Let’s face it: energy efficiency is boring when compared to the (relative) excitement of developing new sources of low-carbon electricity or heat. The popular science magazines are full of articles on new forms of solar panel and the latest designs for wind turbines. Improving the insulation of ordinary homes, shifting to LED lighting or increasing the take-up of heat pumps rarely command the attention of editors.

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In a breathtakingly elegant paper in Energy Policy, Jonathan Cullen and Julian Allwood of Cambridge University try to persuade us just how wrong we all are.[1] The theme of the paper is that carbon emissions are far more responsive to changes in how we use energy than in how we generate it. They say that it will be cheaper, easier and quicker to make efficiency savings than to switch to renewable electricity or heat.[2] The scale of the loss from the raw energy value of a fossil fuel to its eventual productive use is enormous and the authors argue that cutting this gap is a far easier task than replacing the 50,000 fossil fuel power stations with millions of wind turbines and vast solar power plants strung across deserts to meet our emissions reductions estimates. Are they right? This article uses the Cullen/Allwood paper to look at the total potential saving that might reasonably be obtained in the next couple of decades if we make a determined effort to improve energy efficiency.

My very tentative conclusion is that we can look for a 40% reduction in current energy use if we pursue efficiency objectives enthusiastically. (I don’t look at the impact of economic growth in developing countries and the way this might substantially increase total energy demand.) Perhaps surprisingly, the cost of achieving even a 40% energy efficiency gain looks high to me, particularly compared to the cost of decarbonising electricity generation. Wind turbines probably give a better return on investment.

The background data for the Cullen/Allwood paper is not complex or controversial. The world uses about 475 exajoules a year, all but 100 of which are from fossil sources. Their contribution comes from rigorous quantification of how these energy sources are turned into things that we actually desire. First, the primary sources of useful energy are processed – usually burnt – in a variety of machines, such as a diesel engine or an oil burner. The eventual result is motion, steam, useful heat or cool, and the transformation of materials (turning ore into metal, for example). These things then deliver what human beings want – personal transport, a comfortable home, the ability to communicate, clothes and food.

What is an exajoule?
A exajoule is a unit of energy. Therefore it can be converted into, for example, kilowatt hours, which is another way of describing an amount of energy. To be a really useful measure, an exajoule will usually need to be expressed as a number for a particular period of time such ‘exajoules per year’.

475 exajoules, the world’s yearly use of energy from primary sources such as coal and oil, roughly translates into a continuous power use of about 5.5 terawatts. To put this figure into context, this is about 120 times the average electricity demand on the UK power grid. 5.5 terawatts spread over the world’s population is about 2 continuous kilowatts a head, or about 17,000 kilowatt hours a year. For comparison, the UK continuous power usage is about 5 kilowatts a head – two and a half times as much – and therefore approximately 42,000 kilowatt hours a year.

The paper sets up a four-stage chain. Fuels are extracted or, in the case of renewables, collected and then converted in a machine that turns them into heat or other useful energy source. The process occurs in what the authors call a ‘passive system’ such as a vehicle or a hot water system. The final service is something directly desired by the individual consumer or business, such as transport or comfort. There are efficiency losses in this stage in the chain.

The paper estimates the volumes of energy being used by the world’s major energy conversion devices. The top six machines are as follows:

Table 1

These machines are directed towards producing about 233 exajoules of heat a year and about 175 exajoules of motion. The energy for motion will be accompanied by heat. For example, a car’s petrol engine produces far more heat than energy for motion. So, in the case of a diesel engine, the world’s most important energy conversion device, only about 25% of the chemical energy in the fuel gets turned into energy to move the car.

The service provided by the energy can then be described. Table 2 shows the useful things we get from the 475 exajoules each year.

Table 2

Let’s look each output in turn. How much can we expect to be able to save through well-understood energy efficiency options? (Almost all of the figures in the following section are my estimates and are not from the Cullen/Allwood paper.)

