the UK and France, even though, along with our substantial reliance on interconnection, it emphasises the close interdependence of our economies. Each government has strong interests in advancing UK nuclear. In each case there may be significant elements of industrial strategy that sit behind official support for the project. France wants to maintain a leadership role in a strong European nuclear industry. The UK needs to rebuild some of its own credibility in the sector and will be hoping to provide at least part of the supply chain for any nuclear renaissance. It also needs the capacity to meet growing demand and its low carbon aspirations. If Hinkley makes sense and is “ready to go” then it is attractive. There are however big questions on whether the UK is paying a fair price, and whether the French have on this occasion chosen to back the right nuclear technology.

What is the EdF financial problem? In financial terms EdF can no longer be viewed as the unconstrained state monolith of yesteryear.  Its financial structure is such that, when viewed as a private company, it lacks the balance sheet strength to take on a major project and construction risk on this scale. However EdF remains 85% owned by the French government, and in spite of the noises that will be made about state aids, it is hard to see a project of this magnitude, and strategic and diplomatic significance, being scuppered by largely theoretical concerns about competition law. Whether the project continues to make technical and commercial sense is another matter.

And the technical problems? The French programme of the 1980s and 1990s was hugely successful, and arguably the outstanding example globally of a successful nuclear power programme. So the technical concerns over the Hinkley Point and Flamanville design might be a surprise. Why not replicate the earlier designs?  Unfortunately the world has moved on. With the hiatus over nuclear build in Europe, much of the previous experience has been lost and the key engineers retired. Changes in regulatory and safety requirements, possibly overdone, mean these are fundamentally new designs, not just modifications to tried and tested ones. Finally power stations such as Hinkley are not just pieces of nuclear technology. They are also huge engineering projects. Like many infrastructure projects, eg Channel Tunnel, they are intrinsically subject to the risk of big cost overruns. All parties, including the French and UK governments, should therefore be seeking the highest possible degree of reassurance that we can be confident the technical problems will be overcome.

A good deal for the UK? That is really a question about the price paid, and the details of the contract, including responsibility for unforeseen costs and liability for any failure to deliver on the promised outputs.  Comparison with current or recent wholesale prices is irrelevant, partly because they do not represent a sustainable long run price even for conventional power sources, and partly because the real question is about how to get to the least cost outcome for a low carbon system. Nevertheless there are strong suspicions that the UK may not have secured a good deal on Hinkley Point. If so this can be put down at least in part to a lack of negotiating and technical expertise in the old DECC, and possibly to ideological refusal to countenance direct UK government funding, which Nick Butler in the FT has estimated could have saved some 20% on the kWh price.

Alternatives for the UK if Hinkley Point flounders

Abandoning nuclear and reverting to new gas fired plant as a transitional measure looks an unattractive option in the context of low carbon targets, since these would risk early closure as emissions targets progressively tighten post Paris. Placing a heavier emphasis on carbon capture means reversing the foolish cancellation of funding in 2015, but this is almost certainly a necessary measure in any case, rather than a replacement for Hinkley.

Even if the decision is taken not to proceed with Hinkley, this is unlikely to be the end of the nuclear story in the UK. Further stations are anticipated, using Chinese technology and different designs. There is also increasing interest in smaller scale “modular” nuclear plant, which avoids many of the potential problems of large scale civil engineering, and relies on factory assembled parts where smaller scale and the benefits of replication can also reduce the risk of serious design flaws emerging at a late stage.

Whatever the outcome of tomorrow’s EdF Board meeting, we can expect to hear more about these issues in the months and years ahead. Doubts over the commercial choices and some of the decision making processes also lead neatly into some of the governance and “system architecture” issues that are gaining prominence and which will be addressed in this blog later this summer and during the autumn.
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I have learned a great deal about the history of the UK nuclear programme, and some of the background to the Hinkley story, from listening to talks given by Simon Taylor of the Judge School at Cambridge. Simon has a blog at http://www.simontaylorsblog.com/His new book on the subject is now available: http://www.amazon.co.uk/Fall-Rise-Nuclear-Power-Britain/dp/1906860319/ref=sr_1_1?s=books&ie=UTF8&qid=1456993863&sr=1-1

