Hydrogen is working and it’s much cheaper than we thought

[This article is republished from The Fifth Estate. Originally published on 9 August.]

The technology that produces hydrogen using renewable electricity has already passed crucial regulatory tests for grid balancing in a commercial environment, despite what I said here a month ago.

For over 30 years the prophets of green energy have been promoting the idea that the “hydrogen age” is just around the corner. The gas is abundant in the form of water, molecules of which possess two hydrogen atoms for every oxygen atom.

Making it from water using electrolysis releases only oxygen and no pollutants. It can then be burnt in any suitable boiler, cooker or vehicle and used in fuel cells. All we have to do is get it to the right place at the right time at the right price.

The problem has always been the right price, which provides the market incentive for investment in the necessary infrastructure.

A month ago I wrote a piece on a proposal to convert the UK’s gas grid to hydrogen. The reports I covered judged that the most likely route to creating the hydrogen was through the steam reforming of methane. This is not a climate friendly way of doing it, although it is currently by far the most common.

In a low carbon future, producing hydrogen this way in the required quantities would be unlikely without the ability to capture the carbon released by this process and store it underground, a relatively unproven and expensive process dubbed Carbon Capture and Storage.

I had compared in my article the cost of steam reforming with CCS with the cost of producing hydrogen by the electrolysis of water using wind or solar power. My source for the latter information was an apparently reliable one: the Energy Institute of University College London, which produced a report in April last year authored by Samuel L Weeks about using hydrogen as a fuel source in internal combustion engines. This states: “Hydrogen produced by electrolysis of water is extremely expensive, around US$1500/kWh [AU$1959/kWh].

The editor of The Ecologist magazine, Oliver Tickell, pulled me up on this, observing that it struck him as being way too expensive. I tried to get Professor Weeks and the UCL Energy Institute to give me the source for the $1500 figure but so far have not had a response.

So instead I turned to a company that is already making hydrogen from renewable electricity for grid balancing and fuel cell powered cars: ITM Power. They provided me with another professor, Marcus Newborough, who is their development director. He gave me a much lower figure.

Much, much lower.

He said: “We are currently selling high purity hydrogen at our refuelling stations for fuel cell cars at £10/kg of hydrogen. Each kilogram contains 39.4kWh of energy, so that’s about 25 pence/kWh or $0.33/kWh. The ambition is to decrease the $/kWh value as more stations are manufactured and more FC cars are in circulation. So yes the $1500/kWh number looks absurd to us.”

Indeed it does. It is 4545 times larger, if we are comparing like with like.

And I apologise for not checking more thoroughly.

And I’m still mighty curious as to why UCL Energy Institute got it so wrong.

Not only is ITM using the gas for hydrogen car filling stations, a chain of which it is opening in the UK (on a full tank of hydrogen a fuel cell car can drive up to 300 miles), it is also using it to inject into the grid.

Power-to-gas

The process is called power-to-gas (P2G) and it is useful when too much renewable electricity is being produced compared to the demand that exists at that moment. Instead of it going to waste it could be used to produce hydrogen as a form of energy storage and used when required.

Professor Newborough said, “The power-to-gas approach is a form of energy storage and (in the UK) there are various assessments and discussions ongoing [through organisations such as BEIS (the new UK government department dealing with energy and industry), OFGEM (the British energy regulator), UK National Grid, DG Energy in Brussels (the European Commission’s department dealing with energy) and The European Association for Storage of Energy] but no conclusive economic framework yet for energy storage to operate within.”

He said P2G was particularly advantageous for its following abilities:

• to respond to an instruction from the grid operator to charge up or absorb electricity
• to hold on to the stored energy for a significant period without incurring energy losses
• to discharge energy on demand at a desired rate
• to be scaled up in number or capacity as we head towards a much more renewable electricity system

“P2G is part of this alongside batteries, pumped storage, etcetera,” he said. “Fundamentally the economic benefit is greatest for those technologies that possess the operational advantages of being able to respond very rapidly and/or hold onto the energy for a long period and/or discharge energy at a controllable rate across a very long period. Now power-to-gas is particularly advantageous in each of these respects.”

ITM has a pilot P2G system operational in Frankfurt with 12 other companies that together form the Thüga group.

At the end of 2013, this plant injected hydrogen for the first time into the Frankfurt gas distribution network. It therefore became the first plant to inject electrolytic generated hydrogen into the German gas distribution network, and possibly anywhere in the world. Final acceptance of the plant was achieved at the end of March 2014.

Overall efficiency is said to be over 70 per cent and the plant is now participating in Germany’s secondary control (grid balancing) market.

The conditions for being allowed to do this are extremely stringent. Systems have to respond in under one second when they receive a command to increase to maximum power or decrease to zero power to demonstrate that they are suitable for frequency regulation. The energy is discharged as hydrogen and should be available for as long as required.

The Frankfurt system has been shown to do this and can react to variable loads in the network.

Work is ongoing to see how the plant can be integrated into an increasingly intelligent future energy system.

“For the duration of the demonstration, we want to integrate the plant so that it actively contributes to compensating for the differences between renewable energy generation and power consumption,” Thüga chief executive Michael Riechel said.

The regulatory framework is playing catch-up

Professor Newborough told me that the payment levels for providing such services have yet to emerge.

In the UK, the national grid is introducing an Enhanced Frequency Response service to pay energy storage technology operators to provide sub-second response.

“ITM has already pre-qualified to provide such a service,” he said.

They are also introducing a Demand Turn Up service, which will pay operators £60/MWh (AU$102/MWh) for operating overnight and on summer afternoons to absorb excess wind and solar power.

“Clearly the economics of P2G are a function of such balancing services payments from the grid operator and the electricity tariff,” he said, “but in addition P2G offers a greening agent to the gas grid operator in the form of injecting hydrogen at low concentrations into natural gas.

“So the economics are also a function of the value placed on greening up the gas grid. By analogy we have seen in recent years in France, Germany and the UK, feed-in tariffs for injecting bio-methane into the gas grid as a greening agent and these have been up to four times the value of a kWh of natural gas.

“The economic case therefore depends on a combination of value propositions and costs – providing services to the electricity grid, the electricity tariff paid, the value of green gas for the gas grid and the capital cost of the plant. In this context it is not possible to state firm figures at this time, but equally it is important to state the underpinning factors as described above.”

It was at this point in our conversation that he gave me the price at which the company is currently selling high purity hydrogen at its fuel cell car refuelling stations.

Advantages of hydrogen over batteries

A report on energy storage undertaken by McKinsey and Co last year found that using variable renewable electricity this way could use nearly all excess renewable energy in a scenario in the future in which there was a high installed capacity of renewable electricity generation.

Reusing this stored energy in the gas grid, for transport or in industry, it said, would provide a valuable contribution to decarbonising these sectors. The European potential, in 2050, of this value would be “in the hundreds of gigawatts”.

That’s massive.

This future scenario, in which countries are reliant for much of the electricity on renewables, is likely to be common.

The Kinsey report contrasts the use of hydrogen with the use of batteries, which it calls power-to-power or P2P because it’s electricity rather than gas that comes out.

In this situation hydrogen scores better as a storage medium because batteries can either be emptied (in which case they can’t supply the demand) or full (in which case they can not be charged even if the generator is generating). By contrast, hydrogen can continue to be pumped into the grid or into vehicles and the limiting factor instead is the limit of local demand for the distance to the demand from the generator. This is shown in the following diagram:

How low energy storage capacity is a limiting factor for the use of batteries.

Nevertheless the Kinsey report warns that current regulations lag behind the potential of these technologies. Reviewing them is the key to unlocking this enormous opportunity.

So it now seems that the most likely route to creating the hydrogen that goes into our gas grids could be from electrolysis using renewables after all.

Yet, like many cutting-edge low carbon technologies, it’s early days. The Germans are pioneering this method as part of their transition strategy. It’s one part of the picture.

With the UK Met office this week saying that we have already reached 1.38°C temperature rise since the beginning of the industrial revolution and the Paris Agreement aspiring to keeping that rise to 1.5°C, the task of mainstreaming these technologies becomes even more urgent.

David Thorpe is the author of:

• Best Practices and Case Studies for Industrial Energy Efficiency Improvement (with Oung, K. and Fawkes, S. UNEP, 2016)
• A London Conversation: Business Briefing on Green Bonds (The Fifth Estate, 2015)
• The One Planet Life (Introduction: Jane Davidson. Routledge, 2015)
• Earthscan Expert Guide to Energy Management in Buildings (Earthscan, 2013)
• Earthscan Expert Guide to Energy Management in Industry (Earthscan, 2013)
• Earthscan Expert Guide to Solar Technology (Earthscan, 2011)
• Earthscan Expert Guide to Sustainable Home Refurbishment (Earthscan, 2010)

Could the UK's gas grid be converted to hydrogen?

[NOTE: An earlier version of this piece appeared on 13 July on The Fifth Estate. This version has been updated.]

