Energy – what might the future hold?

Energy – what might the future hold?
Professor Roger Kemp
18 December 2014
This briefing note, prepared for ICAEW, suggests half a dozen energy challenges to which British
industry might be exposed in the future. It is based largely on work carried out with the Royal
Academy of Engineering (RAEng) and the Institution of Engineering and Technology (IET), to which
links can be found on the last page.
Background
There is little doubt that the climate is changing. Over the past 30 years, the world has seen
increasing numbers of record-breaking storms, winds, droughts and floods superimposed on natural
climate cycles and a gradually increasing global average temperature. Although humans may not be
responsible for 100% of the increase, the scientific consensus is that agricultural activity and carbon
dioxide (CO2) emissions are among the largest contributors.
Politicians have produced eye-catching initiatives to reduce carbon emissions – but most,
conveniently, are not scheduled to take effect until after their term of office. Although advice was
sought from scientists on the targets in the 2008 Climate Change Act, there is no evidence of serious
consultation with engineers to assess whether the targets were likely to be achievable. Nor was
there much understanding of their implications.1
Supply
Demand
Biomass
Heating
Renewables
Nuclear
Electrical
appliances
Furnaces
Fossil fuels
Transport
Figure 1: UK energy flows 2008
Figure 1 shows energy flows in the UK economy in 2008 (the date of the Climate Change Act). The
two large users of fossil fuels are road transport (petroleum products) and heating (predominantly
natural gas). Any strategy to reduce CO2 emissions must tackle these uses of fossil fuels.
The recent UN conference in Lima has agreed the first steps of a process that has the possibility of
avoiding the worst effects of climate change, but few independent scientists are optimistic it will be
strengthened sufficiently to be effective.
1
There is a scurrilous rumour that, at the EU Council of Ministers which agreed the 2020 renewable energy targets, Tony
Blair confused 20% of the UK’s electricity being provided by renewables – which he was briefed to support – with 20% of
the UK’s energy being produced by renewables – which was what he signed-up for.
1
1. Measures to reduce carbon emissions are here to stay, but probably not sufficiently rigorous
to keep within the 2°C limit, beyond which we risk runaway global warming. Businesses can
expect to see a long-term trend of increasing taxes on carbon-based fuels (coal, petrol, diesel
and natural gas – in descending order of emissions per kWh of energy) and other regulatory
actions.
2. Despite efforts to limit emissions, it is highly likely that the severity and frequency of extreme
weather events will increase. What we think of as a “once in 100 years” event is likely to
become “once in 10 years”. Business risk assessments based on historic data are likely to be
misleading.
The trilemma – and policy paralysis
Energy policy in the UK is faced with three conflicting demands: security of supply, affordability and
environmental impact; politically, all are important. Failure to keep the lights on or shortages and
panic buying at petrol stations can be toxic to any government. A significant rise in electricity, gas or
road fuel prices creates unwelcome headlines and consumer protests. All recent governments have
committed to reducing carbon dioxide emissions, as well as the oxides of sulphur and nitrogen,
blamed for the acid rain that had destroyed many N. European forests, as well as ground level
pollution causing many early deaths.
Attempting to balance this trilemma of conflicting objectives and election promises has resulted in
more than two decades of policy paralysis, punctuated by occasional bursts of political hyperactivity
in pursuit of one of the three, while conveniently ignoring the others. In 2008, the Climate Change
Act prioritised reductions in CO2 emissions – Coalition promises, long forgotten, to be “the greenest
government ever” followed this line. A few years ago a fleet of new nuclear power stations was seen
as crucial to keeping the lights on, reversing an earlier anti-nuclear policy. Legal challenges, the
repercussions of the tsunami deluging Fukushima and private sector reticence to carry financial risk
have narrowed this down to one – Hinkley Point C – for which there are still no signed construction
contracts and which is unlikely to be completed until the mid-2020s. Most recently, with the focus
on price, the priority seems to be shale gas – even though Lord Browne, chairman of Cuadrilla, has
said it is unlikely to reduce prices.2 Energy security has also risen up the agenda – not surprising, as a
quarter of our power stations are due to close in the coming decade.
Turning from supply to energy use, recent campaigns to cut prices by opening-up the energy market
and encouraging consumers to switch suppliers have conveniently forgotten the plan from a few
years ago, which encouraged suppliers to form long-term relationships with customers, investing in
insulation and energy saving measures, recouped by lower energy use over the following years.
