This is not the way to achieve zero emissions in 2050 (or before). The CCC's May 2019 report

We can all be glad that the Committee on Climate Change recommends zero emissions in the UK in 2050. Equally, we should welcome the assessment that the cost of this policy is low, at perhaps 1-2% of GDP in their estimates.

 However a detailed reading of this long report raises some serious questions about the feasibility of the route that the CCC intends UK policy to follow. Put simply, we should have three main areas of concern:

Faith in technologies that are either untried or have already been shown to be uncompetitive

 ·      The CCC has always had faith in the viability of Carbon Capture and Storage (CCS). In the latest report, CCS is used to capture up to 175 million tonnes of CO2 a year and sequester this safely underground in 2050. This is equivalent to about a third of the UK’s current emissions. Nobody questions that CCS is technically possible, but nowhere in the world is this amount of CO2 currently captured and stored, let alone sequestered. The CCC’s latest report looks at many new methods of carbon reduction, such as the use of electrolysis to manufacture hydrogen, and dismisses them as ‘speculative’. However it never questions the potential scale and low cost of CCS in the UK. This is despite the acutely painful experience around the world of fitting carbon capture equipment to new or existing power plants. Without CCS, as the report quietly points out, ‘hard to decarbonise’ sectors, such as aviation will continue to ensure the UK has emissions of around 3 tonnes per person per year, not the ‘net zero’ that the CCC suggests. The magic of CCS is used to wash away the high level of the UK’s remaining emissions.

·      Similarly, the Committee continues with its extraordinary belief in the value of electric heat pumps as a means of decarbonising domestic heating, a very important source of current emissions. Once again, this faith is contradicted by experience; UK housing is simply too badly insulated to allow widespread heat pump use. Subsidies for air source heat pumps have been promoted for perhaps ten years in the UK, but takeup has been dismal. The reason, as perhaps the CCC should know, is that installations have often left householders cold and facing far higher energy costs than older gas boilers. The CCC’s faith in heat pumps sometimes appears almost theological, but is backed by negligible real world evidence.

·      Not surprisingly, the CCC also continues with its assumption that new nuclear power will come down sharply in cost and will provide a substantial portion of the UK’s power.  I don’t think any further comment is needed.

·      Similarly, despite the growing evidence around the world of the cost-competiveness of renewable hydrogen, the CCC stays with its favoured solution of partially switching to hydrogen but making it from natural gas, with the all the emissions implications. (The assumption is that these emissions are all captured and sequestered).

Failure to deal with some of the major questions surrounding the energy transition

·      Let me briefly list some of the things that are either not mentioned in the new report or are glossed over in a sentence.

o   Dealing with large scale and frequent electricity surpluses as the UK invests more in renewable technologies, particularly offshore wind. Even today, we are seeing renewables and nuclear filling almost all UK demand. As offshore wind grows, these surpluses will get larger and increasingly frequent. There isn’t a word about this.

o   Batteries are dismissed. There’s casual mention of home storage but nothing about large scale grid battery farms.

o   Onshore wind, the UK’s cheapest energy source, plays no role in the 2050 projection. This is the CCC avoiding political controversy rather than carrying out its core task. (Don’t believe me? Look at Table 7.2 where the costs of key technologies are tabulated. Onshore wind isn’t there).

o   Similarly, little is said about the crucial importance of home insulation in reducing emissions. The unpalatable truth is that most homes with cavity walls are now insulated and the major problem that remains is the 30% of homes with single solid walls. These are expensive and difficult to insulate but the CCC’s work makes negligible mention of this problem. This is despite the failure of previous government programmes to make more than a dent in the number of uninsulated houses.

·      New technologies, such as direct air capture of CO2, are crudely dismissed as unproven. There’s a good point here; full decarbonisation is going to require some techniques that don’t exist today at anywhere near cost competitiveness. But when the CCC chooses to question the viability of these new approaches it should use decent, up-to-date research. Direct air capture, which the report writes of as costing £300 per tonne of CO2 in 2050, is already being achieved at prices well below this level. Top flight academic research gives figures below $100 in the next few years. This has always been a serious problem with the CCC’s work; it chooses to avoid keeping up with recent trends in technology, perhaps for fear of looking like a naïve enthusiast for half-baked carbon reduction schemes. Scepticism is fine, but ignoring the proven potential for new technologies is not.

·      It’s part of my particular set of prejudices that the future world will make massive quantities of cheap electricity and use temporary surpluses (such as when an Atlantic gale is blowing) to provide the energy to make synthetic fuels cheaply. These zero net carbon fuels, such as replacement kerosene, can then be burnt in aviation or other tough-to-decarbonise activities. Other countries around the world are working on this today but the CCC sniffs and says research in the UK ‘should not be a priority’. Never miss an opportunity to miss an opportunity, I respond, thinking about the way that UK official bodies have dismissed unproven ideas, such as onshore wind in the 1990s or lithium ion batteries a decade earlier, that have gone on to become major world-wide industries. 

Statements of desirability are no substitute for proper plans

·      One of the most eye-catching recommendations in the report is for 30,000 hectares of reforestation a year. This is what is supposed to push the net emissions from agriculture down to zero. The problem is that this has long been the UK government target (or, more precisely, 27,000 hectares is). We are talking about 0.1% of UK land area a year, principally coming from replacing low intensity sheep farming with woodland. The idea is excellent, although I think the ambition should be doubled or tripled, but no UK government has ever successfully taken on the animal farming industry. Replacing the growing of sheep and cows for meat with woodland is one of the most powerful things that can be done to reduce emissions. But the CCC has nothing to say on how it might be achieved. And, by the way, the crying need for improved retention of carbon in soils (not just for emissions reduction but for food productivity as well) is almost totally ignored.

·      Similarly, the idea that the UK might start district heating plants in urban areas sounds wonderful. This idea has been floating around for decades. Nothing worthwhile has been achieved. The costs of building new heat networks in crowded urban environments are immense. Nothing will change this but there’s no examination in the CCC work of the practical difficulties.

Final point: The CCC’s job is to set targets, not produce fully worked-through policies. But, inevitably, a viable target needs a clear understanding of how it might be achieved. The CCC’s new report, which has raised the ambition for UK decarbonisation, should have been accompanied by a proper plan for achieving zero emissions. Instead it has just doubled down on its existing recommendations, first stated a decade ago, for a wildly impractical focus on CCS, nuclear, heat pumps and other dubious schemes. The things that are really shooting down in cost – solar, onshore wind, cheap electrolysis for making hydrogen – are curtly dismissed.

I’m sorry to be negative. The CCC does really important work but this report just isn’t good enough. More ambition please, less pandering to the perceived political practicability and more willingness to bet on the likely winners in the low carbon technology race.

What does a company have to do to fit itself for a zero-carbon world?  The case of Torres winery in Spain

Large companies across the globe realise that the gravity of the climate crisis obliges them to act. But moving from today’s reliance on fossil fuels to a business with a negligible carbon footprint is hugely demanding, particularly for companies facing shareholder demands for quick investment returns.

The Torres winery, headquartered not far from Barcelona, is the largest producer in Spain. Still family-owned after five generations, its vineyards produce a wide variety of wines, including some of the very highest quality. The company’s planning for a transition to a low carbon world, and its actions to address the impact of climate change on both the amount and quality of its production, seem to me to be exemplary.[1]

Wine has a central role in many cultures; progress on emissions reduction in viticulture can have a powerful exemplar effect across agriculture and other industries. The progress made by Torres shows how large enterprises around the world can productively respond to the threat from a changing climate.

Earlier in April, the company held a day-long session for wine writers and other journalists to present its strategy for adapting to climate change and reducing its CO2 impact. I summarise below some of what we learnt.

Why does climate change matter to a business making wine?

The quality of a wine is highly sensitive to the meteorological conditions the vine and its grapes experience during the growing season. Few industries are likely to be as quickly affected by climate change as viticulture. Variations in temperature, rainfall or wind affect all the world’s agricultural commodities but the volume of wine produced and, in particular, the quality of the product are exquisitely affected by the weather.

·      Higher temperatures affect wine in a particularly important way. The grapes mature earlier than they used to and then need to be picked. The slowly developing taste-enhancing phenolic compounds in the grape have not had sufficient time to mature. Changing climate affects the pleasure we experience from good wine.

·      Less well-known than the gradual, if erratic, rise in temperatures is the increase in the typical variability of weather. Extreme events, such as frost in April, now appear to be more common across the Torres estates around Spain and in other parts of the world. Once the buds on a vine have burst into growth a few hours of frost will reduce yields dramatically. Hail storms can have a similar effect.

·      As climate changes, drought is more likely in hotter regions such as Spain. Prolonged shortages of soil moisture will reduce yields and impair quality.

What can a wine producer do to adapt to the changes in climate?

The Torres family has been experimenting with methods to increase the resilience – in both quality and quantity terms – for well over a decade. It is adapting to the changing climate by:

·      Managing its vineyards differently

o   Rows of vines are planted 2.2m apart, up from 1m previously. This helps reduce the average and maximum temperatures experienced by the vines.

o   Torres is experimenting with not taking the leaves off its vines as the grapes ripen. This helps protect them from maturing too early.

o   The company is covering its vines with hail nets. This both protects against hail and reduces temperatures.

o   Rows of vines are planted north-south, rather than east-west to reduce the intensity of the sun on the plants, thus delaying sugar formation.

o   The vines are pruned differently during the winter period in order to create a different shape at summer maturity. The new shape, called Gobelet, mimics the way ancient Greek and Roman vines were trained.

o   Water management is increasingly important. Torres research has shown the benefit of a fertiliser called Polyter that helps hold water in the soil as well as dramatically improving root growth.

o   Torres contends that organic wine actually has a higher carbon footprint than conventional techniques. Organic production results in substantially higher emissions from fuel use and, more surprisingly, from fertilisers. Organic fertiliser from animal manure bears the high carbon burden of the cows and sheep that produce it. And the transport of manure is substantially more CO2 polluting than the use of standard fertilisers.

·      Changing the location of its vineyards and developing alternative varieties of vine, often based on older Catalonian vines.

o   Torres is developing new vineyards, such as high up in the Pyrenees. Sites are as high as 1,200 metres above sea level (higher than the top of Snowdon, the tallest mountain in England and Wales). Torres is currently growing a white grape variety at its highest location but says it may be able to switch to red at some stage. Red grapes typically need more heat than white. These elevations would have been inconceivable not many years ago.

o   In an experiment lasting over a decade, the company has searched out old Catalan varieties of vine that may be more resistant to extreme temperatures. These varieties have generally been found outside the traditional wine growing areas and are brought into the Torres laboratories to be ridded of viruses and eventually to check on the quality of wine produced. Some of the 46 ancient vine types look as they are better fitted to a hotter, drier Spain than the most popular varieties of today, many of which were initially imported from France and other countries with more moderate climates than Catalonia.

o   Another type of fertiliser being tested is made from dead insects arising from the manufacture of fish food. As with many things discussed at Torres’s presentation of its climate change strategy, the problem is that it will be 30 years before the full impact on the health of the soil is known.

