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Technology, systems and policy for the 21 st Century Michael Grubb - - PowerPoint PPT Presentation

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Delivering the Energy Transition in Theory and Practice Technology, systems and policy for the 21 st Century Michael Grubb Prof. International Energy and Climate Change Policy, UCL Chair, UK Panel of Technical Experts on Energy Market Reform

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Delivering the Energy Transition in Theory and Practice Technology, systems and policy for the 21st Century

Combined elements of presentations: ANU, Canberra, 6 Dec 2016 DELWP, Melbourne 9 Dec 2016 Grote Lecture, UCL Australia / University of South Australia, 12 Dec 2016 UNSW, Sydney, 14 Dec 2016 Adelaide, 12th December 2016

Michael Grubb

  • Prof. International Energy and Climate Change Policy, UCL

Chair, UK Panel of Technical Experts on Energy Market Reform

  • The broad economic concepts
  • Electricity technologies and systems innovations
  • Some insights from UK policy experience
  • Lessons and elements of transition strategy
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SLIDE 2

The Energy Trilemma

Neither security nor environment are easily ‘marketised’

Energy policy needs to address:

  • Security
  • System resilience, over-concentration, geopolitical risk
  • Affordability & competitiveness
  • Fuel poverty, the disconnected, ‘industrial energy prices’
  • Environment and sustainability
  • Air quality, climate change, mining and water

Prioritising one too much over the others generates instability Focus here particularly on electricity, increasingly important in

  • ther sectors (transport, buildings)

A systems issue .. Requiring multiple policies

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SLIDE 3

Satisficing

Habits, myopia, inattention to incidental / intangible costs; endemic ‘contractual failures’, principal-agent failures, risk aversion to change or investment

Behavioural and

  • rganisational

economics

DOMAIN

Theoretical foundations Characteristics

with different characteristics and theoretical foundations,

  • perate at different scales

S O C I A L S C A L E T I M E H O R I Z O N

Optimising

Economic optimisation based on relative prices, ‘representative agents’ with ‘rational expectations’, stable preferences and tech trends

Neoclassical and welfare economics

Transform- ing

Technology, structure, institutional and behavioural change, typically from strategising, innovation, infrastructure investment

Evolutionary and institutional economics

Three domains of decision-processes ..

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SLIDE 4

H M L

H Highest relevance

M Medium relevance

L Lowest relevance

Satisfice Transform Optimise Domain

Standards & Engagement Markets & Prices Strategic Investment Smarter choices Cleaner products & processes Innovation & infrastructure

1 2 3

L/M H L/M L M H

Policy pillars

Ideal policy comprises a package which matches the best instrument to the respective domain of decision-making

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SLIDE 5

Austr alia Czech Republic Fr ance

Ger m any

Hungar y Italy Japan Kor ea Nether lands Poland Slovak Republic Sw eden UK USA 100 200 300 400 500 600 700 800 900 1000 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5

Aver age

Aver age en er gy in t en sit y ( / GDP

EU 15 If energy prices kept too low (as with former Soviet), waste / ‘satisficing’ behavior leaves countries with high bills when subsidies cannot be sustained Line of constant energy expenditure as % of GDP

“Bashmakov-Newbery constant”

Figure 6-1 The most important diagram in energy economics Note: The graph plots average energy intensity against average energy prices (1990-2005) for a range of prices. The dotted line shows the line of constant energy expenditure (intensity x price) per unit GDP over the period. Source: After Newbery (2003), with updated data from International Energy Agency and EU KLEMS

In the long run, countries with higher energy prices do not spend more of their income on energy (the “Bashmakov – Newbery constant”)

  • Stronger efficiency and innovation policies compensate
  • Indeed countries that subsidised energy to keep it cheap have ended up spending more

Affordability – and energy prices

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SLIDE 6

Global energy costs Annual global emissions

Time ‘Green’ futures

  • Integrated high-innovation system
  • Biomass and electricity in transport
  • Low-carbon, ‘smart electricity’
  • High capital costs….
  • ……but low operating costs

