Embargoed until 00.01 Friday 14 March 2008
UK Energy and the Environment Press Release
Latest projections confirm that the
Government’s 2010 carbon
emissions and renewables goals will
be missed by a large margin and
that the statutory targets for
emissions
in 2020 are in doubt
Cambridge Econometrics today publishes the latest edition of UK Energy and the Environment containing detailed forecasts of energy demand and CO2 and SO2 emissions by fuel user and fuel type to the year 2020. These forecasts are based on MDM-E3, Cambridge Econometrics’ integrated energy-environment-economy model of the UK. They are a timely, independent assessment of the latest energy-environment developments following the publication of the European Commission draft directive on the EU’s renewables target and post-2012 arrangements for the EU Emissions Trading Scheme, the Climate Change Bill (due to be enacted by mid-2008), which sets a legally binding target of a 60% cut by 2050, and the January 2008 nuclear power White Paper. The projections take into account the Pre-Budget 2007 and Budget 2007 measures involving the introduction from 2008 of the Renewable Transport Fuel Obligation and the existing and additional measures announced in the Government’s 2006 Climate Change Programme Review. They also take into account the proposed banding of the Renewables Obligation as outlined in the Government’s Energy White Paper. We have also taken a view on the effects of the Carbon Emission Reduction Target and the Carbon Reduction Commitment aimed at improving energy efficiency in, respectively, the household and commercial sectors. However, we have not taken into account the other proposals outlined in the July 2006 Energy Review, or in the May 2007 Energy White Paper and the January 2008 nuclear power White Paper, because they have not as yet been followed by concrete policy measures.
Our forecasts suggest that the Government will fall short of its renewables
electricity target for 2010 but is on course to hit its target for 2020,
although it will not meet the EU-set target of a 15% renewables share in
total final energy consumption
In this forecast we have again projected the share of renewables in total
final electricity consumption, incorporating an innovative model treatment
of the Renewables Obligation. The treatment measures the cost-effectiveness
of various renewables technologies taking the income from Renewables Obligation
Certificates (ROCs) into account and comparing it with that of conventional
CCGT. Investment in renewables technology, according to our model, is stimulated
if the net present value of revenue for a particular technology exceeds
its capital and running costs. The modelling also includes the Government’s
banding measures where technologies such as offshore wind and advanced
conversion technologies are given relatively higher levels of support in
terms of ROCs/MWh than already competitive renewables technologies such
as onshore wind. In the model, the banding is represented by a relative
increase in NPV of favoured renewables technologies, making them more competitive
vis-à-vis, say, onshore wind.
However, only a proportion of required new-build up to 2010 is expected
to be from renewables, as several CCGT stations are likely to be profitable
and have already been given the green light. Our forecast, therefore, suggests
that renewables will account for around 6% of electricity consumption by
final users by 2010 and thus fail to meet the 10% target, However, if electricity
demand grows at around ½% pa over 2010-20 in line with our latest
projections and fossil fuel prices remain relatively high, the share of
renewables in final electricity demand is expected to increase to around
14¼% by 2015, just short of the 15% target set by the RO, but reach
21¾% by 2020, comfortably meeting the Government’s aspirations
of a 20% share.
However, our forecasts suggest that the far more ambitious target set by
the European Commission of a 15% contribution of renewable energy to the
UK’s overall final energy needs by 2020 is, on current policies,
likely to be missed by a wide margin. We expect the share of renewable
energy in final energy consumption to rise from the current level of under
1% to 2% in 2010, 3½% in 2015 and reach just 4¾% by 2020.
To make real progress towards the 15% target will require major policy
measures that promote a step change in the level of renewable deployment
in the UK.
The projected fall in carbon emissions
over 2005-10 will not be enough to achieve the Government’s goal
of a 20% reduction in carbon emissions
Following a 3% fall in 2002, CO2 emissions rose by around 2% in 2003, increased
very slightly over 2004-05, but fell slightly by 0.1% in 2006 (the figures
for 2005 and 2006 are based on domestic effort and exclude the purchases
of allowances that occurred under the EU ETS), as high gas prices led to
a shift from gas to coal in power generation. CO2 emissions are now forecast
to be 134.5 mtc, (16.1% below the 1990 level) in 2010. This implies a fall
far steeper than the 6% reduction achieved between 1990 and 2006 (see Chart
1). The projections take into account the Pre-Budget 2007 and Budget 2007
measures involving the introduction from 2008 of the Renewable Transport
Fuel Obligation and the existing and additional measures announced in the
Government’s 2006 Climate Change Programme Review and also include
the proposed banding of the Renewables Obligation as outlined in the Government’s
Energy White Paper. We have also taken a view on the effects of the Carbon
Emission Reduction Target and the Carbon Reduction Commitment aimed at
improving energy efficiency in, respectively, the household and commercial
sectors. However, we have not taken into account the other proposals outlined
in the July 2006 Energy Review, or in the May 2007 Energy White Paper and
the January 2008 White Paper on nuclear power, because they have not as
yet been followed by concrete policy measures. These may be specified,
after the consultations on the Energy White Paper proposals are completed.