Minimising the amount of CO2 produced by the Torres products

About 80% of the impact of wine making on greenhouse gas emissions arises away from the vineyard itself (‘Scope 3’ in the jargon). Torres often has an important place in the sales of its suppliers and so it is able to exert productive pressure on the CO2 emitted by the chain of the businesses that it works with.

·      One good example is the bottles used to carry wine. A standard glass bottle, used once, has a footprint of between 300g and 400g of carbon dioxide. A household buying 200 bottles a year will therefore add up to 80kg of CO2 to the atmosphere. That’s roughly one per cent of the typical footprint of a European person. Reuse that bottle six times and the number comes down to 75g, a lower figure than a PET bottle and equivalent to foil wine bag in a cardboard box.  Full circularity of glass is as good as any new materials.

·      In the last decade, Torres has reduced the full impact of each bottle [2], including all the elements employed to produce the wine, by almost 30% and is planning to get to 50% by 2030.

·      Some of the changes that the company has made itself are predictable. A 1.8 hectare (over 4 acres) PV array on the roof of its main warehouse, plus a boiler that burns the clippings from its vineyards and other organic wastes, contribute 25% of its overall energy use. It has begun to electrify its car fleet, although most of its vehicles are still petrol hybrids. The tourist bus that takes sightseers around the main estate is battery powered.

·      A huge new reservoir stores water for summer irrigation.

·      More unusually, it is just beginning a large scale experiment to use a highly innovative technology to capture and use the CO2 that bubbles up from the fermentation of the grapes. The Exytron conversion system (analysed here) will take up to 10% of the 2,600 tonnes of CO2 produced during the fermentation and convert it to natural gas (methane) for powering cars and vans.

·      Torres is also working with other major wine producers to set standards for CO2 savings and to share knowledge of emissions reduction techniques. As interest rises around the world in the emissions from our patterns of consumption, becoming leader in taking climate change seriously can only help the sales of Torres wines and those of other fine wine-makers that join with it.

·      Some of Torres’s emissions will be very difficult to entirely remove. So the company has started what it calls a programme of ‘insetting’, as opposed to offsetting, emissions. It is reforesting areas of Spain and Chile that it owns but which today have limited tree cover. The most important area of reforesting lies in Chilean Patagonia, where 6,000 hectares will be planted with trees. (Very roughly, the contribution of Torres towards carbon capture from photosynthesis will be equal to the recent promise by Shell to plant trees in the Netherlands, Spain and Australia to balance some of its emissions. But Shell is the larger company by several orders of magnitude).[3]

 

The quality of wine made in 2050 will depend on decisions made now. So many parts of the winemaking industry do have a culture that allows managers and owners to think several decades ahead. And many of the most successful wineries are still in family ownership; the importance of long-term stewardship of the company and its vineyards is often ingrained in the culture of these businesses.

 The wine industry, called ‘the rock star of agriculture’ by one of the speakers at the Torres conference is highly vulnerable to climate change but is thus able to make highly expensive long-term moves to mitigate its emissions and to act as an exemplar to other industries. I want other companies to copy Torres’s quiet determination to reduce its emissions to near-zero and to keep producing the highest quality wines at the same time.

[1] I visited the Torres headquarters two years ago to discuss its climate change programme and was invited back in April 2019 to give a presentation to its recent conference on the topic. I was paid for this presentation. I travelled to Barcelona and back to London by train.

[2] I believe that this assumes no recycling and reuse of the bottles.

[3] https://www.cnbc.com/2019/04/08/oil-giant-shell-has-a-new-carbon-footprint-plan-millions-of-trees.html

Making hydrogen from renewables is as cheap as making it from natural gas

A new academic paper shows that hydrogen made with renewable electricity is cost-competitive with smaller-scale production of hydrogen sourced from natural gas. Within a few years, the researchers say, water electrolysis will have become cheaper than manufacture from fossil fuels across all sizes of hydrogen manufacturing plant, including the very largest.

A chart from the paper comparing the current price for hydrogen paid by large, medium and small users with the breakeven cost of producing it from electrolysis

A chart from the paper comparing the current price for hydrogen paid by large, medium and small users with the breakeven cost of producing it from electrolysis

The conclusion has great significance. Low cost renewable hydrogen enables 100% decarbonisation across the global economy. Electrolysis will allow the world to generate huge, erratic and unpredictable amounts of electricity and use the temporary surpluses to produce hydrogen. This gas can then be stored for later use as a fuel for gas turbines, employed in fuel cells for transportation or converted to hydrocarbons that mimic fossil fuels such as oil and gas. Hydrogen is the vector, or link, that allows us to use electricity from wind and solar to provide almost all energy needs.

This important research shows that the falling price of renewable electricity, combined with declining electrolyser prices and improved efficiency enables complete replacement of all sources of fossil energy. In summary, we can see a route to a near-costless transition to a low carbon economy. The world has not yet arrived at a point where renewable sources of electricity are always cheaper than oil and gas but that target is now in sight.

Commentators have predicted the arrival of a hydrogen-based economy for the last thirty years. Is this paper yet another example of unsupported optimism? I suggest that sceptics might look at two news items over the last couple of days.

·      On Monday, NEL, the leading Norwegian manufacturer of electrolysers, announced a contract to build a 2 MW plant in Switzerland as part of a 30 MW contract. The eventual size of the electrolysis equipment is expected to be 60-80 MW to supply heavy vehicles on Swiss roads.

·      In Canada, Hydrogenics, one of the world leaders in PEM electrolysis, the technology likely to dominate in the next few years, said it had sold the world’s largest ever electrolyser system to Air Liquide. This 20 MW unit is approximately eight times the size of the largest existing Hydrogenics installation and twice the size of the previous largest contract in the world.

Both the frequency of electrolyser sales and the scale of the orders – which I guess will probably move to the 100 MW plus scale within 18 months – show a technology rapidly improving in competitiveness.

The main conclusions of the paper

·      The break-even price of renewably-sourced hydrogen made from wind electricity in Germany is now approximately €3/kg. This is below the price of hydrogen sold to small and medium customers made from steam reforming of natural gas. A kilogramme of hydrogen contains about 39.4 kilowatt hours of energy. So the cost price per kilowatt hour of hydrogen is just over 7.5 Euro cents. (For comparison, the price of the energy in crude oil is around 5 Euro cents per kWh at $65 a barrel).

·      By the late-2020s, the cost of hydrogen will fall to little more €2.50/kg, or around 6.3 Euro cents per kWh. At this level, hydrogen is cheaper to make from the electrolysis of water than from fossil fuels in large refineries and ammonia plants, the main global users of the gas.

·      The increasing competitiveness of electrolysis derives, in the researchers’ view, from falling electrolyser costs, cheapening wind power and increased variability of market prices for electricity. (The paper focuses on wind not solar).

·      The researchers assume that operators of wind farms will sell their power into the electricity market if the price is above a certain level. If the price falls, production of electricity will be diverted to electrolysis. The increasing variability of electricity prices as more and more wind (and solar) arrives on electricity grids allows electrolysers to work with electricity that is typically cheaper each year, as more hours of electricity production occur when prices are below the level at which it is more profitable to produce hydrogen.

·      The paper makes assumptions about electrolyser costs and efficiencies. Today’s PEM electrolysers are recorded as costing around €1600 per kilowatt of capacity. That number looks high to me since ITM Power, the leading UK electrolyser manufacturer, is quoting €800/kW for 10 MW installations. I suspect that the estimates in the paper for the price of electrolysis and, to a lesser extent its energy efficiency, are possibly too pessimistic. This is an important shift and ITM’s electrolyser price would reduce the break-even cost of hydrogen by at least 1 Euro cent per kilowatt hour, making electrolysis cost-competitive within a few years across all size ranges.

·      Wind turbine costs are also seen as falling, resulting in lower average prices of power, also helping the economics of renewable hydrogen. Making hydrogen from solar PV, particularly in sunny tropical regions would be even cheaper.

To quickly summarise, this is an intricate, carefully argued paper with real economic logic. It provides the intellectual framework that shows why we are seeing rapidly increasing interest in renewable hydrogen around the world.

To be clear, the researchers are not necessarily arguing that hydrogen should be used more for energy purposes in such users as fuel cell cars or hydrogen ships and trains. They are simply saying that hydrogen manufacture – currently mostly for oil refining and ammonia manufacture – is now almost as cheap using electrolysis as the traditional method of steam reforming. Hydrogen is responsible for about 2% of global emissions today.  That will disappear with the switch to electrolysis. More importantly, hydrogen allows the world to vastly expand its renewable electricity infrastructure and store surpluses as either hydrogen or other hydrocarbons that can easily be made from the gas.

 

 


 


 


 


Carbon taxation without increasing inequality

An eminent group of American economists, including all living former heads of the Federal Reserve, has called for a carbon tax. Despite a growing global scepticism about any recommendations from the economics profession, the proposal deserves serious consideration.

The central idea is that the production of goods and services that cause carbon emissions should result in a tax payment to the government. Use a megawatt hour of electricity and your company or household will pay a price that includes a fee related to the amount of CO2 released to the atmosphere as a result of the production of this power. A company producing a tonne of steel and will owe a carbon tax related to the emissions from the coal used to make it.

A carbon tax therefore raises the price of goods and services that have burnt fossil fuels in their production. The US economists behind the latest proposal suggest that the revenue raised from the tax is then entirely redistributed back to individuals as a flat rebate. Each person, for example, might get $200 annually as his or her share of the total funds raised by the tax.

Almost all economists like carbon taxes. This mechanism avoids the need for many regulations and disruptive market interventions. Taxes push both producers and consumers towards low carbon ways of providing goods and services without absolutely obliging anybody to change their behaviour.

Electorates are more equivocal. The ‘gilets jaunes’ movement in France sprang into existence partly as a reaction to the rise in the price of vehicle fuels as a consequence of an increased carbon tax. Badly designed levies penalise the less well-off because poorer households may spend a larger portion of their income on energy-intensive purchases. The people of the Canadian province of Alberta were not happy when a carbon tax was introduced there in 2017. Opinions are still very divided even though the average cost to a single person earning under C$95,000 is calculated by the government to be C$286 but the yearly rebate slightly more at C$300.[1]

The UK needs to start discussing whether a carbon tax would work here. The discussion should particularlexamine how a carbon tax could be designed so that it doesn’t affect poorer people adversely.

