Embargoed until 00.01 Tuesday 16 September 2008
UK Energy and the Environment Press Release
Latest projections confirm that:
the Government’s 2020 carbon emissions and renewables goals will be missed
the statutory targets for emissions in 2020 are in doubt because coal and gas-fired generation are set to make significant contributions to the UK’s electricity needs
In this forecast we have projected the share of renewables in total UK electricity sales incorporating an innovative model treatment of the Renewables Obligation. The treatment measures the cost-effectiveness of various renewables technologies taking the income from Renewables Obligation Certificates (ROCs) into account and comparing it with that of conventional technologies. Investment in renewables technology, according to our model, is stimulated if the net present value of revenue for a particular technology exceeds its capital and running costs. The modelling also includes the Government’s banding measures where technologies such as offshore wind and advanced conversion technologies are given relatively higher levels of support in terms of ROCs/MWh than already competitive renewables technologies such as onshore wind. In the model, the banding is represented by a relative increase in NPV of favoured renewables technologies, making them more competitive vis-à-vis, say, onshore wind. However, only a small proportion of required new-build up to 2010 is expected to be from renewables, as several CCGT stations are likely to be profitable and have already been given the go-ahead.
Our forecasts suggest
that the Government will fall well short of its renewables electricity
target for 2010 and 2020, and also not meet the EU-set target of a 15%
renewables share in total final energy consumption
The Cambridge Econometrics forecasts suggest that renewables will account
for around 5% of UK electricity sales to final users by 2010, just half
way towards meeting the 10% target. However, if electricity demand grows
at around 1-1½% 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 10¼% by
2015, well short of the 15% target set by the RO, and around 15½%
by 2020, well below the Government’s aspiration for a 20% share and
below the 21¾% in the January 2008 forecast.
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 twelve years and there is consequently a smaller need 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 forecasts suggest 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 2¼% in 2010, 3¼% in 2015 and reach just 4¼% by 2020. Our assessment supports that from the Renewables Advisory Board, the BERR-sponsored independent government advisory body, which reported in June 2008, that to make real progress towards the 15% target, would require radical policy measures to promote a step change in the level of renewable deployment in the UK. Such measures remain under consultation or discussion and are not confirmed policy and so are not in our forecast.
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. 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.
However, with an assumed EU ETS allowance price of €32/tCO2 by 2020 and associated with a projected real global oil price of $124 pb (at 2003 prices), 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 allowances 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, however, 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. The result is an additional 4 GW of gas-fired electricity capacity and 3 GW of coal fired capacity in 2020, compared with our last forecast. Consequently, coal and gas-fired generation is higher in the current forecast than we previously projected; and this underlies the upward revision of our CO2 projections. Moreover, the extension of CCGT and FGD coal-fired capacity indicated in our current forecast means that there is a smaller capacity gap for new renewables and CHP technologies to fill than would have otherwise been the case.
The projected fall in carbon emissions
over 2005-10 suggests that the Government’s
goal of a 20% reduction in CO2 emissions by 2010 will be missed
CO2 emissions increased very slightly over 2004-05, but fell marginally
by 0.1% in 2006 (the figures for 2005 and 2006 are based on domestic abatement
effort and exclude the purchases of allowances under the EU ETS), as high
gas prices led to a shift from gas to coal in power generation. Provisional
estimates based on energy use, however, suggest that emissions fell by
around 2% in 2007. CO2 emissions are now forecast to be 140.5 mtc, (12.4%
below the 1990 level) in 2010. This implies a fall far steeper than the
estimated 7% reduction achieved between 1990 and 2007 (see Chart 1). The
projections take into account the Pre-Budget 2007 and Budget 2008 measures
involving the introduction from 2008 of the Renewable Transport Fuel Obligation
(RTFO) and the existing and additional measures announced in the Government’s
2006 Climate Change Programme Review. They 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 July 2008 review of the proposed
rate of increase in the RTFO because none has yet been followed by concrete
policy measures).