Thermal comfort
Few buildings anywhere in the world are particularly well insulated. The typical British home loses around 250 watts per degree Celsius of temperature difference between the outside and the inside of the house. This means an average input of heat of around 200 kilowatt hours a year per square metre of space, compared to best practice (Passivhaus) levels of less than a tenth of this figure. Say, as a simple approximation, that we tried to get UK housing down to a level of 100 kilowatt hours per square metre. This would be expensive and unpopular since it would need most brick-built houses to be clad with insulation materials. If this 50% cut was replicated elsewhere, and also applied to building cooling needs (and there is no reason why not), world energy demand would be cut by approximately 10% (19% times 50%).

Other major energy-use savings could be generated by large-scale switching to heat pumps for home and business heating. We could, in theory, push the energy needed for thermal comfort down very dramatically, but the changes to buildings and their heating systems would have to be enormous. So I have used an estimate of a 50 exajoules energy efficiency saving.

Potential saving from better efficiency: 50 exajoules?

Sustenance
The average person needs about 2 kilowatt hours in food energy a day. (When talking about food, this 2 kilowatts is usually expressed as approximately 2,000-2,500 kilocalories.) The energy efficiency of food varies dramatically by type of product. Red meat might be 10% efficient (i.e. ten units of external energy are needed to produce one unit of food energy) whereas a grain such as oats, which is not generally heavily fertilised, might be as high as 500% (one unit of fossil fuel energy produces five units of food energy – most of the food energy comes from photosynthesis). About a quarter of the calories in the US diet come from meat and dairy products and a similar fraction in most of northern Europe.[3] If this figure fell to about one eighth, or if we switched from the least energy efficient meat (beef) to the best (chicken), the savings could be 40% of total energy consumption. Of course, a wholly vegan diet would increase these numbers hugely, but I haven’t assumed this.

Potential saving from better efficiency: 40 exajoules?

Structure
The key improvements here are weight reduction in the structural materials and a move to ‘closed loop’ recycling. For example, creating metals from ore is generally an extremely energy-expensive process. Think of making aluminium from bauxite, for example. Once we have created a metal from ore, there is usually no good reason ever to dispose of it. But dispose of it we do. 50% of aluminium cans go into landfill in the UK. Even valuable metals such as silver, widely used in very small quantities in electronic devices, disappear as your mobile phone is tossed into the waste.

Almost everything can be reused several times and sometimes indefinitely; but almost nothing is. And as the world becomes virtual, physical structures (such as paper) can be replaced by digits or by transient appearance on a screen.

The Cullen/Allwood paper also mentions the importance of such things as the streamlining of cars, another way in which structural changes can reduce the total need for energy.

Potential saving from better efficiency (this is even more of a guess than other estimates): 30 exajoules?

Freight transport
Freight transport is likely to remain as a major customer for fossil fuel suppliers for many decades. The diesel engine is only 25% or so efficient at turning the chemical energy into energy for motion, but only a huge rise in the price of oil is likely to prompt a switch to electric vehicles or electrically propelled railway trains. Diesel itself may be replaced by biologically derived oils, made from oil seeds or even algae. Whether these bio-oils can be described as more energy efficient in the language of the Cullen/Allwood paper is not clear. These forms of diesel are replacing fossil fuels with photosynthesis processes but the underlying efficiency of the engine remains the same.

In the medium term, it may be possible to switch diesel transportation to vehicles powered by hydrogen fuel cells. This would save energy since a fuel cell may offer twice the conversion efficiency of a diesel engine. Only half the energy is needed for the same amount of transportation

Potential saving from better efficiency: 10 exajoules?

Passenger transport
Passenger cars may switch to electricity and to hybrid electricity/fossil fuel. Both routes offer very substantial savings. Electric cars have approximately 80% conversion efficiencies (chemical energy to energy usable for motion) compared to 20% or so for petrol vehicles. This latter figure is rising quite fast as a result of innovations in materials, drive trains, aerodynamics, and other parts of the car. So a move to a car fleet that is battery equipped, possibly combined with a hydrogen fuel cell, may offer very substantial energy efficiency savings. Greater use of electricity for long-distance transport by rail and employment of fuel cells for urban buses will also help. But nothing in sight will reduce aviation’s energy use per passenger kilometre by as much as the use of electricity for cars.

