Energy system crossroads - time for decisions UK 2030 low carbon scenarios and pathways - key decision points for a decarbonised energy system ICEPT Discussion Paper October 2015 Ref: ICEPT/WP/2015/019 Dr Keith Maclean Dr Robert Gross Dr Aidan Rhodes Dr Matt Hannon Bryony Parrish Imperial College Centre for Energy Policy and Technology Acknowledgements This paper was produced with support from the European Climate Foundation. It benefited from comments from Professor Jim Watson, Director of the UK Energy Research Centre and other colleagues from a range of universities and was discussed at an expert workshop attended by representatives of DECC, DfT, HMT and the Committee on Climate Change. The authors are extremely grateful to all concerned for their advice and input and to the comments and advice of Dr Keith Allot of ECF. We are also grateful to input and support provided throughout the project by Dr Jamie Speirs and Dr Phil Heptonstall at Imperial College and to the wider ICEPT team. All errors and omissions are the authors’ alone. ICEPT Discussion Paper October 2015 Ref: ICEPT/WP/2015/019 Imperial College Centre for Energy Policy and Technology Contents Executive Summary ................................................................................................................................. 1 1 Introduction .................................................................................................................................... 3 2 Background - A plethora of scenarios and an appetite for indecision? .......................................... 5 2.1 Introduction ............................................................................................................................ 5 2.2 Policymaker indecision? .......................................................................................................... 6 2.3 The importance of network infrastructure ............................................................................. 7 2.4 Linking scenarios to decisions ................................................................................................. 8 3 Heat Sector Issues ........................................................................................................................... 9 3.1 Introduction ............................................................................................................................ 9 3.2 Reducing demand ................................................................................................................. 10 3.3 Managing peak requirements ............................................................................................... 12 3.4 Decarbonisation - the future of gas networks? .................................................................... 12 3.5 Electrification - Heat Pumps.................................................................................................. 13 3.6 The role of Distributed Heat ................................................................................................. 14 3.7 Replacing gas boilers ............................................................................................................. 16 3.8 Backstop measures ............................................................................................................... 16 3.9 Further considerations .......................................................................................................... 17 4 Transport Sector ........................................................................................................................... 18 4.1 Introduction .......................................................................................................................... 18 4.2 Demand ................................................................................................................................. 18 4.3 Fuel prices and other costs ................................................................................................... 19 4.4 Types of vehicle ..................................................................................................................... 20 4.4.1 Battery electric vehicles ................................................................................................ 20 4.4.2 Hydrogen vehicles ......................................................................................................... 21 5 Electricity Sector ........................................................................................................................... 23 5.1 Introduction .......................................................................................................................... 23 5.2 Pace and timing of decarbonisation ..................................................................................... 23 5.3 Levelised costs of low-carbon technologies by 2030 ............................................................ 24 5.4 Fossil fuel technology assessment ........................................................................................ 24 5.4.1 Oil and coal.................................................................................................................... 24 5.4.2 Gas................................................................................................................................. 25 5.5 Low carbon technology assessment ..................................................................................... 26 5.5.1 CCS ................................................................................................................................ 26 5.5.2 Nuclear .......................................................................................................................... 26 5.6 Renewables technology assessment .................................................................................... 27 5.6.1 Wind .............................................................................................................................. 27 5.6.2 Solar PV ......................................................................................................................... 28 5.6.3 Biomass ......................................................................................................................... 