The new projection is based on key assumptions about the carbon price
emerging from the EU ETS. An average allowance price of around €20/tCO2 is
now expected in 2008, the first year of Phase 2 of the ETS, rising to €21
by 2010 and €22 by the end of Phase 2; a rise of around 2% pa to €25
has been assumed thereafter to 2020. While there was a reduction of over
13% in allocation of allowances between Phases 1 and 2 of the EU ETS, the
forecast suggests that this is not sufficient to achieve the 20% domestic
goal by 2010.
Total carbon emissions are expected to decline by around 2¼% pa
over 2005-10, following a slight average increase of ¼% pa over
2000-05. The decline is led by the power generation sector where carbon
emissions fall by about 4½% pa over 2005-10 as the assumed recovery
in the allowance price in Phase 2 of the EU ETS reduces coal-fired generation.
Meanwhile carbon emissions from energy-intensive and other industry, as
well as from households and commerce, are forecast to decline by around
1½-3½% pa, but increases in emissions are expected from air
and road transport, as energy demand continues to rise in these sectors.
Carbon emissions are expected to decline more slowly over 2010-15, before
levelling off after 2015
The forecast suggests that after 2010 total carbon emissions will decline
slowly in the period to 2015, as the modest decline in emissions from power
generation, industry and households is partially offset by the continued
growth in emissions from road and air transport and to a lesser extent
commerce.
Over 2015-20, however, total carbon emissions are expected to level off,
as emissions from power generation continue to fall by ½% pa, as
a result mainly of a phasing out of coal-fired generation not fitted with
FGD end-of-pipe filters and the slower growth in emissions from gas-fired
generation. This decline in power generation emissions, reinforced by lower
emissions from industry and households broadly offsets the continuing rapid
growth in carbon emissions from air transport and more moderate growth
from road transport and commerce. Industrial energy demand is forecast
to decline after 2010, but higher energy demand in air transport and slackening
growth in road transport and virtually no growth in household and commerce
result in an expansion of just ¼% pa in total final energy demand
over 2010-20.
By 2020, CO2 emissions, at 132.4 mtc, are expected to be 17½% below
the 1990 baseline. However, this projection does not take into account
the proposals outlined in the July 2006 Energy Review and the 2007 Energy
White Paper as they have as yet not been followed by concrete policy measures.
The UK is expected
to meet the Kyoto target for greenhouse gases, despite the rise in CO2
emissions in 2004-05
The forecast reduction of 16.1% in CO2 emissions by 2010 means that the
UK is on course to meet comfortably its target under the Kyoto Protocol
of a 12½% reduction between the defined 1990 baseline and the average
for 2008-12 in the emissions of a group of six Greenhouse Gases (GHGs).
This target is attained with a 22% reduction in GHGs, despite the rise
in CO2 emissions in 2004-05, because of the assumption that, under the
EU Emissions Trading Scheme, the CO2 allowance price will rise from €1
in 2007 to average around €21 per tonne of CO2 over Phase 2 (2008-12),
and because of large expected reductions in some other GHGs (see Chart
2). The sharp fall in traded Phase 1 allowance prices to virtually zero
by the end of 2007 reflected the fact that the excess allocation of permits
in Phase 1 could not be carried over to Phase 2. However, there appears
to be reasonable market confidence in the level of the Phase 2 cap set
by the Commission for all member states, with forward 2008-12 allowance
prices averaging at present around €20/tCO2. The current forecast
also includes the reductions in the other GHGs (as noted above), and CO2
measures envisaged in the Government’s Climate Change Programme (CCP),
such as the negotiated agreements under the CCL, some modest progress by
2010 both towards the 10 GWe target for Good Quality CHP capacity and towards
a 10% contribution of renewable energy to final electricity consumption
and the negotiated agreements on energy efficiency with vehicle manufacturers.
Professor Paul Ekins of King’s College London, who is Senior Consultant to Cambridge Econometrics and co-editor of its report UK Energy and the Environment, comments on these results:
‘These forecasts provide a timely warning signal about the progress that the UK is likely to make over the next decade towards its longer-term goal of a decarbonised economy. Our projections are released soon after both the UK Government and the European Commission have set ever more ambitious targets for tackling climate change. Unlike the 2010 targets for carbon emission reductions and renewable electricity, the new 2020 targets are legally binding. The Government has asked the independent Committee on Climate Change to consider whether the 2050 target should be ratcheted up to 80% to take account of the scientific evidence, when it reports on its review of the first three carbon budgets in December 2008, which would make the targets more stringent still. Meanwhile the European Commission has proposed a stiff EU-wide 2020 target of a 20% renewables contribution to final energy demand, with the UK required to reach 15% under the effort-sharing agreement. Unless ambitious policies are put in place soon, the 2020 targets will also slip out of reach, because such policies take time to produce an effect.