This article looks at the patterns of household expenditure in the UK and assesses how a government could make sure that the net effect of a carbon tax might be broadly redistributive towards the less well-off. This is an important issue: households in the top 10% of expenditure spend 9% of their income on high carbon goods and services while those in the lowest decile devote over 15% to these products. However, if a 10% carbon tax were to be employed, and the proceeds then redistributed equally to households, the highest spending group would lose about £190 a year and the lowest would gain about £160.

I discuss more complex - and much more obviously redistributive - schemes in the note below but I tentatively conclude that a simple tax, working similarly to VAT, would probably work best. The taxation income then needs to be handed back to households as an equal lump sum for all.

 Patterns of household expenditure

I use the Living Costs and Food Survey (LCF), a long established and well-regarded annual report on how a very large sample of UK households spend their money. This survey divides households into ten deciles (10% groups), ranging from the lowest to the highest spending. The decile spending most had a weekly expenditure of £1222 in the 2018 survey, which is almost six times as great as the lowest decile (£213). Richer households tend to include more people but the expenditure differences per person are still very marked.

In summary, analysis of the LCF shows that the poorest decile spends more of its income on items I have defined as typically ‘high carbon’. A flat rate carbon tax would therefore hit poorer households harder and the article assesses how it might be possible to avoid this politically suicidal problem.

I look at four types of expenditure

a)    Energy for the home

b)    Purchase of meat and meat products for eating

c)     Petrol and diesel for running a car or a motor bike

d)    Air tickets

Energy for the home

Most households buy gas and electricity. Some only buy electricity and heat their home with it. Others use electricity and another fuel for heat, such as oil.

This is the pattern for how much homes spend on domestic energy per week. The left hand axis is the number in pounds and on the right hand side this figure is expressed as a percentage of the household’s total expenditure.

Chart 1

Living Costs and Food Survey for 2017-18, published January 2019

Living Costs and Food Survey for 2017-18, published January 2019

This chart shows that the amount households spend on domestic energy is only weakly related to income. The homes in deciles 3 to 9 typically pay between £20 and £25 per week for their power and heat. The lowest spending households do spend less than richer homes but the difference is not especially marked.

As a percentage of income, the bottom decile spends over 8% of its income on energy but the richest group spends just 2.6%.

This means that any carbon tax needs to be designed with particular care. Adding 20% to gas and electricity bills would cost the lowest spending decile almost £3.50 a week, or over 1.5% of their expenditure. The richest 10% would lose just half a percent of their expenditure.

The key question is: how could consumption of household electricity be taxed in a way that reduced consumption but did not particularly affect the less well-off?

 In parts of the US, for example, electricity gets more expensive the more the household consumes. The first few thousand kilowatt hours per year are priced at one level but as consumption rises, the price per unit increases. (There are no carbon taxes involved of course). One way of discouraging high levels of consumption of gas and electricity would be to have a pricing schedule in the UK and elsewhere that got more expensive as usage increased. This would mean that richer people, who generally live in larger houses, would typically pay much more for their power and gas. And if the carbon tax were imposed as a percentage of the price of the energy, it would disproportionately affect the better off. Theoretically, the tax could be made progressive.

 A pricing structure for energy that obliges suppliers to charge customers more for larger amounts supplied would be extremely difficult within the UK’s energy market. Suppliers would target customers using more energy. (In the US, rising rates happen in markets with just one supplier, usually either publicly owned or heavily regulated).

The obvious alternative is to impose a rising percentage carbon tax on domestic bills. Users of more energy would pay an increasing proportion of their bill as tax. So for example, the first 2000 kWh of electricity might cost 14 pence each, with no carbon tax, but then the costs rise by 2p per kilowatt hour for each extra 1000kWh. (The average domestic user in the UK not using electricity for heating uses about 3,000kWh). The same ideas would apply to gas as well.

A customer buying 100% renewable electricity, or low carbon gas would not see this cost escalation. This would encourage the purchase, and supply, of renewables and nuclear power. It would boost the production of biomethane from anaerobic digestion and other sources.

 Such a tax would raise the incremental cost of energy - possibly sharply - for non-renewable customers and really encourage efficiency.

 What are the problems with such a pricing structure? First, it is a blunt tool from an equity point of view. Some less well-off people have large houses and would be penalised. Or they live off the gas grid and so have to use substantial amounts of electricity for heating. Such households would disproportionately suffer from the high price of electricity for larger consumers. Of course, the obvious choice would then be to buy renewable electricity to avoid the higher costs for heavy users. This might very substantially incentivise the development of new renewable sources.

A tax that increased as domestic usage rose could be broadly progressive. The revenues generated by the carbon tax could then be distributed on a flat per capita basis, meaning that lower income households might be net beneficiaries.

 b) Purchase of meat and meat products for eating

I don’t know of anywhere that imposes a carbon tax on foods. But, logically, the world probably should try to use taxation to reduce the consumption of high carbon foods, particularly those from ruminant animals such as sheep and cows. (The recent Lancet report on improving the global diet put the share of all food production in total carbon emissions at 30%. Others might be happier with a figure nearer 20% but there’s no doubt that agriculture really matters in the contest to limit climate change).

I looked at the pattern of expenditure on meat and meat products. The Living Costs and Food data shows that there is a steeper gradient to this item; richer households do spend more but the percentage of their income expended on meat is lower than for less well-off groups. Although the bottom decile spends about £6 and the top almost £20, the percentage of expenditure falls from about 3% to 1.6%.

Chart 2



Meat and meat products.jpg

 Perhaps it is not appropriate to tax all meat products; the climate change impact of beef and lamb is disproportionate and it may be logical to focus on these foods. The excellent Living Costs and Food survey doesn’t give us perfect data. We can track purchases of the meats themselves but we cannot know how much of a line called ‘meat products’ contains beef or lamb. Nevertheless, I thought it would be helpful to show the chart of beef and lamb purchases

Chart 3

beef and lamb.jpg

The amounts spent rise slightly more sharply with income and, as a consequence, the share of income spent on beef and lamb is flatter across the deciles.

Personally I think we should investigate the possibility of adding VAT (20% value added tax) on all products containing beef, lamb or the meats of other ruminants, such as deer and goats. Logically, it also makes sense from the point of view of carbon avoidance to tax milk and milk products from ruminants. VAT is already generally charged on meats sold in restaurants.

This policy would cause outrage that any such policy would cause among farming groups and many individual households, even though producers of other meats, such as pork and chicken, would probably benefit. Nevertheless, I think VAT on foods with a very high carbon impact makes very good sense.

 Assuming that about 50% of all items classed as meat or meat products in the consumer survey actually contain cow or sheep products, a rich household will pay a tax of about £100 a year and one in the poorest decile will see a £30 surcharge. If all the carbon taxes from meat were then given back to households, the average rebate would be about £60. Poorer households would be net beneficiaries.

 c) Petrol and diesel for running a car or motor bike

Motor fuels are already heavily taxed. In the UK, duty and VAT take more than half of the price of petrol and diesel at the pumps.

The percentage of total expenditure spent on motor fuels rises across the deciles, with an unusual exception of the highest income households. Although this group spends more in cash terms than the next decile down, the percentage of income spent nevertheless falls because the total expenditure of the richest families is almost 50% greater than the second decile.

 Chart 4

Motor fuels.jpg

 

This pattern of expenditure makes it possible, in theory, to increase the duty (the old fashioned word used in the UK for the tax on petrol and diesel) on fuels without increasing income inequality across society.

 A carbon tax of, say, 15p per litre on motor fuels would raise the average household’s expenditure on motor fuels by just over £100. If the tax system rebated this equally across all households, the average home in at least the lower four deciles would see a net gain.

But, as the French found three months ago, some people with relatively low incomes, particularly those living in areas with poor public transport, spend a much larger proportion of their total expenditure on driving a car. They would therefore disproportionately suffer from a tax increase and a £100 rebate would not be sufficient to recoup their costs. Very, very roughly any household having to travel more than 11,000 miles/18,000 km a year in a small modern car would see a net cost from a 15p/litre tax.

I cannot think of an easy way to make a carbon tax on motor fuels easy to implement politically. Some people will suffer heavily from a duty imposed on fuels. It can be argued that governments should invest in better public transport in rural areas or increase the subsidies for electric cars but neither of these measures will work rapidly enough to avoid the cash costs to poorer households necessarily using a car for high mileage.

 d) Air tickets

The situation is much easier when we come to look at air travel. The Living Costs and Food survey does not separately list the expenditure on ticket purchases but the ONS very kindly provided me with the data for 2017. This shows a very steep increase in money spent on air travel as household expenditures rise. Households in the top decile spend almost £1,000 a year on tickets, and the bottom group spends less than a tenth of this figure. So a tax on air travel will disproportionately affect the rich.

Chart 5

air travel.jpg

Increasing air ticket prices by an average of 10% would produce a sum equal to about £35 a household compared to the typical cost across the bottom three deciles of about £12. A tax would therefore have a positive effect on income inequality.

International rules forbid the levying of taxes on fuel for international air travel. So any tax cannot directly be on the carbon emissions from burning the aviation fuel. However a carbon tax can certainly be levied on the price of the ticket, as indeed it already is in the form of air passenger duty (APD).

The simplest way of attempting to decrease air travel is to increase the cost of flying through a higher rate of tax. But a case can be made that a better route forward might be to allow each person one or two flights a year and then to increase substantially the cost of extra travel beyond these flights. The idea is that people going on holiday to Spain once a year shouldn’t be burdened with extra tax.

Others have already suggested a voucher scheme to achieve this. Each individual would get the rights (presumably expressed in digital form) to perhaps a couple of flights a year and would be able to sell these rights to others for cash. Just under 50% of UK adults do not take a single flight in any twelve month period and these people would be able to cash in their vouchers and make some money from not contributing to the destruction of the planet.

The value of these vouchers on the open market would be heavily influenced by the volumes issued. If more vouchers were issued than flights taken, then the value would zero, or close to it. But if the number of vouchers were adjusted to achieve a price of, say, £20 a voucher then people taking no air flights might gain a reasonable benefit.

 Summary

 A carbon tax that increased the price of each of these four categories of goods and services by 10% would increase inequality if the revenue was simply added to the existing government budget. 15% of the average expenditure of the least well-off decile % goes on high carbon goods, of which much is spent on home energy. This compares to a total of 9% of the richest households.

Chart 6

Living Costs and Food Survey for 2017-18, published January 2019

Living Costs and Food Survey for 2017-18, published January 2019

However if all the revenue was simply handed back equally to households, perhaps by something as simple as a reduction in council taxes, carbon tax could become redistributive. Speaking personally, I prefer this outcome to the more complex ideas I briefly discussed above.

