The UK Energy Review: Policy and Prospects for Hydrogen and other Carbon Mitigation Resources

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The UK Energy Review Policy and Prospects for
Hydrogen and other Carbon Mitigation Resources

• Dr Neil Strachan
• Policy Studies Institute, strachan_at_psi.org.uk
• Presentation to the Scottish Hydrogen Group
• University of Stirling
• 23rd February 2006

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Caveats

• Caveat 1
• This presentation raises issues for discussion,
  not firm conclusions
• Caveat 2
• This presentation is not intended to represent
  the views of colleagues within the UK-SHEC PSI,
  or the UK MARKAL modelling team

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Presentation overview

• UK-SHEC
• Overview, Energy systems modelling
• UK-SHEC visions towards a hydrogen transition
• UK energy policy (from within the M25)
• Drivers and context
• The 2003 Energy White Paper
• Multiple policy initiatives
• The 2006 Energy Review
• Conclusions / discussion points

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UK sustainable energy consortium (UKSHEC) Social
science component

• The Policy Studies Institute
• Principal Investigator Professor Jim Skea
• Scenarios Dr Malcolm Eames, Will McDowall
• Economics Professor Paul Ekins, Paolo Agnolucci,
  Nick Hughes
• Modelling Dr Neil Strachan, David Joffe
• Salford University
• Professor Simon Marvin and Dr Mike Hodson SURF
  Emerging regional hydrogen economies in the UK
  (Teesside, London, Wales)
• Professor Paul Bellaby, Professor Rob Flynn and
  Dr Miriam Ricci ISCPR Public awareness,
  acceptability and risk perception of hydrogen
  energy

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Aims and Objectives (1) Economics and Modelling
of SHE

• Understand the nature of the technological
  transition that is involved in the creation of a
  sustainable hydrogen economy (SHE)
• Demand pull policies
• Describe markets that might pull hydrogen
  technologies into mainstream use, and analyze
  public policies (including price incentives) to
  enable this
• Technology push policies
• Analyze complementary (technology) policies to
  push technical innovations and enable hydrogen to
  build its competitive position in different
  markets or applications

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Aims and Objectives (2)Economics and Modelling
of Hydrogen

• Use this framework to describe the economic
  component of hydrogen scenarios
• Indicate the development of the economics of
  hydrogen, and the social context, such that it
  could become competitive with fossil fuels
• Use formal modelling techniques
• To assess the economic viability/ desirability of
  pathways to different hydrogen futures.
• To assess the magnitude and nature of the
  economic stimuli/policy interventions needed to
  steer energy supply/distribution at critical
  stages of development.
• Derive a possible trajectory for the price of
  hydrogen over time, to be compared with the
  possible price of fossil fuels.

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UK MARKAL Overview

• Identifies the most cost-effective pattern of
  resource use and technology deployment over time.
• Depicts the production, trade, transformation and
  use of energy and the associated emissions, as a
  Reference Energy System (RES) network.
• Evaluates all options within the context of the
  entire energy/materials system by
• balancing all supply/demand requirements,
• ensuring proper process/operation,
• monitoring in detail each processs capital stock
  turnover, and
• adhering to user defined environmental policy
  restrictions.
• Selects technologies based on life-cycle costs of
  competing alternatives.
• Provides a framework (data and model) for
  exploring and evaluating alternative futures

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Components of a MARKAL model
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MARKAL MACRO

• M-M merges the bottom-up engineering and
  top-down macroeconomic approaches
• M-M maximizes consumer welfare over the solution
  period, and provides least cost energy system
  configurations
• M-M has price responsive (aggregate) demands
  (i.e., determined endogenously)
• M-M gives insights into economy-wide impacts
  (e.g. GDP)
• MARKAL and MACRO are linked through Energy Costs
  (ECt) and Energy Service Demands (Ddm,t)

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MARKAL MACRO Schematic
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UKSHEC hydrogen visions
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A multi-level perspective
Adapted from Geels, 2002, Research Policy
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Mapping the transitions to end-points
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Transition to hydrogen

• Not just a single product or technology, but a
  systems innovation
• Lessons from history
• Transitions are unpredictable
• Explore non-obvious futures
• Transitions occur slowly
• Lock-in, increasing returns to scale, stranded
  assets
• Important developments in many areas
• Markets, regulations, user behaviour, culture,
  politics
• Role of public policy
• Rural electrification vs. 3G mobile networks

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World energy demand by fuel
Source IEA WEO
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World energy demand by country
Source IEA WEO
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UK energy RDD (public) spend
Source IEA
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International drivers

• Innovation
• UK is a price taker
• Future climate regimes
• Supply and demand
• Global demand sectoral and fuel
• BUT, demand is for energy services
• Geopolitics and sources of supply

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Domestic drivers

• Societal attitudes
• Willingness to conserve
• Transport the most inelastic demand?
• Willingness to tolerate higher prices
• Sustained increases vs. shocks
• Acceptability of specific technologies
• DG, wind, nuclear, transmission etc
• Scotland, regions, cities

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UK energy policy goals

• Heterogeneity of energy sector
• Historical
• Cost and competitiveness
• Security of supply
• Plus
• privatization, local air pollution, safety,
  employment, tax revenue, nuclear support, equity
• Recent
• Climate change
• Domestic oil and gas resource exhaustion

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What should energy policy do?