A new study claims converting the UK gas grid to carry hydrogen instead of natural gas will help to meet the UK’s carbon reduction targets and is technically feasible without much disruption to consumers. It proposes Leeds as a pilot city, but there are still major problems to be overcome before it can go ahead.

The proposal is called the H21 Leeds City Gate and the report has been produced by the North of England’s gas distributor, Northern Gas Networks, which is clearly worried by what could happen to its assets down the line, as the country reduces its greenhouse gas emissions by 80 per cent of 1990 values by 2050, which is the target.

It commissioned Kiwa Gastec, Amec Foster Wheeler, and Wales & West Utilities to assess the prospects for converting the gas network to take hydrogen instead of natural gas for cooking in heating, beginning in Leeds and eventually covering the entire UK.

The study is backed by no less than four other recent reports, all making the case for using the existing gas grid, which serves almost half the UK population, for either biogas or hydrogen or a combination.

• National Grid's Future of Gas report
• Energy Networks Association (ENA)'s Green Gas report
• The Green Gas Book backed by the UK's Labour Party
• Consultants KPMG's report 2050 Energy Scenarios - The UK Gas Networks role in a 2050 whole energy system.

A UK-wide conversion of the grid to hydrogen gas could, it’s claimed by H21, reduce greenhouse gas emissions associated with domestic heating and cooking – currently over 30 per cent of the UK’s total emissions – by a minimum of 73 per cent, as well as supporting decarbonisation of transport and local electricity generation.

The report argues that a hydrogen gas grid could use the existing underground natural gas pipe network, and that household appliances can be converted to run on hydrogen with far less disruption and expense than converting to renewable energy sources.

Dan Sadler, H21 project manager at Northern Gas Networks, said: “Households won’t be required to buy new appliances. The conversion process will be similar to that carried out in the 1960s and ’70s when 40 million appliances across 14 million households were converted from town gas to natural gas. We’d have special teams, working street by street to make the conversion as smooth as possible for customers with minimal impact in the homes and the highways.”

H21 says the project would be funded the same way as happened during that first conversion. This would allow the costs to be paid back over time and, alongside energy efficiency measures, would have a minimal impact on household energy bills.

Household appliances will, however, need to be upgraded or modified.

Pure hydrogen embrittles many pipeline steels causing cracking and many pipes are made of iron, but they are slowly being changed to polypropylene at a cost of around £1 billion (AU$1.75b) a year. This cost is spread across consumer bills.

NGN is proposing that Leeds, the UK’s third largest city, is used as a prototype test bed, and the conversion would take place from 2026-29. If successful, there would be a rollout across the UK, implemented at the pace required.

The government has cautiously welcomed the report as a contribution to the debate on Britain’s energy future.

John Loughhead, the chief scientific adviser at the Department for Energy and Climate Change, said: “Meeting the challenge of the Climate Change Act is a huge technical and business challenge. The H21 Leeds City Gate project has usefully explored one possible contribution to meeting this challenge. DECC, and wider UK government, are looking forward to seeing the full findings of the project in the final report.”

The Leeds proposal has received backing from local authorities and businesses including Leeds City Council, the Leeds City Region LEP and Tees Valley Unlimited LEP.

Councillor Lucinda Yeadon, Leeds City Council’s executive member for environment and sustainability, said: “Transforming Leeds into a hydrogen city would be a bold step. It could play a crucial role in how we heat and power our homes in the future alongside other sustainable energy sources.”

NGN is asking for £70-100 million to take the project to the next stage.

Big hurdles

There are several problems with NGN’s proposal besides replacing the pipes, to do with the energy content of hydrogen, and the process of obtaining it.

NGN is proposing the hydrogen be derived from North Sea natural gas with the carbon dioxide removed and placed securely back under the sea so that it doesn’t contribute to global warming.

But at present there is no proof this can work or will be cost-effective. 

Let’s look at this a little more closely.

Most hydrogen in the lithosphere is bonded to oxygen in water. Over 90 per cent of today’s hydrogen is mainly produced by a process called steam reforming, which uses fossil fuels – natural gas, oil or coal – as a source of the hydrogen. The carbon dioxide is removed and vented to the atmosphere.

Hydrogen produced from gas this way is two to three times the cost of the original fuel.

Of course, the energy content of hydrogen is less than that of the original fuel. The claimed energy efficiency for natural gas reforming is 75 per cent. Furthermore, by weight, a unit of hydrogen contains around three times more energy than natural gas or petrol:

• Hydrogen: 33.33 kWh/kg
• Natural gas: (82-93 per cent methane): 10.6-13.1 kWh/kg
• Petrol: 12.0 kWh/kg
• Methane: 13.9 kWh/kg

But natural gas is 7.857 times more dense than hydrogen, and we buy it by volume. Since natural gas carries 41.7 per cent less energy per unit of weight, you’d need to pipe to people’s homes just over three times as much volume of uncompressed hydrogen for them to get the same amount of energy, so the pipes will be under greater pressure to compensate.

Then there’s the climate change problem. The global warming potential of producing hydrogen using the steam reforming process is 13.7kg CO2-e per kg of hydrogen produced. Coal gasification, another major production method, delivers even worse emission levels.

A typical steam methane reforming hydrogen plant with a production rate of one million cubic metres of hydrogen a day produces 0.3-0.4 million standard cubic meters of CO2 a day, which is normally vented into the atmosphere.

To fully attain the benefits of using hydrogen, we must therefore either produce it from renewable energy – or capture and store somewhere the carbon dioxide removed during steam reforming – a process called carbon capture and storage. H21 is proposing the latter.

The renewables option

There are at least eight sustainable ways of producing hydrogen. Electrolysis of water is the cheapest but currently is much more expensive, around US$1500/kWh.

A comparison of photoelectrochemical (PEC) and photovoltaic-electrolytic (PV-E) ways of producing hydrogen with low CO2 and CO2-neutral energy sources indicated that base-case PEC hydrogen is not currently cost-competitive with electrolysis using electricity supplied by nuclear power or from fossil-fuels in conjunction with carbon capture and storage.

They are currently an order of magnitude greater in cost than electricity prices with no clear economic advantage to hydrogen storage as of yet.

A number of possibly cheaper technical breakthroughs are in the wings but we don’t yet know if and when they will be commercially viable.

Analysts at the US National Renewable Energy Laboratory who have looked into the feasibility of hydrogen, assume that 53kWh are required for an electrolyser to produce a kilogram of hydrogen (remember that’s 33kWh when converted), so we’d need a lot of renewable energy to create all the hydrogen to feed the grid.

It might just be more effective to send the electricity straight there and use it directly for heating and cooking.

The CCS option

The H21 proposal has been welcomed by Scottish Carbon Capture & Storage, a research partnership that includes the British Geological Survey, whose director, Stuart Haszeldine, called steam reforming with carbon capture and storage “the least cost method of generating the large amounts of hydrogen required”.

So he is right. Except that no one knows how much it will cost.

The H21 report points towards the very few existing CCS projects in the US and elsewhere – but these operate under very different conditions.

Ever since CCS was first proposed over 15 years ago, I have been sceptical that it could work. It has always been seen as a get-out-of-jail card to permit business as usual in terms of fossil fuels and energy use while seeming to tackle climate change.

Every single deadline and target to get economically viable demonstration and proof-of-concept projects off the ground has been missed in Europe.

This crucial hurdle needs to be overcome – perhaps by backing a completely different and sustainable route to making the hydrogen, or by using the carbon dioxide removed as a feedstock for fuels, chemistry and polymers.

This is called Carbon Storage and Utilisation (CCU).

CCU for the production of fuels, chemicals and materials has emerged as a possible complementary alternative to CO2 storage, but the report does not mention it. Nor do the two other reports on adapting the gas network produced last week.

"CCS is basically a non-profit technology, where every step is costly. CCU however has the potential to produce value-added products that have a market and can generate a profit." says Dr Lothar Mennicken, German Federal Ministry of Education and Research.

The report CCU in the Green Economy from The Centre for Low Carbon Futures shows CCU can be profitable with short payback times on investment.

It says: "Although only a partial solution to the CO₂ problem, under some conditions using CO₂ for CCU rather than storing it underground can add value as well as offsetting some of the CCS costs."

But what are the life-cycle carbon emissions of hydrogen production using SMR plus CCS/CCU?

The latest UK government estimated LCA CO2 emission figures for NG combustion are 184.45 g/kWh plus 24.83 g/kWh emitted by the supply system, totalling 209.28 g/kWh.

But this depends on the gas source: e.g., liquefying natural gas in Qatar, transporting it in refrigerated ships, transporting it in special depots, reclassifying and compressing it into the transmission system can add around another 20 g/kWh, totalling 230 g/kWh.

The carbon footprint of SMR+CCS has been evaluated as 269 g/kWh using the lowest 184.45g/kWh figure above and assuming an efficiency for the process of 68.4%. But applying this to the more accurate lifecycle figure for NG of 230 g/kWh obtains 336.26 g/kWh.

