IEEJ：November 2015, All Rights Reserved.

DISTRESSED POLICY CORRECTION:
NEW DIRECTIONS IN UK
RENEWABLE ENERGY AND CLIMATE STRATEGYJohn Constable

16 November 2015

IEEJ：November 2015, All Rights Reserved.

RENEWABLE ENERGY FOUNDATION• Energy policy think tank, and UK registered charity• No political affiliation, supported by private
donations and research contracts• REF publishes searchable databases at
www.ref.org.uk/energy-data• Giving monthly performance data for UK renewableinstallations; FiT lists; GB electricity fuel mix by halfhour since 2009IEEJ：November 2015, All Rights Reserved.

Talk Outline• Part 1–Survey of EU and UK Energy & Climate Policy• Greenhouse Gas Reduction• Energy Efficiency• Renewables Deployment and Costs• Part 2–Hidden Dangers of Energy Policies and Costs• Cost rendered in complex capital stocks• Mandated shift to energy with low Energy Return

IEEJ：November 2015, All Rights Reserved.

EU Climate & Energy Targets• Sloganeering: “20-20-20 in 2020”– Not an engineer’s target…

• 20% cut in greenhouse gas emissions– from 1990 levels• 20% of EU energy from renewables• 20% improvement in energy efficiency– Calculated as 80% of the ‘Business as Usual’ prediction in
2007, to give EU 2020 target of 12,540 TWh Final Energy
Consumption (FEC)• All by 2020

IEEJ：November 2015, All Rights Reserved.

GHG Emission Reduction Target• EU emissions in 2013 were approximately 19% below
1990 levels– Because of economic turbulence and leakage• 2020 projection is for 21% reduction in emissions
compared with 1990 baseline• Twenty-three member states on track; five are not:Luxembourg, Ireland, Belgium, Austria and Latvia• But note: Germany, Luxembourg, and Poland failed tomeet interim 2013 targetIEEJ：November 2015, All Rights Reserved.

Progress towards GHG Target by Country
20%
15%
GHG National Target

10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%

Current 2020 projection

2020 target

Source: Eurostat. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

Energy Efficiency Target and Recession• EU target energy consumption in 2020 no more than
12,540 TWh of final energy (cf 13,793 TWh 2005)• Recession impacts highly significant, e.g. Greece isalready 25% under the target level
Greece: Final Energy ConsumptionTWh2020 Target

238

2005 (Actual Consumption)

244

2013 (Actual Consumption)

178

Source: Eurostat. Table by REF.

IEEJ：November 2015, All Rights Reserved.

Final Energy Consumption in2013 and the 2020 Target
Final Energy Consumption (TWh)

3,000
2,500
2,000
1,500
1,000

500
-

2013

2020 target

Source: Eurostat. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

Legal Action and the Efficiency Directive• In spite of effects of recession in reducing energy
consumption throughout the EU, 27 member states
face threat of EU legal action over energy efficiency(March 2015)• 3 countries made no progress on implementation– Hungary, Greece, Bulgaria• EC referred Hungary to the European Court of Justiceseeking daily fines of €15,444 for not transposing the
Directive by the June 2014 deadline

IEEJ：November 2015, All Rights Reserved.

The EU Renewables Directive and the UK• EU Renewables Directive (2009): 20% of EU Final
Energy Consumption (FEC) to be renewable by 2020
• UK burden share: 15% of FEC (up from 1.5% in 2009)– Target is a % of an unknown quantity– Approximately 230 – 270 TWh must be generated fromrenewable sources in 2020

• Approximate composition:– Transport fuel: 45 TWh (10% of UK transport fuel)– Electricity: 120 TWh (~30% of UK electricity)– Heating and cooling: 70 TWh (~12% of UK H&C)

IEEJ：November 2015, All Rights Reserved.

