Re-Assessing the Prospects for a Diverse Generation Mix in a Market
Dominated by Gas and Rising Prices
Chairman, British Energy plc
Ladies and gentleman, I am glad to have the opportunity to talk to you today. In this presentation, I want to explore the nature of the transition in the power sector that began with the ‘dash for gas’. I want to discuss the role of gas as the sector’s dominant technology and the implications for other technologies including nuclear power. And I’ll try to identify the questions
that this transition requires us to discuss.
Shell 慡pirit of the Coming Age?Scenario
Coal derived methane400or hydrogen
Source: Energy Needs, Choices and Possibilities,
Scenarios to 2050, Shell International, 2001
This is Shell’s ‘Spirit of the Coming Age’ scenario. It portrays one way in which the world’s energy system may unfold. As you’ll see, the scenario shows a world in which the energy system is served by an increasing number of energy sources. Fossil fuels and nuclear energy will continue to make major contributions, but new energy technologies are assumed to emerge in the longer term. It’s also a world in which the most appropriate energy
source is exploited to suit local and regional needs. Electricity is the major energy carrier.
Of course, this is just one vision of the future. Nonetheless, it appears we are set for major transition in our energy system in the first half of this century and, while the role and contribution of gas seem assured, nonetheless it seems to me that we are experimenting with our energy system, and the outcome is far from certain. In the face of changes on the scale contemplated, Government has a critical role to play in this transition, although whether this is as facilitator or market regulator, or both, remains to be seen.
I will focus on the UK situation as one that I know well, and in the belief that many of the messages are equally applicable to other parts of Europe.
Next steps in the power sector transitionTWh
Coal and oil Gas NuclearHydro and new renewables
Source: Digest of United Kingdom Energy Statistics, DTI
The UK currently enjoys the benefits of electricity derived from a number of technologies with coal, gas and nuclear each a major contributor to the total. This is a relatively new phenomenon brought about by the liberalisation of the power sector, which led to the ‘dash for gas’ phenomenon and increased productivity of the nuclear sector, both at the expense of coal. This process has had a positive impact on the environment with carbon emissions down
25% on 1990 levels, helping the government towards its Kyoto commitments.
DTI projections for power sector by technology
Source: Energy Paper 68 (Central-Low scenario data extended
slightly to 2025), Department of Trade and Industry
According to the UK’s Department of Trade and Industry projections, this process is set to continue over the next decade or so, as gas and the emerging technologies displace old coal plant and then replace nuclear plant that is decommissioned.
However, there is growing concern about the impact of the liberalisation process on security of energy supply. It is difficult to establish what constitutes an acceptable security of supply, particularly as the UK has historically been relatively well served in this area, originally through its indigenous coal supply and, more recently, though a generation mix that includes gas derived from the North Sea.
The UK will become increasingly dependent on gas from further afield –
expert opinion in government suggests the UK may have to import up to 90% of its gas by 2020. This means that security of electricity supply, which
is almost 100% today, will decline to just 20% as existing coal and nuclear plant close, to be replaced by gas generation.
In today’s world, perhaps the increased inter-dependency that globalisation
brings is reason enough to down-play the risk of a serious physical disruption to supplies, but nonetheless the resulting strategic weakening in the country’s position is significant but as yet largely uncontroversial. Even so, accommodating these changes will still impose costs on the economy because supply networks will need strengthening, gas storage capacity will have to be increased significantly, and back-up sources for the new renewable technologies provided. In liberalised markets the cost of these will ultimately be borne by the consumer, and yet under pressure from our system of economic regulation, distribution networks are increasingly coming to be owned by heavily leveraged entities with little capacity for incremental investment.
Now let’s turn to emissions.
Projected carbon emissions from the UK power sector
Carbon emissions / million t C
Source: Adapted from DTI Energy Paper 68, 2000
The projected generation mix for the UK has significant consequences for the environment. As I indicated earlier, the switch from coal to gas and increased productivity in the nuclear sector has resulted in a major decline in carbon dioxide emissions from the power sector over the last decade or so.
But, as this chart shows, this trend will reverse as emissions free nuclear generation is replaced mostly by gas, and this will make our attempts to reduce carbon dioxide emissions more difficult and place increased emphasis on the need for reliable and cost-effective generation from non-nuclear renewable sources.
Gas will be the dominant fuel for the electricity sector over the next few decades and the nature and scale of its development will determine the fate of other technologies. But there are a number of issues that will influence the development of gas
Unlike coal and nuclear fuel, gas is used in many applications, with the domestic sector, power generation and industry all increasingly reliant on this resource. Competition may well increase should natural gas emerge, either directly or indirectly, with a role in a new transport technology in the future. In the longer term, the much anticipated ‘hydrogen economy’ may
also rely on gas as a source, placing more pressure on gas supplies. Higher gas prices are consistent with such a scenario.
Security-of-supply issues may also surface as Europe becomes more dependent on gas from further afield - Russia, North Africa and the Middle East. It may well be that the market will deliver gas supplies on the scale required, as many believe, but government may have to act as facilitator to ensure adequate resource access and to encourage private finance for major infrastructure projects, including new pipelines, LNG and storage facilities.
