Climate change, innovation

1
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
2
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 its 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

3
Driving forces in UK energy policy have changed
radically
Predict and provide Build coal and nuclear to
power industrialisation Oil imports for
transport and power
1960s
Energy security and domestic production Develop
North Sea for energy independence supportive
regime and production tax incentives
1970s Early 1980s
Competitiveness and Regional environment Liberal
ise electricity and gas systems Reduce coal
exposure and S etc emissions
Mid 1980s mid 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
Since late 1990s
4
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.

5
The low carbon challenge is to profit from the
opportunity through good near-term investment
Big long-term opportunity
but some short-term costs

• 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

• 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)

6
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

7
Dedicated policy measures help technologies
traverse the innovation chain
Appropriate economic support for specific
technologies will vary as costs decline
Technology specific support
RDD Grants
Capital Grants/ Loans
ROC (Buyout)
General support
CCL Exemption
Wholesale Price
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)
8
The biggest renewable energy potential in UK is
offshore wind energy
9
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

10
UK Offshore Wind Energy First wind farm (North
Hoyle) now operating
Construction started April 2003, delivered
electricity late November 20034-5 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
11
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?

12
The carbon in oil and gas reserves is very
limited compared to the emissions of most climate
scenarios
Coal
Oil
Gas
13
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)

14
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
15
UK Energy White Paperpolicy 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

16
UK Energy White PaperEconomic 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