• Keep energy systems working
• Set targets
• Embody public goods and externalities
• Correct (other) market failures
• Balance (conflicting) policy goals
• Pick winners?
• Technology portfolios vs. economies of scale and
  learning?

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Energy policy focus

• Supply
• Domestic fossil resources, imports
• Specific technology options
• Nuclear, CCS, renewables, CHP
• Infrastructure
• Electricity, natural gas, hydrogen
• Demand
• Industry, residential and commercial, transport

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Energy policy tools

• Target setting
• Technology push
• Research and development
• Demonstration
• Demand pull
• Information
• Regulations (level playing field)
• Standards
• Technology portfolio
• Price support
• Price vs. quantity mechanisms

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The Innovation Process Source Carbon Trust 2002
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RCEP and PIU

• RCEP (2000) report
• Energy the Changing Climate
• IAG (2002) study
• Long-term reductions in greenhouse gas emissions
  in the UK
• Comprehensive technical analyses including MARKAL
  energy systems model
• PIU (2002) review of long-term UK energy policy

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The 2003 Energy White PaperOur energy future -
creating a low carbon economy

• Key Objectives
• Reduction of CO2 emissions by 60 by 2050, with
  demonstrable progress by 2020
• To maintain reliability of energy supplies
• To promote competitive markets and improve
  productivity
• To ensure that every home is adequately heated

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Tensions in the objectives

• Short-term vs. long-term progress
• CO2 reduction, energy reliability imply higher
  prices
• Competitiveness, fuel poverty reduction imply
  lower prices
• Tension still not resolved, energy use and
  emissions continue to rise

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SEPN

• Inter-departmental network
• Prime Ministers Office, Cabinet Office, DES,
  DEFRA, DFID, DTI, DFT, ODPM, MOD, FCO, HM
  Treasury, Carbon Trust, Energy Saving Trust,
  OFGEM, Environment Agency, Englands Regional
  Development Agencies, Northern Ireland Office,
  Regional Co-ordination Unit, Regional Energy
  Group, Scotland office, Scottish Executive, Wales
  Office, Welsh Assembly Government
• Launched on 4th June 2003
• 130 objectives under 10 work streams

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SEPN milestones (international)

• Kyoto Protocol into force on 16 February 2005
• G8 Presidency engaging with emerging economies as
  their energy needs grow
• The International Energy Strategy was launched by
  FCO, DTI and DEFRA on 28 October 2004
• International scientific conference, Avoiding
  Dangerous Climate Change on 1-3 February 2005
• The EU Emissions Trading Scheme (EU ETS)
  commenced in January 2005.
• New Framework Treaty with Norway that could
  secure up to 20 per cent of the UKs future gas
  demand

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SEPN milestones (domestic)

• Exceeded the 2004 target for the Warm Front
  Scheme
• The Renewables Obligation Order 2005 came into
  force on 1 April 2005, with a target of 15.4 by
  2015/16
• The British Electricity Trading and Transmission
  Arrangements (BETTA) live in April 2005 across
  the UK
• The Nuclear Decommissioning Authority (NDA)
  established on 1 April 2005
• Intention to double the level of Energy
  Efficiency Commitment (EEC) activity from 2005 to
  2011
• Transport white paper The Future of Transport a
  network for 2030, July 2004
• Carbon Abatement Technologies strategy, June 2005
• Consultation on micro-generation underway (due
  April 2006)

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Research councils energy programme

• UK Energy Research Centre 6 themes plus
  coordination
• Sustainable Power Generation and Supply
  (SUPERGEN)
• 10 consortia covering renewables, networks,
  hydrogen (UK-SHEC), fuel cells, plant life
  extension
• Towards a Sustainable Energy Programme (TSEC)
• 5 Consortia covering managing uncertainties (3
  social science), bio-energy and carbon capture
  and storage
• Carbon Vision (with the Carbon Trust)
• 5 consortia covering buildings (3), industrial
  process efficiency (1) and unlocking low carbon
  potential (1)
• ALSO
• HM Treasury Spending Review 2007 bids that
  address energy/climate challenges will be
  received warmly
• Energy Research Partnership, bringing together
  government, industry and academia funders of
  energy RD and innovation

