Climate change and the UK energy sector: the review report

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
  • METHODOLOGY
• REVIEW REPORT
  • Climate change and the UK energy sector series
  • Consumer demand is not making the energy sector respond to climate change
    • Little potential exists for energy suppliers to exploit green energy tariffs.
    • Existing policies are stopping energy efficiency and microgen being exploited.
    • A plethora of policies have failed to engage customers in climate change.
    • The energy sector, not the consumer, is the main target for cuts in emissions.
    • By involving the consumer, policies can force the energy sector to respond.
  • The RO may stimulate renewables but does not engage consumers
    • The renewables obligation creates supply but not consumer demand.
    • The RO subsidy does not guarantee that the UK will meet renewable targets.
    • Integrated energy suppliers are penalised for over investing.
  • As the UK debates, not acts, climate change is embroiled in security of supply
    • Security of supply is perceived to be the energy sector's greatest challenge.
    • A carbon-focused energy sector will not produce carbon-focused consumers.
    • Discounting the value of nuclear build in combating emissions may be foolhardy.
    • Contradictory views exist as to what the sector should do to manage climate change.
• RENEWABLE POWER: THE SUPPLY AND DEMAND BALANCE
  • Increasing supplier power on the RO may reduce its success.
    • Most renewable power is generated through landfill gas and co-firing biomass
    • The most productive stations are co-firing biomass and off-shore wind farms.
    • To date, the majority of assets have been with merchant generators.
    • 14GW of new capacity is planned, principally wind farms.
    • Half of the potential capacity remains with merchant generators.
    • 8.6GW of existing and proposed capacity is with merchant developers.
    • Suppliers are exercising greater control over the RO and the sector.
  • For suppliers the RO remains a burden rather than an opportunity.
    • RO provides a subsidy by forcing suppliers to pay for renewable power.
    • ROC price is dictated by the buy-out price and payments to ROC-holders.
    • RO is split three ways: buy-out fund; suppliers' generation; and bilateral ROCs.
    • By paying into the buy-out fund, the RO is a burden for most suppliers.
  • Some suppliers have a big advantage in having assets under planning.
    • This analysis has three scenarios in commissioning new capacity.
    • In the FAST scenario the RO is met by 2010/11 through large wind projects.
    • In the FAST scenario the RO is met through merchant generators.
    • In the SLOW scenario the RO is a distant target with wind farms delayed.
    • In the SLOW scenario generators have not commissioned enough plants.
  • The best thing for a supplier is to own assets, and hope others do not.
    • Only two suppliers have their future RO covered by own capacity.
    • Suppliers must buy up merchant generators or their RO position will worsen.
    • All suppliers will have to buy assets to keep up with other suppliers.
    • If the RO remains unfulfilled, it benefits suppliers with assets.
  • APPENDIX
  • Extended methodology
• GREEN ENERGY: CONSUMERS AREN'T BUYING IT.
  • Demand for green energy is yet to be stimulated by the wholesale market
    • Disjuncture between wholesale and supply is caused by the RO subsidy.
    • Suppliers need to enter the wholesale market; generators do not need to supply.
    • Taxes and subsidies do little to encourage renewable energy tariffs.
    • Suppliers should stimulate green energy demand to recoup the cost of the RO.
  • Green energy is niche as suppliers are not "pushing" it to consumers
    • Only 5% of the renewable power is being supplied to residential consumers.
    • Fuel mix disclosure should increase consumer interest in green tariffs.
    • Levy exemption certificates create I&C demand for renewable power.
    • Residential consumers are not actually buying "real green" power.
    • Green tariffs are peripheral because suppliers only market them at a premium.
  • Green tariffs have evolved, but have a long way to go
    • Suppliers are now starting to offer integrated environmental tariffs.
    • The EEC and the 28-day rule hinder the viability of energy saving tariffs.
  • Appendix: green energy tariffs, by supplier
• CLIMATE CHANGE AND THE ENERGY SECTOR: OPINION
  • Security of supply is thought to be a greater challenge than CO2 emissions
    • Security of supply is considered to be the greatest challenge.
    • High gas and power prices are attributed to security of supply.
    • New nuclear build and new gas infrastructure are the favoured solutions.
    • Increased access to gas imports is considered most likely to reduce prices.
  • Nuclear power is thought to be needed to tackle climate change
    • Hydro and wind power are considered the best renewable options.
    • Prospects for wind power are uncertain.
    • It is only visible future subsidies that make executives believe in wind power.
    • New nuclear build is considered suitable for tackling climate change.
  • Executives doubt that the sector can effectively reduce customer demand
    • Energy may not be expensive enough to stimulate energy efficiency.
    • The EEC (energy efficiency commitment) may be unsuccessful.
    • Energy suppliers may not be ideal in implementing energy saving schemes.
  • APPENDIX
    • Appendix 2: In reducing energy, the EEC was a success.
  • List of Tables
    • Table 1: Barriers to energy efficiency and microgeneration [caused by existing energy market policy].
    • Table 2: Policies and schemes targeted to assist in managing climate change
    • Table 3: Example policies that may engage consumers in climate change.
