A new government consultation, published this week, asserts that the UK “will…require” new nuclear or gas-fired power stations with carbon capture and storage (CCS), in order to meet its net-zero emissions target.
This assertion is the basis for proposing a new “regulated asset base” (RAB) funding model to support the construction of additional nuclear plants around the UK. The RAB model could also be used to buy the infrastructure needed for gas CCS, a second consultation says.
The idea that electricity from nuclear and CCS will be required to get to net-zero is broadly in line with advice from the Committee on Climate Change (CCC) and some other research, whereas the National Infrastructure Commission (NIC) recommended a focus on renewables instead.
As with other multi-billion decisions around the UK’s future energy system, however, the government’s justification appears to rest on model simulations run internally, which have not been published.
The consultations are among 10 rushed out by the Department for Business, Energy and Industrial Strategy (BEIS) this week, at around 6.30pm on Monday evening, ahead of the announcement on Tuesday morning of Boris Johnson as new Conservative leader and presumptive prime minister.
These consultations, summarised in the article, below, represent the bulk of a long-awaited energy white paper, which had been expected this week but may no longer be published.
- The energy white paper
- RAB funding for new nuclear
- Business models for CCS
- Driving a market for energy efficiency
- Reforming energy markets to reach net-zero
Energy white paper
BEIS officials had for months been drafting an energy “white paper” – a document setting out proposals for future legislation. This was partly as a response to a review of the cost of energy, but its scope had subsequently grown to include other areas of work towards bringing energy sector emissions into line with UK climate goals.
The energy sector faces significant challenges given the need to decarbonise not only electricity – where significant progress has already been made – but also heat and transport. Even if renewed efforts to improve building energy efficiency succeed, this shift could see overall electricity needs double, as electric vehicles and heat pumps add to demand.
This demand must be met with zero-carbon sources of electricity, while ensuring supplies are available throughout the year. Energy markets may also need reform to not only accommodate but actively encourage this new world of more integrated heat, transport and power supplies.
These strands of policy were given renewed significance last month, after the government decided the UK should become the first major economy to target net-zero emissions by 2050.
However, rather than publish the white paper – which could not have responded fully to the recent net-zero announcement – the government decided this week to publish a series of 10 consultations. These cover funding for new nuclear and CCS, reviews of the way the energy market operates and how to create markets for energy efficiency, among other matters.
There is one significant omission from this list, which Carbon Brief understands was due to have featured in the white paper. Namely, a move to increase the transparency around the internal BEIS modelling and data, which is used to test and subsequently justify government policy.
This important work generally receives little attention, even though it often forms the bedrock of multi-billion pound decisions such as signing a contract to build the Hinkley C new nuclear plant.
BEIS rejected a Carbon Brief request for more detail on its modelling in 2017, under freedom of information rules. This year it published a 19-page “methodology overview” offering brief summaries of its approach across energy demand, electricity sector modelling and other areas.
This overview leaves many questions unanswered, particularly around the assumptions used in its modelling. It also refers readers to documentation from 2012 on the BEIS electricity sector model, even though this has been completely overhauled since then.
RAB funding for new nuclear
Contracts for Difference: The new subsidy scheme to support investments in low-carbon electricity generation. Schemes are paid a fixed “strike price” for each unit of electricity they produce, giving investors the promise of steady returns. If wholesale electricity prices are below the strike price, contracted schemes receive the difference as a top-up payment. If prices rise above the strike price, they must pay back the difference.
The current lack of transparency is amply illustrated by the first of the 10 BEIS consultations published this week. This covers the idea of a new “regulated asset base” (RAB) funding model for new nuclear plants, which BEIS says are “required”.
The need for a different funding model for new nuclear flows from this “requirement” – as well as the failure of proposals to build more reactors under the existing “contracts for difference” scheme.
This week’s BEIS consultation says:
“[T]here will still be a crucial role for low-carbon ‘firm’ power in 2050…to meet net-zero while maintaining security of supply and keeping costs low…While advances in technologies, system flexibility and energy storage may eventually provide additional options for fully decarbonising the power sector, it is clear that a significant capacity of new nuclear power stations and gas-fired power plants with CCUS [carbon capture, utilisation and storage], alongside renewables, will also be required.”
The Times also reports that former business secretary Greg Clark told a meeting with industry this week that 30-40 gigawatts (GW) of “firm” low-carbon capacity would be needed in 2050 to meet the net-zero target, according to unpublished BEIS analysis.