As the chart below shows, the richest decile households spend over £5,000 a year on the four categories I discuss. The least well-off decile spends about £1,600. A 10% tax on the four categories would add about £165 to yearly bills in the bottom expenditure decile but £517 to the richest group. If the money raised were then redistributed equally, each household would get about £329 a year back. This means that the bottom four deciles would gain income, the next two see a roughly neutral result and the richest four deciles suffer an income loss.

Chart 7

Living Costs and Food Survey for 2017-18, published January 2019

Living Costs and Food Survey for 2017-18, published January 2019

However if all taxes were rebated to households as a lump sum, perhaps as a reduction in council tax, then the net impact would be redistributive. Across all expenditure deciles, the average impact of a 10% rise in the price of the high carbon goods specified here would add £320 to typical bills. But lower expenditure groups would face a smaller absolute increase in their bills. The bottom group will be asked to pay an average of £160 in carbon tax. A rebate of £320 would therefore save them money as shown in the chart below.

Chart 8

Living Costs and Food Survey for 2017-18, published January 2019. Calculations by the author.

Living Costs and Food Survey for 2017-18, published January 2019. Calculations by the author.

It seems to me that a relatively simple scheme like this could work. But it doesn’t solve the problem of poorer households with high energy bills or which need to travel long distances by car. People in these groups cannot easily be protected. All the more reason to plan now for major improvements in public transport and better insulation in homes. To be slightly more specific, a fair carbon tax must be accompanied by transport improvements that benefit the less well-off, and not simply make it easier to get to the capital from other cities (I am referring to HS2, the vanity project that provides a new London to Birmingham link). It must also target substantial and inexpensive improvements to the quality of the UK building stock rather than the ill-designed schemes that governments have been playing with over the last decades. 

[1] https://www.alberta.ca/climate-carbon-pricing.aspx

[2] Council tax in the UK is a highly regressive property tax

Lessons from the collapse of GE

(This article was written by Charlie Donovan and me and is published here by the Imperial College Business School).

Investors worried about carbon risks need to be looking at industries beyond coal, oil and gas

In October 2018, GE parted company with John Flannery, its CEO for the previous 14 months. Announcing the departure, the business also said it would write off about $23 billion in its power division, its largest segment and the world’s most important manufacturer of gas turbines.

The question many are asking is whether this is evidence of the implosion of a “carbon bubble”. While it is too early to draw firm empirical conclusions, we do see lessons to learn. There is great potential for an unexpected reduction in business value from a global swing away from fossil fuels and the competitive threat of cheaper solar and energy storage. But that may occur in economic sectors where people have spent little time looking for signs of trouble.

When Flannery became GE’s CEO in August 2017, there were few hints of the catastrophic problems to come. In the results presentation just after he was appointed, power division revenues were up five per cent year on year, and the conglomerate expressed great confidence in the future of its gas turbine sales.  At that time, the share price was $29. On the day before Flannery left, it had fallen to settle at $13 per share, wiping out over $100 billion in shareholder value.

The absolute size of the market matters far less than whether it is expanding or not

Thus far, investors concerned about the impact of climate change on asset valuations have focused almost exclusively on the fossil fuel corporations. The crisis at GE shows they may be looking at the wrong businesses. Coal, oil and gas out of the ground should see gradual decline over time, but it is likely to be a slow, mostly predictable process. There are nearly one billion cars on the world’s roads today; they will continue to use gasoline and diesel until they are scrapped. Even with massive new electric vehicle penetration, the structure of the global refined oil product markets puts an inertial brake on demand decline.

The collapse in the markets for GE Power’s goods and services, on the other hand, happened quickly. It raises an interesting hypothesis that the companies downstream in the fossil fuel value chain may suffer first, not the upstream owners of the carbon products assets themselves. While it’s too early to judge whether the crisis at GE is indicative of a broader trend for downstream suppliers, there are some lessons to be learned. We offer some suggestions here to those watching for early signals of carbon risks in other industries.

1, New large gas turbines

GE remains the world leader in manufacturing new turbines for large gas-fired power stations. In March 2017, it estimated an average of 78 gigawatts of turbine capacity would be installed across the globe in the years to 2026. By mid-2018, GE told its investors the number would actually be below 30 gigawatts for 2018 and about the same for the following two years. This year’s global sales represent a reduction of about 45 per cent on estimates of little more than a year ago.

Analysts had uniformly agreed with GE’s earlier forecasts. Few saw the dip coming as it was universally assumed the turbine market would continue to be buoyant. Natural gas would, after all, act as a standby fuel for variable solar and wind power. The reality was different.

There are nearly one billion cars on the world’s roads today; they will continue to use gasoline and diesel until they are scrapped

After growing at an average of 4.0 per cent a year in the previous 10 years, electricity production from gas turbines only rose 1.4 per cent in 2017. Renewables have been growing faster than expected, now providing more than half of the world’s annual increase in power requirement. In the first three quarters to June 2018, 32 gas turbines were ordered from GE, compared to 51 in the same period of the preceding year. And it’s not just GE: Siemens, its largest competitor, reported lack of demand pushed down the price for turbines 30 per cent between financial years 2014 and 2017. GE’s reversal was even more spectacular:  turbine revenues were down 49 per cent in the third quarter of 2018 versus previous.

The wider lesson: Producers of capital goods such as turbines that are sold to provide extra capacity are vulnerable to even small changes in the rate of growth of their markets. The absolute size of the market matters far less than whether it is expanding or not. In another example, the construction of new petrochemical plants is sound business if oil use is growing – but if it is stable, or even slowing, then suppliers of new equipment will suffer. Both sale realised prices and quantities sold can fall sharply.

2, Maintenance revenues

As the demand for gas-generated electricity stopped rising, GE’s revenues were also affected by a fall in the needs for both emergency repairs and planned maintenance. Power plants that work a smaller number of hours per year typically fail less frequently. GE reported in October 2018 that service orders were down 15 per cent in the third quarter of 2018 compared to the year before. Even an activity that must have seemed extremely secure – the servicing of the huge installed base of GE turbines – was vulnerable to the small shift away from gas as a fuel for electricity.

The wider lesson: Small changes in utilisation can produce substantial swings in revenues to those supplying services. Note the price of ocean freight transportation is highly sensitive to variations in the amount of oil being shipped: a fall in volumes produces stark reductions in rates, reducing the returns for owning tankers.

3, Performance improvement products

Older power plants can benefit from GE’s advanced gas path (AGP) product, which improves the efficiency of converting gas into electricity. This activity has also seen similar downward pressure on sales. The latest public data showed sales of six AGP’s in the first quarter of 2018, versus 21 a year before. AGP sales have fallen partly because gas turbines are tending to operate fewer hours per year. A utility deciding whether to invest the millions needed to improve performance will see far lower returns if the power plant is expected to be idle for most of the time.

The wider lesson: Similar effects are going to be seen, for example, in conventional car engines. Why should auto manufacturers continue to back component suppliers who promise better fuel efficiency if the total sales of internal combustion engine cars start falling as electric vehicles move into the mainstream?

4, Sales of smaller gas turbines 

GE also sells smaller gas turbines that are similar to jet engines. These are normally used to provide electricity to meet short peaks in demand. Everybody expected this segment to be a bright area of growth. The swing towards renewables was expected to produce a greater need for turbines that can respond within seconds to a call for power.

Once again, the reality has proved to be very different: in the second quarter of 2018, GE took orders for three “peaker” turbines, compared to 12 in the same quarter of 2017, a reduction of 75 per cent. The security offered by these turbines may become increasingly unnecessary as large commercial and industrial customers, and utilities, get better at adjusting their power needs to match short-term availability. Improving economics for large storage batteries is also undermining the role of “peakers” around the world.

The wider lesson: The growth of alternatives to fossil fuels will not necessarily result in increases in sales of products that are designed to make “old” work well alongside “new”. In the case of automobiles, for example, many people see plug-in hybrids as a bridge to the world of fully electric transport. But the battery-only car is improving so fast that it will be fully competitive with the internal combustion engine within a few years with the right business models. Suppliers focusing on components for hybrid cars could see rapid reductions in demand.

All the parts of GE’s flagship division have struggled against the headwinds caused by the growth of renewables and the improvement in ability of utilities to intelligently match electricity supply and demand. The value destruction of tens of billions of dollars of GE market cap occurred after solar and wind had grown to just eight per cent of world electricity output. Let this be a warning. Asset values for firms supplying the fossil fuel economy may fall precipitously with little warning and far earlier than could be foreseen. Investors need to broaden their concerns over carbon bubbles to a wider group of businesses.

Is the FT right to carry misleading advertisements from Exxon?


Anyone browsing the Financial Times web site this week may have seen a startling juxtaposition. An article on New York state’s lawsuit against ExxonMobil for allegedly misleading investors over its response to the threat of climate regulation was accompanied by a large advertisement trumpeting the same company’s commitment to low-carbon biofuels derived from algae.

In fact, the algae advertisement has been plastered over the FT web pages for weeks, often placed at two different points in the same article. Its unsubtle purpose has been to offer readers a different vision of Exxon. Instead of the raw climate denial that characterised the company’s public statements a decade ago, today’s Exxon has decided to market itself as a leader in alternative fuels.

Source: New York Times front page

Source: New York Times front page

I think the Exxon advertisements present a highly partial and inaccurate view of the company’s actions and intentions. I question whether responsible media owners should accept advertising which is as misleading and incomplete as this.

This article tries to make my case that the Financial Times should have demanded more evidence to support its advertiser’s assertions.

(The Appendix at the end gives a bit of background about Exxon’s ambitions and actions). 

·      The scale of Exxon’s plans, and the company’s commitment to carrying them out

Exxon has been working on algae for at least nine years. In mid 2018, Exxon said that it would enter a new phase in the research by farming algae in outdoor ponds. It suggested that ‘the goal is to reach the technical ability to produce 10,000 barrels of algae biofuel per day by 2025’. This choice of words is important; it is not a promise to invest in production capacity, nor a commitment to harvest algae, but a statement of intent to get to a position where it might be possible to produce a volume of fuel. Exxon is not suggesting that a decision to invest in building a commercial facility is close.

Is 10,000 barrels a day a significant amount? World oil production is now about 100m barrels a day (b/d), or approximately ten thousand times as much. Exxon alone processes about 5m b/d through its refineries, meaning that the algae biofuels would account for 0.2% of its throughput if did go ahead and build a 10,000 barrel a day farm.