29 5.6.4 Hydro and Marine ......................................................................................................... 29 5.6.5 Overall objectives for renewables ................................................................................ 29 5.7 Market issues ........................................................................................................................ 29 6 Summary of Recommendations .................................................................................................... 31 7 Bibliography .................................................................................................................................. 33 Executive Summary Successful reduction of greenhouse gases will depend upon the decarbonisation of the energy system. A large number of UK energy system scenarios envisage substantial progress with decarbonisation in the period to 2030. To assist the new Government in thinking through key decision points, this paper reviews a broad spectrum of recent UK energy system scenarios and seeks to provide an explicit linkage between the outcomes that the scenarios envisage (for 2030 and beyond) and the policy choices and investor actions that will be needed in the coming years. Linking scenarios to policy is not uncomplicated. One reason is that many scenarios use optimisation models that behave a bit like a central planner. In the real world there is no perfect foresight, and decisions are made by multiple agents. The paper does not seek to ‘centrally plan’ a route to decarbonisation, rather it derives the key decisions and actions – some to be taken directly by government bodies, others to be encouraged indirectly through market instruments and regulation – necessary for delivery. This is not a prescription of what must happen, rather a consideration of the policy implications of achieving the decarbonisation envisaged in scenarios. Simply put, the paper assesses what action is likely to be needed if the decarbonisation outcomes are to be achieved. Many of the decisions derived from the scenarios may be needed rather earlier than is commonly recognised due to the long lead time associated with network infrastructure and large capital projects, such as nuclear power stations, or the time taken to roll out very large numbers of new consumer products. This is especially the case if they are dependent on new or extended infrastructure, where there can be substantial costs and impacts associated with the transition that may not be well represented in existing models and which need further analysis and consideration. The paper looks at the challenges from a whole-system perspective and recognises that an overall framework of decisions will be needed. It also analyses the sequencing of these decisions with a practical reflection on physical delivery and recognition of the interactions and interdependencies across sectors. It deliberately starts from the demand side because this helps to ensure that the implications for supply and distribution can be properly assessed. Since most scenarios foresee significant electrification of heat and transport at some point, any approach to power sector development and decarbonisation must take these other sectors into consideration and recognise not only the overall demand to be satisfied, but also the distribution of this in time - across the day and across the seasons - and geographical location. By making simple, but realistic assumptions about real life delivery challenges the paper lays out the key junctures at which various types of decision and action are needed. It makes clear that all those involved will be able to make better informed choices if there is clarity about the overall destination, which also makes it easier to decide what to do as new crossroads are encountered and to determine what corrective action should then be taken when hurdles are encountered, even if there is remaining uncertainty about exactly which pathway is correct, how some participants might behave, or whether each and every policy will be a success. The paper links scenario outcomes to decisions across heat and personal transport, and for power generation. Scenario outcomes which point in similar directions are highlighted – especially where this reveals actions of low or no regrets. Where they contain mutually exclusive elements, or diverge significantly, the paper outlines the informed choices that must be made to narrow down 1 the range of options and focus limited resources, especially when enabling network infrastructure is required. Other decisions are recommended which put in place backstop regulation to ensure that desired outcomes are not only incentivised, but also underpinned. It will be important to achieve the right combination of approaches, appropriate for each situation – regulation, on its own, may be more effective and cost less than financial incentives, but might be seen as too draconian and lead to poor acceptance and political risk. The paper starts by looking at heat (because of its large energy use and its extreme daily and seasonal demand fluctuations) and then transport before considering the power sector. Some of the key recommendations for each sector are summarised below: Heat  Long term, effectively targeted investment programme in residential and commercial buildings to reduce energy demand for space heating and hot water  Analysis of the potential role for ‘decarbonised’ gas to allow continued use of valuable gas network infrastructure and storage  Clear plans at a local level for the potential use of heat pumps and district heating  Regulation of any move away from natural gas boilers and to adapt appliances for alternative fuels  Regulatory backstops to ensure the necessary measures are deployed to reduce and manage heat consumption. Transport  Stronger regulatory measures to underpin the move away from fossil fuel powered vehicles  Clear local plans for the stepwise roll out of electric vehicle charging points and/or hydrogen refuelling points, building on local public sector and business requirements. Electricity  Carbon intensity target for electricity production and/or phase out plans for coal and oil  Market and regulatory reform to support necessary system services - security, flexibility and balancing  Plans for the next stages of CCS deployment and infrastructure delivery  Enhanced competition for nuclear contracts through expedited design approval of multiple technologies  Guidance on locational and volume aspirations for renewables The paper concludes that, unless key decisions about deployment and the supporting network infrastructure are made, the necessary investment in innovation, production and standardisation needed for cost savings is unlikely to be forthcoming. Therefore, delaying or making no decision, even if this is pending better information about costs, could actually be the most expensive option. 