If 90% of the carbon dioxide emitted by combustion is captured by CCS or CCU this still leaves [184.45/0.687] x 0.1 + 20 + 24.83 g/kWh = 71.68g/kWh emissions of carbon dioxide equivalent gases – a not insignificant amount.

H21Leeds puts the figure higher, at 85.83g/kWh. Hardly zero carbon – so H2 generation by renewable energy + electrolysis might be a necessary option in the future.

So, for the time being H21 is an interesting dream – but we must wait to see if it can become a reality.

David Thorpe is the author of:

• Best Practices and Case Studies for Industrial Energy Efficiency Improvement (with Oung, K. and Fawkes, S. UNEP, 2016)
• A London Conversation: Business Briefing on Green Bonds (The Fifth Estate, 2015)
• The One Planet Life (Introduction: Jane Davidson. Routledge, 2015)
• Earthscan Expert Guide to Energy Management in Buildings (Earthscan, 2013)
• Earthscan Expert Guide to Energy Management in Industry (Earthscan, 2013)
• Earthscan Expert Guide to Solar Technology (Earthscan, 2011)
• Earthscan Expert Guide to Sustainable Home Refurbishment (Earthscan, 2010)

This Energy Bill is all about tax revenues from North Sea gas

The Energy Bill compromise is about revenues to the Treasury to help pay off the budget deficit before the next election.

The position on renewables in Britain stands in stark contrast to that north of the border.

The Scottish Government is hoping for independence after 2014. 90% of Britain's oil and gas is in Scottish territory. The Institute of Fiscal Studies is arguing that revenues after the possible independence would be split between the two nations proportionately on the basis of population.

But oil and gas production dropped 18% last year. It will continue this inexorable decline in years to come.

The Scots know this. That's why they are aiming for 100% renewable electricity by the end of this decade. They reckon they will even have more to spare. Perhaps to sell to England and Wales. At this rate, England and Wales are going to need it.

Perversely, George Osborne, David Cameron and the rest of the Conservatives are determined to hitch the UK's wagon to Qatar, from which most of our gas flows: there was a moment two weeks ago when almost 100% of Britain's gas fired power stations were running on gas imported from that Arab country.

But why would they do that?

Many authorities have commented on the volatility of gas prices. They are only likely to rise, affecting each and every one of us and the economy as a whole.

The Committee on Climate Change, in its report, Household energy bills – impacts of meeting carbon budgets, said "Of the total £455 increase [in typical household energy bills between 2004 and 2010] (i.e. 75%, compared to general price inflation of 16% over the same period), by far the largest contributor was the increase in the wholesale price of gas, which added around £290 to bills.”

And Ofgem agrees. In Why are energy prices rising?, we read: “Higher gas prices have been the main driver of increasing energy bills over the last eight years”.

But, forget this. Forget, even, Qatar. This decision is directly related to what the Exchequer receives from North Sea gas extraction.

A dash for gas means a market for Scottish-English gas as well. High gas prices mean higher revenues for the Treasury.

I have prepared this chart of Government revenues from UK oil and gas production, available from figures published here.

Most of this revenue comes from the Ring Fence Corporation Tax, rated at 30% and separate from other corporation tax, which was introduced under New Labour. This prevents taxable profits from oil and gas extraction in the UK and UKCS being reduced by losses from other activities or by excessive interest payments.

It explains why George Osborne gave away £500 million towards further gas and oil offshore exploration in September. As he said at the time, it's because he will get it back in spades from revenue to come: “It will give companies the incentive to get the most out of older fields, creating jobs and delivering more revenue for taxpayers.“

The revealing thing is what happens if you plot oil and gas revenues against total tax revenues.

Then we find, that in the crunch tax year, 2008-2009, oil and gas revenues were at their highest as a proportion of all tax revenue: 2.56%.

As the recession hit, it fell again. The following two years it was at 1.37% and 1.67%, but it has begun to rise again to 2.04% in the current financial year. There have only been three years in the last 20 when it is gone above 2%.

Here are the full figures:

Year	% of revenue from oil and gas	Total revenue (£bn)
00/01	1.24	359.3
01/02	1.47	369.1
02/03	1.37	375
03/04	1.08	397
04/05	1.21	427.1
05/06	2.05	456.8
06/07	1.84	486
07/08	1.45	516
08/09	2.56	508
09/10	1.37	477.8
10/11	1.67	528.9
11/12	2.04	550.6
12/13	1.7	569
13/14	1.34	599
14/15	1.19	633
15/16	0.92	664
16/17	0.85	704

Treasury predictions for the next four years show this percentage to fall dramatically, but this is only because there are wildly optimistic expectations for tax revenue to increase in this period, to £70.4 billion in 2016/17, compared to £55 billion in this financial year.

Now consider this: renewable energy does not provide such an income. In fact it’s a cost, because of the subsidies.

Conclusion: the Energy Bill compromise is not about what happens after 2020. That couldn’t be further from Osborne’s mind. It's about revenues to the Treasury to help pay off the budget deficit before then.

To put it bluntly, it's about who wins the next election, since it will most likely be determined by how well Osborne has managed the economy.

The world is heading for a ”carbon cliff” - PwC

PwC's Jonathan Grant says "we are heading for a carbon cliff" unless habits are changed.

PwC is warning today that the world is heading for 6°C warming unless emissions of greenhouse gases go into reverse.

The annual rate of reduction of carbon emissions per unit of GDP needed to limit global warming to 2°C has passed a critical threshold according to new analysis in the PwC Low Carbon Economy Index, published today. This measures developed and emerging economies' progress towards reducing emissions linked to economic output.

It demonstrates that at current rates of emissions growth, at least 6°C degrees of warming could be possible by the end of the century, which would result in large parts of the world becoming uninhabitable.

While last month, Britain topped a European league table for reduction of greenhouse gas emissions, it is by no means clear that this reversal will continue, as Government policy is to maximise oil, gas and coal extraction, and to build a new generation of gas-fired power plants.

The PwC report

The PwC report shows that to limit global warming to 2oC would now mean reducing global carbon intensity by an average of 5.1% a year, a performance never achieved since 1950, when these records began.

PwC's director of sustainability and climate change, Jonathan Grant, says that "we are heading for a carbon cliff" unless habits are changed. "Even doubling our current annual rates of decarbonisation globally every year to 2050, would still lead to 6oC, making governments’ ambitions to limit warming to 2oC appear highly unrealistic.”

Andrew Sentance, PwC's senior economic advisor, says that "Government policies must radically change", and that for business this "represents an opportunity as well as a risk".

“The challenge now is to implement gigatonne scale reductions across the economy, in power generation, energy efficiency, transport and industry, as well as REDD+ in forested nations,” added Grant.

With less than four weeks to the UN Climate Summit in Doha, the analysis illustrates the scale of the challenge facing negotiations. The issue is further complicated by a slow market recovery in developed nations, but sustained growth in E7 economies which could lock economic growth into high carbon assets.

Emerging markets’ previous trends on carbon emissions reductions linked to growth and productivity have stalled, and their total emissions grew by 7.4%.

By contrast, the UK, France and Germany achieved record levels of annual carbon emissions intensity reductions, but were helped on by milder winters.

Examining the role of shale gas, PwC’s report suggests that at current rates of consumption, replacing 10% of global oil and coal consumption with gas could deliver emissions savings of around 3% a year (1gt C02e per annum).

However the report warns that while it may “buy some time”, it reduces the incentive for investment in lower carbon technologies such as nuclear and renewables, and could lock in emerging economies with high energy demand to a dependence on fossil fuels.

America has been exporting the coal it would have burnt had shale gas not displaced its domestic use, so, globally, a shift to shale gas in one country alone makes little difference to overall emissions.

This underlines the importance of reaching a global deal at Doha, PwC says.

UK oil, gas and coal extraction

At home, British policy on reducing carbon emissions no longer appears as consistent as it did until recently.

On 25 October, Energy Minister John Hayes announced 167 new North Sea oil and gas licences, saying that every last economic drop of oil and gas from the North Sea will be extracted.

In answer to a question from Green MP Caroline Lucas last Friday, about whether the effect of this on achievement of the UK's domestic carbon budgets had been calculated, he gave no indication that it had, instead repeating that the Government “aims to secure over time the maximum economic recovery" of the "20 billion barrels of oil equivalent left on the Continental Shelf".

If all this were to be burnt, it would lead to the emission of 872 trillion kgCO2.

Meanwhile, despite a decline in the demand for coal caused by six British power stations having to close by 2016, the coal industry, through CoalPro, their producer’s association, hopes that the industry will be able to maintain a total of approximately 36 working surface mines across the UK, according to the Loose Anti Opencast Network (LAON).

LAON’s latest review of the stage at which 22 current and possible opencast planning applications across the UK have reached, has just come out.

LAON is calling on the Government to align its planning policy with its energy policy. Steve Leary, its coordinator, says: “It is the Government's intention to phase out the use of coal for power generation purposes, leading to a 75% decline in the use of coal for such a purpose over the next 10 years, whilst at the same time, through provisions in the Growth and Infrastructure Bill, it is possibly making it easier to dig the coal out".

