Optimism on energy supply clouds UK climate programme

The Government's new climate change programme claims that existing policies will come within a whisker of delivering the promised 20% reduction in carbon dioxide emissions by 2010. There is now greater realism about the likely contributions from transport - but the Government's expectations of the nuclear and renewables sectors, combined heat and power and domestic energy efficiency still appear over-optimistic.

It took more than two years, two major consultations and a host of lesser ones, but the Government finally delivered its climate change programme in November. 1

The programme contains little in the way of new policies. It does, though, send a much reinforced message about the long-term direction of climate policy.

Towards a low-carbon economy
Much of the credit for this goes to the Royal Commission on Environmental Pollution. In its recent report on energy, the RCEP highlighted the need to reduce the country's carbon dioxide emissions by perhaps 60% over the next 50 years as part of a globally equitable solution to the problem of climate change - and urged that a radical transformation of the UK's energy supply system should begin promptly if that target was to be met (ENDS Report 305, pp 19-22 ).

The Government will respond to the report next year. But it has already accepted that preparations need to start now to begin the shift towards a low-carbon economy.

The programme is also unusually candid in accepting that the UK's position in the energy efficiency league is poor. In 1998, it points out, nine EC countries had a lower energy intensity - energy consumption per unit of GDP - and eleven had a lower transport energy intensity. And all EC countries obtained a greater proportion of their energy from renewable sources than the UK, while most also made more use of combined heat and power.

The Government has now promised "to instigate a national debate on how the UK might make the transformation to a low carbon economy. This will need to be an open and innovative dialogue, involving a wide range of stakeholders, looking at technological options for the future and the scope for significantly shifting patterns of demand and consumer behaviour."

The programme also contains the Government's most radical statements yet about the need for greater resource efficiency. "The trend established in the late 20th Century - for many user needs and aspirations to be met through greater direct consumption of short-life goods - is not sustainable," it says. The process of supplying goods "will have to be made significantly more efficient," and a greater proportion of needs met through contract services, leasing and community-based schemes.

"This theme in environmental policy is relatively new," the programme notes, "but will need to be developed quickly to help meet the long-term challenges implicit in climate change and other areas where current trends are unsustainable." Support for the European Commission's efforts to develop an integrated product policy is listed among "the most significant measures" to shift the UK economy onto a less carbon-intensive path.

Brighter emission prospect
All that is for tomorrow. For now, the question is whether the climate programme is likely to deliver everything the Government says it will.

The official prognosis is even rosier now than it was in the March consultation on the programme (ENDS Report 303, pp 25-28 ).

Then, the Government was claiming that the measures in the draft programme would bring the UK's emissions of the six greenhouse gases regulated by the Kyoto Protocol almost 20 million tonnes of carbon (mtC) below the UK's target under the Protocol in 2010. And it also claimed that they would reduce CO2 emissions by 17.5% from the 1990 level by 2010 - not far short of the domestic 20% target.

According to the finished programme, emissions of the six gases will fall even further - by 22.7mtC by 2010. And CO2 emissions are now projected to decline by 19% by 2010 (see table

).

However, the sharper emission reductions projected in the finished programme have little to do with any policy measures added since March. They are the result of revised energy and CO2 projections produced by the Department of Trade and Industry in its new Energy Paper 68 2 - which in March was still only a working paper.

Both sets of projections took account of several recent policy initiatives - notably the climate change levy, the fuel duty escalator to 1999, and delivery of the target to generate 10% of electricity from renewable sources by 2010. The projections incorporate six scenarios which have varying assumptions about economic growth rates and energy prices.

Energy projections up - but CO2 down
EP68 projects that the UK's primary energy demand will grow at 0.7-0.8% per year in the two central scenarios, above the 0.6-0.7% projected in the working paper. Most of the extra growth is due to rising demand for electricity, particularly from the domestic sector, where the DTI has accepted that electronic entertainment - especially digital TV - will drive up demand faster than its working paper assumed.

As a result, electricity demand is forecast to increase by 1.25% per year to 2010 in the "central low" scenario - compared with a rate of less than 1% to 2005 and a fall-off thereafter predicted in the working paper. Correspondingly, power station emissions of CO2 are now projected to be 2.5mtC higher by 2010 in both central scenarios than they were in March.