Progress in Renewable Energy in 201310

Shortfall (% points)

8
6
4
2
-2
-4

Source: Eurostat. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

A Moving Target…
2000 FEC
2013 FEC% change2020 Target(%)
2020 Target on
2013
consumption
basis (TWh)Germany

FranceUK2,559 TWh
2,527 TWh-1%
18%

1,806 TWh
1,769 TWh-2%
23%

1,702 TWh
1,586 TWh
-11%
15%

455

407

238

Source: Eurostat. Calculations by REF.

IEEJ：November 2015, All Rights Reserved.

UK Policies Supporting RE Deployment
PolicyCharacter

SourceImpactRenewables Obligation

Income Support

Consumer bills

Regressive

Feed-in-Tariff

Income Support

Consumer bills

Regressive

Contracts-for-Difference

Income Support

Consumer bills

Regressive

System costs socialization

Avoided costs

Consumer bills

Regressive

Green Investment Bank

Capital Support

Increased tax
burdenEU ETSTax on fossil fuels
favouring renewables
indirectly

Consumer bills

Climate Change Levy
Exemption (cancelled 2015)

Income Support

Increased tax
burdenIHT Exemption

Indirect financial support

Increased tax
burdenCGT Deferral

Indirect financial support

Increased tax
burdenRegressive

IEEJ：November 2015, All Rights Reserved.

Renewable Obligation• Obligation on electricity suppliers to use increasing proportionof renewable sources or pay a ‘fine’ (the ‘Buy-out’ price)

Obligation

Buy-out price
Recycle payment

Total RO subsidy
Cost of CO2 saved(assuming 1 ROC
per MWh)

2002
3%

2008
9.1%

£30 per ROC (perMWh)
£16 per ROC£46 per MWh£95 per tonne£36 per ROC£19 per ROC£54 per MWh£113 per tonne

Source: Ofgem. Calculations by REF.

IEEJ：November 2015, All Rights Reserved.

UK Renewable Electricity Target
140
1202020 Target Trajectory
2010 Target

100

Renewable TWh
Subsidised TWh

60
40
20

Source: Ofgem. BM Reports. Chart by REF.

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0

2003

TWh

80

IEEJ：November 2015, All Rights Reserved.

UK Renewables Subsidy Cost
• Cumulative Cost: 2002–2014: £15 bn• Estimate in 2014/15 ca. £4 billion
3.5

Cost in £ billion

3
2.5
2
1.5
1

0.5
0

Source: Ofgem subsidy claim records. Calculations and chart by REF.

IEEJ：November 2015, All Rights Reserved.

Renewable Electricity Cumulative Subsidy
2002–2040• Assumptions: Current subsidy levels; no new capacity
after 2020; DECC technology pipeline projections• Cumulative subsidy Cost 2002–2040: ca £162bn

Source: REF. Based on DECC’s pipeline projections in Renewable Energy Roadmap 2013.

IEEJ：November 2015, All Rights Reserved.

UK Electricity Fuel Mix 2009 to 2015 (GWh)

Source: GB Transmission System Demand (MWh). BM Reports. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

UK Electricity Fuel Mix 2009 to 2015 (%)
60%

50%

Coal

40%

Gas
NuclearWind

30%

Biomass
Hydro
French Int

20%

Dutch Int

10%

0%
2009

2010

2011

2012

2013

2014

2015

Percentage of Transmission System demand (MWh).Source: BM Reports. Chart by REF

IEEJ：November 2015, All Rights Reserved.

UK Electricity Fuel Mix: Renewables andInterconnectors 2009–2015 (% of demand)
8%

7%

6%

5%
Wind
Biomass4%

Hydro
French Int

3%

Dutch Int

2%

1%

0%
2009

2010

2011

2012

2013

2014

2015

Percentage of Transmission System demand (MWh). Source: BM Reports. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

UK Electricity Fuel Mix (2009-2015):
Renewables and Interconnectors (GWh)

Renewables and Interconnectors. Percentage of Transmission System demand (MWh).
Source: BM Reports. Chart by REF.

IEEJ：November 2015, All Rights Reserved.