The lack of transparency makes this analysis impossible to judge, says Michael Liebreich, founder of and now senior contributor to Bloomberg New Energy Finance. He tells Carbon Brief:
“Any case for ‘firm’ power is essentially valueless without knowing the detail of the assumptions. Firm power which cannot be switched off when you don’t need it will be as much of a problem as variable power which cannot be switched on when you do. What is called for is flexibility, in huge quantities and of all types. Does the nuclear power in the government model provide it? We just aren’t told.”
Recent CCC advice on reaching net-zero broadly supports the internal BEIS analysis – and is cited in the consultation document – but it includes a wider range of sources with different characteristics and levels of flexibility. The CCC technical report on net-zero says:
“Reducing emissions towards net-zero will require continued deployment of renewables and possibly nuclear power and other low-carbon sources such as carbon capture and storage and hydrogen, along with avoiding emissions by improving energy efficiency or reducing demand.”
Its “indicative” zero-carbon electricity mix for 2050 does not specify “required” capacities of particular technologies, instead showing one possible set of resources.
This includes the Hinkley C new nuclear plant and additional generation equivalent to around two further large nuclear sites (5.5GW). It also includes a significant quantity of electricity from gas CCS, which Carbon Brief analysis suggests is equivalent to perhaps 20-30GW of capacity, depending on how flexibly it is deployed.
The BEIS assertion that these technologies are “required” is more clearly at odds with the views of the National Infrastructure Commission (NIC), which said last year that a focus on renewables “looks like a safer bet than constructing multiple new nuclear plants”.
(The NIC was set up in 2015 to “provide the government with impartial, expert advice on major long-term infrastructure challenges”. It is chaired by Sir John Armitt, who has a background in the nuclear industry.)
The NIC also gave short shrift to small nuclear plants (“their benefits remain speculative”) and CCS in the power sector (“unlikely to form part of a cost competitive generation mix”).
(Small nuclear was given up to £18m of government funding as part of this week’s BEIS package. The technology’s proponents say it could be much cheaper than existing large nuclear reactor designs, though the first units are unlikely to be commissioned before 2025 at the earliest.)
The BEIS consultation itself poses questions around the principles and broad outline of a RAB funding model for new nuclear, which was rejected by the then-government in 2011 as “high risk” and has more recently been questioned by the NIC.
The RAB model is already used to finance other major infrastructure projects, including electricity transmission lines and London’s “supersewer” under the Thames, yet these have significantly different characteristics in terms of scale, cost and complexity compared to nuclear power plants.
BEIS consultation questions include whether a RAB deal “could raise capital to build a new nuclear power station and deliver value for money for consumers and taxpayers”. It also asks if the RAB model “could be value for money” if it lowers the overall cost of new nuclear, in exchange for consumers sharing the risk of building any new power plant on time and to budget.
Responses are due by 14 October, after which further consultations could be held on the details of a RAB approach.
Business models for CCS
BEIS has also published two separate consultations on CCS this week. One relates to the reuse of oil and gas infrastructure in a future system to transport and store CO2 underground while the other explores potential business models to support the adoption of CCS.
The lengthier document on business models sets out the case for CCS investment, which is far broader than any potential role in the power sector (see discussion, above). The government sees “an opportunity to become a global leader in CCUS and create significant new opportunities for UK business domestically and globally”, it says.
The CCC recently described CCS as “a necessity, not an option” for meeting net-zero, BEIS notes. This is down to its ability to help mitigate emissions across power, industry, transport and heat – including via low-carbon hydrogen – as well as to facilitate “negative emissions” techniques.
The government has an “ambition to have the option to deploy CCUS at scale during the 2030s, subject to the costs coming down sufficiently”. Meanwhile, the CCC has recommended the UK plan for the first operational CCS sites to be in place by the mid-2020s.
This week’s consultation is broad and its findings “will allow us to move to considering the detailed implementation of preferred business models”, BEIS says. This implementation would include: “[I]ssues such as liabilities on government, public finance considerations, state aid and the regulatory framework that business models might operate under.”
The work will also feed into its efforts around low-carbon hydrogen, BEIS says. This area of work is less well-developed and the consultation instead sets out the challenges to designing support for the production of low-carbon hydrogen, without arguing for a particular solution to the problem.
