A new E3G study highlights the financial risks the UK could face by pursuing a new dash for gas as the Quad of senior Government Ministers prepare to meet on Wednesday to finalise the UK gas investment strategy and key elements of the forthcoming Energy Bill.
The analysis tells a compelling story about the need to manage the impact of too much unabated gas generation and the advantages of continued support for RES deployment, energy efficiency and CCS demonstration to contain the cost and manage the risks of power sector decarbonisation.
The future role of gas in the UK power sector has become a central object of controversy in UK energy policy. The debate often focuses on often irreconcilable views of future trends, in particular prices and costs. This is the wrong debate and will lead to the wrong outcome if it is resolved by government picking a single view of the future and optimising policy around this.
The right question is how different policy approaches to incentivising investment in the UK power sector would perform in delivering UK decarbonisation goals in an affordable and secure manner under all plausible futures.
In some instances the carbon price would need to rise to very high levels of around €350 t/CO2 to attract the additional investment necessary to meet the decarbonisation objective.
The study shows that a policy approach that solely uses carbon prices to drive investment would tend to favour a gas-heavy decarbonisation pathway, and as a result, this would underestimate cost and policy delivery risks to delivering low-carbon investment in the UK power sector.
In some instances the carbon price would need to rise to very high levels of around €350 t/CO2 to attract the additional investment necessary to meet the decarbonisation objective. Furthermore, the decarbonisation objective is missed in some gas-heavy pathways, in particular when large scale deployment of carbon capture and storage technology (CCS) in the early 2020s fails to materialise.
In addition, there are potentially larger cost risks to industry and consumers under a gas-heavy decarbonisation pathway. Despite lower power sector costs under central assumptions, when tested against potential structural failures, such as such as failing to deploy large scale CCS in early 2020s or delivering electrical efficiency, in some cases power sector costs increased by up to 98% by 2030.
These cost and delivery risks occur even without an increase in the price of gas. The study also modelled scenarios where wholesale costs more than doubled in more extreme cases. In comparison, where technology specific support to renewables continued, power sector costs were more predictable with a maximum increase of 8%.
Some would argue that we should just relax the carbon target in order to reduce risks.
Nick Stern’s recent article in the Financial Times warns that “it’s all too easy to suggest that some other part of the economy can do the work, but the power sector holds the key to emissions reductions elsewhere, including in transport”. E3G’s analysis shows that these risks can be avoided through a balanced package now; a path that is easily affordable.
Therefore, the Government must take into account all the potential risks of a gas-based energy system and should push for a balanced package of measures which includes continued technology specific support for renewables deployment and a strong decarbonisation target around 50 g/KWh for the power sector to drive this support, a proactive strategy to secure large scale CCS and the rapid expansion of electrical efficiency.
A briefing paper and a key figures slidepack that sets out details of the analysis can be found at E3G’s website.