Exxon’s advertisements in the Financial Times make no mention of the relatively small scale of algae’s potential even if the company does decide to press ahead with commercial production.

·      The financial commitment of its research

Exxon announced in 2009 that it would conduct sustained research into the viability of growing and then harvesting algae as a source of oils from which to make motor fuels. Its partner since then has been Californian company Synthetic Genomics, which has genetically engineered a common form of algae to maximise its oil production.

Exxon indicated in 2009 that it would spent about $600m on the quest for commercially viable production.[1] It intended to work with Synthetic Genomics for ‘five to six years’to create the knowledge that would allow full scale commercial manufacture’.[2] (Five to six years from 2009 would be 2014/2015).

To provide some sense of the scale of the proposed investment, the expenditure of $600m over ‘five to six years’ would equate each year to approximately half of one percent of the yearly profits of Exxon in 2017, which amounted to just under $20 billion.

The advertisements focus on a research activity of Exxon which it suggests is fundamental to its future but which is actually a trivial use of its free cash flow.

·      The possible demands for land for tanks to grow algae

How much land would a farm producing 10,000 barrels a day use? Exxon states that it expects to grow algae that will produce about 15,000 litres of fuel per hectare per year (1,600 US gallons an acre).[3] That means a 10,000 b/d farm would occupy around 39,000 hectares, about 95,000 acres. Very roughly, this would be equivalent to a square of 20 km by 20 km, about four times the size of Paris. Although Exxon might have the ‘technical ability’ to build a facility of this size by 2025, it is vanishingly unlikely to be able to create a plant of anything more than a small fraction of this.

At Exxon’s claimed levels of algae productivity - which are higher than many scientists believe are possible - it would take about 18% of the UK’s land area given over to agriculture to provide enough fuel for the country’s transport.[4]

The ubiquitous advertisements on the FT made no mention of the huge land use implications of a switch to algae.

·      Are algae biofuels ‘low-carbon’?

Exxon probably wants us to assume that biofuels made from algae are good for carbon emissions. On its websites it says that ‘algae biofuels could be the low-emissions fuel of the future’.

Yes, we can expect some reductions in CO2 from diesel made from algae. But on other Exxon web pages the company says that ‘on a life-cycle basis, algae biofuels emit about half as much greenhouse gas as petroleum-derived fuel’. Algae need to be fed with nutrients, grown and harvested with machinery and converted into oil in a refinery. All these activities have carbon costs.

Transport today emits about 8 billion tonnes of CO2 a year, approximately 25% of total energy emissions. This would fall to 4 billion tonnes, according to Exxon, if oil were replaced by algae. But, as we now understand, the world needs rapidly to move to zero-carbon transport.

Algae biofuels help, but not by much. They certainly do not take the world safely towards a zero-carbon future. Nowhere in the advertising is this mentioned.

·      How does algae production compare with other sources of power?

What about the alternatives? For most parts of the world, electricity made from solar power will provide a far more effective source of energy for transport.

First, let’s look at the cost of electricity compared to the price of oil. In sunny countries, solar PV is now providing power at a cost of around 3-4 US cents per kilowatt hour. At today’s price of around $75 a barrel, the raw cost of the energy contained in oil is somewhat higher at about 4-5 US cents/kWh.

More importantly, internal combustion engines are about a quarter as efficient as electric motors in terms of the energy needed to move the car at a standard speed. So oil today is over four times as expensive as energy from solar in a sunny country. Even in the UK PV is cheaper as a source of motion. And, by the way, Exxon never contends in its advertising or on its web sites that biofuels will be any less expensive than fossil oil.

What about the energy collected per unit of land area? Solar energy collection needs space, just like algae tanks do. But even assuming Exxon’s statements about the energy productivity of its proposed algae farms are correct, solar PV will typically be at least 4.5 times as efficient in the use of land.

Taking into account the greater efficiency of motors when compared to internal combustion engines, that difference becomes eighteen-fold. This means instead of using 18% of the UK’s agricultural land area to grow the algae to make fuel, we need only give over 1% to solar PV to generate enough power for all the country’s transport needs. (Much of this energy would have to be stored, of course, so this is not a full comparison).

The huge inefficiency of using biofuels rather than electricity to power transport vehicles is never discussed in the Exxon advertising or one the Exxon websites to which the advertisements link.

Implications

The advertisements that trumpet Exxon’s role in pushing algae seem to have been the most frequent ads on the FT for the last weeks and months. Most of us have a deeply held view that freedom of speech demands that media such as the Financial Times are obliged to accept advertisements from whomever wants to advertise. So we reluctantly accept the Exxon insertions.

Are we correct in this opinion? In view of the existential threat from climate change, written about very effectively by the FT’s chief economics commentator Martin Wolf just this week, should not the newspaper demand that its fossil fuel advertisers present a fuller and more accurate view?[5] Should large companies be allowed to push marketing at us that distorts the reality of what they are doing? Exxon is one of the five most important polluters on the planet. Is it right that it is able to use advertisements that are intended to artificially inflate the public perception of the seriousness of its own efforts to wean itself off fossil fuels?

I find this a very uncomfortable dilemma but I’m beginning to think that polluters may need to be restrained.

 

Appendix: algae as the source of fuel

The oil we extract from the ground today largely comes from the decomposition of prehistoric algae. These tiny organisms contained about 20% lipids, a form of fat, which eventually pooled into the oil that is being produced today from fields around the world.

Exxon is trying to find ways of replicating the natural process. It wants to grow algae in large open-air reservoirs, harvest the product, dry it and then extract the fats efficiently. The fat can be relatively easily converted to liquids that can fuel conventional cars. Its research since 2009 has been focused on increasing the fat content of the organism. Genetic engineering of a particular strain of algae has pushed the percentage up to 40%, with only a small diminution in the rate of growth, the company claims.

 As it grows, algae use photosynthesis to convert CO2 in the atmosphere into useful oil. When extracted from the organism, the oil can therefore be said to be low-carbon. In fact, as I mention above, Exxon says that fuel derived from algae is approximately half as carbon-intensive as conventional oil. Others are far more sceptical about the carbon benefits of this route to making fuels.

[1] https://www.nytimes.com/2009/07/14/business/energy-environment/14fuel.html

[2] https://archive.nytimes.com/www.nytimes.com/gwire/2009/07/14/14greenwire-exxon-sinks-600m-into-algae-based-biofuels-in-33562.html

[3] http://www.biofuelsdigest.com/bdigest/2018/05/24/back-to-the-future-all-over-again-exxonmobil-targets-algae-fuels-at-scale-by-2025-as-oil-prices-rise/

[4] https://theconversation.com/algal-biofuel-production-is-neither-environmentally-nor-commercially-sustainable-82095

[5] https://www.ft.com/content/b1c35f36-d5fd-11e8-ab8e-6be0dcf1871

The economics of power to fuels

Does it make financial sense to construct chemical plants that use surplus electricity to make liquid and gaseous fuels? This topic is rarely discussed in the UK but is an increasing focus of interest in the rest of Europe, and particularly in Australia.  As previous posts on this web have tried to suggest, full decarbonisation is completely impossible without such ‘power to gas’ and ‘power to liquids’ (or P2x).

In this short article I look at some of the results contained in a new presentation from Lappeenranta University of Technology (LUT) in Finland.[1] This shows that some P2x products are likely to be competitive with fossil fuel variants in 2030, even before carbon taxes

Source: Fasihi and Breyer, Synthetic Fuels and Chemicals, figures converted to US $. Market prices  converted to US $ per megawatt hour.

Source: Fasihi and Breyer, Synthetic Fuels and Chemicals, figures converted to US $. Market prices  converted to US $ per megawatt hour.

The work by Mahdi Fasihi summarises detailed investigations on the likely cost of P2x for a variety of chemical energy carriers, ranging from hydrogen to dimethyl ether, a potential diesel substitute. He and his colleague, Professor Christian Breyer, have built detailed flow charts that show how the chemical plants that make these fuels will operate, both in terms of process and thermodynamically. Standard industry software can then convert these flows into estimates of the full costs of these products.

Fasihi’s process charts assume that the hydrogen contained in fuels is entirely derived from water electrolysis. The carbon (where necessary) is shown as being distilled directly from air. Although direct air capture is still in its early infancy, LUT has been at the forefront of research into possible technologies through its involvement in the Soletair project.[2]

The cost of hydrogen produced by water electrolysis is dominated by the price of the renewable electricity used to generate it. Although the impact of the capital cost of the hydrogen generators is far from negligible, the price of electrolysers is falling very sharply as technology improves and bigger machines are built. Modern electrolysis machines are approximately 80% efficient, meaning that for every 1 unit of electricity used about 0.8 units of energy are made available in the form of hydrogen. (This ratio will improve slightly in years to come). Therefore electricity bought for €40 a megawatt hour will produce hydrogen at raw cost of €50 per MWh.

Fasihi assumes electricity costs will come down, particularly in areas of the world with the best renewable energy availability. The presentation looks in detail at the places where a combination of wind and PV will produce large amounts of electricity for very large numbers of hours per year. This measure called ‘full load hours’, with the best places offering high renewables generation for 6,000 or more hours per year, meaning that any P2x plants associated with them have a reliable source of power.

As is well known, Australia comes out well in the full load hour rankings, as do parts of Chile, including the Atacama desert, and Patagonia. Somalia has good numbers, as do Tibet and the Great Plains of the US. For us in the UK, the west coast of Scotland and the Hebridean islands also score very well. 

By 2030, parts of the world are expected to see full costs of electricity from renewables at around €17-20 per megawatt hour (about £15-18, $19-23). (This compares with wholesale prices today for all forms of electricity of about £50 in the UK). The researchers calculate that electricity in 2030 can produce hydrogen for about $41 per megawatt hour based on the likely costs of renewables.

How does this compare to the market price of hydrogen today? Hydrogen isn’t an easy commodity to price because most of the gas is made in refineries to serve the petrochemical processes there. It doesn’t change hands much. When it is traded, it is usually also shipped from its source to the customer and transport costs for hydrogen are high because it has to be shipped in liquid form at very high pressure. But, very roughly, hydrogen prices are between about $65 and $118 for a megawatt hour of energy content for traded gas.[3] Today’s hydrogen costs more to make, using natural gas as its key ingredient, than hydrogen from electrolysis will be in 2030 in large parts of the world.

Australia sees its huge resources of wind and solar as helping to build a hydrogen business, particularly for shipping to Japan. There the gas will be used for fuel cell cars, if Japan’s ambitions are successful. It probably doesn’t make sense for Australia to transport hydrogen but instead to merge the gas into ammonia (NH3, or three atoms of hydrogen and one of nitrogen). Ammonia uses much less space and doesn’t need to be heavily pressurized. It can be turned back into hydrogen gas at the destination.

