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.

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 its’ own uncertainties

a) Gas: the fuel is now hugely 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 it’s 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.

[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.


pp said...

With you all the way on the analysis as it stands. The one thing that is overlooked in all the coverage of these issues is that the demand forecast is based upon the assumption that we will continue to go on living as we currently are - in other words using energy with gay abandon and more or less complete irresponsibility. Quite aside from anything else one only has to look at climate change and our impending doom to appreciate that.

The option to reduce consumption and simplify our lives remains. It may not be popular politically, but impartially considered seems an essential component of any sane and workable response to this policy dilemma. There is likely to be a lot of very rough water going under the bridge before 2015 as a result of the various crises you set out. Attitudes may be a lot different - dare I say realistic - by then.

TheClimatePhilosopher said...

A good point.

It seems that it may be sensible to reduce our energy demand, and before 2015 perhaps essential.

A combination of incentives (e.g. Carbon Taxes), encouragement and providing alternatives to energy consumption I think may be effective. Energy is very cheap in comparison to the environmental costs it is imposing on us.

In the long term, the technological solution may be a switch to efficiently used electricity from other sources, so we will still need the investment.

pp said...

'Energy is very cheap in comparison to the environmental costs it is imposing on us.'

You've summed it up beautifully. Also from the point of view of its inherent scarcity - when thinking about non-renewables.

Hence the price mechanism has to be reapplied correctly - meaning with all current externalities included. So part of the management of the problem must be a significant hike in price to realistic levels, unpopular though that may be.

I'm with you on the rest, and believe we must go for a combination of renewable sources plus radical cut back in demand.

Possibly slightly off topic, but with With oil, the question of quotas has to be considered at some point - wealth should not be the sole mechanism for determining the distribution of such a scarce and precious resource.

TheClimatePhilosopher said...

Renewables are scarce too! They depend on using land, which usually has alternative uses. Land use may be significant issue for a high-population-density country like the UK or China. e.g. Tyndall centre estimates that physically feasible renewable energy may be 20% of total energy consumption.

The problem with coal is not so much it's scarcity but it's non-scarcity. There is more than enough coal to push CO2 levels way above 1000ppm. That's why we've got to stop burning it unless we have capture.

As far as Uranium is concerned, there are multiple options if we are to get beyond the 85 years x 350GW we have at present. Thorium (x3 in reserves), Uranium from Seawater (x100?), Fast-breeders(x40), Fission-Fusion hybrids fueled with depleted Uranium (x40).

There may be other reasons for shunning coal and nuclear, but their status as 'non-renewable' is besides the point.

TheClimatePhilosopher said...

I like the way pp puts it - I think simplifying life with less energy consumption is a good personal way forward. It may not suit everyone, but 'spreading the word' has got to be a good way forward.

I think an energy plan with 'enough power' (from renewables, coal with capture, possibly nuclear, and international solar) may well be more easy to achieve politically than one with extreme demand reductions. If we don't need all the power that we invest in, we can export to other countries.

It seems to be largely a matter of opinion how much to promote and enforce specific lifestyles in politics, but a prescriptive approach may alienate. A green-lite approach may be easier. It could be that the perceived threat to people's lifestyle is making the climate change issue 'negative' - hard for people to accept. Furthermore we shouldn't use climate change as a 'battering ram' to achieve what we personally feel is morally justified.

Maybe we should go for both - large investments in everything low-carbon and encourage behaviour change.

If we achieve both we can export low carbon power to other parts of Europe who may not have been so successful.

But in Britain we are a way off this happy eventuality at present so action on all fronts may be the best thing to recommend.

TheClimatePhilosopher said...

On the economics of scarcity, when there is a natural or artificial limit on something, there is a 'scarcity rent' associated with it. One example is the land in Central London - this is in fixed supply and has a rent associated with it.
Oil is similarly restricted (both physically, in only some parts of the world) and artificially (by controls on how fast it is extracted by the oil producing countries).
The allocation of this 'scarcity rent' is an important political question. Historically, a notable contribution is Henry George's 'Progress and Poverty' who argues for taxation.

The key point in regard to climate policy is that limits on CO2 production have an implied scarcity rent associated with them.

One possible problem with doing things in terms of quotas is that there is an 'allocation problem'. People will seek those rents and 'rent seeking behaviour' may distort the political process.