Despite these adverse trends, national CO2 emissions in 2010 are projected to be lower by EP68. The most important reason for this is the forecast that industry emissions will be almost 4mtC lower at the end of the decade than predicted in March. EP68 says that this reduction is "mainly due to lower estimated emissions from offshore activity" - but offers no further insight as to what information has come to light since March to justify this crucial downward revision.

It is this and other smaller revisions which account wholly for the 2.5mtC closure of the gap between the CO2 target and what the full climate programme is projected to achieve since March. But that is not the end of the story.

Bullish assumptions on energy
Our analysis of the March consultation paper concluded that the draft programme, as well as some key assumptions in the DTI's working paper, were seriously over-optimistic about the impact of some measures on emissions. Some of these concerns have been alleviated - but several still remain.

  • Nuclear power: EP68 assumes, as did the earlier working paper, that nuclear output will decline slowly from its peak of 91TWh in 1998 to 66TWh in 2010. But events over the past year have badly dented confidence in that assumption.

    In March it was known that nuclear output had slipped in 1999. The full extent of the reduction became clear shortly afterwards, when BNFL confirmed that output from its Magnox stations had dropped by 15% in 1999/2000, while British Energy's output had fallen by 9%.

    The sector's problems have scarcely abated in this financial year. British Energy's nuclear output in the first seven months was 4% down on last year, while BNFL's largest Magnox station, the Wylfa plant on Anglesey, has been closed since the summer. DTI figures show that nuclear output was 15.7% down on last year between April and June.

    Other developments since March have included BNFL's announcement that five of its seven Magnox stations will be closed by 2010 (ENDS Report 305, p 20 ) - though the DTI maintains this is consistent with the assumptions in EP68. Meanwhile, British Energy is looking to confound the sceptics by aiming for a reliable nuclear output of 70TWh - above its record of 69TWh two years ago.

    The climate programme is acutely vulnerable to events in the nuclear sector, as this year's developments are bearing out. The DTI had expected CO2 emissions to be on a declining curve to 2005 before rising again. But EP68 reveals that it now anticipates an increase in emissions this year due to depressed nuclear output and an increase in coal consumption - up by 7% in the six months to September.

    EP68 dismisses this as a "temporary blip". Whatever the next few years hold for the nuclear generators, it should be noted that last year's reduction in output alone was equivalent to almost 0.5mtC.

  • CHP: The Government has a target to increase CHP capacity to 10GWe by 2010. Capacity increased by a record 354MWe last year to reach 4.2GWe, saving around 4mtC per year.

    However, progress is now set to slow, according to the CHP Association. In October, it released the results of a survey which showed that construction of one-third of consented CHP capacity is on hold. Many members felt there was little or no prospect of the target being met following recent increases in gas prices and cuts in electricity prices (ENDS Report 309, pp 7-8 ).

    EP68 projects that capacity will rise to 7.6GWe by 2010 after the impact of the climate change levy - from which CHP is largely exempt - is taken into account, but excluding the stimulus provided by enhanced capital allowances for CHP and uptake of the technology by businesses within sectoral energy efficiency agreements.

    However, the CHPA is contesting these projections too. In November, it published a report by Cambridge Econometrics and Forum for the Future which concludes that current policies will deliver only 6.6GWe of CHP by 2010.

    The CHPA has become increasingly irritated by the Government's failure to publish its long-promised strategy to deliver the CHP target. The programme notes only that the Government "is preparing" the draft strategy - so any relief for the sector is clearly some way off.

  • Renewables: The target to generate 10% of the UK's electricity from renewable sources is also a long way off. Their contribution rose by less than 0.1% per year during the 1990s to reach 2.8% last year. The DTI's recent consultation paper on the proposed new renewables obligation on electricity suppliers envisages the annual growth rate increasing to between 0.5% and 1.0% in the current decade (ENDS Report 200, pp 41-42) - clearly a formidable undertaking.

    The "new and strong drive" on the renewables promised by Labour on taking office has failed to materialise. Only around 350MW of capacity has been added under the current administration - no better than under the Tories.

    The sector may have to wait until 2002 for the new renewables obligation to be put in place. But there have recently been more heartening signs.