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UK energy RDD landscape April 2005
Source UKERC
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Achieving a low carbon economySource IAG 2002
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Pathway towards a H2 strategy

• Hydrogen energy support in the UK (January
  2004) to identify current UK expertise in
  hydrogen and identify what support is currently
  available
• A strategic framework for hydrogen energy in the
  UK (December 2004)
• The Governments response (June 2005)

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Key findings from strategic framework report

• By 2030, six energy chains could provide the UK
  cost-effective, energy secure means to reduce CO2
  emissions for the transport sector
• Renewable energy, Nuclear electricity, Natural
  gas with carbon capture and storage (CCS), Coal
  with CCS, Biomass (with optional CCS), Novel
  hydrogen production methods
• The use of hydrogen for stationary power would
  not meet these energy policy objectives

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Key recommendations from strategic framework
report

• A Hydrogen Coordination Unit (HCU).
• HCU to coordinate research and development, and
  demonstrations.
• HCU to act as a facilitator for private finance
  for product commercialisation
• An industry association for UK commercial
  interests
• Public funding for RD, demonstration,
  commercialization and market stimulation
• Policy measures to stimulate demand

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DTI response (1)

• Acceptance that hydrogen is likely to play a key
  role in the UKs long term energy future
• International co-ordination is vital
• European Hydrogen and Fuel Cell Technology
  Platform (HFP)
• International Partnership for the Hydrogen
  Economy (IPHE)

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DTI response (2)Domestic initiatives

• New 15m/ 4 year demonstration programme for fuel
  cells and hydrogen
• Centre of Excellence for Low Carbon and Fuel Cell
  Technologies (CENEX) under consideration
• Hydrogen coordination unit (HCU)
• Mandate under consideration but unlikely to
  disperse funding
• Industry trade association (UKHA) welcomed
• Links to existing H2 and fuel cell groups
• SuperGen UK SHEC
• Low carbon vehicles partnership

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Multiple reviews

• Energy review (Summer 2006)
• Other reviews
• Climate change programme review (early 2006)
• Stern Review on the economics of climate change
  (Autumn 2006)
• Energy efficiency innovation review (November
  2005)
• Committee on radioactive waste planning (July
  2006)
• ODPM sustainability of existing buildings
• and others (CCS, micro-generation, CHP)

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The Energy Review

• UK's progress on the medium and long-term Energy
  White Paper goals
• Led by Energy Minister Malcolm Wicks
• Launched on 23rd January
• Modelling and quantitative support
• UK MARKAL-MACRO modelling
• Past analytical work
• Consultation process
• 12 week statutory period

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Why an Energy Review now?

• Given rationale
• Evidence on climate change impacts
• Rising fossil fuel prices
• UK now a net gas importer
• Progress slow in EU energy markets
• General international instability

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UK greenhouse gas emissions
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UK projected electricity fuel mix
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UK natural gas resources
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Fuel poverty progress(No. of households paying
10 of income on basic energy services)
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Energy review main goals

• What more could the government do on the demand
  or supply side for energy to ensure that the UKs
  long-term goal of reducing carbon emissions is
  met?
• With the UK becoming a net energy importer and
  with big investments to be made over the next
  twenty years in generating capacity and networks,
  what further steps, if any, should the government
  take to develop our market framework for
  delivering reliable energy supplies? In
  particular, we invite views on the implications
  of increased dependence on gas imports.
• The Energy White Paper left open the option of
  nuclear new build. Are there particular
  considerations that should apply to nuclear as
  the government re-examines the issues bearing on
  new build, including long-term liabilities and
  waste management? If so, what are these, and how
  should the government address them?
• Are there particular considerations that should
  apply to carbon abatement and other low-carbon
  technologies?
• What further steps should be taken towards
  meeting the governments goals for ensuring that
  every home is adequately and affordably heated?

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Energy review contributory goals

• The long term potential of energy efficiency
  measures in the transport, residential, business
  and public sectors, and how best to achieve that
  potential
• Implications in the medium and long term for the
  transmission and distribution networks of
  significant new build in gas and electricity
  generation infrastructure
• Opportunities for more joint working with other
  countries on our energy policy goals
• Potential measures to help bring forward
  technologies to replace fossil fuels in transport
  and heat generation in the medium and long term.

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Conclusions / discussion points

• Hydrogen transition inevitably complex
• Challenging and potentially conflicting goals of
  the White Paper
• Multiple initiatives in response
• Technology push vs. demand pull
• Short term vs. long term
• Technology options vs. supply vs. demand vs.
  infrastructure
• Hydrogen as the other infrastructure
• Focused policy vs. picking winners