BATTERY CHOICE FOR POWER SYSTEMS. THE BENEFITS OF DIVERSITY

  

A colleague who researches battery technologies raised an interesting question. A lot of emphasis in battery research is placed on getting the highest possible energy efficiency, of which their Faraday or Coulombic efficiency is a major component. But what are the key parameters on which battery research should be focused to produce an ideal set of battery choices and options for the power sector? Faraday efficiency clearly matters but battery types have numerous technical and economic parameters, including weight, volume, charging and discharging rates, scalability, capital cost, losses in storage, physical degradation, and so on. The simple answer is ”horses for courses”; it all depends on the application. For power sector applications this takes us into some interesting questions of system economics, and the answers will differ for different geographies and different policy priorities. But there is room for diversity in battery technologies for power systems.

There are several parameters against which any battery or energy storage technology has to be judged and their relative importance may be highly context and application specific. The development of batteries for use in electric vehicles, for example, places a high premium on overall weight and volume and hence on energy density per kg or per litre. In low carbon power systems, the use of storage can provide big benefits in matching less flexible generation with consumer demand.  The mobility associated with high energy density can be a useful feature in local distribution networks, but for large scale application it is the impact on total cost that is the more critical factor. We can start to make some educated guesses about what the key parameters and trade-offs should be, especially when we start to consider the economics of batteries as part of a power system.

Key economic parameters in power generation are capital and operating costs. This leads to a familiar comparison in electricity economics, known as the cost polygon, in which the optimal balance between capital and operating costs is determined by the capacity utilisation (load factor) required of the generating plant. Plant choice for baseload or near continuous operation tends towards higher capital but lower fuel and running costs, and conversely for peaking plant towards lower capital but higher running costs.

Corresponding trade-offs apply to deployment of battery and other storage technologies. Capital costs dominate when the requirement is for a small number of expected charge/ discharge cycles in a year, for example for seasonal storage or as peak capacity. Battery capital costs imply they are very unlikely to be suitable for seasonal storage, at least in the context of current and currently anticipated battery chemistries. Seasonal storage remains one of the big unresolved questions for geographies with strong seasonal loads. The most promising avenues to a solution for seasonal storage are currently seen as forms of chemical storage (eg hydrogen or ammonia), heat storage (for heating purposes), or possibly hydro storage in favourable geographies, rather than batteries. Some of these options will have much lower overall energy efficiencies of around 70% or less, compared to the best batteries with Faraday efficiencies[1] around 100%.

Energy costs are more important for a daily or more frequent cycle. If the main requirement of storage is to flatten the daily load curve, then a daily or twice daily cycle means that much more importance attaches to running or energy costs, and hence the Coulombic efficiency of the battery.  

Prima facie it ought to be a simple matter to compare the economic benefits of a higher capital cost but more energy efficient battery with a lower capital cost but less efficient one. But there is a further question – what is the right way to assign a value to the cost of the energy that will be put into the battery when it is charged. This is a system economics question for the power sector in which the batteries will be operating, and the answer will not always be straightforward, for a number of reasons.

First, the question cannot be separated from an analysis of expectations as to how the system is going to operate and the states of the system when the batteries are called on to charge or discharge. The system marginal cost, for charging, and the system “value”, for discharging, will often vary considerably over the day and year. The cost may be zero or even negative when there is surplus generation, but very high at peak periods. So some analytical perspective is needed on future system operation. At the very least this implies some attempt at high level modelling of the future power system.

Second, for what are currently fossil based systems, costs and wholesale prices will provide only a limited guide to the valuation of energy saving. From a perspective of low carbon and climate policy objectives, which ought to inform a public policy assessment, it must be important to take account of the impacts of any choice on carbon emissions. Emissions have not historically been adequately priced to reflect their climate impacts and many European systems remain essentially fossil based, with fossil generation continuing to set the system marginal cost or wholesale price. So from this public policy perspective a heavy emphasis on Faraday efficiency looks to be fully justified on a relatively short to medium term perspective.