    One is the new funding which will kick in next April. There will be £30 million over six years for farmers growing energy crops. A further £39 million over three years will be recycled from climate levy receipts to support biomass and offshore wind projects - and in October the Prime Minister added another £50 million in Lottery funding to be shared between the same technologies.

    Significant milestones have also been passed in recent weeks. The UK's first offshore wind turbines were commissioned off Northumberland, its first wave power scheme began generating on the Scottish island of Islay, and the first onshore wind farm to receive no subsidy began producing power in Scotland.

    Nevertheless, the road to the 10% target remains a steep one. One reason is that the renewables industry is aiming at a constantly receding target. During the 1990s, electricity demand increased by over 50TWh - so that renewables output last year accounted for 2.8% of total supply instead of the 3.3% had demand held steady at the 1990 level.

    The picture is set to be the same in the current decade. Indeed, a striking omission from both EP68 and the climate programme is any discussion of the implications of EP68's projection that electricity demand will rise more steeply than suggested by the DTI's working paper in March.

    According to ENDS' calculations, the demand projection in EP68's central low scenario implies that renewables output will have to grow by an extra 1.5TWh or so above the level implied by the working paper if the 10% target is to be met. This extra output is equivalent to around two years' average growth in the late 1990s once fluctuating generation by large-scale hydro plants is removed from the equation.

    EP68 deals with this - if that is the right phrase - by assuming that the 10% target will be met regardless of its practicality. But the enormous challenge facing the renewables sector could not have underlined more strongly the need to break the link between economic growth and energy demand.

  • Domestic sector: As in the March draft, the climate programme treats the domestic sector differently from others. It identifies a potential for cost-effective energy saving measures worth 2.6-3.7mtC by 2010 - and then assumes that it will be delivered even though policies are not fully in place to do so.

    Carbon leakage
    The programme's expectations of other sectors appear more realistic. The estimated emission savings of 3.3mtC from the Government's integrated transport strategy which featured in the draft programme were cut back to a more sensible 1.6mtC in the ten-year transport programme announced in July (ENDS Report 306, pp 16-19 ).

    In the business sector, the projected saving from the forthcoming greenhouse gas trading scheme has been firmed up from 0.5-2.0mtC in March to at least 2.0mtC. However, the Government's consultation paper on the scheme, also issued in November (see pp 42-43 ), raises a couple of important questions about the CO2 target.

    One is the possibility of carbon "leakage" if a company reduces output or closes down capacity in the UK, sells the resulting emission credits in subsequent years, but replaces the lost production overseas. The Government appears unlikely to come up with an answer to this.

    Secondly, companies in the trading scheme - as well as those in sectoral energy efficiency agreements - will be able to meet their targets by credits from overseas projects. Initially these are likely to be only energy efficiency or renewables projects - but the Government has conceded that it may eventually have to allow credits from carbon sequestration projects as well.

    The simple point about these overseas credits is that they were never envisaged as contributing towards the CO2 target when it was originally set - well before the Kyoto Protocol introduced the idea of international "flexible mechanisms" to help reduce compliance costs. The target was to reduce the UK's own CO2 emissions by 20% by 2010 - but it has now been dropped.

    Sectoral agreements and HFCs
    The sectoral agreements under the climate levy are still projected to deliver emission savings of 2.5mtC in 2010. Only two trade bodies - the Maltsters Association and the Wood Panel Industries Association - had formally signed agreements by late November. But around 40 are expected within the next few weeks.

    The agreements still need clearance from the European Commission under EC state aids rules, which are themselves under revision. The Commission made one major concession this summer, dropping its plan to allow full subsidies for no more than five years. This would have scuppered the agreements, which are due to run for ten years.

    The Government has given few concessions to manufacturers and users of HFCs. The draft programme branded these as "not sustainable in the long term" and announced plans for voluntary agreements to curb their usage. Half the 125 or so company responses criticised this new policy.

    The Government has given ground to the extent of suggesting that the agreements might include a list of uses "where HFCs are agreed with industry to be not necessary". The significance of that concession remains to be seen. Some clarification may come from a new study of the energy efficiency of refrigeration and air conditioning equipment and insulation foams - sectors in which energy efficiency claims for HFCs and alternatives are often hotly contested.

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