Embargoed until 00.01 Tuesday 21 April 2009
UK Energy and the Environment Press Release
Latest projections confirm that:
the recession will help to cut the UK's emissions but the Government's carbon-reduction goals for 2010 and 2020 are still likely to be missed
the statutory targets for emissions in 2020 are in doubt because coal and gas-fired generation are set to continue to make significant contributions to the UK's electricity supply
The recession will help to reduce UK carbon emissions by around 6% over
2009-10, but the Government’s long-standing domestic goal of a
20% reduction by 2010 is still likely to be missed by a wide margin
The Cambridge Econometrics forecast suggests that CO2 emissions will decline by around 3% in both 2009 and 2010 as energy use by final users declines due to lower economic activity and the substitution of gas for coal in electricity generation. We now forecast emissions in 2010, as Chart 1 shows, to be 137.4 mtc (14.7% below the 1990 level) in 2010. This implies a fall far steeper than the estimated 8.5% reduction achieved between 1990 and 2007 (the corresponding reduction including the impact of the EU ETS is 12.8%).
Following a 3% fall in 2002, CO2 emissions increased very slightly over 2004-05, but fell marginally by 0.1% in 2006, as high gas prices led to a shift from gas to coal in power generation. Emissions fell further by around 2% in 2007, primarily because power generators shifted back to gas and away from coal as the gas-coal price differential narrowed and energy use and emissions in industry and commerce fell. Provisional estimates based on energy use suggest that emissions fell again by around 2% in 2008, due to continued fuel switching from coal to gas for electricity generation combined with lower fossil fuel use by industry and in road transport. The figures for 2005-08 are based on domestic abatement effort and exclude the net purchases of allowances under the EU ETS.
The projections take into account the Pre-Budget 2008 and Budget 2008 measures involving the introduction from 2008 of the Renewable Transport Fuel Obligation (RTFO), the existing and additional measures announced in the Government’s 2006 Climate Change Programme Review, the Budget 2007 and 2008 measures increasing the Climate Change Levy in line with inflation respectively from 2008 and 2009 and the uprating of the main fuel duties over 2007-09 (the other key policy assumptions and judgments are outlined in the section entitled ‘Context of the forecast’ at the end of this press release).
The new projection is based on key assumptions about the carbon price emerging from the EU ETS. An average allowance price of around €10-11tCO2 is now expected over 2009-10, largely reflecting the impact of the recession in reducing demand for permits, and the knock-on effects of weak oil prices. An increase to €21 is assumed by the end of Phase 2 in 2012 as the economy recovers; a rise of around 2% pa to €26 has been assumed thereafter to 2020. Although there was a reduction of over 13% in allocation of allowances between Phases 1 and 2 of the EU ETS, the forecast suggests that this is not sufficient to achieve the 20% domestic goal by 2010.
Generation from coal and gas-fired power stations is set to make a significant
contribution over the period to 2020 towards meeting the UK’s electricity
needs
An important feature of our current forecast is that, given expected prices of coal, oil, and gas and EU carbon prices, we expect the life of coal-fired FGD plants to be extended beyond the original decommissioning dates. These dates, in our judgment, now seem rather implausible, following the expected investment in FGD technology to comply with the EC Large Combustion Plant Directive (LCPD). We infer from this investment that operators will continue to generate coal-fired electricity past the original decommissioning dates for an extra five to ten years beyond the end of the LCPD in 2015.
This inference is based on a EU ETS allowance price of €26/tCO2 by 2020 and an associated real global oil price of $56 pb (at 2003 prices). However, if the price differential of coal over gas were to be greater than we expect (either through the impact of a higher-than-assumed EU allowance price or because of changes in wholesale prices faced by power generators), then coal-fired plants might, after all, be decommissioned at the planned dates.
At present we forecast that a number of large CCGT plants (over 1 GW), which were originally due to be decommissioned between 2015 and 2020, will now have their lives extended by at least five years. However, as carbon prices have fallen and long-term electricity demand is lower compared to the July 2008 forecast, the amount of gas-fired capacity built over the forecast period is reduced. Consequently, gas-fired generation is lower at 171 TWh by 2020 than in the July 2008 forecast (227 TWh). In total the CO2 projections are similar to the previous projection as more coal-fired generation cancels out the reductions in total electricity generation.