UK Fuel Mix: Main Stories• Fall in demand for electricity– Mainly due to recession– Efficiency measures? Yes, but continued low demand suggests
fundamental economic ill-health• Fall in coal use as EU Large Combustion Plant Directive
takes effect– But note, only weak recovery in gas generation• Major growth in wind and solar generation– Caused by subsidies• Major growth in electricity imports– Caused by price differential

IEEJ：November 2015, All Rights Reserved.

Subsidy and Renewables Sector Overheating

Installed Capacity (GW)

25
20

20
15
10

15

15

13

NREAP 2010
2014

10
8

8
6

5

5

Incl Permitted

5

5
3

2 2 2

Onshore Offshore Biomass
wind
wind

Solar

Hydro

1

0 1

MarineSource: Chart by REF. Data from DECC, Renewable Energy Planning Database; andNational Renewable Energy Action Plan (NREAP) 2010.

IEEJ：November 2015, All Rights Reserved.

Operational Renewable Electricity Capacity
2002–2015 by Technology
Onshore Wind

8.0

Offshore Wind

7.0

BiomassHydro

6.0

Solar PV

5.0
4.0
3.0
2.0
1.0

So0urce: DECC REPD. Chart by REF

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

-

2002

Installed Capacity (GW)

9.0

IEEJ：November 2015, All Rights Reserved.

UK Renewables Target OvershootBiomass

Operational (GW)
Under Construction(GW)
Awaiting
Construction (GW)

Hydro

Offshore
Marine Waste Wind

Solar

Onshore
Wind
Total

3.8

0.5

5

0

0.8

5.1

8.4

23.7

0.4

0

0.2

0

0.2

0

2.2

3

3.2

0.1

3.3

0.5

0.7

15

4.7

27.4

Total Consented
Capacity (GW)
Submitted to
Planning (GW)
Load Factor

7.4

0.5

8.5

0.5

1.7

20.1

15.3

54.1

0.3
66%

0
36%

2.6
10%

0
8%

0.1
68%

1.8
34%

6.2
26%

11

Est. output fromconsented capacity
(TWh)

43

1.7

7.4

0.4

10.1

59.9

34.7 157.2

Est. output from inplanning capacity
(TWh)

1.6

0

2.3

0

0.8

5.4

Source: DECC REPD, October 2015; Calculations by REF

14

24.1

IEEJ：November 2015, All Rights Reserved.

UK Renewables Overshoot• 54 GW of capacity consented– Of which 23 GW is operational– Includes 20 GW of offshore wind (5.1 operational), whichis 7 GW in excess of NREAP projections– 8.5 GW of solar (6 GW in excess of NREAP projections)– 15 GW of onshore wind, as projected in NREAP, but thereis 6 GW still in the planning system• Output of consented capacity = 157 TWh– 43% in excess of 110 TWh target for electricity– NB: No budget for overshoot in LCF. Excess likely to be
in range of £2 billion (30% overshoot)IEEJ：November 2015, All Rights Reserved.

Levy Control Framework under Strain• 2020 LCF budget set at £7.6 billion, but forecast to reach ca.
£9bn (2011 prices)• Current forecast suggests cost will reach £13 billion (actual) in
2020:

Source: Office of Budget Responsibility, Economic and Fiscal Outlook, July 2015.

IEEJ：November 2015, All Rights Reserved.

DECC: 2020 Electricity Price Policy Impacts• Overshoot would exacerbate already severe priceimpacts.
• Even if within LFC…
• Domestic Households– Low fossil price scenario: + £55/MWh (+ 42%)

• Medium Sized Businesses– Low fossil price scenario: + £53/MWh (+77%)• Even in DECC’s High Fossil Price scenario prices rise by
30% to 45% due to climate and other policies
Source: DECC, Estimated Impacts of Energy & Climate Policies on Prices
and Bills (2014)

IEEJ：November 2015, All Rights Reserved.