He says this coal would probably be exported if not burnt at home.

This morning, activists from the No Dash for Gas campaign who have been protesting at the Government's policy to build a new generation of 20 gas-fired power stations, are ending a seven day occupation of the 300 foot high chimneys of EDF's West Burton 1,300MW Combined Cycle Gas Turbine (CCGT) plant, currently under construction in Nottinghamshire.

Energy and Climate Change Secretary, Ed Davey, has guaranteed that if built, these stations will be exempted from emissions regulations and can continue emitting CO2 unabated until 2045.

Call to decarbonise
  -->

In a timely move, the Carbon Capture and Storage Association, the Nuclear Industry Association and RenewableUK have today issued a joint call to Energy Secretary Ed Davey to largely decarbonise the power sector by 2030.

The three associations, representing over 1,000 corporate members, make the request  in a letter  copied to the Chancellor, Prime Minister, Business Secretary and Deputy Prime Minister and Minister of State at the Cabinet Office.

The letter states that including a reference to the objective to largely decarbonise the power sector by 2030 in the Bill would reassure potential investors by lowering political risk and bring the cost of capital down for lower carbon generation.

The organisations stress, however, that any target set in legislation should serve a specific and necessary purpose and not contribute to so-called "target fatigue" in the energy sector; and it

Davey goes for gas as €9.5 billion price rise forecast for 2013

 Ed Davey at Gastech today.

Rising gas and power prices will cost European industrial energy buyers an additional €9.5 billion in 2013 according to new forecasts.

The news comes on the day that major corporations including BT and Microsoft are urging George Osborne and the Conservative Party to do more to support renewable energy, and Ed Davey told the GasTech conference about his commitment to gas.

€4.2 billion of these forecast price increases will be due to hikes in gas prices, and €5.3 billion to growth in the price of electricity, market consultants EnergyQuote JHA, will say at their biannual energy price forecasting conference which begins on Wednesday.

UK consumers will see an increase of between 5% and 7%. This is not the highest in Europe by any means: the Dutch will find prices 12.5% higher and Germany Austria and Belgium businesses will face increases of over 10%.

Britain is in the process of approving a number of new gas-fired power stations, which would leave the nation at the mercy of such future price increases. Ed Davey, Energy Secretary, has said that up to twenty could be built over the next two decades.

He told the Gastech Conference & Exhibition this morning that gas will be important even through to the 2040s, and said the sector needed £110 billion of investment in power generation and transportation to 2020.

He said a new generation of gas-fired power stations must be built ready for carbon capture and storage. “CCS matters not only for the continued use of gas in the long-term in the UK; it is also vital for cutting emissions globally. And as we prove the commercial viability of CCS, we have the chance to create in that process an exciting export opportunity for companies that become early leaders in this technology.”

He also said that he is waiting for evidence on the viability of shale gas in the UK before making a decision about it.

He was followed by BG Group's CEO, Sir Frank Chapman, who said: "We must prove that gas is the 'destination fuel' of the low carbon economy".

A new 880 MW combined cycle gas turbine (CCGT) power plant, which will be built by engineering consortium Alstom Duro Felguera and Carrington Power, secured financial support for its development in Manchester last week.

That the gas industry is in buoyant mood is evident at its industry conference, which is happening this week at ExCeL London.

Tomorrow, the conference is being attended by Russian Energy Minister Alexander Novak, giving his first press conference in the UK since he was appointed to the role in May this year. He will be anxious to promote the advantages of Russian gas.

He is being accompanied on his visit to this country by Alexey Kalinin, who, as Rosatom’s Head of International Business, represents another Russian energy sector, nuclear power, that is anxious to sell into Britain.

He will be speaking about Rosatom’s willingness to develop a new nuclear skills base in the UK, to an audience at a Centre for Policy Studies Fringe Meeting during the Conservative Party Conference, that will include John Hayes MP, the new Minister for Energy & Climate Change.

Whether Britain builds a new generation of gas-fired power stations, new nuclear plants, or invests further in home-grown renewable energy, will determine not just the price of energy in the future, but UK energy security and whether the country will meet its 2050 carbon emission targets.

Major companies lobby Osborne

Over 50 companies, investors and industry bodies, including EDF, BT, Microsoft, Marks & Spencer's and PepsiCo, are signatories to a letter sent to George Osborne, David Cameron and other senior Tories today, warning that sending out mixed signals on energy policy risks undermining investment in renewable energy.

They back the setting of a 2030 target for decarbonising the electricity sector, which is urged by the Committee on Climate Change, because reliance on gas beyond 2030 would be incompatible with meeting legally binding emissions targets set under the 2008 Climate Change Act.

“It is essential for government to provide investors with the long-term confidence they need to transform our electricity market and make investments capable of driving wider economic growth,” the letter says, going on to warn that the Government's commitment to green power is being “undermined by recent statements calling for unabated gas in the power sector beyond 2030”.

"Failure to act at sufficient scale and pace will undermine our prosperity and cause us to miss out on the huge commercial opportunities associated with the global shift to a low carbon, resource efficient economy," it says.

The letter is organised by the Aldersgate Group.

Decarbonisation target

The Financial Times is reporting today that utility company SSE also supports a 2030 carbon intensity target, because it “could provide much-needed certainty for low-carbon investors, showing developers that the government is committed to decarbonisation in the long term”.

Both Labour and the Liberal Democrats are in favour of a 2030 decarbonisation target of 50g CO2/kWh, which will be set in the context of the Energy Bill that will be laid in final draft before Parliament towards the end of the year.

Ed Davey's recent thinking is that there should be such a target, but within it there should be some flexibility. He reportedly wants to see a target range for different sectors.

This is a model also being considered for an amendment to the Bill by Friends of the Earth.

This would stipulate a general 50g CO2/kWh by 2030 target, but allow for flexibility within the context of an overall 2050 carbon target. The fixed target would be invoked in primary legislation, but secondary legislation could support different targets for, say, transport.

This would take the burden of responsibility away from resting solely upon the energy sector.

The environmental lobby body is cautious however. Donna Hume, FoE's energy campaigner, has warned that adopting a decarbonisation "range" instead of a specific target could result in the UK failing to deliver the necessary emissions cuts.

"A decarbonisation target would provide greater clarity on the direction of travel for many renewable energy businesses after 2020," she said. "It would also ensure it was a more democratic and transparent process."

UK coal generation, emissions, up due to low carbon price

Burning coal to generate electricity in the UK increased by over a third in the first half of 2012, compared with a year earlier, as it became more profitable.

This has caused analysts at Thomson Reuters Point Carbon to forecast that the country's greenhouse gas emissions from the energy sector will hit 158.7 million tonnes in 2012, up 14% on the previous year.

Figures released yesterday by the Department of Energy and Climate Change show that coal-fired generation increased by over a third in the first half of 2012, compared with a year earlier. Coal-fired plants produced 67.2 terawatt-hours (TWh), compared to 49.56 TWh the year before.

This trend was helped by a drop of 50% in the price of carbon permits over the year, which meant that it became, and continues to be, at times, almost cheaper to burn coal than gas.

At the same time, the output of nuclear power fell by 5%, or 2.6TWh, due partly to the retirement of plants at Oldbury and Wylfa, Anglesey.

But output from renewable sources increased over this period, with wind power rising 28.3% to 7.17TWh.

The whole of the UK's energy sector emitted 139.8 million tonnes of CO2 in 2011, according to EU data, cuasing it to leap 28 million tonnes above its permitted cap in the EU Emissions Trading Scheme, meaning it will have to purchase emission credits.

The high profitability of coal means the UK is becoming more reliant on the dirtiest form of energy production, a trend that has been ongoing for the last few years.

Deal with Norway guarantees future UK gas and oil dependency

Øyvind Eriksen, executive chairman of Aker Solutions, Norwegian Prime Minister Jens Stoltenberg and David Cameron discussing the deal in a side street in Oslo, Norway.

The Norwegian and British Prime Ministers yesterday agreed several landmark energy partnerships between the two countries designed to secure long-term energy supplies.

The deals will further increase UK dependence on gas and oil for decades to come, including committing it to tapping reserves in the Arctic that are opposed by environmentalists. They will also support the development of offshore wind and, it is hoped, carbon capture and storage. Finally, they continue to support a grid interconnector between the two countries, allowing the UK to import geothermal power.

The deals were sealed at a breakfast meeting in Oslo with Prime Ministers David Cameron and Jens Stoltenberg that was attended by ten leading energy companies from both countries: Fred Olsen, Gassco, Aker Solutions, National Grid, NorthConnect, Shell, Statoil, Statnett, Statkraft and Centrica.