Our forecast suggests that the Government will fall well short of its
renewables electricity targets for 2010 and 2020, and also not meet the
EU-set target of a 15% renewables share in total final energy consumption
Our forecast suggests that renewables will account for around 6% of UK electricity sales to final users by 2010, just half way towards meeting the 10% target. However, if final electricity demand grows at around ¼-1% pa over 2010-20 in line with our latest projections and fossil fuel prices remain relatively high, the share of renewables in UK electricity sales is expected to increase to around 9½% by 2015, well short of the 15% target set by the RO, and around 13½% by 2020, well below the Government’s aspiration for a 20% share.
The forecast failure to meet the renewables target is largely due to the expectation that fossil fuel generation will remain an important contributor towards meeting the UK’s electricity needs over the next decade and there is consequently a smaller demand for new renewables to fill the gap left by the decommissioning of most of the UK’s nuclear and older non-FGD coal-fired power stations.
Consequently, our forecast suggests that the far more ambitious target set by the European Commission of a 15% contribution of renewable energy to the UK’s overall final energy needs by 2020 is, on current policies, also likely to be missed by a wide margin. We expect the share of renewable energy in final energy consumption to rise from the current level of under 1% to 1¼% in 2010, rising to just under 1½% in 2015 and remaining at around that level to 2020.
CO2 emissions are expected to decline substantially by 2010, but then
fall more slowly at around ½% pa thereafter to 2020
Total carbon emissions are expected to decline by around 2% pa over 2005-10, following a slight average increase of ¼% pa over 2000-05. The decline is led by the power generation sector where carbon emissions fall by about 1¼% pa over 2005-10 largely due to lower electricity demand over the short term and the impact of the LCPD in reducing coal-fired generation particularly from power plants not fitted with end-of-pipe filters. Meanwhile, carbon emissions from energy-intensive and other industry, and from commerce are forecast to decline by around 4% pa, with smaller reductions of around 1½% pa in emissions from households and road transport but only slight declines are expected from air transport, as energy demand continues to hold up in this sector.
Over 2010-20, total carbon emissions are forecast to decline more slowly, by around ½% pa, as the emissions from power generation fall by ½%-¾ pa , as a result mainly of a phasing-out of coal-fired generation not fitted with FGD end-of-pipe filters and despite the continued growth in emissions from gas-fired generation. This decline in power generation emissions, reinforced by lower emissions from industry, commerce, and households (and stable emissions from road transport), is partially offset by the continuing rapid growth in carbon emissions from air transport.
By 2020, CO2 emissions, at around 131 mtc, are expected to be 19% below the 1990 baseline and some 7 mtc lower than our July 2008 forecast, due largely to the knock-on effects of the recession, which mean that energy use and hence emissions from industry, commerce and road transport are much lower than previously forecast. However, the latest projection, in common with our previous forecast, does not take into account the proposals outlined in the July 2006 Energy Review and the 2007 Energy White Paper as they have as yet not been followed by concrete policy measures. Our forecast, which is based on domestic abatement effort, includes only the direct impact of the EU ETS allowance price on UK emissions, but excludes the possible impact of additional allowance purchases from other participants in the EU ETS.
The UK is expected to meet the Kyoto target for greenhouse gases
The forecast reduction in CO2 emissions for 2010 means that the UK will easily meet its target under the Kyoto Protocol of a 12½% reduction from the defined 1990 baseline and the average for 2008-12 in the emissions of a group of six GHGs. Official figures suggest that in 2007 GHGs were some 18.4% down on the 1990 baseline based solely on domestic effort; the decline was 21.7% with allowance for trading under the EU ETS. This target is attained in our forecast (based on domestic effort alone and excluding the possibility of additional allowances being purchased from other participants in the EU ETS) with a 22.6% decline between the 1990 baseline and the average over 2008-12 and also reflects large expected reductions in some other GHGs (see Chart 2). This forecast takes into account the rise in CO2 emissions over 2004-05, (and the decline over 2006-08). A crucial element in our forecast is the assumption that, under the EU Emissions Trading Scheme, the average allowance price will rise from its estimated level of €10-11 in 2009-10 to reach €21 by the end of Phase 2 in 2012. The current forecast also includes the reductions in the other GHGs (as noted above).