Controlling Spending: UK Govt. Actions• End support for new large scale onshore wind
– Early closure of Renewables Obligation, but legislation has been
blocked in the House of Lords• Remove subsidies for new large solar PV• Reduce subsidies for new small scale solar• 400 MW cap on subsidy guarantees for dedicated biomass– And likely exclusion of all biomass from guarantees in future• Retrospective cut for all existing sites: Remove Climate
Change Levy (CCL) exemption for renewables (worth £0.3 to£0.5bn per year in 2015/16 to Treasury)

IEEJ：November 2015, All Rights Reserved.

Subsidy tariffs repeatedly adjusted to attempt tocontrol costs… and cool sector… without success• Renewables Obligation (RO): 1
74 tariffs• Feed in Tariff (FiT): 21
385 tariffs
Installed Capacity (MW)

3500
3000
2500
Solar

2000

Wind

1500

AD

1000

Hydro

500

0
2010

2011

2012

2013

2014

Source: DECC. Chart by REF.

2015

IEEJ：November 2015, All Rights Reserved.

Further Problems:Unintended consequences (A)• RO not designed to subsidise ‘large hydro generators’• A ‘large hydro generator’ defined in legislation as one“which has, or has had at any time since 1 April 2002,
a declared net capacity of more than 20 MW”.
• Approx 60MW of hydro lost immediately throughdown-rating to under 20 MW• Kinlochleven – 93 years old – capacity cut from 30
MW to 19.5 MW

IEEJ：November 2015, All Rights Reserved.

Unintended Consequences (B)• Investment signals for conventional generators
destroyed– But conventional generation still required to meet peakload

• No investor appetite even for CCGT investments• Government responded with:– Contracts for Difference for Nuclear (£92.50)– Capacity Market (costing £1.3 billion a year in 2020)– Industrial load shedding contracts

IEEJ：November 2015, All Rights Reserved.

Further Problems:
Cost of abating CO2 emissions
Cost per tonne CO2
Roof mounted solar PV£250 - £980

Free-standing solar PV£180

Small onshore wind (<500 kW)£400

Large onshore wind (> 1 MW)£90

Offshore wind£180

Dedicated biomass

£130

Hydro

£0 - £90 - £450

Anaerobic digestion£180 - £250

Incinerated municipal biomass£0

Source: Ofgem, DECC. Calculations and chart by REF.

IEEJ：November 2015, All Rights Reserved.

Further Problems: Integration Problems:
Constraint Payments to Wind Power• Total 2010 to Oct. 2015:£156m• Almost all in Scotland• Average price in 2015 toreduce generation: £74/MWh– Nearly double the lost income• But “constraining wind off
the system may be cheaper
than building more network”• Colin Gibson, Former National
Grid Power Networks Director

The UK HV Network
Source: National GridIEEJ：November 2015, All Rights Reserved.

Wind Constraints: As at October 2015
800

60
GWh

700

50

GBP (million)

40

500
400

30

300

20

200

10

100

0

2010

2011

2012

2013

2014

2015

Source: BM Reports; Chart and calculations by REF

GBP (millions)

Constrained Wind (GWh)600

IEEJ：November 2015, All Rights Reserved.

Wind Power System Integration Costs:
Grid, Balancing, Security of Supply
Technology

Subsidy (£/MWh)

System Cost (£/MWh)over and above thesystem cost of
conventional
generation

Total (£/MWh)Onshore Wind

£45

£75

£120

Offshore Wind

£95

£64

£159

Biomass (Conversion)

£50

£0

£50

Biomass (Dedicated)

£75

£0

£75

Source: Colin Gibson, “Levelised costs estimates for electricity generation”,(Institute of Engineers and Shipbuilders in Scotland: 2011):
http://www.iesisenergy.org/lcost/IEEJ：November 2015, All Rights Reserved.

Subsidy + Wind Integration Costs
Total Cost 2002–2040: ca. £256bn

Source: REF. Based on DECC Pipeline projections. Ancillary costs based on
Colin Gibson for IESIS (2011).

IEEJ：November 2015, All Rights Reserved.

Integration Problems: Solar

Source: National Grid, Operational Forum, 20.10.15

IEEJ：November 2015, All Rights Reserved.

