Transcript insights from UK experience and links to the

Climate change, innovation
and the fossil fuel industries
- Insights from UK experience and links to TAR
Presentation to SBSTA consultation on IPCC Third Assessment Report
Milan, 27-28 November 2003
Michael Grubb, Associated Director of Policy, The Carbon Trust
Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &
Senior Research Associate, Department of Applied Economics, Cambridge University
Imperial College
OF SCIENCE, TECHNOLOGY AND MEDICINE
The energy context:
UK is not an obvious choice ..
 ‘Britain is an island of coal in a sea of oil and gas’
– Common observation in energy studies during the 1970s
and 1980s
 “ We could defeat climate change if we chose to. Kyoto
is right. We will implement it and call upon all other
nations to do so. But it’s only a start. With
imagination, we could use or find the technologies that
create energy without destroying our planet.”
– Tony Blair, UK Prime Minister, October 2, 2001
Driving forces in UK energy policy have
changed radically
1960s
Predict and provide:
Build coal and nuclear to power industrialisation
Oil imports for transport and power
1970s –
Early 1980s
Energy security and domestic production:
Develop North Sea for energy independence;
supportive regime and production tax incentives
Mid 1980s –
mid 1990s
Competitiveness and Regional environment:
Liberalise electricity and gas systems
Reduce coal exposure and S etc emissions
Since late
1990s
Integrate low carbon, competitiveness and security
Diversify in face of North Sea plateau and decline
Deepen market liberalisation
Support efficiency and innovation for low C techs
The UK Energy White Paper (2003):
perspective and goals
 First White Paper on energy policy for 20 years
 Fundamental reorientation: ‘Our energy future – creating a low
carbon economy’
 Central goal, accepts Royal Commission recommendations:
– 60% cut in CO2 emissions by 2050
– actions guided by need to deliver Kyoto commitments and remain
on path to this long term objective.
 Three other objectives to be accommodated (Ch.6: Reliability;
Ch.7: Productivity and competitiveness; Ch.8: Energy and the
vulnerable, ‘fuel poor’ at home and abroad).
 ‘To lead the way in Europe and internationally in developing
environmentally sustainable, reliable and competitive energy
markets that will support economic growth in every part of the
world’.
The low carbon challenge is to profit from the
opportunity through good near-term investment
Big long-term opportunity…
 Net impact on global GDP
growth marginal or
potentially positive over the
long-term
 Tremendous opportunities in
rapidly growing global
markets
– £200Bn/yr Environmental
goods and services industry
– £100Bn/yr capital spending
by electricity supply
industry
 Developing a low carbon
industry sector will allow UK
to capture a greater share
of the value created
…but some short-term costs
 Short term capital
investment will be required
– transition costs including
infrastructure
– capital costs currently
higher for renewables than
conventional sources (but
declining)
 Downside impact on a
limited number of
disadvantaged industrial
sectors
– If action is harmonised
within EU, impact limited to
externally traded goods
(~11% of GDP)
UK Energy White Paper:
renewable electricity support system
 Reaffirms 10% renewables by 2010 commitment, ‘aim’ to
20% by 2020
 Main instrument: Renewable Obligation Certificates (ROCs)
– Like Renewable Portfolio Standards in US
– Electricity supply companies have to source given percentage
from renewables
– ‘Cap’ (buyout) on ROC prices of 3p/kWh
 Additional £100m capital grants for renewable energy
(£38m announced 2002 + £60m new)
 Overhaul planning systems (both onshore and offshore)
 Review electricity structure, regulation, etc
 No specific regulatory structure for non-electric renewables
Dedicated policy measures help
technologies traverse the innovation chain
Appropriate economic support for specific technologies
will vary as costs decline
Technology
specific
support
14
Electricity Price (p/kWh)
12
10
Offshore
Wave
RD&D Grants
Energy
Crops
8
6
4
Capital Grants/ Loans
Offshore
Wind
ROC (Buyout)
Onshore
Wind
CCL Exemption
2
Wholesale Price
0
1995
2000
2005
2010
2015
2020
2025
Note: ROC excludes recycling; Capital grant based on maximum of 40% of typical capital costs
Source: PIU Working Papers (OXERA II Base case cost decline)
General
support
The biggest renewable energy potential in
UK is offshore wind energy
Features of UK offshore wind energy
 Rapidly developing sector
 13 main projects currently in development
 Almost all are 5 – 10 km offshore
 Companies include established oil (eg. Shell), electricity
(eg. PowerGen) and offshore engineering service (eg.
AMEC) companies
 Wind energy investment during next five years
expected to average around £1bn/yr
 A major contributor to UK renewable energy target
(10% by 2010) and longer term goals
 First UK offshore wind farm started delivering
November 2003
UK Offshore Wind Energy: First wind farm
(North Hoyle) now operating
Construction started April
2003, delivered electricity late
November 2003
4-5 miles off the North Wales
coast
30 wind turbines of 2
megawatts (MW)
electricity to supply 50,000
homes.
Offsets about 160,000 tonnes
of CO2 per year
There is rapidly growing involvement from
offshore & energy companies as the oil & gas
provinces mature
 Government established ‘UK renewables’ in
Aberdeen (centre of UK oil industry)
 Oil industries confirm that offshore wind
engineering relatively simple transfer of some
core skills – no major engineering problems
foreseen
 Major issue is stability and duration of
government support mechanisms (ROCs
currently expire in 2010)
 Wider lessons in context of oil and gas
reserve / resource profiles?
The carbon in oil and gas reserves is very limited
compared to the emissions of most climate scenarios
Coal
Oil
Gas
Petroleum reserves and climate change
 Conventional petroleum is not the problem
– Only unconventionals and coal have enough carbon to do
big damage
– We are likely to use all the proven petroleum reserves
 carbon control raises relative costs of unconventionals
and coal, the ‘default’ non-oil alternatives
 Important to ensure that any large-scale development of
coal-based synfuels, tar sands etc involves CO2 removal
and disposal
 As conventional oil & gas provinces peak, the industrial
opportunities may move towards renewables
 Conventional oil and gas could benefit long-term from
carbon controls (by making high-carbon backstops more
expensive)
Climate change, innovation
and the fossil fuel industries
- Insights from UK experience and links to TAR
Presentation to SBSTA consultation on IPCC Third Assessment Report
Milan, 27-28 November 2003
Michael Grubb, Associated Director of Policy, The Carbon Trust
Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &
Senior Research Associate, Department of Applied Economics, Cambridge University
Imperial College
OF SCIENCE, TECHNOLOGY AND MEDICINE
UK Energy White Paper:
policy principles and guideposts
 Market-oriented – not a return to central planning
 Need for government to establish the regulatory and
incentive framework
 Looking for cuts of 10-20% (15-25MtC) below
reference projection by 2020
 Non-binding 2020 targets for energy efficiency,
renewable electricity, and CHP
 No specific proposals for new nuclear build (or other
direct government build)
 Renewables and efficiency have five years to prove
their potential
UK Energy White Paper:
Economic instruments and energy efficiency
Emissions trading:
 ‘will be at the centre of our energy markets’
 entry for key sectors (power stations, refineries, most heavy
industry) into EU scheme from 2005
 ambiguity about overall linkage between trading and Climate
Change Levy structures
Energy efficiency
 ‘develop’ the energy efficiency commitment (EEC) scheme
 Insulation grant schemes and EECs to secure end to ‘fuel
poverty’ in England by 2010, Britain by 2016-18.
 Revision of building standards brought forward to 2005, and
push for stronger EU standards on fridges, PCs etc
 Public sector procurement to ‘set an example’