Billions of pounds of new investment are expected to result, with the potential to create thousands of new jobs. The agreements include the creation of:

• 300 jobs from Statoil's £12 billion investment over the lifetime of oilfields in the UK's Mariner-Bressay North Sea
• 1300 jobs in the oil services industry created by Norwegian firm Aker Solutions in Chiswick
• continued cooperation on gas supply and exploration between Centrica and Statoil, sealed in a new Memorandum of Understanding
• a promise to develop the 9GW Dogger Bank offshore wind farm off the East coast of Yorkshire by the Forewind Consortium
• a deal to provide more Norwegian gas to Shell from Gassco
• continued progress on installing two subsea electricity interconnectors to provide geothermal electricity between the UK and Norway.

Prime Minister David Cameron said of the Norway-UK Energy Partnership for Sustainable Growth: "The jobs and investments announced today highlight how vital the strong relationship between Norway and the United Kingdom is for our energy security and economic growth. We look forward to strengthening our partnership further, driving investment into a diverse, sustainable energy mix that delivers affordable long term supplies for consumers."

Norway is already an important supplier of oil and gas to the UK, providing over a quarter of the UK's primary energy demands: 42% of imported gas and 62% of imported oil in 2011. Charles Hendry, Energy Minister, added that: “The investments and jobs announced today by British and Norwegian companies are a clear signal of the benefits of this partnership.”

The agreement says that oil exploration on the Norwegian and the UK continental shelves “will continue to provide substantial energy supplies for the coming decades". Included in this is the ability to use new technology to improve recovery from mature fields and from the Arctic.

Carbon capture and storage

The statement continues: "The UK is currently developing a gas generation strategy, setting out the role for gas-fired power in delivering a secure and affordable route to a low-carbon economy. CCS will enable gas to provide substantial electricity consistent with our climate change agenda."

Norway is leading the world in this technology; it has been burying carbon dioxide there since 1996. Last month, Norway's Prime Minister, Jens Stoltenberg, opened the next stage of the world's largest prototype carbon capture and storage plant at an oil refinery and gas power plant at Mongstad, that is financed by the Norwegian government to the tune of $1bn.

The United Kingdom, however, like the rest of Europe, is lagging behind Norway and other countries such as America, Canada and Australia, all famous for the size of their carbon footprints in implementing CCS. The main reason is the low price fetched for a tonne of carbon released into the atmosphere under the European Emissions Trading Scheme, roughly one tenth of the cost of burying it back in the ground.

David Cameron hopes that we can learn a thing or two about CCS from the Norwegians to improve the prospects of the fledgling CCS projects here in the UK.

However, with the proposed emission limits of 450gCO2/kWh for Emissions Performance Certificates for new gas-fired power stations in the new Energy White Paper, it is hard to see that there will be any regulatory incentive to capture carbon from these power stations.

Arctic oil and gas

Because of the agreement, Britain will have no shortage of oil and gas in the years to come. Norway is ranked 13th amongst nations with gas reserves. Major new discoveries of oil and gas have been made recently in the Norwegian Continental Shelf, in the Skrugard and Havis fields in the Barents Sea, and the Johan Sverdrup in the North Sea. Aker Solutions has recently been awarded contracts by Statoil for exploring these. The Barents in particular is a harsh, Arctic environment.

But exploration in the Arctic faces severe opposition from environmentalists. Greenpeace calls it “a catastrophe waiting to happen" and is mounting a big campaign, fronted by Jarvis Cocker, who recently visited the Arctic Circle and was reportedly moved to tears at the region's majestic landscape.

David Cameron did not have time to do any sightseeing. In the joint statement is the claim that coming Electricity Market Reform will create a "framework for investment in the UK" worth "over £200bn in energy project opportunities. Similarly," it continues, “Norwegian policies are creating new commercial opportunities for companies, particularly in the High North," a reference to the Barents Sea discoveries. "The Norwegian-Swedish Green Certificate Scheme also offers incentives for British investors in renewable energy," it adds.

This scheme was launched on 1 January 2012 and is a market-based system to support the expansion of electricity production from renewable energy sources and peat. Since then 12,573 green certificates have been issued in Norway in relation to 26 plants.

In Norway, Statoil, which is 67% owned by the Norwegian government, is facing stiff opposition from the public, church leaders and 28 Norwegian organisations including WWF Norway and Greenpeace Norway, for having chosen to get involved with tar sands.

Wind farms

As for the renewable energy projects, the largest of these is the Dogger Bank one, which comprises up to four offshore wind farm projects, 156km off the coast of Teesside, which could provide over 10% of the UK's energy needs

The windfarms will be connected by onshore high voltage direct current (HVDC) underground cabling and up to four direct current (DC) to alternating current (AC) converter stations. A local consultation is currently underway.

The Forewind consortium managing the project is comprised of the Norwegian companies Statkraft and Statoil, German company RWE npower renewables, and Scottish company SSE.

Finally, the Norwegian-UK agreement says that "The UK and Norway will work together to build on outcomes of the Rio+20 Conference, including further development of the Energy+ Initiative to increase clean energy access for developing countries."

The next step is a conference to discuss the achievements and future priorities of the UK-Norway energy partnership, to be held at London’s Royal Geographical Society in September.

The new Energy Bill is everything the UK doesn't want

The draft Energy Bill, published today, will do nothing to help energy efficiency or make it easier for new renewable energy companies to enter the market place.

It is too complicated, biased towards the Big Six, gas and nuclear, and still contains many uncertainties.

Even the Institute of Directors thinks so. Corin Taylor, its Senior Economic Adviser said:
"Businesses need clean, secure and affordable energy, but we're concerned that the draft Energy Bill may fail to deliver. We need to see a technology-neutral approach adopted as soon as possible, so that the cheapest low-carbon energy sources are prioritised, but the Bill confirms that the Government will try to pick energy winners for at least another decade.

"It looks like an overly-complex way of delivering much-needed investment in Britain's energy infrastructure."

Joss Garman, senior energy campaigner for Greenpeace, slammed the Bill for failing to do anything about energy efficiency, “the fastest and the cheapest way to bring down both bills and emissions, and said it will make it "harder to invest" in renewable energy, particularly for small generators.

“The coalition has decided to throw billions of pounds at the failing nuclear industry, which is going to send household bills even higher," he said, adding that by encouraging greater "dependence on burning expensive imported gas to generate electricity", this "will increase bills for families and businesses and see money going to countries like Qatar and Norway instead of back into the British economy.”

Dr Neil Bentley, CBI Deputy Director-General, said there are still many unknowns. “We are still some way from having a detailed picture of how the electricity market will look in the future," and that it was now up to Parliament to ensure that it "not only gets it right, but does so as a matter of urgency".

“The clock is ticking to create the market certainty that will unlock billions of pounds of private sector investment, generating many new jobs across the UK, and securing an affordable supply of energy," he added.

Which? executive director Richard Lloyd is sceptical and said he "wants to see more evidence and the small print before we can judge whether this will work for all of us who are expected to foot the bill”.

"Contracts for Difference could see potential savings for consumers but the Government must be honest about the cost that this investment will involve," he added, at the same time calling for reform of the retail market and "an effective energy efficiency strategy".

The IPPR also says that a "tax on the emissions of power companies contained in today’s Energy Bill will do nothing to reduce carbon emissions while piling more cost on to the shoulders of already hard-pressed consumers in the UK, and threatens to damage the reputation of policies aimed at tackling climate change". It says it will waste £1 billion and argues for a different approach to raising the carbon price and raising certainty for investors that would see the creation of a European Carbon Bank to manage the price at an EU-level.

The Institution of Engineering & Technology (IET), the non-profit engineering body, also expressed surprise that "no reference is made to reducing demand in the announcement made today".

The chief mechanisms for promoting low carbon generation and keeping the lights on are the feed in tariffs with contracts for difference (FIT CfD) and the creation of a capacity mechanism. But how will they work?

What is FIT CfD?

It is a type of power purchasing agreement between the generator and the purchaser that guarantees a price over a period of time, with a top up, equal to the price difference between the cost of producing the electricity and the current market price.

They are intended to help provide a guaranteed, fixed return on investment to compensate for the high initial cost of constructing low carbon generation plant.

The Bill's impact assessment admits that “only low-carbon projects that are able to secure FIT CfD contracts will be able to participate in the market".

For intermittent generation like wind and solar power, pre-selling a day ahead in the electricity market, a common practice, would give it a low price. You might think this was an advantage for renewables, but it is not if a higher price is required to repay investors.

The Bill allows for FIT CfD contracted plant to receive a top-up price to compensate for this perceived disadvantage. But as the price of constructing new plant comes down, this policy could actually prevent some types of renewable energy from being as competitive as they otherwise would be.

However, it should remove or improve the situation where wind farms are currently paid not to produce electricity, which has been seized on by anti-wind farm protesters as a reason to oppose them.

In a future Britain where a FIT CfD package is implemented, there will be savings in carbon costs as decarbonisation will be more rapid than without the package.

Generation costs would also reduce as there will be reduced output from gas plant and more from coal-with-CCS (carbon capture and storage) plant (coal is cheaper than gas).

This assumes that CCS materialises as an installed technology for coal-fired plant. This is not an inevitable outcome if gas plant becomes relatively cheaper due to the introduction of the much-criticised low Energy Performance Standard (EPS) for generation plant of 450g/kWh being proposed by the Bill, that would let gas plants be constructed without the need for expensive carbon capture and storage.