Solar PV in 2015
• Max energy in one day: 64.9 GWh• Peak PV generation: 6.96 GWh• Peak share of daily energy demand (MWh) met by PV:
8.6%• Peak share of half-hourly load (MW) met by PV: 19%• Increasing volatility of Transmission System demand– 3,860 MW difference in PV on consecutive days
– Up 1,320 MW increase in PV output in 30 minutes• Increasing reliance on weather forecasts in demand
forecasting• Source: National Grid, Operational Forum, 201.10.15

IEEJ：November 2015, All Rights Reserved.

Errors in Solar Forecasts…

Source: National Grid, Operational Forum, 20.10.15

IEEJ：November 2015, All Rights Reserved.

Part 1: Summary/Conclusions• Setting realistic targets far out into the future is difficult• Subsidies to deploy existing technologies are a costly mistake• Distressed policy corrections are very expensive• Annual subsidy costs and system costs are very high– Very high cost per tonne of CO2 abated• Not economically compelling to developing world• The current energy and climate policies are extremely
unstable due to high costs– Only low cost emissions reductions have any political
future– Invention and innovation policies required if low
emissions energy systems are to be acceptableIEEJ：November 2015, All Rights Reserved.

Part 2: Dangers of Energy Taxes and Levies• Obvious– Short term cost (annual)– Premature technology adoption on a broad scale, leading to
mal-investment– Suppression of invention and innovation– Failure to achieve emissions reductions that set an
economically compelling example– Long term, cumulative, cost

• Hidden–Costs rendered in capital structures, leading
to long term economic poisoning

IEEJ：November 2015, All Rights Reserved.

Hidden Dangers: Scale of the Problem• Transport Fuel Tax– £27 billion a year
– 60% of the pump price• Renewables Obligation and Feed-in Tariff– £4 billion a year at present– Rising to ca. £8 billion a year in 2020
• More if LCF is breached…

– Cumulative total since 2002 approx. £15 billion– Cumulative total 2002 to 2040 (assuming LCF notbreached and no new subsidy contracts after2020): £160 billion

IEEJ：November 2015, All Rights Reserved.

Not the End of the World?
• Domestic Energy Efficiency– “[…] taken together [i.e. subsidies plus efficiency drives], theGovernment’s policies mean that household bills will be on
average 11%, or £166, lower in 2020”• Energy as share of commercial costs– “For most businesses, direct energy costs are a relatively small
proportion of total costs. […] around 2.5% of total costs for UK
manufacturing as a whole.”• Source: DECC, Estimated Impacts (2013)• Factor substitution– “If we use less energy we will need to increase other inputs,
e.g. more and better capital investment, or improved
technique, if labour productivity is to be maintained.”• Adair Turner, Just Capital (Pan Books: London: 2001), 286.

IEEJ：November 2015, All Rights Reserved.

Efficiency Measures?
• Capital cost of energy
efficiency is high• Efficiency measures may notwork• Rebound Effect– “[…] it is wholly a confusionof ideas to suppose that theeconomical use of fuels is
equivalent to a diminishedconsumption. The very
contrary is the truth.”• The Coal Question 1865

W. S. Jevons (1835–1882)IEEJ：November 2015, All Rights Reserved.

Energy Share and Factor Substitution• Instantaneous energy share (ca. 5%) does notreflect the importance of energy in theeconomy…
– Energy consumed over time accounts for allother inputs• Thus factor substitution for energy is an illusion– All factors are the result of earlier energy
inputsIEEJ：November 2015, All Rights Reserved.

The Ontology of Wealth• “[Wealth] is a form or productof energy”• “The flow of energy should be
the primary concern of
economics”– Frederick Soddy, Wealth,Virtual Wealth, Debt (1926)

Frederick Soddy FRS
Nobel Prize for Chemistry, 1921

Economic growth in a system is a reduction ofthat system’s entropy (increase inimprobability) as a result of energy conversion.

IEEJ：November 2015, All Rights Reserved.