Fasihi at LUT calculates that the full cost of ammonia in places such as Australia in 2030 will be about $72 a megawatt hour. This compares to $50 for ammonia delivered in bulk today.[4] But if ammonia can be cheaply converted back to hydrogen, ammonia may become the way in which hydrogen is transported. Importantly, the main Australian research organization in the energy field just demonstrated a successful trial of extracting 100% pure hydrogen from ammonia for filling up fuel cell cars.[5]

Methanol made from hydrogen and captured CO2 is almost as cheap in 2030 as this liquid would be today: $81 per megawatt hour compared to about $76 for the fossil fuel version. However at today’s CO2 prices of around $22 per tonne in Europe, synthetic methanol would be about the same price as the conventional product, which would be burdened by permit costs. About 60 million tonnes of methanol are made each year and it is one of the top five products made from oil but not used directly in cars. Hydrogen and ammonia are two of the others.

Fasihi’s numbers suggest that the difference between standard natural gas (mostly methane) and methane from power to gas processes is larger. In the table, I’ve shown today’s natural gas price in Japan, one of the world’s higher cost locations for this fuel. At $34 a megawatt hour, the price today is well below the price of natural gas made from renewable hydrogen and CO2 of around $66. The carbon prices of today would not cut substantially into this difference.

What should we conclude? First, synthetic methanol stands out as an obvious focus for a renewable fuel. Second, that hydrogen from electrolysis may be competitive in some circumstances. It can be used for local energy storage in particular, and then converted back to electricity in a fuel cell. By contrast, renewable methane looks expensive, particularly in places such as the US where natural gas is extremely cheap. Last, ammonia is particularly interesting because it can substitute for natural gas in CCGT power stations and can be made in relatively small quantities for local use as the key ingredient for fertilisers in remote places.[6] We can envisage microgrids that provide electricity but store surpluses as ammonia, either for food production or for combusting for electricity purposes at times of seasonal lows in renewable production.

Most important of all, we just need to do more work on the economics and practicality of synthetic fuel. Full decarbonisation demands it. And, in parts of the UK, we have the potential to produce very carbon fuels at prices lower than most of the world.

[1] I think this presentation is absolutely outstanding. LUT has produced much of the most insightful research, both practical and academic, into P2x. Fasihi’s work summarises and extends existing knowledge. https://www.strommarkttreffen.org/2018-06-29_Fasihi_Synthetic_fuels&chemicals_options_and_systemic_impact.pdf

[2] https://www.lut.fi/web/en/news/-/asset_publisher/lGh4SAywhcPu/content/finnish-demo-plant-produces-renewable-fuel-from-carbon-dioxide-captured-from-the-air

[3] Source: $65 Northern Gas Networks https://www.northerngasnetworks.co.uk/wp-content/uploads/2017/04/H21-Report-Interactive-PDF-July-2016.compressed.pdf Page 260      $118, McKinsey https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Sustainability%20and%20Resource%20Productivity/Our%20Insights/How%20industry%20can%20move%20toward%20a%20low%20carbon%20future/Decarbonization-of-industrial-sectors-The-next-frontier.ashx. Page 58

[4] Source: Methanex published prices.

[5] http://www.abc.net.au/news/2018-08-08/hydrogen-fuel-breakthrough-csiro-game-changer-export-potential/10082514

[6] See the Proton Ventures web site http://www.protonventures.com for some details of small-scale Haber Bosch plants.

How much of the UK's emissions are nearly impossible to decarbonise?

We can envisage decarbonisation of electricity production, of most transport requirements and much of our heating needs. But even after the obvious sectors have been shifted to zero carbon sources, the UK and other societies will still have very substantial emissions. I estimate in this article that CO2 emissions from energy use, which are currently running at about 367 million tonnes a year, are going to be very difficult to cut below 115 million tonnes, about 30% of today’s total.[1]

Why is this number - equivalent to 1.7 tonnes  per person - so high? Critically, I assume that sectors which require fossil fuels because of their energy intensity are going to struggle to replace coal, oil and gas with electricity. You cannot melt iron ore easily, get a commercial airliner up to cruising height or avoid high temperature chemical processes without dense fuels such as oil or coal that burn at very high temperatures

However the world urgently needs complete decarbonisation. To make the obvious point, this means that net emissions in the UK must be zero as soon as possible

My argument in this article is that to achieve this vital target we will need to create synthetic replacements to fuel these very hard-to-switch activities. Principally, our aim must be the development of low cost hydrogen manufacture from water electrolysis. With large quantities of hydrogen made from renewable electricity we can create pathways for the production of fuels that do not add to CO2 or methane in the atmosphere. Somewhat inaccurately, we might think of oils and gases as merely the means by which the high energy of hydrogen atoms is carried in useful form.

The UK, and other societies, need to invest more in the production of fuels that replicate the characteristics of conventional fossil sources but without adding any net carbon dioxide to the atmosphere. As importantly, synthetic fuels will allow us to store energy from surplus wind and sun, allowing dull lulls to be accommodated. Without the storage of energy in synthetic fuels, covering electricity demand by using renewables will be both extremely difficult and expensive.

First, I offer an assessment of the size of the challenge we face in reducing our use of fossil carbon fuels to zero. I look at how energy demand is satisfied by the various energy sources and then calculate the impact of moving that demand from fossil fuels to electricity generated entirely from non-carbon sources. The first step is to ensure all electricity is from renewables, then to decarbonise transport by switching to electric vehicles as much as possible, then to move all coal and oil domestic heating to electricity, followed by gas domestic heating. I assess the climate impact of each shift.

Note: this analysis does not examine greenhouse emissions from activities unrelated to energy provision. These includes methane and nitrous oxide emissions from agriculture and raise total GHGs by about 80 million tonnes. This figure will also have to be reduced to a net zero.

1990 and 2017 emissions.

Emissions from UK energy use in 1990 were estimated at 583 million tonnes, or nearly 10 tonnes a head. Coal caused around of 222 million tonnes of this total. By 2017, coal use was down to little more than one tenth of previous levels and had been driven out of electricity almost entirely. But oil use has also fallen, now running at around three quarters of the 1990 figure. Gas use is up. Total emissions from energy use are now about 63% of the earlier figure. This is a good record by world standards, but emissions cuts are now stalling as the scope for reducing carbon use in electricity generation falters and the UK pulls back from solar and onshore wind.

Difficult decarbonisation 1.jpg

The makeup of energy need today, expressed as primary energy flows

We probably all occasionally need reminding that electricity is a far less important source of energy than fossil fuels that are combusted for other purposes. The way the statistics are calculated for ‘primary’ energy puts electricity as just over 20% of the total terawatt hours.[2] (A terawatt hour is a billion kilowatt hours). Natural gas is over twice as large a source of energy and oil (petroleum) is also much more important than electric power. Why is this important? Because electricity is relatively easy to decarbonise, oil and gas combustion much less so.

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Final energy consumption

Primary energy consumption measures the total inputs of fuel into energy production. But some fuels are employed as sources to be transformed into electricity or used for non-energy purposes, such as making plastics from oil. For example, 286 TWh of gas were used in 2017 to generate about 134 TWh of electric power. The final energy consumption figures in the chart below show that electricity supply - about 301 TWh in 2017 after excluding transmission losses – was less than 20% of total final energy need. Nuclear, conventional renewables and the burning of wood pellets were slightly more than half of the electricity supply.

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Moving all electricity to zero carbon sources

Final electricity demand in the UK in 2017 was about 334 TWh. This includes transmission losses of 33 TWh, taking the delivered number down to 301 TWh as mentioned in the last paragraph. 156 TWh, including transmission losses, came from fossil fuels.

This 156 TWh of useful power took 358 TWh of oil, coal and gas to produce. Burning that 358 TWh produced about 76 million tonnes of CO2 out of the UK’s total emissions of 366 million tonnes, or just over 20% of the total.[1]

In other words, complete decarbonisation of the power sector would still leave the UK with almost 80% of its current greenhouse gas output from the use of energy.

Simply replacing fossil energy with renewables would be impossible. When electricity demand peaks, there is no guarantee of wind or solar being available. This is one of the reasons why I argue for an energy policy that includes the replacement of oil and gas by synthetic fuels. The UK can then hugely overinvest in wind and solar and, instead of curtailing production in times of excess power, it can divert the electricity to producing hydrogen from electrolysis so that an energy source is available at all times.

Converting all electricity to low carbon sources reduces emissions by around 76 million tonnes, taking the total down to around 290 million tonnes.

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The electrification of transport

After a decade of scepticism, most manufacturers now assume that electric vehicles will replace both diesel and petrol cars. The issue is how fast this happens. In the case of heavier vans and trucks, the industry still plans for liquid fuel vehicles.

In my simple model, I assume that all petrol vehicles switch to electricity and 75% of diesel use also moves to battery power.

I believe that aviation will require liquid into the indefinite future. An aeroplane powered by a battery is just about conceivable for short flights with limited payloads. But unless the energy density (kilowatt hours per kilogramme of weight) of batteries improves by a factor of ten aviation kerosene will remain the fuel of choice for the vast bulk of air travel. A doubling or tripling of battery energy density looks possible but a ten fold improvement looks tough. Therefore I’ve kept oil-based fuels as the energy source for aviation.

In my calculations I have assumed that all transport is currently powered by fuels made from oil. This isn’t quite accurate because a small number of vehicles use electricity or natural gas. An even smaller group is powered by hydrogen. The simplification of saying that all cars and trucks use petrol or diesel doesn’t significantly affect the numbers.

In 2017, transport used about 581 terawatt hours of energy. To give a sense of scale, that’s almost double the amount of electricity used in the UK. Just over half of this is diesel, which is consumed both by passenger cars and by heavy vehicles. However all internal combustion engines for surface vehicles are inefficient, only converting about a quarter of the energy in oils to motion of the car or lorry.

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Conversion of all petrol use and 75% of gas oil and diesel to electricity, but leaving aviation to be powered by oil , reduces total liquid fuel needs to 206 TWh, or just over a third of the current level. This reduces emissions by a further 88 million tonnes, taking the total to around 204 million tonnes.

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Avoiding the use of coal and oil for domestic heating

About 20% of the UK’s homes do not have access to natural gas. These houses are heated by electricity or by liquid petroleum gas (LPG), coal or oil. In this paragraph I calculate the effect of replacing all coal and oil use in the home with electricity. Oil is more important, supplying about 26 terawatt hours for domestic heating compared to about 4 for coal. Overall, the impact of switching these uses to electricity is quite small, removing about 6 million tonnes of emissions. This takes the remaining total UK energy emissions down to about 197 million tonnes.

