Category Archives: Technology/Energy

The UK Energy Crisis

What do we need to do to solve the simultaneous energy and climate crises?

What do we mean by the energy crisis?

There are various energy crises (high prices, unstable suppliers, resource depletion(?)). One possibly serious energy crisis is the potential shortage of electricity generation capacity.

For example, by 2015, the UK might have only 80% of the generating capacity that it needs.

What are the reasons behind this ’energy gap’?

Firstly there is a closing of existing capacity: both of old nuclear power stations coming to the end of their lives and of dirty coal power stations being closed down due to EU regulations: see this report p11-13.

Secondly, there is large uncertainty in the market.

Uncertainty leads to:

a) returns need to be higher or else investment won’t take place [1]

b) investment may be delayed, especially if a delay will lead to the resolution of uncertainty [2]

The problem now is that there is severe uncertainty over the future of the energy in this country. The government has assuaged some of the regulatory uncertainty by making strategic statements about the future of nuclear, renewable and fossil fuel energy. But there remains great financial uncertainty.

Each power source has uncertainties:

a) Gas: the fuel is now expensive, making this source uneconomic if such prices were to be maintained

b) Nuclear: nobody has built a nuclear power station in the UK since Sizewell: there are considerable price escalation and legal risks. A power station can be built in 7 years but with all the regulatory and public opinion hurdles new power is unlikely to come on stream before 2020. The government was 5 years too late in its decision.

c) Renewables: the Renewables Obligation, unlike the German system of ‘feed-in tarrifs’ provides a highly uncertain return

d) Carbon Capture and Storage (coal or gas): again we don’t know the exact cost until the plant has been built. Any plants built by 2015 would be ‘demonstration’ plants.

e) Coal. The dirtiest energy source of them all. The price of energy in the form of coal is a lot lower than the price of energy in the form of natural gas or oil. However, is the European Emissions Trading Scheme carbon price sufficient to control the price?

In this sitution, gas is ruled out as too expensive. renewables may happen if they can get through planning, nuclear is too late for 2015 but could make a significant impact from 2020 onwards. We are stuck between the rock of our climate change ambitions and a hard place of the investment response of low-carbon electricity to current ambitions. What we need is strong incentives for investment and in particular strong incentives for low carbon electricity. My next post will explain how this can be done.

References

[1] uncertain cashflows will lead investors to require a higher return in order to compensate for the risk. in otherwords people will invest but only if the price is right.

In otherwords, uncertainty may lead to less investment and the prices of that investment may rise to compensate investors for the extra risk incurred.

The relevant theory of this is known as certainty equivalent. Under certain conditions, an investor’s aversion to risk can be represented by a higher or ’risky’ discount rate. For a full account of the relation between the various ways of representing risk in investment decision see Rothwell and Gomez (2003) “Electricity Economics”, IEEE press, NJ, USA pages 53-74

If governments make investing more risky than it needs to be, then electricity consumers (industry and the public) are likely to have to pick up the bill in higher bills or blackouts.

[2] If investment is irreversible there is a further effect. Real options theory shows that a combination of irreversibility and uncertainty can lead to investments being delayed. See for example Dixit and Pyndyck ’Investment Under Uncertainty, Princeton.

The Biofuel Blues, or, it’s the Opportunity Cost, Stupid!

As I woke up this morning BBC Radio 4 was telling me the very encouraging news that an adviser to Barack Obama has questioned his policy on biofuels. I can find no reference to this story on the Web, but Obama’s website still leads its entire discussion of energy with a speech made in Des Moines, Iowa, capital of the corn belt. For some reason the BBC suggested the policy was to win votes in Illinois. I wonder whether they’ve muddled the two states: won’t Obama win Illinois anyway, being already senator for that state, and isn’t it Iowa that is famous for being corn-country? Though corn does grow in Illinois, too.

Continue reading The Biofuel Blues, or, it’s the Opportunity Cost, Stupid!

What Will It Take to Make New Nuclear Happen?

Electricity price risk is not the whole story

It is not clear whether there will be new nuclear build in the UK without some form of government support. Although nuclear power station can provide electricity to society at a reasonable cost 24/7, it is not a generation type suited to varying the amount electricity produced. So nuclear can be a risky investment if the price of electricity is very volatile and falls below the level need to make interest payments.

Prof David Newbery has recently written an article “Be Creative, Reduce the risk of nuclear investment” http://www.econ.cam.ac.uk/eprg/pubs/misc/Newbery_NuclearInvestmentRisk_FT_080109.pdf

In it, he suggests that the risk of a volatile electricity price, faced by new investors in nuclear can be mitigated by generators selling bonds which pay according to the electricity price.

On Wednesday afternoon I had a meeting with a city financier, about the idea. His thoughts were that the financial risks associated with new nuclear are more fundamental than just the risk of a volatile electricity price.

The main problem with financing nuclear are the long-term liabilities and the fundamental absence of trust in the nuclear industry.

Continue reading What Will It Take to Make New Nuclear Happen?

Biofuel Payback Periods

A sustainable development talk yesterday made the point that we have to be careful not to focus purely on carbon emissions to the atmosphere, since if we do this we may make other environmental problems worse. The examples of acidification and eutrophication (elevated levels of nutrients e.g. nitrogen) were mentioned, but I’d certainly add water availability to the list.