‘Our forecasts show that the Government is set to miss not only its 20% carbon reduction goal by 2010, but also its declared target of deriving 10% of UK’s electricity used by consumers from renewable sources eligible under the Renewables Obligation (RO) by 2010. The May 2007 Energy White Paper has restated the key role of renewable energy in the Government’s strategy to meet the challenge of climate change. However, our forecasts, which are model-based, suggest that renewables will only account for 6% of UK electricity consumption in 2010, compared with around 4% in 2007. We expect the share of renewables on this basis to rise to around 14% by 2015, and reach almost 22% by 2020, exceeding the Government’s aspiration of a 20% share. But this achievement will depend critically on electricity demand growing after 2010 by around ½% pa in line with our latest forecasts and on fossil fuel prices staying relatively high. The proposed changes on banding the RO, to provide differentiated support levels for differing renewables technologies, particularly offshore wind, require primary legislation. It is unfortunate for the Government’s 10% target that these modifications can only be introduced in April 2009 at the earliest.
‘We predict that the far more ambitious, legally-binding target set by the European Commission of a 15% contribution of renewables to the UK’s overall final energy needs by 2020 is, on current policies, likely to be missed by a wide margin. We expect the share of renewable energy in final energy consumption to rise from the current level of under 1% to almost 5% by 2020. To make real progress towards the 15% target will clearly require major, innovative policy measures that promote a step change in the level of renewable deployment in the UK.
‘The forecasts also indicate that the Government’s policies to promote a low carbon future are not yet sufficient to meet the carbon challenge set out most recently in the May 2007 Energy White Paper and the Climate Change Bill. Carbon emissions have not fallen in any year since 2002 (apart from a marginal reduction in 2006 based solely on domestic effort and excluding the allowance purchases permissible under the EU ETS) and the 20% goal, as acknowledged in the July 2006 Energy Review, appears now to be out of reach, although it has been the Government’s policy since 1997. Our forecast suggests that a 16% reduction is likely by 2010, but this depends on a significant fall in coal-fired power generation, because of the assumed price of allowances under the EU Emissions Trading Scheme. We expect carbon emissions to be some 17½% lower by 2020, suggesting that the 20% goal will, on current policies, not be easy to achieve even ten years later than originally envisaged. But, as our forecasts show, even achieving at least a 26% reduction on 1990 levels, as required by the Government’s interim target will be an uphill struggle unless robust policy measures are introduced that promote carbon reduction.
‘There are also a number of key uncertainties for the longer-term future. These include oil prices (current high prices are helpful for emissions reduction), the price of EU ETS allowances (their volatility is not conducive to emissions reduction, despite the current relatively high Phase 2 forward price of around €20/tCO2) and the behavioural response to that allowance price, particularly in power generation. However, the January 2008 European Commission proposals for the post-2012 architecture of the EU ETS, if adopted, may help to give a more certain longer-term signal for the price of carbon. Our projections have consistently identified the main barriers to a low-carbon economy to be higher emissions from the transport sector, which is expected to rise to just under a third of the UK’s CO2 emissions by 2020.’
Notes for Editors
Cambridge Econometrics is an independent private limited company and is
owned by a charity, the Cambridge Econometrics Trust for the Promotion
of New Thinking in Economics. The company has been providing detailed economic
and industrial forecasts since 1978. Our work also includes detailed regional
and energy forecasts for the UK, and regional and sectoral forecasts for
the European Union.
We provide the most detailed long-term economic and industrial forecasts
available for the United Kingdom. The projections are based on the ‘Cambridge
model’, known as the Multisectoral Dynamic Model of the UK economy
(MDM), and originally developed in the University of Cambridge Department
of Applied Economics. This large computerised system has approximately
5,000 endogenous variables and nearly 16,000 behavioural parameters and
other coefficients. The model is continually revised and improved to take
account of new data and advances in economic theory and econometric techniques.
Our system of quality management for economic modelling has been approved
as complying with the international standard ISO 9001:2000.
In the energy-environment aspects of MDM-E3, demand for eleven fuel types
by thirteen fuel users is modelled, and a capacity-based sub-model of the
electricity supply industry is included. Energy demand for sectors other
than power generation is determined econometrically, and is consistent
with the industrial forecasts released on 31 January 2008. All historical
energy data are consistent with the 2006 Digest
of UK Energy Statistics,
and environmental data with the UK’s National Atmospheric Emissions
Inventory maintained by AEA Energy and Environment.
The cut-off date for the information used in the model run for this forecast
was 31 December 2007.
UK Energy and the Environment is published twice a year. The forecast
and analysis are available on our Knowledge
Base website to companies and government
departments by subscription to our Energy-Environment-Economy Service, which
combines energy and environment forecasts with detailed projections for the
whole UK economy. The information is also available to subscribers in printed
format.
For further information contact
Sudhir Junankar
Manager of UK Energy-Environment Service
or
Phil Summerton
Energy-Environment Economist
Tel: 01223 460760
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