A deep recession followed by a delayed economic recovery could cut CO2
emissions to 131 mtc by 2015, some five years earlier than in our central
forecast
We have examined what would be the impact on UK final energy demand and carbon emissions if the UK were to experience a deeper and more protracted recession and a more delayed recovery thereafter than envisaged in the current energy and environment projections. The current forecast is based on declines in GDP of 3.2% in 2009, and 0.6% in 2010, followed by growth of 1.8% in 2011, picking up to around 2.5% pa thereafter. In the alternative scenario, GDP is assumed to decline by 4% in 2009, 0.9% in 2010, and 0.5% in 2011, before activity stabilises in 2012 and then economic growth picks up to around 2.5% pa thereafter.
By 2015, the alternative scenario suggests that total final energy demand will be some 2% lower than in the baseline forecast, with industrial energy use almost 11% lower, although household and commercial energy consumption is expected to recover broadly to levels envisaged in the current forecast. Primarily due to reduced emissions from power generation, CO2 emissions in 2015, are some 2½% (3½ mtc) lower at 131 mtc than in the current forecast for 2015. Interestingly, the level of CO2 projected for 2015 in the alternative scenario is the same, at around 131 mtc, as we expect to reach by 2020 in the current forecast in which the recession is expected to be relatively short-lived.
Professor Paul Ekins of King’s College London, who is Senior Consultant to Cambridge Econometrics and co-editor of its report UK Energy and the Environment, comments on these results and singles out their most important messages:
'These forecasts provide a timely warning signal about the stronger policies that the UK will have to adopt over the next decade in order to get on track for its longer-term target of an 80% reduction in emissions by 2050 (the UK contribution widely believed to be broadly in line with the objective of limiting the rise in global average temperature to 2 degree Celsius by the end of this century). The Government is expected to announce its response to the recommendations of the Committee on Climate Change (CCC) on the level of the UK carbon budgets and the 2020 target to coincide with the Budget Report, due on 22 April 2009. The CCC assessed that the EU target of reducing emissions to 20% below the 1990 level by 2020 would mean that emissions of GHGs from the UK should be 34% below the 1990 level, requiring CO2 emissions to be 29% below the 1990 level. These recommendations are more demanding than the minimum 26% reduction required by the 2008 Climate Change Act, but seem to be required if the UK is to be reasonably sure of meeting the 80% target for 2050.
‘However our forecast for 2020 shows that, even with the recession, carbon emissions are expected to be around 19% lower than 1990 levels on the basis of current policies, compared with the 29% required in the carbon budgets. Although we expect the UK recession to cut carbon emissions by some 6% (8.6 mtc) over 2009-10, a more moderate decline at around 0.5% pa is forecast thereafter to 2020 as the decline in emissions from power generation, reinforced by lower emissions from industry, commerce and households (and stable emissions from road transport), is partially offset by the continuing rapid growth in carbon emissions from air transport.
‘Given the great uncertainty around global and UK economic prospects following the financial crisis, we have examined what would be the impact on UK carbon emissions if the UK were to experience a deeper and more protracted recession and a more delayed recovery thereafter than envisaged in our current energy-environment-economy projections. In the current forecast, in which the recession is expected to be relatively short-lived, this level of 131 mtc is not expected to be reached until 2020.
‘The central forecast, therefore, confirms that the Government must grasp the nettle and introduce more effective policies if it is to make any headway towards the CCC’s recommendations for a low-carbon future’.
Context of the forecast
Cambridge Econometrics today publishes the latest edition of UK Energy and the Environment containing detailed forecasts of energy demand and CO2 and SO2 emissions by fuel user and fuel type to the year 2020. These forecasts are based on MDM-E3, Cambridge Econometrics’ integrated energy-environment-economy model of the UK. They are a timely, independent assessment of the latest energy-environment developments, as the Government is expected to announce its judgement on the level of the UK carbon budgets and 2020 target to coincide with the 2009 Budget Report on 22 April 2009. The Government is also expected to announce in summer 2009 the details of policy measures it considers necessary to meet the emissions targets.