‘Brown’ futures

  • Continued dependence on fossil fuels
  • Unconventional and synthetic oil in transport
  • Low capital costs…
  • …but high operating costs and a host of

environmental issues beyond carbon

Clustering of ‘low cost’ energy futures around higher and lower emissions, rather than in the middle, reflects divergent responses to depletion of ‘easy oil’

We are here

Figure 10-6: Two kinds of energy future – the carbon divide Source: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors

“No wind is favourable to those who don't know where they are going”

  • Lucius Annaeus Seneca

Need to steer not marginal+ but structural and systemic change

A sense of direction ….

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SLIDE 7

8

In UK – once an ‘island of coal in a sea of oil and gas’ -

  • rientation set by Climate Change Act, with statutory

80%-below-1990 mid-Century

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SLIDE 8

Delivering the Energy Transition in Theory and Practice Technology, systems and policy for the 21st Century

Combined elements of presentations: ANU, Canberra, 6 Dec 2016 DELWP, Melbourne 9 Dec 2016 Grote Lecture, UCL Australia / University of South Australia, 12 Dec 2016 UNSW, Sydney, 14 Dec 2016 Adelaide, 12th December 2016

Michael Grubb

  • Prof. International Energy and Climate Change Policy, UCL

Chair, UK Panel of Technical Experts on Energy Market Reform

  • The broad economic concepts
  • Electricity technologies and systems innovations
  • Some insights from UK policy experience
  • Lessons and elements of transition strategy
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SLIDE 9

Driven mainly by public policy

https://www.bloomberg.com/gadfly/articles/2016-11-23/solar-industry-makes-feast-of-price-famine http://reneweconomy.com.au/how-the-jaw-dropping-fall-in-solar-prices-will-change-energy-markets-55160/ http://www.bloomberg.com/features/2016-ev-oil-crisis/ http://www.bloomberg.com/news/articles/2016-07-27/elon-musk-says-it-s-pencils-down-for-tesla-s-model-3

PV: New record installed power prices

Chile = $30/MWh Masdar = $25/MWh Abu Dhabi = $24/MWh

Module costs: -29% in 2016 to $0.39/Watt

Huge fall in PV and battery costs

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SLIDE 10

Electricity revolution, Pt.1 – distributed servuces

Source: Prof Jun Dong, North China University of Electric Power

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SLIDE 11

Sharp fall but ranges also show the centrality of policy risk

Recent trends in international costs and contracted prices for wind and solar (source: UCL Submission) Wind – onshore Wind – offshore PV

Price trends of the big renewables, 2010-16

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SLIDE 12

More interconnection also valuable – UK rapid increase

  • Based on merchant investment with cap-and-floor on returns

70% 75% 80% 85% 90% 95% 100%

Lower wholesale prices on continent

(2015 average annual prices, €/kWh)

10 20 30 40 50 60

Carbon price Underlying wholesale price

Interconnectors amongst most reliable sources of supply (2015/16 Avg availability, %) * France to also

introduce carbon price floor in 2017

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SLIDE 13

A ‘hollowing out’ electricity system ..

Big generation developments, such as North Sea

Source: Prof Jun Dong, North China University of Electric Power

Source: TenneT

Combined with

Distributed Service Providers

Electricity revolution, Pt.2 ‘hollowed out system’

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SLIDE 14

Delivering the Energy Transition in Theory and Practice Technology, systems and policy for the 21st Century

Combined elements of presentations: ANU, Canberra, 6 Dec 2016 DELWP, Melbourne 9 Dec 2016 Grote Lecture, UCL Australia / University of South Australia, 12 Dec 2016 UNSW, Sydney, 14 Dec 2016 Adelaide, 12th December 2016