Moving all domestic gas heating to electricity or other low carbon sources

Gas for home heating is a far more important source of emissions than oil or coal. In 2017, about 275 terawatt hours of gas heating were used (slightly less than the total demand for electricity). This produces about 52 million tonnes of CO2, so making all home heating zero-carbon would push the UK total down to about 145 million tonnes.

Of course moving all gas central heating to electricity or other low carbon alternatives, such as properly sustainable biomass fuels, is a truly enormous task. Gas demand today peaks in cold winter weather when the UK grid sometimes has to deliver over 300 gigawatts of energy to central heating systems. This is about six times peak electricity demand. So an electricity system that had to provide sufficient power in the winter to meet home heating demand (even if efficiencies were improved by the use of heat pumps) would have to be a large multiple of the size of today’s network. This is another argument for very large scale energy storage, probably in the form of synthetic low carbon replacements for natural gas.

Buildings other than domestic homes also use gas for heating. I have assumed that these uses will remain and will not switch to other sources. My argument is that converting these buildings to another form of heating is at least as difficult as switching domestic use. However a truly aggressive decarbonisation policy might be able to reduce gas use in these buildings.

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Reductions in carbon emissions from reduced energy industry and losses in the energy system

Some natural gas is fed into oil refineries, for example to produce hydrogen. As oil demand falls, less is needed. Similarly, refineries themselves will cease to use as much crude or oil products if the demand for fuels falls.

Estimating the reduction in fossil fuel use from these changes is difficult. I have guessed that about 30 million tonnes of emissions are avoided.

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What is left?

After decarbonising all these energy uses, we are left with a total need for about 626 terawatt hours. Coal provides about 37 TWh, gas 302 TWh and oil 287 TWh. This is over one third of the primary energy demand provided by these three fossil fuels in 2017. Massive decarbonisation still leaves the UK with substantial CO2 emissions.

The remaining CO2 emissions from energy use that is too difficult to decarbonise are about 115 million tonnes. In the world of maximum decarbonisation, gas and oil each produce about 50 million tonnes of emissions and coal just over 10 million tonnes. Thus there is a long way to go to completely avoid massive fossil fuel use even if we decarbonise all the parts of the economy that we conceivably can using current technologies.

The primary remaining energy needs are as follows

·      Coal: fuel needed for iron and steel making and, to a lesser extent, other industrial processes

·      Gas: industrial processes, heating for non-domestic buildings

·      Oil: aviation, remaining diesel, industrial use.

Aviation alone is responsible for about 26 million tonnes of emissions, or about 0.4 tonnes per head. Next comes industrial gas use at around 20 million tonnes and a similar figure for gas heating for non-domestic buildings. Remaining diesel use is around 16 million tonnes.

What are the implications?

Even the most aggressive move to low carbon energy will not eliminate the need for extensive use of fossil fuels, particularly oil and gas. And the calculations in this note assume that we can move all home heating away from gas even though this will prove extraordinarily difficult.  The remaining need for carbon-based fuels inevitably means that we will either need to change society dramatically, for example by banning air travel or spending many billions on home insulation, or we will be required to make low-carbon substitutes for fossil oil and gas. There really doesn’t seem to be any alternative.

Chemically, making synthetic low carbon fuels is simple. We can make a liquid with all the qualities of crude oil without much difficulty from low carbon sources.[2] In fact, these liquids are better because they do not contain ancillary pollutants such as sulphur. Creating a ‘renewable’ natural gas is even easier. We just need a cheap supply of low carbon energy, probably from wind or solar electricity.

The problem is that today these synthetic fuels are more expensive than their fossil equivalents, if made in the UK. As at August 2018, the wholesale cost of petrol and diesel is about 4p per kilowatt hour of energy (around 5 US cents). An open UK auction for large scale solar PV or onshore wind would probably produce a slightly higher number. Then converting renewable electricity chemically into synthetic oil necessarily involves costs and efficiency losses, implying that the cost of zero carbon substitutes will be higher than oil.

Today, using hydrogen sourced from electrolysis using UK wind or solar would probably mean that oil would cost about 7-8p per kilowatt hour (about 10 US cents), or possibly double what fossil oil costs today. We can usually replace coal with hydrogen, for example in steelmaking, but the cost today will be higher than the fossil alternative.

If we accept that some activities in the modern world will continue to need oil, coal and gas, then we have to find a way of making synthetic and low carbon alternatives no more expensive than today’s prices for fossil fuel. That means pushing down the costs of renewables, buying hydrogen in from countries where renewables are cheaper or letting the countries with the best wind or solar resources make our oil and gas for us. Not necessarily easy but there probably isn’t any alternative if we want the full decarbonisation we urgently need.

[1] I assume that each tonne of coal produces 2.5 tonnes of CO2, a tonne of oil 3.15 tonnes of CO2 and 184 kilogrammes are emitted per megawatt hour of gas burnt.

[2] This, for example, is what Carbon Engineering promises, using hydrogen manufacture from electrolysis combining this with carbon dioxide capture from the atmosphere.

Even the older generation now wants onshore wind.

The UK government conducts regular opinion surveys on energy matters. As has been widely noted, the most recent polling shows a rise in support for renewables, including onshore wind.*

What has not been observed is that this shift in thinking about onshore wind has been caused predominantly by opinion changes in those over 65 years old. This chart shows the increase in the net level of support for onshore turbines. The percentage opposing wind is deducted from the percentage supporting the technology.

Source: BEIS opinion tracker. 'Net support' is calculated by deducting the percentage of those opposed to wind from those who support it.

Source: BEIS opinion tracker. 'Net support' is calculated by deducting the percentage of those opposed to wind from those who support it.

This is significant because the de facto ban on large-scale onshore wind in the UK has been driven by the perceived opposition to the technology among the old, the the ruling Conservative party’s core supporters. But April’s survey shows that even among those 65+, those supporting wind on land now outnumber opponents by almost 5 to 1. As it becomes increasingly obvious that onshore turbines are now the cheapest way of generating electricity, the government has no political or financial reason not to abandon its restrictive policy.

I compared April 2018’s survey (Wave 25) with the figures from the April 2017 poll (Wave 21). I used the full survey datasets very helpfully provided by the statisticians at BEIS, the government department in charge of energy.

The overall picture is this:

·      in April 2018 76% of those interviewed across all ranges support onshore wind. Of this, 30% ‘strongly support’ this method of generating electricity. Only 8% oppose wind, of which 2% ‘strongly oppose’ it.

·      The age of the respondent strongly predicts attitude. In the 2018 survey, over 65s were 69% in favour and 14% opposed. But among those younger than 65, ‘strong opposition’ to wind barely exists. For example, only one of the 281 people surveyed from the 35-44 age group held this view.

·      In previous analyses I have done of the results of this regular poll I have found that no other attribute (such as income, gender, rural/urban split) assist substantially in predicting attitudes towards onshore wind. Age drives views on turbines.

·      Between April 2017 and April 2018, the survey showed a rise in the percentage of all age groups supporting wind. The number increased from 73% to 76% of those interviewed. This is the highest support level ever recorded.

·      The increase in support from those aged 65+ was sharper; the percentage rose from about 63% to about 69%, substantially narrowing the gap between the attitudes of the old and the young.

·      Those opposed to wind (including those ‘strongly opposed’ and ‘opposed’) fell from 9 % to 8%, equalling the lowest ever recorded. Those against wind among the 65+ group fell from 17% to 14%. Once again, this narrowed the gap with the opinions of younger people.

·      Therefore the change in opinion towards a more favourable view of wind (fewer opponents, more supporters) was far sharper among the older group than the rest of the adult population.

Of course it may be that the sharply reduced rate of turbine installation over the last year has reduced the salience of the debate over wind. The pro-Conservative newspapers have less to rail about. Perhaps if the current policy were changed, as shows some signs of happening, the older generation’s increasing support for wind would be reversed.

But the polling trend is nevertheless clear; the government survey has been carried out for the last six years and shows a sharp increase in support for onshore turbines, even during periods of rapid turbine growth. The current policy of blocking turbines on land is now implicitly supported by less than 1 in 10 of all adults and, more surprisingly, only 1 in 7 of all those over 65. 

 

* Among other interesting results, those saying that they are thinking about buying an electric car has risen from 5% to 9% of the population over the last year.

 

 

Saudi plans suggest all electricity demand will be met by solar in 2030

The Saudi government and an investment fund led by Softbank’s Masayoshi Son announced they planned to invest $200bn in solar PV by 2030. The funds will be spent within Saudi Arabia.

Although the agreement attracted substantial coverage, many of the implications were not properly examined. In the bullet points below I note some of the main consequences of the deal if it is carried forward.

1, Today $200bn will pay for about 200GW of photovoltaic capacity. ($1m per megawatt). Prices of panels continue to fall, as do ‘balance of plant’ costs. I assume therefore the funds pay for 230GW of capacity. In reality, it will be more. I estimate that panels in Saudi Arabia will generate at a capacity factor of about 18% (although Saudi is sunny, it is also hot, which depresses output). 230GW at 18% utilisation generates 363 TWh a year. Current Saudi total demand is about 340 TWh. In other words the Kingdom’s plans see PV generating more electricity in 2030 than the whole country uses today.

2, Saudi demand peaks at around 65 GW in summer afternoons, driven by air conditioning. At these times the 230 GW of solar PV may be generating up to 130 GW of electricity. Although Saudi demand is still growing, total power production at peak from PV is going to substantially exceed national usage. Either Saudi will store power, export it to neighbouring countries, turn it in synthetic fuels or waste it. It will probably be a mixture of all four outcomes.

3, 230 GW of PV is more than 50% of the world’s total installed solar photovoltaics today. Saudi demand for panels and associated electronics are going to buoy the world market for PV, pushing costs down further.

4, World electricity demand is about 25,000 TWh. Saudi solar will cover about 1.5% of this.

5, The Kingdom plans to build 16 nuclear reactors, with probably 20GW of capacity. If the PV plan goes ahead and storage and synthetic fuels absorb excess supply and make it available at night, it is unclear why Saudi Arabia would also want to build new nuclear. Either you build this much PV or nuclear, not both. Somebody has got their numbers wrong.

6, About 60% of current Saudi electricity is generated from oil. At 40% combustion efficiency and the current $70 a barrel, the raw cost of the oil burnt in a Saudi power station is about 11 US cents per kWh. In some Gulf states, the price agreed for PV output is about 3 cents per kWh and Saudi should achieve a similar figure. PV will cut the production cost of electricity in Saudi almost four fold.

7, Switching from oil to PV for electricity generation will save Saudi Arabia about $22bn a year or $700 a head of current population.