The CCC recommended that emissions of GHGs should be 42% below the 1990 level by 2020 and concluded that this would require a 40% reduction in emissions of CO2 by 2020. These targets are conditional on the operation of a global deal under which EU emissions would be 30% below the 1990 level by 2020. In the absence of such a deal and this limit on EU emissions, the CCC recommended that emissions of GHGs from the UK should be 34% below the 1990 level by 2020; the CCC concluded that this would require emissions of CO2 to be 29% below the 1990 level. This recommendation was in line with the EU target of reducing GHG emissions to 20% below the 1990 level by 2020. The CCC recommendations, however, require cuts greater than the minimum 26% reduction required by the Climate Change Act. The CCC concluded that a bigger reduction was required to be on the ‘optimal’ pathway to meet the 80% emissions reduction target for 2050. Our forecast therefore provides a yardstick for assessing the likelihood under current government policies of the CCC targets being achieved by 2020.
The projections take into account the Pre-Budget 2008 and Budget 2008 measures involving the introduction from 2008 of the Renewable Transport Fuel Obligation (RTFO), the existing and additional measures announced in the Government’s 2006 Climate Change Programme Review, the Budget 2007 and 2008 measures increasing the Climate Change Levy in line with inflation respectively from 2008 and 2009 and the uprating of the main fuel duties over 2007-09. The 2p per litre increase in fuel duty, due in October 2008, was implemented in December 2008, though the impact on pump prices was broadly offset by the reduction in VAT from 17.5% to 15% that came into effect at the same time; the VAT cut has been taken into account in our forecast as has the 1.84 p per litre increase in fuel duty from April 2009 that was confirmed in PBR 2008. The projections also take into account the proposed banding of the Renewables Obligation as outlined in the 2007 Energy White Paper. We have also taken a view on the effects of the Carbon Emissions Reduction Target and the Carbon Reduction Commitment aimed at improving energy efficiency in, respectively, the household and commercial sectors. However, we have not taken into account the other proposals outlined in the July 2006 Energy Review, the May 2007 Energy White Paper, the January 2008 Nuclear Power White Paper, or the Government’s intention, announced in January 2009 to set the RTFO art 3.25% in 2009/10, instead of 3.5%, as the legislation required to amend the RTFO order had not yet been passed by Parliament and because none has yet been followed by concrete policy measures.
Notes for Editors
Cambridge Econometrics is an independent private limited company and is owned by a charity, the Cambridge Trust for the Promotion of New Thinking in Economics. It has been providing detailed economic and industrial forecasts since 1978. Our company also provides detailed regional and energy forecasts for the UK, and regional and sectoral forecasts for the European Union.
We provide the most detailed long-term economic and industrial forecasts available for the UK. The projections are based on the ‘Cambridge model’, known as the Multisectoral Dynamic Model of the UK economy (MDM), which was originally developed in the University of Cambridge Department of Applied Economics. This large computerised system has approximately 5,000 endogenous variables and nearly 16,000 behavioural parameters and other coefficients. The model is continually revised and improved to take account of new data and advances in economic theory and econometric techniques. Our system of quality management for economic modelling has been approved as complying with the international standard ISO 9001:2000.
In the energy-environment aspects of MDM-E3, demand for eleven fuel types by thirteen fuel users is modelled, and a capacity-based sub-model of the electricity supply industry is included. Energy demand for sectors other than power generation is determined econometrically, and is consistent with the revised industrial forecast produced on 31 January 2009. The industrial projections take into account the sharp fall in overall UK economic activity recorded in the fourth quarter of 2008 and the knock-on effects expected over the short term. All historical energy data are consistent with the 2008 Digest of UK Energy Statistics, and environmental data with the UK’s National Atmospheric Emissions Inventory maintained by AEA Energy and Environment.
The cut-off date for the information used in the model run for this forecast was 31 January 2009.
UK Energy and the Environment is published twice a year. The forecast and analysis are available on our Knowledge Base website to companies and government departments by subscription to our Energy-Environment-Economy Service, which combines energy and environment forecasts with detailed projections for the whole UK economy. The information is also available to subscribers in printed format.
For further information contact
Sudhir Junankar
Associate Director
or
Chris Thoung
Economist
Tel: 01223 460760
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