Potential saving from better efficiency: 30 exajoules?

Hygiene
The appliances of motors can be made more efficient but the heating of the water is now the dominant use of energy in ‘wet’ domestic appliances. And, unfortunately, the energy used to heat a litre of water through ten degrees is always going to be the same. It’s certainly true that washing machines, for example, can be programmed to run at lower temperatures and use less water, but the remaining savings above and beyond what is already achieved are probably not enormous.

The amount of hot water for bathing may be possible to reduce by the use of water-saving showers, but the savings are probably not substantial.

Potential saving from better efficiency: 15 exajoules?

Communication
It’s not clear to me that large reductions in energy use are possible. As countries develop, they are also likely to devote a large fraction of their incremental national income to this category so total energy demand may rise, though this is not relevant to our estimate.

Potential saving from better efficiency: 10 exajoules?

Illumination
In most countries of the world illumination comes by the burning of fats and oils. Only in rich countries does a reasonable fraction of fossil fuel energy get employed in providing lighting. In these places, the switch away from incandescent bulbs to more advanced light sources is moving rapidly. A compact fluorescent in the home will typically be four times as energy efficient as the older technology (in terms of lumens per watt of electric power). LED bulbs, just now beginning to come into use, may introduce another four-fold improvement in efficiency. LEDs are also useful in many non-domestic applications such as street lighting, car headlights, and traffic lights.

The scope for a large percentage change in energy use is high, but the absolute amount of the saving in energy is not as large as, say, thermal comfort.

Potential saving from better efficiency: 10 exajoules?

Summing up the estimates
My highly tentative estimates suggest an approximate attainable saving of about 205 exajoules out of the annual global figure of 475. This is a saving of around 40% of current energy use. Let’s call the reduction 2.5 terawatts of continuous power

How much would it cost to achieve the same reduction in fossil fuel use by decarbonising our electricity use? The same net effect as saving 205 exajoules by energy efficiency would be provided by building about 2,000 nuclear power stations or about 2.5 million commercial-scale wind turbines. The cost of 2,000 nuclear power stations might be about £10,000bn ($16,000bn) or about £10,000 per person if divided among the richest one billion people on the planet. Wind might be about the same or even slightly cheaper if we could put most of the turbines onshore or in shallow and calm waters.

£10,000 per person is a large sum, even spread over 10 years. But it is probably less than the cost of achieving the energy efficiency gains mooted in this article. Take housing insulation, for example. Simple savings from wall insulation might only cost £1,000 or so, but generally wouldn’t achieve the 50% cuts in energy use I suggested might be possible in the section above. Really deep cuts in the energy that we use to keep ourselves warm might cost an order of magnitude more. So I want to suggest that even though some energy efficiency savings are cheap – and may even have a quick financial payback at current energy prices – the argument that ‘efficiency’ is always the cheapest way to reduce emissions is not obviously true. Beyond the easy savings from getting rid of gross inefficiency, investment in low-carbon energy sources may be a cheaper way forward.


Footnotes
[1] Jonathan Cullen and Julian Allwood, ‘The efficient use of energy: Tracing the global flow of energy from fuel to service’, Energy Policy, 38.1, pp. 75-81.
[2] Two newspapers for which I occasionally write have now banned the phrase ‘low-hanging fruit’. So I don’t use it in the text even though any article on energy efficiency normally has to use it in the first two paragraphs.
[3] Most of the figures in this paragraph are from Gidon Eshel and Pamela Martin, ‘Diet, Energy and Global Warming’, Earth Interactions, 10 (March 2006), pp. 1-17.

Until this week, we thought that Sizewell B was likely to be the most expensive nuclear power station built in the UK. Image source: World Nuclear Association.

The Guardian newspaper of Monday 19 October broke the story that the UK government is preparing to guarantee a minimum price for carbon dioxide emissions to encourage the development of nuclear power stations. Putting a high cost on greenhouse gas emissions from power stations will force up the wholesale price of electricity, ensuring a better financial return for nuclear power stations (and for renewables such as wind). The decision to create a floor price for carbon demonstrates that the full costs of nuclear technology are probably well above today’s wholesale electricity prices. We may well need nuclear power but we are going to pay heavily for it. The government’s optimistic noises from 2006 to the middle of this year about the commercial viability of nuclear power have turned out to be wrong.