Michael Grubb

  • Prof. International Energy and Climate Change Policy, UCL

Chair, UK Panel of Technical Experts on Energy Market Reform

  • The broad economic concepts
  • Electricity technologies and systems innovations
  • Some insights from UK policy experience
  • Lessons and elements of transition strategy
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SLIDE 15

18

Contracts for Difference

(fixed-price 15-yr contracts)

Capacity Mechanism

(capacity payments

  • n availability)

Carbon floor price Emissions Performance Standard

4 Key Policies Major changes to UK electricity market, implemented during 2011-15

Security of Supply Low Carbon Support No new coal

Four elements of UK Energy Market Reform UK Electricity transition – markets policy

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SLIDE 16

19

  • Energy price topped up (or reimbursed) to a “strike price”
  • Initial contracts awarded by government; moving to
  • Competitive auction held by National Grid, sophisticated design
  • Over 2GW of new capacity, est cost of capital reduction by 3 percentage

points, saving £110m/yr cf administered price – and saving £bns overall

Contracts for Difference (CfDs)

(structure for renewable energy & nuclear)

CfDs to lower the cost of capital

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SLIDE 17

… when combined with competitive auctions

Capacity Admin Strike price 2014 (£/MWh) Lowest auction clearing price Jan 2015 Maximum % saving Solar PV 72 120 79 34% Onshore Wind 1162 95 79 17% Energy from Waste CHP 95 80 80 0% Offshore Wind 750 140 114 18% Advanced Conversion 62 140 114 18%

  • Administered prices, May 2014 followed by competitive auction, Jan 2015
  • Over £315m/yr new contracts offered to five renewable technology classes
  • Over 2GW of new capacity with saving £110m/yr cf administered price in 2014
  • Estimate cost of capital reduction by 3 percentage points – saving £bns
  • Other European auctions in 2016 with further (big) cost reductions
  • UK electricity renewables exceeding expectations: c.35% by 2020
  • Next UK auction announced, expected even offshore wind << £100/MWh
  • Now well within the ‘BNC’ range of affordability, if & as system evolves

Yielding big cost savings

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SLIDE 18

2 4 6 8 10 12 14 16

UK Electricity Generation from coal (TWh), 2012-16

C-price support introduced

2012 2013 2015 2016 2014

C-Price support doubled to £18/tCO2

+ Carbon floor price impacts coal

Dramatic (80%) fall since 2012: first hours without coal power for over a Century Driven as declining gas price meets rising carbon price, and renewables Falls 2012-15 offset by rising renewables; increased gas in 2016

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SLIDE 19

What will replace 14GW UK coal?

What is needed

  • Short-run frequency response
  • Back-up for windless winter days

What the government wants

  • More Combined Cycle (CCGT)

What NGO’s want

  • Batteries, demand response

What we will get

  • Few years of some low load factor coal
  • Embedded small gas (+some diesel)
  • Batteries & CHP multi-services – with more
  • + Interconnectors
  • + transport (and maybe heat) integration
  • Innovation on distributed service providers

Maintaining security

System / consumer costs now well within range of ‘Bashmakov-Newbery constant’

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SLIDE 20

Decarbonising power contributes into other sectors

Renewables (Wind, solar, tidal and marine, biomass), nuclear, CCS

Application of power to transport and heat

100 200 300 400 500 600 2006 2010 2020 2030 2050 g/CO2 per kWh 200 300 400 500 600 2000 2010 2020 2030 2040 2050 TWh electricity generation per year 90% path

Electricity emissions intensity to 2050 Electricity demand to 2050

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SLIDE 21

Delivering the Energy Transition in Theory and Practice Technology, systems and policy for the 21st Century

Grote Lecture, UCL Australia / University of South Australia Adelaide, 12th December 2016

Michael Grubb

  • Prof. International Energy and Climate Change Policy, UCL

Chair, UK Panel of Technical Experts on Energy Market Reform

  • The broad economic concepts
  • Electricity technologies and systems innovations
  • Some insights from UK policy experience
  • Lessons and elements of transition strategy
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SLIDE 22

Smart policy includes ..

