Analysis: Dramatic shift in UK government outlook for gas and clean energy

§ Clean capacity

The UK government last published its energy and emissions projections out to 2035 in late 2015. Its latest analysis was published last week, but is described as the “2016 projections”. It incorporates new assumptions about the price of fossil fuels, CO2 emissions and electricity generating technologies.

One particularly consequential change is that renewables are much cheaper than expected. A November BEIS report cut the cost of wind and solar power by 15-30%, both now and in the future. For more on the price assumptions underlying the BEIS projections, see below.

These changing price assumptions drive the BEIS electricity market model, which has also been updated to better reflect the whole system costs of integrating variable renewables into the grid. (A model description and documentation dating from 2012 is available. BEIS refused a Carbon Brief freedom of information request to see updated details.)

One striking result is a marked increase in the amount of new renewable capacity being built in the model, now projected to reach 36 gigawatts (GW) by 2030 (top left chart, below). This is 71% more than the 21GW of new build capacity seen in the 2015 BEIS projections, which had cut renewables in the wake of then-secretary of state Amber Rudd’s “reset speech“.

The new renewable capacity is not broken down by type. According to Business Green, however, the new projections include 10GW of small-scale subsidy-free solar by 2030.

The latest BEIS cost estimates suggest onshore wind and solar will be as cheap or cheaper than gas in 2020, gaining a clear cost advantage by 2025. Similarly, the Committee on Climate Change (CCC) says onshore wind and solar will be cheaper than gas by 2020.

Alongside an increased role for renewables, BEIS projections now include battery storage for the first time, with capacity reaching 3GW in 2030 and 4GW in 2035. Last year, National Grid also introduced batteries into its forward view for the first time and it is now increasingly bullish.

At a 14 March meeting at Imperial College, Cordi O’Hara, director of system operator National Grid, suggested that if costs continued to fall at 20% per year, then the UK could see 8GW of battery storage connected within five years.

A slightly less optimistic analysis from consultancy Aurora Energy Research suggests battery storage capacity could reach 3GW-8GW by 2030, depending on how quickly costs fall.

Also of note in the 2016 BEIS numbers is a big increase in expected new interconnector capacity, linking the UK’s electricity grid to the rest of Europe. BEIS now sees 15GW of such links by 2024, up from 9GW in the last set of projections.

Interconnectors are seen as a vital component of the flexible grid the UK will need, as it expands the supply of variable renewables in the mix. They also help reduce energy bills, since wholesale electricity prices are lower in continental Europe than in the UK. Plans for new interconnectors include a second 2GW link to France and 1.4GW link to Norway, among others.

§ Fossil capacity

Another clear shift in the projections is a marked reduction in new gas capacity, adding just 7GW by 2029 (see top right chart, above). BEIS had expected 15GW by 2029 in its 2015 numbers and 33GW in the 2013 edition. The 2012 government gas generation strategy had suggested 26GW would be needed by 2030.

Now, it appears that the government is walking back from the idea that the UK needs many large new combined cycle gas turbines (CCGTs). Instead, it has welcomed small new plants that will be built at Kings Lynn and Spalding, as well as “innovative low-carbon capacity like battery storage”.

These schemes are among 3GW of new gas capacity contracted under the capacity market, almost all of which is smaller peaking plant. Along with the 880MW Carrington gas plant in Manchester, commissioned late last year and officially opened by energy minister Jesse Norman earlier this month, more than half of the new gas BEIS expects by 2022 is already contracted or built.

Finally, on the capacity side, the new BEIS projections show how hopes for carbon capture and storage (CCS) have been dashed, after the government withdrew a £1bn funding competition. Once seen reaching 5GW by 2030 and 12GW by 2035, CCS is now virtually non-existent, with zero capacity until the final year of the projections.

The current lack of investment in CCS is the biggest challenge to meeting the goals of the Paris Agreement, studies suggest. It is particularly important for efforts to decarbonise heavy industry, as well as for negative emissions, which the UK is likely to need to meet its share of Paris effort.

§ Generation change

The picture is somewhat less clear when it comes to BEIS projections of electricity generation. Nevertheless, the 2016 figures do throw up some interesting changes compared to previous years.

First, coal generation declines much more quickly, falling close to zero as early as 2022 (bottom left chart, below). This faster fall reflects the closure of several coal-fired power stations last year as well as cheaper-than-expected gas prices (see below for more on this).

Second, the lack of CCS capacity translates directly into a lack of CCS generation. Back in 2014, BEIS expected CCS to deliver 15% of UK electricity supplies by 2035. Now, this has been cut to less than 2%.

Third, nuclear generation is now seen falling in the early 2020s, before picking up again later in the decade (centre right chart, above). In 2024, BEIS expects nuclear to be generating 34 terawatt hours (TWh) of electricity, down from 44TWh projected in 2015 and 67TWh in 2014, in total a reduction of around 50%, with the shortfall persisting until the late 2020s.

This reflects ongoing delays to the UK’s new nuclear programme and the retirement of old reactors. Even after contracts were signed on the Hinkley C scheme in Somerset, doubts hang over its timing and the prospects for several other schemes, such as the Toshiba-backed Moorside plant in Cumbria.