2 1 Introduction Successful reduction of greenhouse gases will depend upon the decarbonisation of the energy system. A large number of UK energy system scenarios envisage substantial progress with decarbonisation in the period to 2030. Policy decisions made at an EU and Member State level will play a central role in determining whether this happens (European Commission 2014). With a new UK government in place, the Fifth Carbon Budget due in December 2015 (Committee on Climate Change 2014) and the Government’s response to this to be published in 2016, there is an ideal opportunity to inform the decision making process about the transition to a low carbon energy system. Building on the accompanying analytical annex where leading energy system scenarios are summarised, this discussion paper seeks to stimulate debate about important and urgent choices that will affect progress with decarbonisation. It seeks to link energy system scenarios to energy policy and delivery actions, particularly those actions that may need to be initiated in the immediate future and during the current parliamentary term. The paper reveals that the significance, speed and scale of changes envisaged in scenarios for 2030 is not yet matched by an urgency and clarity of purpose in policy, let alone action. The paper therefore considers in particular these key decisions that will need to be made by policymakers to stimulate the actions that will need to be undertaken by industry, consumers, operators and other participants in the energy system if satisfactory levels of decarbonisation are to be achieved. The paper does not seek to ‘centrally plan’ a route to decarbonisation, as if all possible actions were in the hands of central government. As we discuss in Section 2, although many scenario-modelling exercises do use optimisation models that plan an idealised future energy system, the real world is much more complex and uncertain. The paper seeks to create an understanding about what decisions and actions are needed if the changes that the scenarios envisage to meet Government’s targets and legal obligations are to stand any chance at all of coming to pass. It also differentiates between the key decisions and actions, acknowledging that some will be taken directly by Government bodies, both central and local, whilst others can only be encouraged indirectly through suitable incentives and regulation. One reason decisions are urgent is the long lead time associated with network infrastructure and large capital projects, such as nuclear power stations. There is a further challenge – the time taken to roll out very large numbers of new consumer products, something that may also be dependent on new infrastructure (examples include electric cars and charging stations or domestic heat pumps and power network upgrades). This can create problems where ‘chicken and egg’ decisions prevent progress – e.g. without a charging infrastructure electric vehicles are less viable yet until electric vehicles appear in large numbers the case for creating a charging infrastructure is limited. In some cases the paper also argues that there are potentially substantial costs and impacts associated with transition and new infrastructures that may not be well represented in existing models and need urgent further analysis and consideration. The paper concentrates on the UK and builds on previous UKERC research, including a working paper which reflects on historical energy system scenarios (McDowall et al 2014) as well as an in-depth review of more recent energy system scenarios undertaken by Imperial College, which was discussed at an expert workshop hosted by UKERC in June 2014. The paper has also been informed by the wider programme of research being undertaken by UKERC, including work on energy system uncertainties (UK Energy Research Centre 2014) and estimating future costs (UK Energy Research 3 Centre 2013b) as well as work by Imperial College on the decarbonisation of heat, (Sansom & Strbac 2012) and the long-term role of coal (Gross & Speirs 2014). Section 3 discusses the general context in terms of decarbonisation scenarios. Section 4 discusses the heat sector, electrification of heat, the potential for re-purposing of the gas networks and the role of distributed heat. Section 5 discusses the transportation sector, including future demand levels, fuel prices and the electrification of transport. Section 6 discusses the electricity sector, decarbonisation pathways, investment levels and technology assessments. Section 7 provides a summary of the recommended decision points. The chosen sequence is a practical reflection of the need to ensure that changes to the supply of energy and associated networks properly reflect changing patterns of energy use. In other words, it deliberately starts from the demand side because this helps to ensure that the implications for supply can be properly assessed. For example, partly driven by a wide consensus that in all scenarios the electricity sector must be decarbonised extensively and quickly, many detailed discussions begin (and often end) with ideas for electricity supply and networks. However, since most scenarios also foresee significant electrification of heat and transport at some point, any approach to power sector development and decarbonisation must take other sectors into consideration and recognise not only the overall demand to be satisfied, but also the distribution of this in time - across the day and across the seasons - and geographical location. 4 2 Background - A plethora of scenarios and an appetite for indecision? 