Third, if we look further ahead, to systems that will be based heavily or exclusively on low carbon generation sources such as renewables or nuclear, the question changes. It will be argued that batteries are often charged only when there is surplus renewable (or nuclear) power in the system, to be “spilled” into storage with a zero opportunity cost. In reality the system economics are not quite so favourable, and consideration only of short run marginal cost, ignoring capital requirements, is not sufficient. There will always be some premium on energy efficiency because higher efficiencies ultimately require a smaller quantity of total generating capacity and hence lower capital costs in generation.  But systems which can increasingly build in storage solutions are also likely to find a role for storage cycles with lower than daily frequency. This adds value to maintaining the option to deploy battery technologies which may be less efficient but have a substantially lower capital cost.

And where is this leading?

At least one battery firm has argued [2]that it is a “common myth that people would want to install battery storage to make money by buying cheap off-peak power and selling expensive on-peak power” – a gain that will often depend on very high energy efficiencies.  Instead the “fundamental value proposition” is the “capacity-like” properties of batteries, quick installation in constrained parts of the network, and rapid response to system demands on the grid.

It is therefore likely to be worth exploring alternative battery chemistries, especially if these have the potential to deliver much lower capital costs.[3] This provides power systems with more options, and there are likely to be plenty of conditions under which a lower energy efficiency is acceptable if it results in substantially lower capital costs. But the eventual choices will also be determined by the overall plant mix and the economic and operating characteristics of the power systems in particular geographies.

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[1] 100% Faraday efficiency does not equate to 100% energy efficiency, since there are other sources of energy loss in an electrochemical system.

[2] This particular firm has been developing zinc-air batteries, claiming a significantly lower cost per kWh of storage capacity than lithium-ion.

[3] It may be helpful to give a very loose idea of comparative capital costs and performance. The Dinorwic pumped storage facility in North Wales is estimated to have cost some £425mn to completion in the 1980s, with an energy storage capacity of some 8 million kWh. In today’s money this suggests a cost of around £ 100 per kWh, a number comparable to some projections of future battery costs.  Pumped storage operates at around 75% efficiency over the storage cycle.

LEAVING THE EU. ABOLITION OF DECC. A MAJOR CONCERN FOR CLIMATE POLICY?

One of my concerns over the referendum vote has always been that leaving the EU would reduce the UK voice in EU climate policy. This was never a vote of confidence in EU policy as such, but I continue to believe that it matters, both for the direct benefit of UK citizens and because it does, or did, provide a lever for the UK, which has been a world leader in climate policy, to make a greater positive contribution to global policy and to increase the chance of better global outcomes.

I was also concerned by the close connections, in terms of political philosophy, between the Leave campaigners, the neo-liberal and laissez-faire orthodoxies exemplified by the Institute for Economic Affairs, and the anti-science rhetoric of the climate sceptics.  Victory for the Leave side raised the spectre of much greater influence for this rather backward looking element of the British political establishment.

In consequence Theresa May’s shaping of her new government team has raised a lot of concerns for the future of climate policy in the UK. Stephen Devlin, environmental economist at the New Economic Foundation argues that:

“Abolishing the Department of Energy and Climate Change is a terrible move … and signals a troubling de-prioritisation of climate change by this government.”

This is a very understandable reaction but I am inclined to take a more cautious and less pessimistic view. The labels certainly suggest that climate policy will have less prominence, with DECC ceasing to be a stand-alone government department but ultimately this may matter far less than the ability of ministers to deliver on some very challenging questions. The positive side of the reorganisation is that energy is now placed in the context of overall industrial strategy, which the new government seems determined to take much more seriously than its predecessors.

Given the scale of the transformations that we can anticipate as a pre-condition for a low carbon economy, the importance of this linkage cannot be exaggerated. To list just a few of the bigger questions, the new minister will have on his plate some massive issues. These include:

·         The future of the Hinckley Point nuclear power station, and the nuclear programme in general.

·         Restoration of credibility to the UK’s plans for carbon capture and storage.

·         Future organisation of the power sector to cope with the coming technology. transformations affecting all aspects of energy use and production, and

·         How the UK motor industry responds to the challenge of decarbonising the power sector.

In this context merging energy and industry makes a lot of sense. This is particularly important as the weakness of relying purely on markets to deliver transformative change in the power sector, and more widely, becomes more and more evident.