The overall effect of these developments may well be an accelerated depletion of indigenous gas supplies, higher costs to the consumer, and a detrimental effect on the UK and EU balance of payments as imports grow.
From an environmental perspective, natural gas is a greenhouse gas in its own right, with a climate change impact a factor of twenty greater than carbon dioxide. Leakage is a problem at all stages of its cycle - in supply, distribution and end use. In the UK leakage is about one half a percent of throughput. In the future gas may be distributed long distances through poorly maintained networks where leakage rates could be much higher. The more gas is used, the more will leak to the atmosphere.
And the combustion of gas in end use applications results in carbon dioxide and nitrogen oxide emissions, detrimental to climate change and air quality respectively. Overall, a gas dominated power sector will result in higher
climate change impacts than those prevailing today.
Extending the playing field
Playing fieldPlaying field
There is also a major transition underway in the policy arena as government seeks to create the framework to ensure security of supply, protection of the environment, and a fair deal for the consumer. There is a ‘policy space’ described by externalities (meaning the cost of impacts currently captured in the price), by economic instruments, by the market, and by stakeholders.
Applying this framework to carbon emissions for example, we see that the ‘playing field’ occupied in this ‘policy space’ is small at this time. This is because very little of the environmental cost of these emissions is reflected in the cost of products or services; appropriate economic instruments have not been applied in a concerted fashion; none of the major stakeholders are made responsible for their emissions; and the market does not reflect the cost of carbon.
But environmental ‘taxation’ has gradually risen up the policy agenda of the
UK government, as it has in many other European countries. There is considerable ‘experimentation’ being undertaken both with the nature and scope of a number of economic instruments.
Each EU country is developing a portfolio of instruments best suited to its particular needs but in time the ‘playing field’ will fill the ‘policy space’ and
the most effective approach will gradually emerge. In this way nearly all externalities will be addressed using a range instruments, and the majority of stakeholders and the market will be fully involved.
From an industry perspective, it is important that the impact of any new policy initiatives is well understood, and that uncertainty is minimised. This has not always been the case with policy initiatives in the energy arena conflicting with initiatives aimed at conservation, the environment or security of supply.
The EU’s Emissions Trading Scheme for greenhouse gases is the first significant attempt at making fossil generators in the UK and elsewhere pay for the carbon component of their external costs. Unfortunately, the fact that the scheme is based on the free allocation of allowances means these generators are not sufficiently ‘incentivised’ to switch to less carbon intensive or carbon free fuels, making the instrument less effective than it would otherwise be.
There is actually relatively little differentiation between carbon free and carbon polluting derived electricity in the early stages of implementation of this scheme. As such it does little to improve the relative economics of nuclear or other carbon–free carriers.
A move to auctioning at the earliest opportunity is highly desirable from the government’s perspective – it would simplify many of the issues that have
served to ‘tether’ the scheme; it is consistent with the polluter-pays-principle;
it is more likely to encourage switching to low or zero emissions technologies. Furthermore any price rise paid by the consumer would go to the Treasury who can use the revenues to further other policy initiatives in the energy and environment arenas.
Annual baseload forward price curve
Market price, ?MWhLevelised cost, ?MWh
New CoalPre NETAPost NETA
Gas Combined Cycle
The Government’s projections for the power sector in the future are dependent on private investment for new plant and infrastructure. It is relying on the market to provide the appropriate ‘signal’ for investment in new capacity.
The baseload forward price should provide such a ‘signal’. Until very recently the market has ‘indicated’ no new capacity was needed despite a steadily declining reserve margin below historically acceptable levels.
New build requires long term planning because of the many issues that need to be addressed. This means that any ‘signal’ from the market may be too late to avert a possible crisis in terms of securing adequate electricity supplies and meeting the environmental objectives the government has set itself.
Clearly gas generation will remain the preferred new build technology by the market for the foreseeable future. Levelised costs will rise with higher gas prices, but this alone is unlikely to bridge the gap between gas and other forms of generation in the short to medium term.
Renewables will be built because of the generous subsidies on offer, but only to a level where the integrity of the grid is maintained. Recent evidence suggests this could be much less than previously thought due to a number of factors including high costs, intermittency and the need for fossil standby plant.
The so-called ‘clean’ coal option refers primarily to sulphur and nitrogen oxides that can be removed by conventional means – removal of carbon is
much more difficult and expensive. The future looks a little bleak for this technology, although security-of-supply considerations may well provide some scope for its ongoing contribution to the mix, albeit at a lower level than that prevailing today.
That leaves the nuclear option. Nuclear is different to other technologies because the relationship between government and the industry is necessarily strong, even if the plant operators are private companies working in liberalised markets. It’s also a technology not immune from controversy.
UK nuclear power capacity
Source: Adapted from Digest of UK Energy Statistics
The civil nuclear programme has been a fair success in the UK. It has involved the construction of 19 stations in three phases. The first station, a