2.1 Introduction There are a large number of models and scenarios for the future energy system (Analytical Annex 2015). Many recent UK scenarios have important commonalities, for example scenarios from the Committee on Climate Change, Department of Energy and Climate Change, National Grid, UKERC and others all point to the need to substantially decarbonise electricity generation in the period to 2030. These scenarios are listed below and are further described in the Annex (Analytical Annex 2015). Scenario Sets Selected Scenarios CCC 4th Carbon Budget Scenario National Grid Future Energy Scenarios 2014 Gone Green Low Carbon Life UKERC Scenarios Update 2011 Low Carbon DECC-AEA Carbon Plan 2011 DECC-1A-IAB-2A Table 1: List of Selected Energy Scenarios Yet this ‘consensus’ can disguise a raft of differences, for instance the mix of renewables, nuclear and carbon capture and storage varies markedly across scenarios (Gross & Blyth 2014). Models will produce different outcomes given different judgements about future technology costs, build rates for new technologies and various policy decisions. Unsurprisingly, scenarios that seek to meet a particular objective (for example a target level of CO g/kWh) describe a different mix of generation 2 options from those that seek to explore market drivers without a carbon constraint. Those that model a high carbon price come to different conclusions from those that concentrate on feed-in tariffs or other measures. Substantial differences also arise with regard to the scenarios which have been developed to represent how future demand for decarbonised domestic heat will be met (routes being varied in terms of the role of energy efficiency, gas, heat pumps, district heating, renewable heat and others). In the transport sector scenarios again vary in terms of the rate of roll-out of electric vehicles, penetration of advanced hybrid vehicles or how important a role biofuels and other vectors like hydrogen can play. A recent UKERC working paper (McDowall & Keppo 2014) evaluated historic energy system scenarios dating back to 1978. It produced a number of findings, a selection is summarised below:  Scenarios in the past were not just wrong, but real outcomes lay outside modelled boundaries, and developments considered too unlikely did materialise  Scenarios mirrored the biggest concerns of the time, but what turned out to be the most important were not always captured – this was especially true of institutional, political and governance elements  Actual pathways were more challenging than ‘least-cost’ models suggested  Communication of results is important and should recognise that, on the one hand, ambiguity was often ignored or used as a reason to discredit and reject findings as unreliable, while on the other, quantification was often too precise and created a false impression of accuracy and certainty. 5 This led to a number of conclusions which are useful in setting the context of this paper:  Diversity is important – thinking must be opened up to a wide range of possibilities, perspectives and framings, and be supported by a range of tools and techniques – the richest and broadest picture of uncertainty emerges when insights from multiple scenario studies by different organisations are combined.  Too great an emphasis on consistency across methods and approaches to thinking about the future generates a mistaken focus on a narrow range of uncertainties and possible futures.  Future work should include examination of scenarios in which goals (e.g. security of supply, climate change mitigation, cost reduction) are not met or only partly met, and should include greater attention to social, political and institutional uncertainties alongside policy and technology. With this in mind it is perhaps unsurprising that scenario exercises can differ significantly from each other and from reality. Many scenarios make use of an idealised modelling framework in which costs are minimised and the system optimised as if it were centrally planned. However, in the real world there is no central planner with perfect foresight, and decisions are made by multiple agents as well as government – from a single regulator, through a few monopoly network operators to millions of households. What also becomes very clear is that the scenario outcomes are determined to a great extent by decisions about the key inputs and parameters applied. This is a direct parallel to the real world where outcomes will also strongly depend on the decisions that are made, or indeed, not made. Therefore, if the UK is to get even close to the scenario outcomes, important choices have to be made. Once there is clarity about the destination, it is easier to decide what to do as crossroads are encountered - corrective action can then also be taken, even if there is uncertainty about exactly which pathway is correct, how some participants might behave, or whether each and every policy will be a success. The key purpose of this paper is to show how insights from the scenarios can be used to guide and inform which up-front decisions and subsequent actions are needed to determine the path towards, and the ultimate shape of the future energy system. 2.2 Policymaker indecision? For a variety of reasons UK policymakers have tended to stress the need to keep options open, support a broad variety of approaches and technologies and avoid ‘picking winners’ (Gross et al. 2012). This concept was right at the heart of the Government’s Carbon Plan in 2011 where it announced it would be running a “low carbon technology race”. Option creation is indeed an important component of policy and it is essential that policy continues to promote and reflect innovation. However, in an increasing number of areas, if the 2030 goals for decarbonisation are to be met, then strategic decisions are needed, so that technologies and systems can be implemented efficiently at scale – particularly where new or modified supporting network infrastructures are needed, where large scale investments are required and where large volumes must be rolled out in in order to have a material impact on emissions. There is no shortage of policy tools – what is missing are the decisions about what these tools are meant to deliver and a consistent, long term approach to their application. For instance, on the supply side of the electricity sector, Electricity Market Reform (EMR) has created a framework where tenders and auctions run by or on behalf of government will largely determine 6