Its proposed approach to funding CCS infrastructure is in two parts, in contrast to previous plans based on a full CO2 capture, transport and storage pathway.
First, it suggests adopting a RAB model for CO2 transport and storage infrastructure, with users paying a fee for access. Second, it suggests a modified contract for difference (CfD) for power plant CCS, which would pay a fixed price for electricity generated but would also need to enable operators to run profitably during peak periods only.
This CfD modification would be needed because increasing amounts of wind and solar generation are expected to provide the bulk of electricity in future, BEIS explains, with sources such as gas CCS operating only when needed to fill in during periods with little sun or wind.
A range of possible modifications are explored in a separate report for BEIS, which suggests a combination of CfD payments for electricity generated plus capacity payments for providing security of supply.
(Intriguingly, this report also considers a potential role for coal CCS, in addition to gas or biomass CCS. This would be allowed within the government’s coal phaseout plans, but has not been widely discussed as an option for some years.)
For industrial CCS, BEIS sets out several business models including another type of CfD modification, direct government compensation or a system of tradeable CCS certificates within a fixed target for CO2 removal. It asks for views on these or alternative arrangements.
Both CCS consultations close on 16 September.
Driving a market for energy efficiency
A handful of the consultation documents released this week focus on boosting the UK’s energy efficiency. Measures to improve efficiency, which can range from home insulation to low energy lighting, have already played a vital role in cutting the nation’s emissions since 1990, and are expected to continue doing so in the decades to come.
Government figures suggest there is 40 terawatt hours (TWh) of energy efficiency potential in commercial and industrial buildings, and another 10TWh in industrial processes. The CCC has called for a retrofit of the 29m homes across the country, describing such a target as a “national infrastructure priority”.
While the “clean growth strategy” set an aspiration for “as many homes as possible” to be upgraded by 2035, the government has regularly faced criticism from MPs, NGOs and climate advisors for failing to back its plans up with “concrete policies”.
In one of its new consultations, BEIS describes energy efficiency as a “vital part” of the clean growth strategy and “one of the most cost-effective” ways of meeting its net-zero target by 2050. It notes that besides reducing overall energy demand and potentially cutting bills, some improvements could actually be made faster than comparable developments in power generation.
However, it also says that to unlock the potential of energy efficiency there are still significant barriers, and asks for input on how to overcome them. (The barriers to realising energy efficiency improvements have been well known and widely discussed for years.)
Among the issues outlined by BEIS are difficulties measuring and standardising energy efficiency improvements, providing funding, and whether such developments should be able to participate in the “capacity market” in the same way as – for example – a new power plant.
This market – currently in stasis after being ruled illegal – offers contracts to ensure electricity demand can be met during peak periods. Most support has so far gone to nuclear, coal and gas-fired power stations.
However, the government launched a pilot scheme in 2014 to test the idea of supporting businesses to cut their electricity use at peak times as part of the capacity market. Savings were made through measures such as improving motor or pump systems and replacing old light fittings, while ensuring these projects satisfied the requirements for capacity market participation.
While the scheme was a success in that it delivered lasting – but relatively tiny – savings of 19 megawatts (MW), cutting both emissions and energy costs for the businesses involved, BEIS makes it clear in its consultation that it thinks energy efficiency projects are not yet ready to enter the capacity market:
“The findings of the pilot indicate that participation in the capacity market as currently designed would likely be low and energy efficiency projects would be unlikely to win capacity market agreements, combined with the view that significant design changes would likely be needed to accommodate energy efficiency in the capacity market.”
Noting other systems in place to support energy efficiency – such as the competitive tendering pilot scheme STEP up! in Germany – the consultation is aiming to determine how existing and new markets can support this crucial area.
The consultation mentions the range of measures already in place that require or incentivise energy efficiency everywhere from individual households to large industries. It asks how any new ideas can best align with these existing policies, and how energy efficiency measures will interact with the rollout of smart technologies.
BEIS also considers the Energy Company Obligation (ECO), a scheme intended to cut emissions and address fuel poverty by forcing suppliers to improve efficiency in low-income and vulnerable households, primarily by installing insulation and new gas boilers.
(ECO replaced earlier, more successful schemes, after government subsidy cuts prompted by former prime minister David Cameron’s infamous comments, in which he reportedly asked officials to “cut the green crap” from energy bills. The latest figures show the rate of energy efficiency improvements in UK homes has “collapsed” by 85% in the past five years.)