It's a gamble. The modelling used by DECC argues that by the latter half of the next decade, assuming nuclear power stations come on stream and are in budget, then consumer costs for electricity will be reduced if fossil fuel prices are high. The question is, whether anyone believes this will happen.

If this low carbon generation does not arrive, more fossil fuels will be burnt and the UK will spectacularly fail to meet its carbon emission targets of 50g CO2/kWh in 2030: it will be 190g CO2/kWh.

Under FIT CfD, consumers will be shielded from longer-term wholesale price increases, but, equally, if prices go down their bills will not.

And in the long run, prices from renewable energy installations are bound to reduce as the technologies mature, as Ed Davey admitted in a television interview with Andrew Neil on Sunday, i.e., consumers could end up paying more than they would otherwise.

More damagingly, the impact assessment says, "changes in wholesale prices only affect the amount of support paid out by Government; hence the price risk is borne by Government balance sheets."

If the price to guarantee the building of new nuclear power stations is on the Government balance sheets, then this is the very definition of a public subsidy and will not be permitted by Brussels.

Assuming it does proceed, then overall revenue expectations for generators would be based upon the agreed FiT CfD strike price.

For nuclear power, a ‘strike price’ of over £150 per MWh (assuming a 70% capacity factor), or, at the very least, £135 (assuming 80% capacity factor), would be required by a credit rating agency in order for EDF to achieve is nuclear build plans, according to Dr. David Toke, Senior Lecturer in Energy Policy at the University of Birmingham.

This is more than the figure of around £130 per MWh that offshore wind farm owners are currently being paid; which is made up of two ROCs, worth around £42 per MWh each, plus the wholesale electricity price, around £45 per MWh.

It would mean that consumers would be paying more for their electricity just to support nuclear power.

Capacity market

With the proportion of wind power expected to rise to 25% in the next 10 years, increased capacity is required to cater for days of high demand and low wind.

The capacity market is a strategy being proposed by the Government to find the cheapest way of meeting this demand for extra generation capacity.

It is based on the assumption that 19GW (around 20%) of total generation capacity is expected to go off-stream between now and 2020, compared to around 6GW that closed in the last decade.

However, EDF has announced this week that it is to ask the Office for Nuclear Regulation if it can keep open its existing eight nuclear power stations for a further 10 years.

If this were to happen, there would be plenty of time for extra gas and renewable capacity to be built, which would preclude the need for new nuclear power stations.

In particular, the capacity market strategy favours the construction of new gas plant, with the impact assessment for the capacity market containing an example of how it will benefit a typical new Combined Cycle Gas Turbine plant. It would receive the highest revenues: a total of £275 per kilowatt. This is likely to stimulate the building of new gas-fired power stations.

A capacity market is a significant intervention in the market with potentially substantial administrative costs for businesses.

This will disproportionately affect small generators and new entrants in the market, in other words favour the status quo of the Big Six.

This is not likely to go down well with anyone except the Big Six themselves.

In summary, in their current form, the proposals do not guarantee lower bills for consumers, do not support energy efficiency, and seem artificially to favour nuclear power and gas power generation with no guarantee of meeting the UK’s carbon emission reduction goals. There is also no guarantee that they will be permitted by European Union rules.

Could the Climate Change Act be used to curb new gas-fired plants?

DECC's decision to set EPCs at 450gCO2/kWh could be open to legal challenge.

It is now fashionable to term natural gas a “transitional" fuel on the road to a low or zero carbon economy at some vague point in the fuzzy future.

Just as many thought carbon capture and storage would be a “get out of jail free" card enabling business as usual (note: this does not include the International Panel on Climate Change), in the same way that many people once believed that quack doctors' miracle cures for ailments actually worked, gas is now the favourite conventional temporary solution to our climate change problems.

In January, I wrote that "low gas prices are the biggest threat to renewables", and this was borne out by the Chancellor's Budget and Ed Davey's announcement this week.

Ed Davey has decided that Emissions Performance Certificates for new gas-fired power stations can be set at 450g of CO2 per kilowatt hour until 2045, 15 years beyond the date recommended by the Committee on Climate Change.

To comply with the recommendations of the Committee, the emissions level would need to fall to 50g/kWh at 2030.

In that column, I wrote that "we must particularly guard against constructing more gas-fired power stations as this would lock us into higher emissions for twenty or more years".

Tory George Osborne and Lib-Dem Ed Davey seem to be united in this Coalition vision. We may not have shale gas in this country (yet) and it's unlikely that we ever will, nor is gas currently as cheap as coal to burn in power stations.

No, its big advantage is that a gas-fired power station can be up and running in two years, making electricity cheaper than wind power, with around half the emissions of coal.

Last week, Green MP Caroline Lucas asked Charles Hendry if he thought that the Committee's requirement that an 80% reduction in emissions by 2050 required that electricity generation be almost entirely decarbonised by 2030.

His response referred to last December's Carbon Plan, which looked at different scenarios consistent with meeting carbon budgets. He said that "Government are not setting an explicit decarbonisation goal for electricity generation in 2030 at this point, given the uncertainties involved in setting a target this far out, which include levels of electricity demand and cost-effectiveness of different technologies".

But the Government is setting the level of the playing field which helps define the cost-effectiveness of different technologies. Davey's pronouncement is part of that.

And it can also estimate very well for how long a gas-fired power station will continue generating if built in the next three to four years; it will certainly be doing so by 2030, just 14 years later.

According its own recent estimates, published in DECC’s Updated Emissions Projections in October 2011, an additional 4.9 gigawatts (GW) of new gas-fired electricity generation capacity is projected to come online by 2020.

Of this, 4.1GW is projected by 2016, but in reality it's even more than this: new gas projects with government consent currently amount to 16.2GW.

Information from National Grid and New Power shows that all of these projects could be online before 2020.

This level of unabated gas operating at 450g/kWh at 2030, let alone 2045, would make it impossible for the UK to meet its long-term carbon emission reduction goals.

Hendry is talking disingenuous nonsense.

The wind/gas future

Recent analysis by Platts on the electricity market argues that 'transitional' gas and wind power will form the backbone of the system in the near future.

They write: "This will be combined with baseload power from biomass and a declining amount of legacy coal and nuclear.

"Gas will act as the hydrocarbon bridge to a more sophisticated low carbon smart energy system that will include a greater range of RES, backed by demand response, storage and other clever means of balancing electricity supply with demand."

Platts' conclusion is that energy companies have two choices: either enter a declining competitive market or pursue renewables.

Platts calls renewables “subsidy-backed", but as we have seen from the Budget gas and oil are subsidised in their own way, by tax breaks for example, just as any other form of electricity generation.

Nevertheless, in simple levelised cost terms, seen from this point of view, wind has just about reached what we could term grid parity.

In this picture, gas is required to fill in the gaps when the wind isn't blowing sufficiently, and the gas power stations will remain idle when it is.

This gives us a picture of the future. In a competitive market, with a smart grid, buyers will choose whichever is the cheapest power source at that moment.

In the UK, the question is whether such a pattern will bring down emissions sufficiently to meet the U.K.'s legally-binding requirements under the Climate Change Act.

The next legal challenge

I have no doubt that Friends of the Earth, currently celebrating their third victory over the Department for Energy and Climate Change over solar feed-in tariffs that was announced on Friday, will be watching carefully to see if they can to mount a legal case themselves against Ed Davey's decision, on the grounds that it could lead to the UK failing to meet its carbon budgets under the provisions of the Climate Change Act.

Under this, the UK must have reduced its carbon emissions by 35% by 2022 and 50% by 2027.

As they have calculated, with this amount of gas generation that will be impossible.

Rhian Kelly, CBI Director for Business Environment policy, has commented on the Supreme Court’s ruling on feed-in tariffs, saying: “What’s important now is that the Government learns the lessons from this sorry solar saga.

“As it puts the finishing touches to reforms to electricity markets and the Green Deal, it must be sure it creates a stable, predictable policy framework which leads to investor confidence and generates jobs.”

Rhian Kelly, that is a nice dream. Government energy policy remains as stable as a galleon in a gale.

Osborne's carbon-fuelled budget sets the scene for a gas-fired future

Would you trust this man to lower carbon emissions?

Budget 2012 will be remembered in the future as the trigger for a new era of gas-fired generation and oil exploration.

• "A bad day for the environment" (John Sauven, executive director of Greenpeace).
• “I am concerned about the focus that the Budget took on fossil fuels" (Mark Kenber, CEO of The Climate Group).
• "Despite small green shoots of recovery, investor confidence, instability and uncertainty remain" (Michael Lunn, Environmental Industries Commission’s Director of Policy and Public Affairs).
• "Sticks two fingers up at David Cameron's promise to build a clean future – and gives a massive thumbs down to new jobs and cutting our reliance on expensive gas and oil" (Andy Atkins, executive director of Friends of the Earth).
• "We had hoped for greater clarity around future energy and emissions policies to enable better business and investment planning." (Melanie Leech, Director General of the Food and Drink Federation).
• "We urgently need a long term, consistent policy framework to provide businesses with the confidence to invest in low carbon and energy efficient improvements" (Martin Baxter, Executive Director of Policy, Institute of Environmental Management and Assessment, who believes the Budget does not deliver this).