At first sight, different problems of sustainability may seem to be incommensurable. But I suggest they can be related in various ways. For example, we could set up tradable quotas of all different emissions to the atmosphere allowed in a given geography – e.g. globally or in South Cambridgeshire – and establish financial markets for all resources, in particular water and land, and allow the market to sort the problem out for us. Having a Carbon Budget alongside the fiscal Budget, as our friend Alistair Darling has announced the UK will do from 2009, in fact represents a reinvention in a limited form of that clever tool we call “money”. The wrong approach, IMHO. What’s needed is political courage, not a new currency. If it is indeed necessary to postpone from April to August a 2p/litre rise in fuel duty, then we’re only pretending to solve the problem. You can’t make meringue without breaking eggs, Chancellor.

Until and unless we monetise all environmental resources, we can nevertheless make ad hoc analyses to try to work out whether we are doing the Right Thing. The use of biofuels is a case in point. Here, the crucial resource is land, because land (that we humans have deemed is not required for food production or other uses) can be used either to grow biofuels or left alone to sequester carbon. There may be other reasons for using land to grow biofuels, but here we are only concerned about global warming. We therefore consider growing biofuels to be a way of employing land to try to alleviate global warming, using a resource (the land) to (supposedly) reduce a liability (carbon emissions in the atmosphere). Since land stores carbon naturally (go for a walk in the woods!) there is an opportunity cost in terms of carbon emissions of the land we use to grow biofuels. The crucial question is how long we have to grow a given biofuel for on land with a given carbon carrying capacity (dependent on climate conditions etc.) in order to produce a net carbon saving.

A few years ago we were all talking about our “ecological footprints”, i.e. how much land we need to support our lifestyles. If we switch from fossil fuels to biofuels we obviously increase our footprint. Land use therefore seems to me the obvious measure of whether biofuels are indeed sustainable. Growing biofuels saves (if we’re lucky) an amount of carbon each year. This amount is small relative to the amount of carbon stored in a natural ecosystem on the same land. I therefore suggest that the critical measure of sustainability is the payback period, the number of years for which biofuels would have to be grown in order to justify the decision to farm the land rather than allow it to support a natural ecosystem, such as a forest. This idea is developed in this paper:
Biofuel Payback Periods (pdf).

Once again, for a little more discussion around the issue, please see my original essay on this topic, Biofuels Are Not the Answer (pdf).

Note that my argument is not particular to biofuels. It can also be applied to other land uses. We need to take the opportunity cost of the land required into account when, for example, deciding what food to eat or how to produce energy. In the case of renewable energy, my method is really no different to taking into account the carbon emissions (and/or energy) “embedded” in the hardware. PVs, I’m reliability informed, take about 1 year to pay back the energy cost of their manufacture. If the purpose is to “displace” carbon emissions, and we start to cover fields with the things (as apparently is being done in Germany), then we also need to consider the payback period for the land being used – a PV “farm” is no longer able to support an ecosystem, such as a forest. Obviously, the best place to put PVs is in the desert, where there’s also more sun per square metre and less cloud, and not artificially divert the world’s limited supply of solar panels to Northern Europe.

Biofuels Are Not the Answer

By Tim Joslin
Full Article (pdf)

The threat of global warming has led governments around the world to encourage the use of biofuel, in particular in the transport sector, in the hope of displacing fossil fuel. The UK, following an EU Biofuels Directive, is introducing a Road Transport Fuel Obligation (RTFO), requiring fuel providers to ensure that 5% of their total road transport fuel sales “is made up of fuels from renewable sources” by 2010.

It is already well-known, through the efforts of, in particular, George Monbiot, that a large-scale diversion of agricultural land to the production of biofuel will set up competition between food and fuel, between people and cars. Vast tracts of rainforest are already being cleared to create more land on which to grow biofuel crops, such as oil palm. Governments may argue that they can manage these problems, whilst continuing to promote biofuel use. This is doubtful.

But there are even more fundamental arguments against biofuels. This paper shows that the use of biofuel to supplement fossil fuel for vehicle transport is not only disastrous in practice, it is also flawed even on its own terms, in two distinct ways:

  1. plant-growth on land is one of the main ways in which CO2 is removed from the atmosphere. Land is therefore a resource in the fight against global-warming. Even under optimistic assumptions, growing biofuel crops will not reduce atmospheric levels of CO2 over any timescale of up to more than a century, compared to preventing deforestation or even simply leaving already cleared land alone and allowing natural plant growth to capture carbon.
  2. we know that within a few decades we must dramatically reduce our reliance on fossil-fuels, especially in the transport sector, where capturing and sequestering carbon emissions would be very expensive. In terms of achieving this objective, the use of biofuel is counter-productive. Instead of encouraging investment in energy supplies that are renewable for the long-term, measures such as the RTFO incentivise businesses and individuals to make further investments in technology for burning fossil fuels. Government should instead encourage a technological path from hybrid cars, through plug-in hybrids, to electric cars. Instead of continuing to burn carbon, our future transport energy needs can be met by the generation of electricity using true renewable and/or nuclear technologies.

Biofuels are not the answer.

Full Article (pdf)