The Ontology of Wealth

Economic growth in a system is a reduction ofthat system’s entropy (i.e. an increase in the
improbability of the system) as a result ofenergy conversion.

IEEJ：November 2015, All Rights Reserved.

Energy is No Ordinary Input• “Coal in truth stands not
beside but entirely above
all other commodities. It is
the material energy of thecountry—the universal aid[…] With coal almost any
feat is possible or easy;
without it we are thrownback into the laborious
poverty of early times.”– The Coal Question (1865)
W. S. Jevons (1835–1882)IEEJ：November 2015, All Rights Reserved.

Escaping the Organic Economy…
• “The ‘laborious poverty’[…] towhich most men and women
were condemned did not arise
from lack of personal freedom,from discrimination, or from thenature of the political or legal
system”• “It sprang from the nature of allorganic economies. […] theplant growth in question
represented the bulk of the sum
total of energy which could bemade available for any humanpurpose.”– Energy and The English Industrial
Revolution (Cambridge 2011),
239.

IEEJ：November 2015, All Rights Reserved.

The Thermodynamic Ontology of Wealth• When the world is ordered in accordance with humanrequirements, this is wealth, and only energy can bring it
about• This valuable order can be analysed as improbability:– Complex structure: A refrigerator for example, or improved land, butalso ideas and institutions– Timeliness: The glass of cool water in the desert is valuable because
it is improbable in that location at our hour of need, and only theuse of energy can make its delivery certain– Constable, “Thermo-Economics”, journal of the Economics Research Council:
http://www.ref.org.uk/images/PDFs/jc_thermoeconomics_erc_21_08_14.pdf• There is no substitute for energy, which is rendered ascomplexity in all inputs without exceptionIEEJ：November 2015, All Rights Reserved.

Limits of the Organic Economy…
• “The ‘laborious poverty’[…] sprang from the natureof all organic economies. […] the plant growth inquestion represented the bulk of the sum total ofenergy which could be made available for any
human purpose.”– Energy and The English Industrial Revolution (Cambridge2011), 239.

• Organic economies have a Low Energy Return on
Energy Invested (EROEI)  Poverty• Fossil economies have a high EROEI  WealthIEEJ：November 2015, All Rights Reserved.

High Energy Return on Energy Invested(EROEI) Economy

Source: Charles Hall et al, Energy and the Wealth of Nations (Springer 2012)

IEEJ：November 2015, All Rights Reserved.

Source: Charles Hall et al, Energy and the Wealth of Nations (Springer 2012)

IEEJ：November 2015, All Rights Reserved.

The Long Term Dangers of Expensive Energy• A forced energy transition against the cost gradient drives
energy resources into the energy generation sector itself,
reducing their availability for other purposes.
– Also concentrates capital wealth and political power (see thepre-coal economies…)• The smaller surplus of energy is now more expensive, andas this surplus is used to repair and refresh capital, so theuse of that capital itself becomes more expensive, aneffect that will gradually but inevitably reduce generalprosperity over time.
– Constable, “Thermo-Economics” (2014)

IEEJ：November 2015, All Rights Reserved.

Part 2: Conclusion• Taxes and levies on energy should be avoided• A coerced energy transition ahead of the learning
curve and against the cost (energy density)
gradient is hazardous and human wellbeing• Even if the policies stop now, OECD economies
are all to some degree poisoned with high costcapital stocks resulting from decades of taxationand levies.
• Flushing with very cheap energy is the only
remedyIEEJ：November 2015, All Rights Reserved.

Energy and Resource or Capital Crisis?
• There is no shortage on earth of free energy(thermodynamic sense: available to do work)• With sufficient free energy we will never lack forresources of any kind
• But capital erosion (wealth destruction) may prevent
access to and use of the available free energy• Think of Alexander the Great…

IEEJ：November 2015, All Rights Reserved.

IEEJ：November 2015, All Rights Reserved.

Source: Wall Street Journal (2008). Oil seep in N. Iraq.
Contact :report@tky.ieej.or.jp