This fair sprinkling of reactions paints the broad brush picture. Read on for the Low Carbon Kid's comprehensive summary of the sector highlights of Mr. Osborne's third budget.

Carbon Reduction Commitment (CRC)

The Chancellor announced a review of the Carbon Reduction Commitment (CRC). Mr. Osborne said it is "cumbersome, bureaucratic and imposes unnecessary cost on business", and that if ways of improving it "cannot be found, I will bring forward proposals this autumn to replace the revenues with an alternative environmental tax".

The CRC has few friends. The CBI, the Engineering Employers' Federation (EEF) and others felt he should have gone the whole way and announced its immediate dissolution. “The Government is wasting time by announcing yet another consultation," said the CBI's Director-General John Cridland.

Gareth Stace, head of environment and climate policy at the EEF, welcomed the news, saying "no amount of tinkering with this doomed tax on British business will ever make it work and therefore the government should scrap the scheme".

But the CRC is not completely isolated. KPMG's lead CRC advisor, Ben Wielgus, cautioned that "the introduction of a tax alone would be unlikely to deliver on all aspects of the CRC: namely the reputational drivers and focus on energy usage that are core to the scheme at present".

"Any reporting requirements would create an administrative burden on business and would need to be carefully designed to ensure that any replacement actually reduces administrative costs compared to the CRC," he added.

Michael Lunn of the Environmental Industries Commission was even more sceptical: "Having previously diverted funds raised from the CRC Scheme from green initiatives into general taxation, the Chancellor has now announced that it must be simplified, or scrapped. This sends a very unhelpful message to those companies working their internal budgets and committing funds to comply with a regulation that may become redundant in just a few months’ time," he said.

"Constant policy changes are detrimental to business and growth in the green economy, and we need to put in place a long-term, predictable and ambitious environmental policy framework right across the UK economy."

Martin Baxter, Executive Director of Policy, Institute of Environmental Management and Assessment (IEMA), said he was "disappointed that the government has not taken a longer term approach, as this would provide business with more certainty for investment and effective action on climate change″.


He said he was looking forward to an announcement on mandatory GHG reporting for business, "which will provide benefits for both the UK economy and the environment, by delivering cost and carbon savings”.

The Chancellor said that allowances sold with respect to 2012–13 emissions will be set at £12 per tonne of carbon dioxide, half as much again as the current carbon market price.

Carbon price floor

The Carbon Price Floor is designed to ensure that greenhouse gas emitters pay a price for their emissions, and will be set at £9.55 per tonne of carbon dioxide from 2014–15.

The EEF estimates this will lead to a 6-7% increase in industrial electricity prices and “locks the UK into higher energy taxes than our competitors, regardless of the European carbon price".

Its Gareth Stace said this "contradicts the government’s stance that the UK will go no faster than our partners in Europe.”

Greenpeace slammed it as a "stealth tax" which the Chancellor regards as an opportunity to raise revenue. "To drive investment in the clean technologies that would cut carbon and bring down bills he should instead have said the revenues would be ring-fenced to support ending our addiction to dirty fossil fuels,” said Dr Doug Parr, policy director for Greenpeace.

The CBI called the new level a “33% rise" that would "hit UK energy-intensive businesses hard, and underlines the need for a more coherent strategy to unlock low-carbon industrial growth".

“In the meantime, we urgently need support to those companies most at risk from the increase,” said John Cridland, which the Chancellor already has announced he is doing with £100 million over the Spending Review period.

Combined Heat and Power

"Combined Heat and Power plants will not be liable to carbon price support rates on fuels used for heat," said the Chancellor, in a move which only partially reinstates the tax break on CHP he removed last year.

This was criticised by Graham Meeks, director of the Combined Heat and Power Association, who said that the break "was what allowed these plants to compete in the power market. He has not restored this, and that's very negative".

The positive effect of not applying carbon price support charges to fuels used for Combined Heat and Power (CHP) is offset by the decision to remove the associated Climate Change Levy (CCL) exemption certificates, he said.

Climate Change Levy

Plants must generate at least 2MW of electricity before they become liable for the carbon price support rates of the Climate Change Levy (CCL).

CCL rates themselves will increase in line with inflation from 1 April 2013.

As announced in 2011's Budget, Climate Change Agreements (CCAs) will be extended to 2023, and as the Chancellor said in his Autumn Statement 2011, the Climate Change Levy discount on electricity for CCA participants available from 1 April 2013 will be increased to 90% to support energy-intensive industries.

The removal of exemption certificates to the Levy will bring in £110m in 2013-14, rising to £165m in 2016-17. This will go some way to paying for the carbon price floor and support for combined heat and power, which is estimated to cost £45m in 2013-14, rising to £145m in 2016-17.

Oil and gas

The Chancellor made significant announcements to support expansion of fossil fuels, especially gas, in a move that, together with Ed Davey's announcement of support for gas-fired generation earlier this week, is more than likely to stimulate a new building programme of gas-fired plants.

“Gas is cheap, has much less carbon than coal and will be the largest single source of our electricity in the coming years,” he said, adding that there will be a new strategy for gas generation published by DECC in the Autumn.

The statement was welcomed by Energy Networks Association (ENA), which represents the transmission and distribution network operators for gas and electricity in the UK and Ireland.

It claimed credit in a press release for advising him to do so, in what it called "our" Redpoint report, published a year ago, a claim which throws doubt on the impartiality of this key consultation document.

Mr. Osborne announced a programme of support to make it more economical to exploit small oil fields; action to open new fields to the West of Shetland; and promised primary legislation to permit measures to support investment in brown-fields.

The package was decried by environmentalists and welcomed by the industry, with Richard Forrest, partner in the oil & gas practice of global management consultancy A.T. Kearney, saying it "will entice oil and gas players who have investment options in many basins around the world".

Kearney felt that the introduction of a new £3 billion field allowance for particularly deep fields with sizeable reserves targeted at the West of Shetland "will help drive innovation and capability in the UK oil and gas service sector and have the knock-on effect of supporting competitiveness beyond the UK."

But Charlie Kronick, senior energy advisor for Greenpeace, said: “George Osborne hasn’t learned any of the lessons after the disaster in the Gulf of Mexico. Any oil spill in the west of Scotland would wreak untold devastation on some of the UK’s most fragile habitat and the local economy."

Mark Kenber, CEO of The Climate Group, said this move ridiculed David Cameron's pledge to create the “greenest government ever”. "To drive forward clean technologies we need a government that is willing to invest in low-carbon technologies while displaying strong and inspiring leadership," he said.

To secure billions of pounds of additional investment in the UK Continental Shelf, the Government will introduce a contractual approach to offer long term certainty on decommissioning old rigs.

Kronick said this would mean that "UK taxpayers will continue to pick up the tab for cleaning up the oil companies’ mess," observing that the UK’s tax regime for the oil industry is already among the lowest in the world.

Renewable energy

In a speech notable for few mentions of renewables other than referring to support measures already in the Government's workstream and the updated national infrastructure plan, the Chancellor did affirm that “renewable energy will play a crucial part in Britain’s energy mix – but I will always be alert to the costs we are asking families and businesses to bear.

"Environmentally sustainable has to be fiscally sustainable too.”

Gaynor Hartnell, head of the Renewable Energy Association, welcomed the “noticeably more positive tone” than in the Autumn Statement on renewables, but observed that the government’s own advisers had found that ″volatile gas prices, not renewable energy costs, were responsible for recent soaring electricity bills″.

Enhanced capital allowances

Expenditure on solar panels will be designated as special rate expenditure for capital allowances purposes from next month under the Finance Bill 2012.

While plant eligible for Feed-in Tariff support is ineligible for tax-free enhanced capital allowances, other designated energy-saving and water-efficient technologies do qualify, and the ECA list of eligible technologies will be updated during this summer.

The Government is also extending the 100 per cent FYA (first-year allowance) for businesses purchasing low emissions cars until 31 March 2015, a move welcomed by Mark Kenber, CEO of The Climate Group.

"The Climate Group’s EV20 Plugged-In Fleets report which was published in February 2012 highlighted that electric vehicles (EVs) can be commercially viable in business fleets," he said.

Less cash for DECC and Defra

The Department for Energy and Climate Change will see its Programme and Administration budget cut in real terms after 2012-13; currently it is £1.1 billion, which will rise to £1.4 billion for the next two years before falling to just £1 billion in the last year of this Parliament.

Defra's Programme and Administration budget will also fall, from £2 billion now to £1.8 billion by 2016-17, which will be around an 6% cut with inflation taken into account.

DECC's capital budget will almost double, however, from £1.4 billion to £2.7 billion by 2016-17, reflecting the need to support investment in more energy infrastructure, and a trend that has been ongoing for several years.