The government says two million homes have been improved since ECO was implemented six years ago. But with many millions of retrofits still needed across the country, BEIS says there is a need to ensure they are being done well:
“Despite the development of new requirements since the start of ECO in 2013, there remain too many instances of poor-quality installations. We have seen the impact such installations can have; they can create problems with the integrity of buildings; exacerbate issues such as damp and mould leading to health problems.”
In response to this, the government is proposing a new system – the TrustMark Government Endorsed Quality scheme – to ensure compliance with the most up-to-date standards in housing improvements.
In another document released this week, BEIS considers the government’s fuel poverty strategy in England, which aims to improve “as many fuel poor homes as is reasonably practicable to a minimum energy efficiency rating of Band C, by the end of 2030”.
This consultation considers a range of measures to update the existing strategy, including a new “sustainability principle” that would ensure these policies complement other government targets such as the net-zero goal. As an example, it notes that it would be “short sighted” to support new oil boilers as this would contradict commitments to decarbonise heat in the 2020s.
The energy efficiency consultation closes on 25 September, the ECO3 consultation on 6 August and the fuel poverty consultation on 16 September.
Reforming markets to reach net-zero
The government’s net-zero target will require a massive overhaul of the entire economy, and in another new consultation BEIS lays out a critical challenge it says will lie at the heart of this – reforming energy markets.
In November 2018, BEIS and the energy regulator Ofgem launched a review to investigate what market framework changes would be needed in the rapid transition to a low-carbon, electrified and smarter energy system. This week’s document marks a mid-point in this review.
It states the existing retail market design, which has remained unchanged since it was privatised in the late 20th century, is “starting to hold back progress by preventing consumers from benefiting from innovation, and is slowing down decarbonisation”.
Another issue, not raised in this week’s consultation, is that while Ofgem is obliged to keep climate targets in mind under its existing statutory duties, its primary motive is to ensure that energy customers are getting a good deal. This has drawn criticism from groups concerned that this policy mandate – which has not changed since 2011 – may hamper the shift to net-zero emissions.
Some reforms and interventions to the existing system have already begun, in a bid to help the shift towards a greener energy supply and give customers a fairer deal. Among these are the much-delayed and criticised rollout of smart meters, and the energy “price cap” which is expected to be in place until 2023 at the latest. By that time, the plan is for a reformed energy market to bring easier access to better deals for consumers.
Ultimately, the government says it intends to provide a wide choice of energy services, consumer protection, competitive pricing for everyone and adequate services for vulnerable people, as well as keeping market distortions to a minimum while juggling both environmental and social objectives.
At the core of the net-zero future envisaged in the consultation is one in which control of the energy supply is decentralised away from the major suppliers that currently dominate. Regulatory reform is required because, as it stands, BEIS says the current arrangements may “act as a brake on new products and services” that will support decarbonisation.
For example, electric vehicle rollout could be stimulated if manufacturers include free charging in their sales, but such a service may not be possible under existing rules governing licensed suppliers. Ofgem says it has tested the ability of the existing regime to adapt to new models through its “regulatory sandbox” – allowing businesses to trial new ideas in a real-world environment without some of the usual rules – and found the results were not promising.
In the consultation, BEIS and Ofgem ask for examples of products and services that are being blocked, as well as “current or emerging harms to energy consumers which are currently out of scope of the regulatory framework”. They also ask for advice on how to bring in new regulations.
In a further consultation, the government and Ofgem are investigating the rules that govern the UK’s gas and electricity markets, which they say will need to adapt rapidly to enable a transition to a flexible, net-zero energy system.
According to the consultation, over the years these rules have become excessively complex, fragmented and uncoordinated. As the existing governance framework is mainly industry-led, they say there are minimal incentives to make changes that will benefit consumers. They also note it may be appropriate for this responsibility to fall within an organisation with a specific remit for driving future changes to the energy system.
In their consultation, BEIS and Ofgem ask for evidence of the current codes’ performance, and for feedback on some of the issues they have identified and intend to reform.
Both energy market consultations close on 16 September.
The post Analysis: Does the UK ‘require’ new nuclear to reach net-zero emissions? appeared first on Carbon Brief.
Subscribe to The Financial Analyst to get original opinion and all the latest news on trending financial topics and breaking stories related to analysis and global markets. If you have a tip or a financial opinion to share get in touch to submit your story.