The new projection is based on key assumptions about the carbon price emerging from the EU ETS. An average allowance price of around €25/tCO2 is now expected in 2008, the first year of Phase 2 of the ETS, rising to €26 by 2010 and €27 by the end of Phase 2; a rise of around 2% pa to €32 has been assumed thereafter to 2020. While 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. Total carbon emissions are expected to decline by around 1½% 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 1% pa over 2005-10 as the higher allowance price in Phase 2 of the EU ETS reduces coal-fired generation. Meanwhile, carbon emissions from energy-intensive and other industry, as well as from households and commerce and road transport, are forecast to decline by around 1½-3¼% pa, but increases in emissions are expected from air transport, as energy demand continues to rise in this sector.
CO2 emissions are expected to decline substantially over 2005-10, stabilise
over 2010-15, but resume their decline thereafter to 2020
The forecast suggests that total carbon emissions will decline substantially
by around 1½% pa over 2005-10 led by a fall in emissions from power
generation, but also reflecting declines from all major final users except
air transport. Over 2010-15, total emissions stabilise, as the modest decline
in emissions from power generation, industry and households is broadly
offset by the continued growth in emissions from air transport and commerce
and, to a lesser extent, road transport. Over 2015-20, however, total carbon
emissions resume their decline, by around ¼% pa, as emissions from
power generation fall more quickly by 1% 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 and households, is partially offset by the continuing rapid growth
in carbon emissions from air transport and more moderate growth from road
transport.
By 2020, CO2 emissions, at around 138 mtc, are expected to be 14% below the 1990 baseline and some 5½ mtc higher than our January 2008 forecast, due largely to higher emissions from power generation. 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 2006 GHGs were
some 16.4% down on the 1990 baseline based solely on domestic effort; the
decline was 20.6% 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 19¾% 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 2006-07). 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 €25 in 2008 to average €26 over Phase 2 (2008-12). The
current forecast also includes the reductions in the other GHGs (as noted
above).
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 reality check about the progress that the UK is likely to make over the next twelve years towards achieving its goal of at least a 26% reduction in carbon emissions by 2020 and at least a 60% reduction by 2050. Our projections are released as the Climate Change Bill is expected to become law this autumn and the independent Committee on Climate Change is due to advise the Government on whether the 2050 target should be increased to 80% to take account of the scientific evidence when it also reports in December 2008 on the level of the first three five-year carbon budgets covering the period to 2022. Meanwhile, the European Commission has proposed a challenging EU-wide 2020 target of a 20% renewables contribution to final energy demand, with the UK required to reach 15% under the effort-sharing agreement.
‘The headline message from these forecasts is that, despite all the rhetoric about the urgency of tackling climate change, the Government has seemingly still not understood the stringency of the policies required to move the UK towards a low-carbon economy. In particular, the 2020 target of a 26% reduction in carbon emissions being legislated in the Climate Change Bill will be missed by a large margin, unless further tough policy measures are forthcoming soon, because such policies take time to produce an effect.
‘Our forecasts also show that the Government is likely to miss all its related targets: its 20% carbon reduction goal by 2010, its declared aim of deriving 10% of UK electricity sales to consumers from renewable sources eligible under the Renewables Obligation (RO) by 2010 and its aspiration of a 20% share by 2020. The disappointing performance on renewables reflects the too-weak incentive in the RO. Our modelling projections suggest that renewables will account for just over 5% of UK electricity sales to final users by 2010, compared with around 4½% in 2007, rising to 10¼% in 2015 and 15½% by 2020. But even this advance will hinge crucially upon electricity demand expanding by around 1-1½% pa after 2010 in line with our latest forecasts and fossil fuel prices continuing to remain fairly high. The proposed changes on banding the RO, to provide differentiated support levels for differing renewables technologies, particularly offshore wind, require primary legislation. It is unfortunate for the Government’s 10% target that these modifications can only be introduced in April 2009 at the earliest. Moreover, the Government’s longer-term aspirations for a more substantial contribution from renewables to UK’s electricity generation mix by 2020 are also frustrated in our forecasts by the expected extension of CCGT and FGD coal fired capacity that has the effect of restricting the growth of new renewable technologies, despite the closure of most of the UK’s nuclear and nearly all of the older coal-fired power stations not fitted with end-of pipe filters.