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More generally, this note argues that the failure to incentivise nuclear construction in the current liberalised electricity regime may oblige the UK to introduce high guaranteed ‘feed-in’ payments for all low-carbon generators, including the very largest power stations. Guaranteed tariffs may be a more effective instrument for incentivising low carbon generation than the carbon dioxide price.

2006 government views on the costs of nuclear
In September 2006, David Kennedy, then a senior civil servant in the UK Department of Trade and Industry (now BIS) and currently the chief executive of the Climate Change Committee, submitted a paper to an academic journal on the economics of nuclear power.[1] The paper was published the following year. In the paper Dr Kennedy looked at the likely costs of building new nuclear plants in the UK. He then used these estimates to say what the wholesale price of power would need to be to encourage the building of new nuclear power stations.

Table 3 of his robust and cautious paper contained 10 estimates from independent external sources of what is called the ‘levelised’ cost of electricity from new nuclear. ‘Levelised’ figures spread the costs of a power station over its expected lifetime generation of electricity and account for matters such as the deconstruction of the power station at the end of its life. An interest rate is applied so that money spent now is given a higher weight than the money expended in sixty years’ time.

The ten estimates quoted by Kennedy were as follows:

The average was £30 per megawatt hour (mWh). This is equivalent to 3p per kilowatt hour. For comparison, current UK retail prices for electricity are about 13p a kilowatt hour.

Dr Kennedy’s paper went on to provide a more conservative figure that UK policymakers might use. He assumed a cost of £37.50 per kilowatt hour. The analysis also suggested a figure of £43.70 as an ‘extreme’ high case.[2] The wholesale price of electricity, at least as shown in medium-term contracts to buy and sell power, varies between about £50 per mWh and about £60.[3] Ofgem’s recent energy market scenario report also suggests a figure of about £60 for late in the coming decade when the first new nuclear plants might be starting to generate. So readers of Dr Kennedy’s paper would have assumed that nuclear power is profitable at current market prices and at projected future levels. Indeed, government policy-making from 2006 to 2009 has explicitly assumed that nuclear is ‘cost-competitive’ with other forms of generation such as gas and coal.

The views of the Committee on Climate Change, December 2008
By late 2008, the Committee on Climate Change (CCC) had a very slightly different view:

Current estimates of the likely cost of generating electricity from new nuclear are in the range 4-5p/kWh (£40-50 per mWh). These cost estimates are higher than typically produced two to three years ago, as a result of the significant increases in steel and other component prices, and of significant supply bottlenecks which have emerged as demand for new nuclear power station construction has come up against a limited capacity supply industry.

But fossil fuel price increases over that period have produced an even greater increase in the cost of fossil fuel based electricity, and the relative cost position of nuclear has therefore improved.

Less than a year ago, the CCC was saying that nuclear was the lowest cost generating plant for power generation even though its estimates were higher than Kennedy’s figure of two years earlier. ‘4-5p’ per kilowatt hour for nuclear compared favourably to more than 6p for gas generation and more than 7p for coal. Its view was unambiguous:

Nuclear power is competitive with both coal and gas-fired generation in the central fossil fuel price scenario even without a carbon price.

The Guardian’s news story
In October 2009, if the Guardian reports are accurate, the government is admitting that nuclear is not able to compete with fossil fuels except with protection from a high carbon price. The newspaper mentions a figure of €30 a tonne, compared to today’s price of CO2 emissions permits in Europe of about €13 a tonne. This levy will be added to the cost of using coal as a fuel for the power station and the effect will be to increase wholesale prices.[4] A €30 price for a tonne of CO2 will add about £20 to the cost of producing a mWh of coal-generated electricity.

During the course of 2009 the implied cost of nuclear power has risen from being no worse than competitive with gas and coal (at a zero carbon price) to being €30 (£27) per mWh more expensive.

