EnergyPolicyGroup

Keepingupwiththecostsofenergysystemchange

8thMarch2017

i.soutar@exeter.ac.uk@isoutar

10thFebruary2017

EnergyPolicyGroup

Overview•  IntrototheEnergyPolicyGroup

•  Overviewofenergysystemchallenges

•  Currentcostsofgenera?on

•  ...Thesearechanging

•  Respondingtochangingeconomics

EnergyPolicyGroup

TheEnergyPolicyGroup•  14membersbasedat

Penryncampus

•  Allaspectsofenergypolicyandgovernance

•  Understandingprocessesandimplica?onsofchangeinenergysystems•  Regula?on;economics;

markets;ins?tu?ons,poli?cs;people

•  Focusedonpolicyandsocietalgoalsofenergy

•  Interdisciplinary•  Impact-oriented

hLp://geography.exeter.ac.uk/research/groups/energypolicy/

EnergyPolicyGroup

Mul?plechallengestobeovercome

•  Thestructureofourenergysystem(bothtechnologicalandhumanelementse.g.ownership)givesrisetosocialandeconomicallyimportantproper?es–  Security–  Carbonintensity–  Affordability

•  Toaddressthese,policy-makers(andinterestedpar?es)seektoaffectchangeindirec?onandscaleofinvestmentsinenergytechnologiesandrelatedinfrastructure

•  Therearecostsandbenefitsassociatedwithalteringthesystem•  Policyaffectswinnersandlosers

EnergyPolicyGroup

Publicinterestissuesofenergy

Publicinterestissuesaroundenergyserviceavailability/affordability•  Essen?alforpublichealthandsafety•  Energyisofna?onalstrategicsignificance

•  Produc?vity/economicdevelopment•  Jobs/industrialstrategy–energypolicynowunderBEIS

•  EnergyassetsoutlastshiXingpublicinterestissues•  Societalburdenof‘externalcosts’ofenergy(climatechange,pollu?on)•  Publicinterestspansgenera?ons–systemmustadapttoreflectthe

changingneeds/preferencesofsocietywithregardtotheenergysystem

Energypolicydecisionsmustbeabletodemonstratevalueformoney/bedefendable/legi?mate

SeeSustainabilityFirstNew-PINpaper

EnergyPolicyGroup

SECURE LOWCARBON

AFFORDABLE

•  ‘Trilemma’soughttocaptureenergypolicygoals

•  Eachdecisionrepresentsopportunitytomeetall3goalssimultaneously

HOWEVER•  Clearthatexis?ng

energysystemunabletomeetthesechallenges

EnergyPolicyGroup

Thefourthchallengeofovercominginer?a

•  Manyelementsofthesystemresistanttochange–  Centralisedtechnologies-Economiesofscale,interdependent–  Incumbentenergycompanies?edtobusinessmodels–  Ins>tu>ons–formalandinformal‘rules’,e.g.regulatoryregime–  Manyconsumersunable/unwillingtochangebehaviour

•  Thislocksusintoinferiortechnologies,markets,ins?tu?onsdespitetheemergenceofalterna?ves–  Renewables,storage,efficiencymeasures,flexibility,newbusiness

modelsetc•  Resis?ngchangeensuresthatwewillpaymorefortheenergy

systemthanneedbe

EnergyPolicyGroup

Centralizedsystemscanfindithardtochangedirec?on…orindeedacknowledgetheneedto

EnergyPolicyGroup

Energybillscontributetocostsofrunningandtransformingtheenergysystem

Wholesalecosts

Networkcosts

Opera?ngcosts

Environmentalandsocialobliga?oncosts

VAT

Otherdirectcosts&margin

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Costofbuying/impor?ngelectricityonwholesalemarket

Costoftranspor?ngelectricityvianetworks,andensuringelectricitydemandiscon?nuallybalancedbysupply

Costsofrunningasupplybusiness(sales,billing,metering,staff,marke?ngetc.)

Costsofadministeringenvironmental&socialobliga?onpolicies(energyefficiencyprogrammes,emissionsreduc?on,andrenewables)

Basedonaveragedomes?c

electricitybillin2016,£562

hLps://www.ofgem.gov.uk/consumers/household-gas-and-electricity-guide/understand-your-gas-and-electricity-bills#thumbchart-c6544416133875424-n100630

EnergyPolicyGroup

Costcons?tuentschangingover?me

EnergyPolicyGroup

Communica?ngcostsandpricesareinherentlypoli?cal

•  Rela?onshipbetweenenergycostsandpricesisnottransparent•  E.g.framingofenvironmentalandsocialcomponentsas‘green

crap’

EnergyPolicyGroup

Costofcurrentop?ons

BEIS2016hLps://www.gov.uk/government/uploads/system/uploads/aLachment_data/file/566567/BEIS_Electricity_Genera?on_Cost_Report.pdf