Finally, in the latest BEIS projections, the output of renewables dips in the early 2020s. BEIS says: “This is due to a number of factors, including the temporary increase in gas generation to maintain system flexibility.” Consequently, gas output picks up the slack in the projections.

It is not clear why renewable plant would voluntarily reduce output, with the implication being that wind and solar could be increasingly curtailed in this period, until system flexibility increases as batteries are built. However, this aspect of the projections is as likely to reflect the constraints of the BEIS model as it is real limits to renewable grid integration.

§ Future mix

Despite these shifting projections and uncertainties, clear trends in the UK’s electricity generation mix emerge from the BEIS figures. The most obvious is a shift away from fossil-fuelled electricity generation, with coal phasing out well before the government’s 2025 deadline and gas shrinking steadily, despite its role in ensuring system flexibility (see chart, below).

It is also clear that BEIS expects renewable and nuclear generation to increase in the longer term. One oddity is the large role for electricity imports (the purple area and line in the charts, below), which BEIS projects reaching 23% of total supply in 2025.

Given the disparity in wholesale electricity prices between the UK and continental Europe, it is reasonable to expect that rising interconnector capacity would drive rising power imports. However, this projection is likely to be both politically difficult and sensitive to changes in relative prices, future carbon prices and the outcome of negotiations over Brexit.

It’s worth adding that the BEIS projections have in previous years been fixed to meet a 2030 decarbonisation target, as recommended by the CCC. This means the rise of imports could be filling in for a gap in low-carbon electricity supplies, highlighted in a recent CCC report.

Since greenhouse gas emissions are measured on a territorial basis, electricity imported to the UK counts as zero carbon. Some imports come from France, where low-carbon nuclear supplies most electricity, and future links to Norway will also be low-carbon. However, the continental market is tightly linked such that French exports of nuclear power to the UK could increase German coal generation.

Whether or not electricity imports are truly low-carbon, there is a sizeable gap in home-grown low-carbon power supplies in the late 2020s. This gap is a result of the government’s opposition to expanding onshore wind and solar, its strictly limited support for offshore wind and the lack of clear signals on tidal power or biomass, combined with ongoing delays for new nuclear.

§ Conclusion

It isn’t only the power sector where there is more to be done if the UK is to meet its legally-binding carbon targets in the 2020s and 2030s. It has been clear for several years that the UK will likely fall short of the fourth and fifth carbon budget goals, for the years from 2023 through to 2032.

The BEIS projections reiterate this, noting:

“There are projected shortfalls against the fourth and fifth carbon budgets of 146 MtCO2e [million tonnes of CO2 equivalent] and 247 MtCO2e, respectively. The government will be publishing its emissions reduction plan, setting out plans for decarbonising in the 2020s.”

This shortfall to the fifth carbon budget is even larger than expected in the previous round of BEIS projections. However, the complexities of carbon budget accounting make it hard to unpick why this is. Not least, the UK’s carbon budgets are currently entangled in the EU ETS.

While the gap in carbon budget compliance has grown, the UK’s projected emissions are actually lower than expected last year, as the chart below shows. This is primarily down to a change in methodology for agriculture, land use change and forestry (LULUCF).

Within that total, emissions from homes and transport are higher than expected. This change is driven by cheap oil, real-world data showing cars use more fuel than thought and lower-than-expected benefits from energy efficiency and renewable heat policies, BEIS says.

The emissions reduction plan, referred to in the BEIS quote above, has been repeatedly delayed and renamed. It is now being referred to by ministers as the “Clean Growth Plan”, and is scheduled to be published “as early on in 2017 as possible in order to move on to the delivery phase”.

§ A note on changing assumptions

Compared to its 2015 projections, BEIS has also sharply cut coal and gas prices (see charts, below). BEIS was late in adjusting to several years of falling markets. However, this trend has now reversed: gas broke through 50p per therm and coal topped $75 per tonne in early 2017.

The cuts in projected fossil fuel prices were made last year, but until now had filtered through to the BEIS energy and emissions projections because of the long delay in producing the 2016 numbers.

The latest assumptions for power sector CO2 prices are also significant, with BEIS now expecting no change until 2027. These prices reflect the EU Emissions Trading System (EU ETS) and the UK’s top-up carbon tax, the carbon price floor, which is officially frozen until 2022.

The extended period to 2027, with flat CO2 prices in the power sector, is merely a modelling assumption, BEIS insists, and is “not [an] indication of wider government policy”. (Note that the longer-term increases in the chart, above, reflect the price required to meet carbon targets, not an expectation of future market conditions).

Carbon prices, therefore, remain uncertain. The UK may leave the EU ETS when it leaves the European Union. At his spring budget, chancellor Philip Hammond put off changing or extending the price floor. However, the government “remains committed” to power sector carbon pricing.

Lower wholesale power price assumptions – down around 1p per kilowatt hour (kWh) versus the 2015 figures – likely reflect several factors, including the cut in expected gas and CO2 prices.

Lower wholesale prices would increase the cost of low-carbon subsidies for renewables and new nuclear. Each 1p/kWh reduction in the wholesale price adds around £250m to the annual subsidy and £9bn to the lifetime subsidy of the Hinkley C scheme, for example.