Put at its simplest, the progression in nuclear cost estimates is therefore as follows:

* £20 for the carbon permits to produce a mWh of coal-fired electricity added to the current wholesale price of £50 or future prices of £60 per mWh. Assumes that that the €30 a tonne figure suggested by the Guardian is the level required to cover the ‘levelised’ costs of nuclear power per mWh.

For reference purposes, it may be helpful to know that the last nuclear power station built in Britain, Sizewell B, has levelised costs in today’s money of about £60 a mWh, or somewhat less than the apparent current projections of nuclear costs but higher than any of the government figures from the 2006-8 period.

Why is this important?
Nuclear power has gone up in price, probably by a factor of between two and three above what was expected even a few years ago. This is no surprise and even this blog predicted such figures early this year (see here and here). The continued problems at the new Finnish nuclear power station raise the strong suspicion that cost estimates will rise further in the future.

More generally, the Guardian report buttresses the case of those who say that the UK needs a guaranteed floor on the carbon price urgently. Today’s gas prices are very low by recent standards and depressed world economic growth may cause this to continue. The rational investor is therefore looking to build new combined cycle gas turbine power stations to profit from these low fuel prices. This runs the risk of either locking the UK into carbon-emitting power generation and/or shortages of power if the current glut of gas reverses unpredictably or if emissions targets oblige the generators to curtail production. But, as it stands today, the generators are queuing up to build unabated gas power stations. At today’s gas and carbon prices not only nuclear power but coal with carbon capture is looking very expensive.

The EU’s decision last week to back Powerfuel’s Hatfield coal gasification (IGCC) plant is welcome, but the project may only make financial sense with carbon prices at least as high as needed for nuclear power. Powerfuel’s proposed technology is still largely unproven at the scale envisaged and it may well turn out to be far more expensive than expected. There are many sceptics out there around the world saying that IGCC with capture will be even more expensive than nuclear. And offshore wind, today buttressed by a temporary increase in renewable subsidies in the UK, will need similar long-term incentives.

Are there any solutions?
My strong sense is that the woefully slow progress in developing new UK sources of low-carbon electricity might possibly be remedied by agreement between the main UK political parties on a high and semi-permanent carbon tax, probably of at least £40 a tonne. This may imply an increase in electricity costs of about 3 pence per kilowatt hour, a painful jump on already historically high levels.

Or – and this runs completely against the spirit of electricity market liberalization over the last twenty years – it may be simpler to copy the micro-generation feed-in tariffs scheme and offer a stable and guaranteed price for low-carbon electricity sources constructed in the next fifteen years, perhaps with higher prices for the first 10, 20, and 30 gigawatts of capacity constructed. The early rate might be £80 per mWh for nuclear, £90 for coal with capture, £70 for onshore wind, and £100 for offshore. The effect of this measure will be to unwind the working of the free(ish) markets in electricity generation and retailing. Few people may yet be willing to contemplate such a massive change, but even enthusiasts for liberalised energy markets must surely admit that the inability to incentivise the construction of nuclear, coal with CCS or even wind under the current system is indicative of a market failure of dangerous and unprecedented proportions.


Footnotes
[1] David Kennedy, ‘New nuclear power generation in the UK: Cost benefit analysis’, Energy Policy, 35.7 (2007), 3701-16.
[2] Kennedy 2007: 3709.
[3] Drax power station, by far the biggest in the UK, records in its latest financial statement of August 2009 that the average price it has sold electricity in the forward market for 2011 is £60.30 per mWh.
[4] This requires the assumption that coal power stations are pressed into service last: after gas and renewable (i.e. in economist’s language, coal stations are the ‘marginal’ producers).

Ed Miliband, Minister for the Department of Energy and Climate Change. Photograph: David Levene/Guardian.

The government wants to emphasise the affordability of climate change mitigation. It produces low estimates of the cost of low-carbon technologies. In the recent 2009 budget documents, the government estimated a cost of 1% of GDP to meet the tough new 2020 targets. In his pronouncement on carbon capture at coal-fired power stations, energy and climate change secretary Ed Miliband later said that his proposals will add 2% to electricity bills.