Richard Black, director of the Energy and Climate Intelligence Unit offers a different view from that of Stephen Devlin:

“Greg Clark is an excellent appointment. He understands climate change, and has written influential papers on the benefits of Britain developing a low-carbon economy. …. Importantly, he sees that economic growth and tackling climate change are bedfellows not opponents – and he now has the opportunity to align British industry, energy and climate policy in a way that’s never been done before."

He adds that “… Theresa May has assured Conservative MPs that her government will continue to be an international leader on climate change, and it would be odd not to continue with that when all the most important new trading partners in our post-Brexit world, such as China, India and the United States, are themselves making massive investments in a clean energy transformation."

This last point is perhaps a key one. Issues of trade policy and trade negotiation will exert a sobering influence on some of the more excitable claims of the Leave camp on climate matters, including the trio of ministers now engaged in seeking to change our relationships with the rest of the world . The idea that the UK can afford to abandon its objectives for a low carbon economy, while the US, India and China press ahead, is simply not realistic.

There are also some questions to be resolved in the context of direct relations with other EU member states. Most obvious is the financing and construction of Hinckley Point. But we will also need to take care that our reliance on interconnections with Europe, now an important element of our security, is not compromised in future commercial arrangements and protocols. And we will need to discuss our participation in the EU carbon trading scheme, the EU ETS.  

Meanwhile Andrea Leadsom, who began badly at DECC by asking whether climate change was real but later promised that the UK government would in due course legislate for the zero carbon future promised in Paris, will be fully occupied at DEFRA.  Her new department may pick up responsibilities for climate adaptation from DECC, but she is likely to be more than fully occupied with explaining to farmers how referendum promises on agricultural subsidies are to be managed in the Brexit world.

So overall, leaving the EU can still be seen as a bad move in a context of global climate policy and international influence. But it does not necessarily have large negative or positive effects on the ability of the UK to manage its own low carbon transitions.

REACTION TO NEW UK GOVERNMENT. BREXIT STARTS TO UNRAVEL. LIGHT AT THE END OF THE TUNNEL?

The new UK Cabinet is interesting in several respects.

It places responsibility for a satisfactory Brexit fairly and squarely on the shoulders of those who argued for it most powerfully, notably Boris Johnson. His reputation as a buffoon, and the fact that he has managed to insult many of the most important people with whom he has to deal may make his task harder, but that is his problem first and foremost. "You broke it, you own it."

Fox and Davis will not find life any easier on the trade front. Several factors are becoming apparent.

 - There is no automatic reversion to WTO status. That is a Brexiteer illusion.
 - Many or most of our potential "new" trading partners will want to see an end to agricultural subsidies. This  may be a good idea in principle (though I'm less sure) but it will be a hard sell for the Tory faithful in Middle England.
 - Other trading partners, notably India, may value freedom of movement as part of the deal. This is ironic. We should be welcoming talented Indians to the UK but that is not what most of the Brexiteer followers voted to achieve. 
 - The appalling complexity of unpicking just about anything - and we potentially have to unpick everything - is becoming daily more apparent.

The leading Brexiters will have the unenviable task of explaining:

- why the concerns expressed by every shade of expert during the campaign have by and large been realised.
- why they are unable to deliver both free trade and control over the level of immigration.
- why the explicit "promises" made in the campaign are undeliverable.
- why the campaign was based on a number of deliberate falsehoods.

And the likely endgame? This is much harder to predict. I suspect May will refuse to trigger Article 50 until a very clear route forward is established. If there is any kind of agreement, with the EU and/or other others, I anticipate it will be put to the electorate either in a referendum or a general election. We may well end up with the default option, which currently looks like the best on the table, that of continued EU membership. But it all depends on how many bitter pills some of our political leaders are prepared to swallow.

An interesting feature is the obliteration of the neo-liberal or neocon influences in the new government. Austerity is abandoned for the time being, and we have promises of a more interventionist government, more emphasis on infrastructure, attacks on the "undeserving" rich and moves to greater equality and support for those regions that have been "left behind".

In these conditions some of the main threats to a positive and constructive UK climate policy look as if they have subsided, at least for the time being. Loss of a separate department for energy and climate change should be a concern but we shall have to wait and see. Retention of our connections with Europe should be an energy priority for the new government, not least because of our physical dependence on interconnection. With luck some of the damage caused by this ill-considered referendum can be repaired.