    • Table 4: The ability of suppliers to exercise power over the renewables obligation makes it less effective
  • List of Figures
    • Figure 1: Why have green tariffs remained peripheral? Rate [1-5] (1=do not believe at all &5=believe totally)
    • Figure 2: UK CC Programme 2006, DEFRA, Carbon dioxide emissions by source 1990 to 2020, MtC
    • Figure 3: Diagram of the interrelationship between the wholesale and supply markets.
    • Figure 4: Net cost of the renewables obligation to the major suppliers
    • Figure 5: What do you believe to be the greatest challenge facing the UK power and gas sector?
    • Figure 6: Climate change policy direction: through managing the energy sector or via consumers, indirectly altering the energy sector.
    • Figure 7: What do you believe to be the most suitable for managing climate change?
    • Figure 8: The opinion of key stakeholders in the security of supply and climate change debate
    • Figure 9: RO accredited capacity and its corresponding electricity production by plant type
    • Figure 10: Average MW and average GWh per annum generation of different RO accredited plant types
    • Figure 11: MW installed capacity of the major suppliers and merchant generators, by type of capacity
    • Figure 12: Planned cumulative generating capacity by type 2005-2011
    • Figure 13: New cumulative capacity to be developed over the period 2005-2011, by supplier
    • Figure 14: The mix of independent renewable developers [those without a supply or RO and sites where ROCs have not been sold on]
    • Figure 15: RO options for suppliers
    • Figure 16: The price of ROCs over 2002-2005
    • Figure 17: The suppliers' performance in meeting the 2004/05 obligation with ROCs
    • Figure 18: The net cost of renewables to suppliers
    • Figure 19: Performance against the RO to date and forecasts
    • Figure 20: FAST: The RO commitment and ROC production by plant type, 2002/03-2010/11
    • Figure 21: FAST: The RO commitment and ROC production by supplier, 2002/03-2010/11
    • Figure 22: SLOW: The RO commitment and ROC production by plant type, 2002/03-2010/11.
    • Figure 23: SLOW: The RO commitment and ROC production by supplier, 2002/03-2010/11
    • Figure 24: RO commitment covered by ROCs produced by suppliers, 2002/03-2010/11
    • Figure 25: The net amount paid into the RO scheme for each of the suppliers in the FAST scenario, 2004/05-2010/11
    • Figure 26: Diagram of the interrelationship between the wholesale and supply markets.
    • Figure 27: ROC accredited power [%] generated by different parties.
    • Figure 28: Diagram showing how the CCL and RO subsidies provide an incentive to I&C buyers, but not residential consumers
    • Figure 29: The performance of meeting the RO with three forecasts
    • Figure 30: Datamonitor's estimates of the shares of supplying renewable power to residential customers.
    • Figure 31: Fuel mix disclosure of the major energy suppliers.
    • Figure 32: Demand for levy exempt renewable power from I&C sector - modelled from MEU buyer survey.
    • Figure 33: Renewable power generated compared to ROCs and LECs issued.
    • Figure 34: Why have green tariffs remained peripheral? Rate [1-5] (1= disagree totally & 5 = agree totally)
    • Figure 35: Table and description of green energy propositions, by supplier
    • Figure 36: Performance of the energy efficiency commitment [EEC]. Homes reached by type of installation.
    • Figure 37: Exploratory diagram of microgeneration in the UK, by type of installation [2006-2010].
    • Figure 38: Renewable power is offered by most suppliers, but price and quality vary.
    • Figure 39: CO2 neutral tariffs are starting to be offered by some of the major suppliers.
    • Figure 40: Suppliers have not yet established tariffs that favour microgeneration.
    • Figure 41: Donations to "Green funds" are offered by many of the larger suppliers.
    • Figure 42: Energy saving plans are being offered by major suppliers and fit in with the EEC.
    • Figure 43: What do you believe to be the greatest challenge facing the UK power and gas sector? [Please rank 1st to 3rd]
    • Figure 44: Which one do you believe has been most responsible for the increases in gas and power prices this year? [Please select one]
    • Figure 45: How likely is it that the following actions will help solve existing problems with UK energy markets? (1-5 where 1 = very unlikely & 5 = very likely)
    • Figure 46: Can you please rate [1-5] the likelihood of the following actions actually reducing energy prices? (1-5 where 1 = very unlikely & 5 = very likely)
    • Figure 47: What do you believe to be the most suitable sources in reducing emissions from power generation? Rate [1-5] (1= least suitable & 5 = most suitable)
    • Figure 48: Do you think that the prospects for wind power are good or bad?
    • Figure 49: Summary table of verbatim comments on the prospects of wind power.
    • Figure 50: What do you believe to be the most suitable for managing climate change? Rate [1-5] (1= least suitable & 5 = most suitable)
    • Figure 51: Do you believe that energy is actually too cheap at the moment to encourage energy efficiency?
    • Figure 52: Has the energy efficiency commitment (EEC) been successful? (Yes/No)
    • Figure 53: Do you believe that power/gas suppliers are the best companies to be implementing energy saving schemes? (Yes/No)
    • Figure 54: Appendix 1: selected statements from respondents