This support was broadly welcomed, but the ESA's Matthew Farrow said the waste industry "would have liked to see specific ‘green infrastructure allowances’ to incentivise investment in the sector, as the loss of industrial building allowances has made some potential waste management investment less economically viable".

By contrast, Defra's capital budget will fall in real terms, remaining at £0.4 billion.

Transport

The Chancellor announced plans and support for more roads, rail investment and even potential enlargement of Gatwick Airport.

Greenpeace said this "flies in the face of the Coalition agreement that specifically ruled it out".

Amongst the announcements on rail was support for Network Rail to invest a further £130 million to improve transport links between cities in the North of England which will enable the number of fast trains to double.

Vehicle excise duty (VED) rates will increase in line with the Retail Price Index from April 2012 but VED rates for heavy goods vehicles will be frozen.

For fleets and company cars there are changes to the capital allowance regime for business cars to strengthen the incentive to purchase more fuel-efficient cars.

Environment

Alongside the revolutionary Red Tape Challenge changes to environmental legislation announced by Defra this week, Mr. Osborne said the Government is to set up a Major Infrastructure and Environment Unit that will at an early stage look at the impact of nationally significant infrastructure projects on potential Habitats Directive issues.

The appointment of Dieter Helm as Chair of the new UK Natural Capital Committee was announced by the Chancellor. This body provides advice on the state of English Natural Capital to the Economic Affairs Cabinet Committee (chaired by the Chancellor of the Exchequer).

To coincide with this, the Global Legislators Organisation (GLOBE) released a new Rio+20 draft of its original Natural Capital Action Plan which helped shape the creation of the UK Natural Capital Committee last year by the Government, and which will form part of the central agenda of the Rio+20 meetings and World Legislators Summit meeting this June that GLOBE is helping organise with the UN.

Landfill tax

The standard rate of landfill tax will increase by £8 per tonne to £72 per tonne from 1 April 2013. The lower rate of landfill tax will remain frozen at £2.50 per tonne in 2013–14.

The value of the landfill communities fund for 2012–13 will remain unchanged at £78.1 million. As a result, the cap on contributions by landfill operators will be reduced to 5.6%.

Packaging recycling targets

These will increase annually by 3% for aluminium, 5% for plastic and 1% for steel from 2013 to 2017. Glass recycling targets will be split by end use.

Matthew Farrow, the Environmental Services Association’s Director of Policy said this was right. “The higher targets and five year timescale will give confidence to investors in recycling and reprocessing facilities."

He added, "We also support the splitting of glass PRNs by end use, to reflect the environmental benefits of glass recyclate going to remelt".

Aggregates levy

The Government is delaying the planned increase in the aggregates levy rate from £2.00 to £2.10 per tonne until 1 April 2013 to avoid putting additional pressure on the aggregates industry in Northern Ireland.

That's it. The Chancellor barely mentioned or ignored the Contract for Difference Feed-in Tariff, the Renewable Heat Incentive, the Green Deal, Electricity Market Reform policies, UK Green Investments (UKGI), changes to the Renewables Obligation, or the Energy Efficiency Deployment Office.

But perhaps that is just as well.

“Perfect storm" has arrived for efforts to reduce carbon emissions

Efforts to reduce carbon emissions in the UK and across Europe are facing a combination of factors strongly hindering investment in low carbon power generation and energy efficiency and promoting the burning of coal.

Now who do you believe? Today, one British tabloid newspaper is reporting that the construction of gas power plants is “twice government predictions", while another is reporting the exact opposite.

The Guardian reports Friends of the Earth analysis of the latest Government figures, from October, saying that while about 5GW of new gas-fired power generation will be needed to supply the UK in the coming decades, “power stations with more than 3GW of capacity are already now under construction and nearly 10GW of plants have received planning permission. In addition, nearly 10GW of capacity is in the earlier stages of planning".

Meanwhile, the Financial Times is warning that with 11GW of mainly coal-fired generation due to close by 2015 under the EU’s Large Combustion Plant Directive, we are burning more coal because it is currently cheaper than gas.

What is the truth?

Actually, both, at different time scales. Either way, however, it's not good news for the climate.

Coal is too cheap

Gas is today trading at just over 58p per therm, yielding baseload power for delivery today from gas generation of ￡45.20 per megawatt-hour. This does not leave much room for profit when electricity is trading at 45.50 ￡/MWh, and this is why coal generation is now favoured over gas.

The FT says “coal plants have been pumping at more than 75 per cent capacity, compared with 25 per cent a year ago".

This is a continuation of the trend of burning more coal over the last two years which is helping to push up the U.K.'s carbon emissions.

Partly as a result of increased demand, UK Coal moved from an interim loss of ￡93.2 million to a profit of ￡22.1 million in the six months to last June, following losses totalling ￡270 million over the previous three years. (However, this has not stopped it from announcing plans today to close the U.K.'s biggest coal mine, Daw Hill, near Coventry, by early 2014 when current seams are exhausted.)

The demand is driving strong imports of U.S. and Colombian coal into Europe, and prices have fallen to just over $100 (￡64) a tonne.

This figure is wildly different from that predicted by the government just six months ago: $124 (￡80).

(In fact, the price of coal wasn't even the price that DECC's report said it was at the time it was published; yet these now wildly inaccurate figures are those on which the Government bases its energy policy.)

The low price for coal is also partly the reason why Drax announced last month that it was scrapping plans for a new biomass power station, calling for more support for biomass generation from the Renewables Obligation to counter an increase in its fuel costs; although it put these fuel costs at just ￡33.3 per megawatt-hour, significantly less than that for gas.

Too many carbon credits

None of this is helping the UK, or Europe, meet its greenhouse gas emission targets.

The problem is that with coal prices low, a recession on, and an over-abundance of EU Emissions Allowances resulting in a low price of carbon, there is insufficient disincentive to burn coal, let alone gas, and consequently even less incentive to build renewable energy generation, nuclear power stations or develop carbon capture and storage.

Hence the need for DECC's
announcement this week of a ￡20 million competition to develop Carbon Capture and Storage technology, in the hope that it will reduce the price of this still unproven technology.

This combination of factors is the perfect storm for attempts to reduce carbon emissions this decade.

Carbon prices fell by over half during 2011 and are now still trading for under €8.

Despite rumblings from Brussels, the Commission is dragging its feet on moves to set aside allowances in order to restrict demand and stimulate the price.

Instead, it seems to be hoping that by the end of the year, when airlines begin being required to purchase carbon-emission allowances as part of their role in the Emissions Trading Scheme, this will stimulate a price rise. But that is still nine months away.

According to carbon market analyst Steven Knell, from IHS CERA, the ETS in no longer the main policy tool for reducing emissions ″because the supply and price of allowances are fixed and predetermined. The market is poorly equipped to deal with disruptions in demand levels," he says.

“This, plus the financial crisis, the consequent fall in emissions, and the fragile nature of the recovery, added to recent price decline due to the expectation that policy risks will deprive the market of demand, mean that action to fix the problem is urgently required".

The oversupply means that only 6.8% of all EUAs are trading; a poor proportion. This amounts to 550 million tonnes, which is equivalent to all the emissions of the non-power generation industry members of the market in Europe, i.e., the high energy users like steel and concrete; or, to put it another way, all of the U.K.'s allowances.

“This yields a long position and indicates what the price will be like in 2020: that it will not change sufficiently to stimulate the demand required for investment in energy efficiency and renewable energy lesser-known carbon capture and storage or nuclear power," says Knell.

The supply of carbon-emission allowances needs to decline more aggressively and prices need to be higher.

The policy overlap in Europe needs addressing, he says. “The latest agreements give the possibility to set aside some EU Allowances to promote energy efficiency in the draft of the Energy Efficiency Directive, but the amount set aside would need to be substantial," he says.

“Strong medicine is needed."

“Strong medicine is needed," concludes Knell. He points to an increase in European ambition for emission reduction cuts from 20% to 30% by 2020, which, he says is achievable due to the recession's effects.

However, Poland has just vetoed this target at last Friday's meeting of environment ministers because of its own addiction to coal-fired electricity generation. This vote is not binding on a Commission decision however, and it remains to be seen what will happen.

In the meantime, only two strategies are available to individual governments, because they can't control the price of oil, and these are to tax carbon and support the carbon price.

Therefore, any measure that favours the energy-intensive industries by reducing the impact of carbon-penalising policies in next week's Budget from the Chancellor, George Osborne, will send precisely the wrong signals to the market.

The setting of the carbon price floor, and reform of the energy market are urgently required to favour carbon-reduction investment and weather this storm.

But contrary to the impression given by the Financial Times article, whatever happens the lights will stay on in Britain, because of the number of gas-fired power stations that have received planning permission; they may not be built just yet, but they will be built when coal and nuclear generation comes off-line in the future, to meet any demand not met by offshore wind.

But whether it's coal or gas, it locks in more UK carbon emissions than desirable for the next 20 or so years. Chancellor: are you paying attention?