  • Balanced approach to deliver all Trilemma goals
  • Integration across the three pillars of policy
  • A broadened industrial strategy ..
  • Whilst using competitive forces
  • .. with clear attention to distinctive needs of

– Operational incentives – Efficient networks – Generation investment – Demand side engagement

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SLIDE 23
  • For Strategic (“Third Domain”) investments – eg security and sustainability

inc emerging renewables - a role for government is inescapable

– The public benefits exceed any risk-adjusted return in spot market

  • Can shifting some risk to government (eg. long term contract) be good?

Yes if

– the risks arise from private perception of policy risk; – markets (particularly capital markets) are myopic; or – the benefits are partly public (eg. Due to inadequate environmental pricing, or innovation / learning, etc)

  • Do we need a Capacity Mechanism in addition to low carbon supports?

– Yes in UK conditions – but scope is crucial, so too is design

  • Auctions are very valuable – competitive pressures remain important

– Better than government decision at cutting costs / finding options

  • Institutional complexities

– contracting bodies and their governance

UK Energy Market Reform

Key lessons

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SLIDE 24

To minimise ‘state management’, the future system could develop competition between at least four markets

Distributed Service Providers Capacity market kWh Spot market Green supply / carbon- backed contracts

Competition for bulk electricity Competition for peak load capability

Balancing and short-term storage Heat integration and long-term storage

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SLIDE 25

Tools of Regulatory Impact Assessment also need to broaden

Impact Assessment

Strengthening analysis of these issues is designed to more systematically represent issues related to the interest of future consumers, complementary to a monetised CBA Improved consistency Increased transparency

Monetised aggregate CBA Social & distributional impacts Explicit consideration of strategic & sustainability issues

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SLIDE 26

Standards & Engagement Markets & Prices Strategic Investment

POLICY PILLARS Technology

  • ptions &

competitiveness

Need to integrate across all three pillars:

  • Enhanced efficiency
  • Cleaner products
  • Innovation and

infrastructure And harness this for social and industrial strategy

  • Lower resource costs
  • Consider carbon pricing,

including materials consumption & innovation

  • Accelerate innovation for

competitiveness

Manage bills, increase responsiveness Revenues, revealed costs, strategic value

Values, pull & preferences

Attention, products & finance

Education, access & control

Integrated policies conceptual framework

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SLIDE 27

Conclusions: Practice

  • 21st Century energy systems will be radically different from

20th Century

  • Understanding transition on this scale means broadening

economic horizons to all the triads: Trilemma goals, three Domains of decision-making, & associated pillars of policy

  • Transition is already under way, so far driven far more by

the non-pure-market policies

  • Aggregate cost impacts (eg. Germany) pushed to the limit
  • f this approach, but resulting technology cost reductions

place the transition within reach of global development and more balanced policy packages

  • Clear policy direction can shift risk and lower finance costs
  • … including new roles and narrative for carbon pricing
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SLIDE 28

Planetary Economics:

Energy, Climate Change and the Three Domains of Sustainable Development

Pillar 1

  • Standards and engagement for smarter choice
  • 3: Energy and Emissions – Technologies and Systems
  • 4: Why so wasteful?
  • 5: Tried and Tested – Four Decades of Energy Efficiency Policy

Pillar II

  • Markets and pricing for cleaner products and processes
  • 6: Pricing Pollution – of Truth and Taxes
  • 7: Cap-and-trade & offsets: from idea to practice
  • 8: Who’s hit? Handling the distributional impacts of carbon pricing

Pillar III

  • Investment and incentives for innovation and infrastructure
  • 9: Pushing further, pulling deeper
  • 10: Transforming systems
  • 11: The dark matter of economic growth

1. Introduction: Trapped? 2. The Three Domains

  • 12. Conclusions: Changing Course

http://climatestrategies.org/projects/planetary-economics/ for further information #planetaryeconomics

Published Routledge 2014 6-page ‘Highlights’ paper available