3. It would be a naïve company that looks to government for a stable long-term energy policy.
Which of the three conflicting demands of affordability, security and emissions reductions is
prioritised will depend on recent political events. Businesses need to evaluate their strategy
against a range of possible national policies, not just the current energy policy.
The professional engineering institutions, led by the IET, have been pushing for a change to the
regulatory structure and the establishment of a system architect for the GB electricity system to
provide integrated technical planning. Short term action by government is not expected.
2
The UK is part of an interconnected European gas market, which tends to equalise prices across Europe. Even if the
production costs of British shale gas are lower than other sources (which is far from proven), production volumes are
unlikely to be sufficient to have a significant effect on market price.
2
The Khazzoom-Brookes postulate – or energy rationing?
Recent government initiatives have been to reduce retail prices of energy and to improve the
efficiency with which it is used. The Khazzoom-Brookes postulate (sometimes referred to as the
Rebound Effect) states that if energy prices do not change, cost effective energy efficiency
improvements will inevitably increase economy-wide energy consumption above what it would be
without those improvements. (A similar argument is that, in the long term, road-building results in
an increase in traffic.) The corollary of this is that, to use the market mechanism to reduce CO2
emissions, inflation-adjusted energy prices (including taxation) have to rise faster than efficiency
improves.
If governments oppose energy price rises, there are few alternatives. One mechanism, that has
been successful in reducing car emissions, is regulation. Under EU rules, supported by UK taxation
policy, car manufacturers have been forced to improve the fuel efficiency of cars so now there is a
range of vehicles with emissions below 100 gCO2/km. Engineers in the industry reckon that further
improvements to 80 or even 60 gCO2/km might be possible but, if this is not to lead to long term
increased car use and we believe the Khazzoom-Brookes postulate, this has to be accompanied
either by a pro-rata fuel price increase or by some form of rationing – both politically challenging!
There is no politically easy way to cut emissions. The most likely is a gradual increase in taxation
coupled with various incentives for buying energy saving devices (such as the £5000 plug-in car
grant, or grants to insulate your home) and regulations (such as EU directives on car emissions) to
“nudge” energy users in the preferred direction.
A stable industry about to face dramatic change
For 100 years, the principles behind Britain’s electricity sector have remained largely unchanged. The
steam turbine was demonstrated by Sir Charles Parsons in 1884 and, before the First World War,
Charles Merz had established the world’s first ac distribution grid in Newcastle upon Tyne. By the
mid-1920s there were more than 600 local electricity grids, supplied by coal-fired power stations,
which were rationalised by the Electricity (Supply) Act 1926 setting up the Central Electricity Board.
The 132 kV grid started as a number of disconnected networks in 1933 and, by the outbreak of the
Second World War, it was operating as a national system with 9 million consumers.
Electricity delivered [TWh/year]
300
250
200
150
100
50
0
1945
1950
1955
1960
1965
1970
1975
Figure 2: Post-war growth in electricity supply
3
1980
The Central Electricity Generating Board (CEGB) oversaw the last major expansion of the electricity
network in England and Wales and, between 1950 and 1970, the output of Britain’s electricity
system quadrupled, as shown in Figure 2, above. However the concept of steam turbine generators
feeding a high-voltage grid, progressively stepped-down to low-voltage feeders supplying individual
streets was largely unchanged for the 30 years before the CEGB expansion and is the same today.
At the date of writing (15 December 2014) grid-connected electricity generation over the previous
24 hours had been: Coal: 34%, Natural gas: 24%, Nuclear: 20% and Wind 10% with 5.5% imported
from France and the Netherlands via undersea cables and the balance from various minor sources of
power.3 All but one of the coal-fired power stations date from the 1960s or early 70s and are rapidly
approaching, if not past, their “use by” dates. The EU Industrial Emissions Directive (2010/75/EU)
imposes limits on gases, such as SO2 and NOx, and several power stations have given a “limited life”
undertaking so will be closing in the near future. And all existing nuclear stations, except Sizewell B,
are expected to close within 10 years.
The imminent closure of many existing power stations and their replacement by (as yet undefined)
renewables and/or nuclear power will have two main effects:

Firstly, renewable generation is intermittent: it is available when the wind blows, the sun
shines or the tides ebb and flow. The extent to which it can “guarantee” a particular level of
power depends on a statistical calculation and assumptions about weather patterns. These
could be disrupted by climate change – for example melting polar ice might affect the course
of the jet stream (in the upper atmosphere) and/or the Gulf stream (in the Atlantic ocean);
either might alter the probability of long windless anticyclones and/or overcast skies.