Are these numbers reasonable? Professor Sir David King, the former chief scientific adviser, says no. In a BBC interview of 26 April, he indicates that he thinks that the cost of reducing the UK’s emissions is much higher than the government indicates but also that the financial implications of not dealing with the climate change threat are far higher than even Nick Stern suggests.

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I strongly suspect that David King is right about the costs of decarbonisation. Let’s look at the electricity supply industry. Almost all of our electricity today comes from fossil fuel and nuclear power stations. Before 2020, we have committed to multiplying the contribution from renewable electricity 10-fold. This is not a misprint – and it was repeated in the budget statement of April 2009. And then this extraordinary pace will have to quicken further. To get on the road to near-full decarbonisation of electricity supply by 2030, which is the key plank in the Climate Change Committee’s recommendations, we need to take the following measures as a country: a) complete carbon capture on coal- and gas-fired power stations; b) huge growth in renewables; c) possibly huge investment in nuclear power stations; and d) an unprecedented investment in an improved and expanded transmission grid.

How much will these actually cost? Here are some rough-and-ready numbers:

• a) Complete carbon capture and storage on fossil fuel plants: Most estimates suggest that this will add approximately £30 to the cost of producing a megawatt hour of electricity. On top of today’s wholesale price of about £50 per megawatt, this will add about 60% to the cost of producing electricity from fossil fuels.
• b) Huge growth in renewables: Onshore wind would be cheaper, but it looks as though only offshore wind is politically acceptable. Very substantial growth in new generating capacity is possible. Perhaps costs will come down, but including the cost of ‘grid balancing’ to deal with intermittency, the incremental cost of offshore wind above today’s wholesale prices is probably between £30 and £40 a megawatt hour.
• c) Nuclear power stations: The Climate Change Committee offered an extremely optimistic cost for nuclear electricity, suggesting it is cost-competitive today. Frankly, I think they were dreaming when they let this assumption into their hugely impressive December report. All the evidence is that robust and safe nuclear power stations are going to need at least £25 a megawatt hour more than today’s fossil fuel power stations.
• d) The cost of a new grid: We need new connections of very substantial transmission capacity between Scotland and England and between this country and Scandinavia, the Netherlands, and with France. The key purpose of this is to allow easier flows from where power is plentiful to where it is scarce. When the wind isn’t blowing, the UK will need power from Norway. And, by the way, we will have to pay handsomely for it because the Norwegians don’t partly want their enormous hydro capacity to be tapped to provide power security for the late-moving British. It’s little more than a guess but new grid investments may add as much as £5-£10 to the cost of each megawatt hour.

These numbers are at the highest level of approximation. But they suggest that the market price of electricity at the wholesale level will need to rise from about £50 to about £80-£90 a megawatt hour within two decades. And, importantly, the cost will have to jerk upwards soon, otherwise the crucial investments will not be made by private industry in time.

What is the overall impact of the likely sharp rise in electricity prices? It will probably add about a third to prices paid by final retail customers like businesses and homeowners. This alone will cost the equivalent of 1% of today’s GDP. This is before considering the need to divert very large budgets into government-sponsored R+D for offshore wind, tidal power and (dare one say it) nuclear. In other words, decarbonising electricity generation will alone cost as much as the government’s rather easy assumption of the costs of climate change avoidance measures. It may be worth pointing out that electricity supply is only about a third of total UK carbon emissions.

But the high cost of building an entirely low-carbon electricity industry is a cost worth paying. You don’t have to believe in the urgency of the climate threat to realise that fossil fuel resources are going to get more expensive. The right comparison to make is not between the cost of fossil fuel electricity today and what it is going to cost in the low-carbon future. No, the correct assessment should estimate the likely cost of energy in ten and twenty years time. Then the incremental cost of low-carbon energy may well actually be negative. But none of us should be in any doubt that electricity prices are going to be much higher in 2030 than they are now. It would be better for the government to admit this, rather than hide behind what I think is the comfortable fiction that the climate change and energy security problems can be dealt with at minimal cost to living standards. As a society we also urgently need to recognise that electricity prices will have to rise sharply soon – this is not a problem that can be dealt with by a slow and graceful upward curve. The implications of this for the poorest members of British society must be addressed now.