‘On these projections fears about an ‘electricity gap’ in the next decade are misplaced. Rather it looks as if new renewable plant will be crowded out by the life extension of existing fossil-fuel generating plant. Therefore, we predict that the far more ambitious, legally-binding target set by the European Commission of a 15% contribution of renewables to the UK’s overall final energy needs by 2020 is, on current policies, 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 just over 4% by 2020. To make real progress towards the 15% target will, as the independent BERR-sponsored Renewables Advisory Board report in June 2008 has emphasised, clearly require major, innovative policy measures that promote a step change in the level of renewable deployment in the UK. The measures identified include accelerating grid connections, streamlined consenting processes, early introduction of revised support mechanisms and, most importantly, strong political leadership.
‘The forecasts also indicate that despite high energy prices the Government’s policies to promote a low-carbon future are not yet sufficient to meet the carbon challenge restated most recently in the May 2007 Energy White Paper and the Climate Change Bill. Although provisional estimates based on energy use suggest a 2% fall in carbon emissions in 2007, the 20% goal, as acknowledged in Defra’s Second Annual Report to Parliament on the UK’s Climate Change Programme in July 2008, appears to be out of reach, although it has been the Government’s policy since 1997. Our forecast suggests that a 12½% reduction is likely by 2010, but this depends on a significant fall in coal-fired power generation, because of the assumed price of allowances under the EU Emissions Trading Scheme. We expect carbon emissions to be some 14% lower by 2020, suggesting that the 20% goal will, on current policies, may well not be achievable even ten years later than originally envisaged. Meanwhile achieving the 26% reduction on 1990 levels, as required by the Government’s interim target in the Climate Change Bill, will be a daunting task unless robust policy measures are introduced that promote carbon reduction.
‘There are also a number of key uncertainties for the longer-term future. These include oil prices (current relatively high prices are helpful for emissions reduction), the price of EU ETS allowances (their volatility is not conducive to emissions reduction, despite the current relatively high Phase 2 forward price of around €25/tCO2) and the behavioural response to that allowance price, particularly in power generation. However, the January 2008 European Commission proposals for the post-2012 architecture of the EU ETS, if adopted, may help to give a more certain longer-term signal for the price of carbon. Our projections have consistently identified the main barriers to a low-carbon economy to be higher emissions from the transport sector, which is still expected to account for over a quarter of the UK’s CO2 emissions in 2020.’
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, shortly before the Climate Change Bill becomes law this autumn and the Climate Change Committee is due to provide advice by December 2008 to the Government on its review of the UK’s 2050 target of a 60% cut in carbon emissions and on the level of the first three carbon budgets. Our forecasts also provide the context for assessing the official consultations on the European Commission’s draft directive on the EU’s renewables target and post-2012 arrangements for the EU Emissions Trading Scheme, and on nuclear power following the January 2008 White Paper.
The projections take into account the Pre-Budget 2007 and Budget 2008 measures involving the introduction from 2008 of the Renewable Transport Fuel Obligation (RTFO) and the existing and additional measures announced in the Government’s 2006 Climate Change Programme Review. They also take into account the proposed banding of the Renewables Obligation as outlined in the Government’s 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 July 2008 review of the proposed rate of increase in the RTFO 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 Econometrics Trust for the Promotion
of New Thinking in Economics. The company has been providing detailed economic
and industrial forecasts since 1978. Our work also includes 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 United Kingdom. The projections are based on the ‘Cambridge
model’, known as the Multisectoral Dynamic Model of the UK economy
(MDM), and 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 industrial forecasts released on 30 June 2008. All historical
energy data are consistent with the 2007 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 May 2008.
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
Manager of UK Energy-Environment Service
or
Phil Summerton
Energy-Environment Economist
Tel: 01223 460760
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