Secondly, the characteristics of the electrical supply are likely to change. The existing power
stations with massive turbo-generators rotating at 3000 rev/min act as flywheels stabilising
the grid; sudden changes in load are evened-out by the inertia in the system. Solar panels
and wind turbines do not have the same level of inertia and so the frequency of the supply
(nominally 50 Hz) is likely to be less stable. Also the electronic “black boxes” coupling wind
turbines and solar panels to the grid are not able to respond to short term spikes in demand
(possibly caused by a fault)4 and so the level of voltage transients on the supply is likely to
increase.
Both these effects will change the characteristics of the electrical supply. After decades when
generating capacity was overprovided, during the coming decade we are likely to see an increased
risk of the electricity supply being unable to meet the load. This is unlikely to cause a widespread
blackout but there could be local disconnections and there are likely to be financial incentives for
organisations that are able to shed demand when asked to do so. In addition, we are likely to see a
worsening of “power quality” (e.g. greater levels of harmonic distortion, more dips and surges in the
supply voltage and greater fluctuations in system frequency) which might affect sensitive computer
equipment.
4. Businesses would be advised to carry out a risk assessment of the effects of an unplanned loss
of power and/or of a lower standard of power quality. They might also consider the possibility
of moving some loads to an “interruptible” tariff, which would result in cheaper electricity.
3
http://www.bmreports.com/bsp/bsp_home.htm Note: these figures ignore generators connected to the distribution
networks (e.g. roof-mounted PV panels, single wind turbines or CHP generators in factories, universities, etc.). These are
invisible to National Grid and are counted as “negative loads” on the system.
4
In technical terms, the fault level of the supply will be lower. This can affect the operation of over-current protection as
well as systems, such as current source inverters, that rely on a low source impedance.
4
Who makes decisions in the electricity industry?
By the 1980s, the large-scale rebuilding of infrastructure by the CEGB and the unexpected drop in
the rate of increase of demand caused by the rapid exploitation of North Sea gas led to an overgenerous capacity margin (the difference between the maximum available supply capacity and the
maximum demand). Privatisation was seen as a way of reducing costs for consumers, as well as part
of an ideological policy to “roll back the frontiers of the state”.
The principle of privatisation was set out by Nigel Lawson in a speech on energy policy. It provided a
clear break with the tradition of state control and was the start of the process that led to the
Electricity Act 1989 and privatisation of the industry:
“I do not see the government's task as being to try to plan the future shape of energy
production and consumption. It is not even primarily to try to balance UK demand and supply
for energy. Our task is rather to set a framework which will ensure that the market operates
in the energy sector with a minimum of distortion and energy is produced and consumed
efficiently.”5
However, as Dieter Helm wrote in 2002, 6 “It is apparent that any attempt to describe the energy
market as a competitive one, just like any other industry, is mistaken. The government is a major
player in the energy market – indeed, in many respects, it is the dominant one, influencing price,
outputs and capital structure. Privatisation did not change this feature; it changed the form of
interventions, and the mechanisms of influence shifted from the boardrooms of nationalised
industries to more explicit policy instruments and regulatory control. But the idea that governments
could simply retreat from the scene and leave it to competitive markets is an illusion – energy is just
too important to the economy and society.”
For all the talk about markets, the electricity industry is heavily regulated. Government decides how
many power stations are built, where and (for nuclear or renewables) how much the generator will
be paid.
The market for electricity
Since the industry was privatised, generators have sold their electricity to retailers in a market under
NETA (the New Electricity Trading Arrangements) with auctions for every half hour period.7 The
market works on energy prices (i.e. £/kWh). This was logical in the situation where most plant had
been fully depreciated and costs were largely fuel (i.e. energy).
However, for both renewables and nuclear power, capex is very large and operating costs are very
low, thus the marginal generation costs (per kWh) could be almost zero. Under this situation, it is
difficult to see how an electricity market based an auction of energy (per kWh) is possible. Bid prices
would no longer be related to operating costs and there must be a risk that it would be closer to a
game of poker, where the bid is based on an assessment of the competition, rather than on cost.
A free market for electricity would be likely to produce extremely high prices in winter, particularly
at periods of peak demand, but very low prices at times when the demand can be met entirely by
5
Lawson, N: Speech delivered at the Fourth Annual International Conference, International Association of Energy
Economists, Churchill College, Cambridge, June 1982.