EnergyPolicyGroup

Costofupcomingop?ons

BEIS2016hLps://www.gov.uk/government/uploads/system/uploads/aLachment_data/file/566567/BEIS_Electricity_Genera?on_Cost_Report.pdf

•  TotalcostsofonshorewindandsolarprojectedtobelessthanvariablecostsofCCGTby2025

•  OneCri?cismofREisthatits?llneedscostlybackupintheform

offossilplant…•  But,itwillbetechnically

cheaperforgasplantoperatorstobuywindandsolarin2025…

ratherthanburninggas

EnergyPolicyGroup

Futureenergycostsnotoriouslydifficulttoforecast

0

20

40

60

80

100

120

140

160

180

2016 2020 2030

Levelised

cost(£/MWh)

Commissioningyear

ChangeinLCOEes>matesfrom2013-2016

LargescalesolarPV2013

LargescalesolarPV2016

Onshorewind>5MW2013

Onshorewind>5MW2016

Offshorewindround32013

Offshorewindround32016

EnergyPolicyGroup

Costreduc?onsinsolarandstorage

EnergyPolicyGroup

Costreduc?onsthroughlearning

EnergyPolicyGroup

Lotsoffactorscancontributetocostoverruns

hLps://workspace.imperial.ac.uk/icept/public/cost%20es?mates%20for%20nuclear%20power%20in%20the%20uk.pdf

EnergyPolicyGroup

IntermiLencyisthenewnormal

BloombergNEFhLps://www.bbhub.io/bnef/sites/4/2016/10/2016-10-11-BNEF-EMEA-Summit-ML-Keynote.pdf

EnergyPolicyGroup

Changingcosts:thenewnormal

Loweroverallcosts,buthigheropera>ngcostsassociatedwithintegra>nghigherpenetra>onsofwind(2013–2030)

Higherpenetra?onofintermiLentrenewablesmeansloweroverallopera>ngcosts(nofuel)buthighersystemintegra>oncostsintermsofreplacingoutdatedenergyinfrastructureSystemIntegra>onCostsinclude•  Increasedbalancingcosts•  Networkreinforcements•  Increasedbackupcapacity•  Costofmaintainingcarbonemissions

EnergyPolicyGroup

Climatechangeis‘…thetragedyofthehorizon.Itgoesbeyondthebusinesscycle,thepoli?calcycleandthehorizonoftechnocra?cauthori?es,likecentralbanks,whoareboundbytheirmandates.’…‘Earlierac?onwillmeanlesscostlyadjustment’butthat

‘thewindowofopportunityisfiniteandshrinking.’MarkCarney,September2015

Movingtoasustainableenergysystemmeanslargeupfrontcosts,butmorerapidsavingsthanotherwisepossibleunderahighcarbonscenario•  HighCAPEXrenewablesoffsetneedforfossil

fuelplantinvestmentsandfuelcosts•  ReplacingvehicleswithEVs•  EfficiencymeasuresDecisionsabouttheenergysystemmusttakealong-termview–andbalanceshorttermcostswithlong-termbenefitsEncouraginglargeupfrontinvestments–ratherthanmaintainingthestatusquoispoli?callydifficult–especiallyincurrentclimate

hLp://riskybusiness.org/fromrisktoreturn/

EnergyPolicyGroup

Theroleofpoli?csinenergypolicy

•  Economicsdoesplayahugeroleinpolicy,althoughmodelsandanalysesareopentointerpreta?on–conclusionscanbebiased

•  Forecastsverydifficulttomake.Economicsisanartratherthanascience

•  Nosuchthingasanobjec?velycheapdecision– Differenttechsofferdifferentsetofservices

•  Decisionswillalwaysresultinwinnersandlosers

EnergyPolicyGroup

Keepingupwithchange•  Newtechshavedifferent

characteris?cs,andthusrequirenewwaysofopera?ngthesystem

•  Fric?onsinevitablewhenthefundamentalsetoftechnologiesandchoicesinamarketplacechange

•  Difficultforu?li?estoadaptunlesspolicyandregula?onareasproac?veandinnova?veaswewantregulatedbusinessestobecome

•  Upfrontcostsofchangemeanthatconsumersmustbeengagedinenergydecisions–throughCE,forexample

•  Notadap?ngnowwillincreasecostsforfutureconsumers

hLps://www.gov.uk/government/uploads/system/uploads/aLachment_data/file/505218/IC_Energy_Report_web.pdf

EnergyPolicyGroup

Movingfromthis…

•  Monolithic•  Unidirec?onal•  Lumbering•  Unresponsive•  Fragile

Thedifficultylies,asKeynessaid,“notinthenewideas,butinescapingfromtheoldones”

EnergyPolicyGroup

…tothis

•  Distributed•  Diverse•  Responsive•  Innova?ve•  Nimble

Thedecisionswemakenowaffecttheabilityoftheenergysystemtocaterfortheneedsoffuturegenera?ons