6
Helm D: Energy policy: security of supply, sustainability and competition, Energy Policy, Volume 30, Issue 3; February
2002, Pages 173–184
7
NETA: http://www.bmreports.com/bsp/bsp_home.htm
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renewable energy. If these energy costs are passed-on to the customer (using smart meters that are
soon to be rolled-out), we could see the cost of using an electric kettle to make a cup of tea at 18:00
in December being eye-wateringly expensive, but electricity costing almost nothing during long
periods in the summer. Headlines about a pensioner paying £10 to boil a kettle would be
“challenging” for whichever government is in power but, if peak-time prices are not allowed to
reflect shortages, there would be no incentive for investment in peak-lopping generation that is used
only rarely, which would risk blackouts – even more politically challenging!
The government has attempted a partial solution to this problem in Electricity Market Reform (ERM)
introduced in the Energy Act 2013 which has made the electricity market arrangements even more
complex. The Act introduces regular capacity auctions, where generators can bid to hold otherwise
unused plant in readiness over a particular time period. While the levels of necessary capacity are
low (a few GW) and generators have mothballed gas-fired plant, the cost is acceptable but retaining
back-up plant to cover the loss of 20 GW of wind power during a fortnight’s anticyclone, as we saw
in the winter of 2008/09 (see Figure 3), are likely to be unfundable.
Winter 2008 - 2009
Average wind energy over 24h period [MW]
1,600
1,400
1,200
1,000
800
600
400
200
0
01/12
15/12
29/12
12/01
26/01
09/02
23/02
Figure 3: Daily wind energy output, winter 2008 – 2009
5. Large differences in energy costs between peak periods and off-peak and even larger
interseasonal differences could trigger new forms of working in industries with high electricity
use. For example, two-shift working in winter from 09:00 to 16:00 hrs and 20:00 to 03:00 is
likely to incur much lower electricity costs than contiguous shifts from 07:00 to 23:00.
Interconnected systems
Critical systems are becoming increasingly interdependent. For example, mobile phone base stations
rely on electrical power but the teams responsible for restoring the electrical power system after
lines have been brought-down by a storm rely on mobile phone communications. Water supplies
and gas networks rely both on electricity, to drive pumps, and computer networks to control them.
Even domestic gas cookers rely on mains electricity to operate flame-failure detection, without
which they cannot operate.
6
JIT manufacturing relies on a working internet and working road transport which, in turn, relies on
diesel, which relies on electrically-powered fuel pumps and often on a mobile phone network to
advise drivers. Many business systems, including improbably-linked activities such as share trading
as well as the more obvious ones like delivery routing, rely on GPS systems. These, and many
communications systems are susceptible “space weather”. A solar storm could shut down GPS
systems with knock-on effects on many business systems.
Any company using computers for operational purposes (e.g. stock control or planning lorry routes)
is likely to be susceptible to a power failure – even if the computer centre has a standby power
supply, it is unlikely that every terminal in a warehouse would be immune to a power outage.
6. Businesses might find it useful to investigate the dependencies in their operations and, in
particular, their reliance on external networks, such as electricity, gas, GPS, mobile phones or
the internet and how these nominally independent networks might be interdependent.
Roger Kemp,
18 December 2014
RAEng and IET reports used in preparing this note
1. Generating the Future – UK energy systems fit for 2050. March 2010
http://www.raeng.org.uk/publications/reports/generating-the-future-report
2. Infrastructure, Engineering and Climate Change Adaptation – ensuring services in an uncertain
future: http://www.raeng.org.uk/publications/reports/engineering-the-future
3. Electric Vehicles: charged with potential. May 2010
http://www.raeng.org.uk/publications/reports/electric-vehicles
4. Heat: degrees of comfort? January 2012
http://www.raeng.org.uk/publications/reports/heat-degrees-of-comfort
5. Extreme space weather: impacts on engineered systems and infrastructure. February 2013
http://www.raeng.org.uk/publications/reports/space-weather-full-report
6. GB electricity capacity margin. A report by the Royal Academy of Engineering for the Council for
Science and Technology. October 2013
http://www.raeng.org.uk/publications/reports/gb-electricity-capacity-margin
7. Wind Energy: Implications of large-scale deployment on the GB electricity system. April 2014
http://www.raeng.org.uk/publications/reports/wind-energy-implications-of-large-scaledeployment
8. Transforming the electricity system: How other sectors have met the challenge of whole-system
integration. October 2014
http://www.theiet.org/factfiles/energy/pnjv-report-full-page.cfm
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