8, At an estimated value of 1.5 MWh per barrel of oil and 40% combustion efficiency in an oil-fired power plant, the Kingdom currently uses about 900,000 barrels a day to generate electricity. This is just under 1% of total world oil production. If PV completely replaces oil in Saudi power production, it will reduce world greenhouse gas emissions from combustion by about 0.4%. (But of course the Kingdom will actually just sell the oil elsewhere!)

 

 

 

Errors in BP’s forecasts of the impact of electric vehicles

 

BP’s respected Energy Outlook was published this week (February 2018). Many commentators have written about the forecasts for electricity generation. I want to concentrate on the impact of electric cars and other efficiency gains on the demand for oil. Specifically, I’m going to focus on what I see as modelling errors and implausible assumptions in the BP analysis.

ENERGY SUPPLIED FOR TRANSPORTATION

Source: BP Energy Outlook, 2018, page 34

Source: BP Energy Outlook, 2018, page 34

Modelling errors

1)    BP sees electricity providing about 4.2% of all transport energy in 2040.[1] The figure is about 1.2% today, almost entirely arising from the electricity used in rail transport. So EVs (and possibly further electrification of rail and even air travel) will only add, BP says, 3.0% to electricity’s share of transport energy between now and 2040. (This small share is clearly demonstrated in the chart above). However, even using BP’s strikingly low figures for EV penetration, the company sees electricity providing the energy for about 31% of all car mileage and just under 15% of all truck travel by 2040.[2] This is a very striking – and arithmetically impossible – disparity.

Electric cars are, and will continue to be, more efficient at using energy to achieve movement than an internal combustion engine and I use a conventional assumption about the energy typically required to move an EV.[3] My calculations show that BP has underestimated the share of energy use contributed by electric cars by about 50%. Instead of rising from 1.2% of transport energy in 2016 to 4.2% in 2040, the true number (using BP’s assumptions) is about 7.2% of energy use.

In support of my assertion that BP has made an arithmetic mistake, I offer another comparison. The company says that natural gas will provide more energy for transport in 2040 than electricity. This is despite gas cars driving only 6% of the miles travelled by electric cars and 25% of the distances of electric trucks. Even though electric cars are probably about three times as energy efficient as LNG or CNG powered vehicles, this is wholly insufficient to explain what I think is BP’s error. (Please note that BP does state that shipping will also use natural gas even though virtually no ships are currently powered in this way).

2)    By contrast, BP has underestimated the efficiency gains from improved internal combustion engines. Once again, I am making this assertion only using the figures BP itself publishes in its extremely useful data file. In its calculations of the total demand for liquid fuels from internal combustion engine cars and trucks, BP assumes an approximate 34% efficiency gain across the entire parc of cars between 2015 and 2040.[4] Nevertheless, its own background figures actually provide an estimate of a more than 50% efficiency gain between 2016 and 2040. [5]The company also states that internal combustion engine efficiency improvements are speeding up. It suggests an average gain of ‘2-3%’per year between now and 2040, implying an approximate gain of around 45%.[6]

These differences are vitally important. BP forecasts a rise of 325 million tonnes of oil equivalent (MTOE) liquid fuel use in transport between 2015 and 2040, taking the figure from about 2,400 to about 2,700 million tonnes. If, instead of the published It correctly used its own estimates for efficiency gains for cars, this number would actually fall, even assuming lower efficiency gains in trucks. This change would, of course, adversely affect the global demand for crude oil. Instead of the picture BP presents of a rise in oil demand for transport to 2030 and then a very slow decline, volumes would fall much earlier to levels below today’s figures.

Highly questionable assumptions

3)    BP sees electric cars rising in number from about 7m in 2020 to about 95m in 2030.[7] This represents average sales of about 9m electric cars a year over the decade, assuming that almost all electric cars sold in the period are still on the road in 2030. This will be between 7 and 8% of all cars sold, assuming average global sales of around 120m a year during the decade. This is in sharp contrast to almost all other commentators.

UBS says, for example, that 16% of all car sales in 2025 will be electric.[8] Major German manufacturers have suggested that between 20% and 25% of all sales in 2025 be plug-ins.[9] Volkswagen talks of selling 3m electric cars a year by mid-decade, a third of BP’s estimate for global sales average across the decade. Several countries, recently joined by Ireland, are planning a ban on internal combustion engines by 2030.[10] Some states, such as Norway and China, may move even earlier.

4)    BP sees the average car travelling a rising number of miles each year. The almost two billion cars on the road in 2040 will each drive an average of about 16,200 kilometres a year, up from about 13,000 in 2016, a rise of over 20%.[11] This flies in the face of the long run downward trend in car mileages in developed countries. There is no justification provided for this assumption and it seems highly unlikely to come about. Doubling the number of cars on the road, and increasing the mileage each travels seems to conflict with the highly congested roads both in developed economies and urban portions of many newly industrialising states.

Conclusion.

BP's mistakes and unconventional assumptions all tend to increase total oil demand for transportation in 2040 compared to 2016. These errors are all multiplicative. More plausible inputs and calculations would result in a forecast from BP that sees oil needs falling earlier than 2030 and then declining at a much faster rate than it projects from this peak. BP does also publish alternative scenarios for electric car sales but I argue that it should use more accurate numbers for its central forecast.

 

[1] Page 34 of the data pack at https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html

[2] Page 38 of the data pack.

[3] I assume 6 km of travel per 1 kWh of battery electricity supplied. If we added a supplement to account for energy losses in recharging batteries the BP underestimate would be increased.

[4] BP uses 2015 figures, not from 2016 on page 34 of the data pack.

[5] Page 36 of the data pack.

[6] This is assuming a constant annual gain of 2.5%. The assertion that efficiency will rise by 2-3% a year is found on page 37 of the main presentation at https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/energy-outlook/bp-energy-outlook-2018.pdf

[7] Includes both plug-in hybrids and fully electric cars.

[8] https://www.bloomberg.com/news/articles/2017-11-28/rise-of-electric-cars-quickens-pace-to-tesla-s-benefit

[9] https://www.reuters.com/article/us-volkswagen-investment-electric/volkswagen-accelerates-push-into-electric-cars-with-40-billion-spending-plan-idUSKBN1DH1M8

[10] http://www.thejournal.ie/electric-cars-ireland-2045-3856261-Feb2018/

[11] Data from pages 36 and 38 of the BP data pack. I assume the car parc in 2016 was about 950 million vehicles.

 

 

'Burning to the ground': The carbon bubble in gas turbines

As the world switches to low-carbon energy, some oil, gas and coal reserves will become worthless because they cannot be exploited profitably. The phrase ‘carbon bubble’ refers to the possible overvaluation of companies owning these fossil fuels.

But is not just oil, gas and coal companies which are susceptible to the risk. Carbon bubbles also threaten businesses that sell equipment to the users of these fossil fuels. In one of the first examples, the demand for gas turbines has slumped in the last few months, causing dramatic falls in the value of the businesses that make and service this expensive equipment. Many other industries - including the automotive and chemical engineering sectors - will go through the same painful transition.

Installing and servicing gas turbines in power stations to make electricity was a $50bn global industry. Until a few months ago, the three international conglomerates that dominate this business said they were confident of continued demand. Although recognizing that the world is switching to renewable energy, they thought that gas will always be needed as a backup fuel for generating electricity. In the conventional view, the market will also be buoyed by utilities switching from coal to much cleaner natural gas.

So even as late as July 2017, Mitsubishi Heavy Industries (MHI) was predicting that orders in its gas turbine division would be up 15% in the current financial year. Operating profit would rise 31%. GE reported that revenues from its turbine activities were up 5%, surmising that it was gaining share because of its advanced technology. Its published forecasts for 2017 remained unchanged. And although the more cautious Siemens had begun to notice significant falls in orders by mid-year, as late as April it recorded a 4% increase in quarterly sales.

Careful analysis might have identified serious problems with the gas turbine business in the previous year but none of the three major participants expressed any public concerns. Contractions of sales and profits were presented as temporary or cyclical.  But by the end of September 2017, a very much sharper fall had set in and the earlier optimism suddenly disappeared. The huge conglomerates which install and maintain turbines were finally forced to admit to intractable problems requiring immediate and painful action.

Over a period of a few weeks in October and November a slew of announcements from all three companies came out, admitting to serious deteriorations in financial performance. Janina Kugel, a Siemens management board member, said ‘the market is burning to the ground’ and that the world was switching ‘extremely quickly from conventional to renewable energies’. In another comment, her senior colleague Lisa Davis said that ‘the power generation industry is experiencing disruption of unprecedented scope and speed’. The company indicated that it would close factories and reduce its staff by about 6,100 people.

GE went further and fired 12,000 people around the world, almost 20% of the staff in its turbine business. The cash flow from the division for 2017 would be $3bn less than predicted a few months before, it announced, explaining that the last quarterly results were ‘sharply lower than we expected’. The company’s overall performance in the three months to the end of September had been ‘completely unacceptable’ and blame was principally laid at the door of the power generation segment. Forecasts for turbine sales in 2018 were reduced by 35% below the already shrunken number for 2017. Expectations for revenues from maintaining and upgrading power stations were also sharply cut.  Both the CEO of the division and the chief financial officer of the holding company were replaced.

MHI sharply cut its projections for orders, sales and profits. It had shipped only 4 large gas turbines from April to September 2017, half what it had sold a year earlier. The company announced a change of strategy, promising – in the words of the divisional president -  to focus on servicing existing turbines rather than selling new products because ‘all around the world we are witnessing a rapid shift away from fossil fuels and towards renewable energy’.

In early November Siemens published estimates showing that the total number of large gas turbines installed in all power stations will fall from 180 in 2016 to a projected 110 this year, a cut of almost 40% in two years.[i] GE intitally gave some similar figures, suggesting that electricity companies installed just 40 gigawatts of gas turbines around the world in 2017, down from more than 70 gigawatts earlier in the decade and about 130 gigawatts around the year 2000. In its most recent results announcement, it moved its estimate down again and suggested that the figure for 2018 will be less than 30 gigawatts, a multi-decade low.

Gas turbine sales.jpg

 

Source: Siemens AG. Number for 2018-20 is the forecast for each year in this three year period

As importantly, Siemens publicly estimated that the prices it can charge for large turbines had collapsed 40% in the last three years as a result of industry over-capacity. In value terms, gas turbine sales have therefore fallen to a fraction of just a few years ago.

The three dominant suppliers had bought up smaller manufacturers in the last few years and had successfully disguised – to themselves and to most outside analysts – the scale of the drop in the underlying market. Until the last months of 2017, none of the announcements from the three top companies voiced any concern about the resilience of longer-term turbine sales. Similarly, all three had assumed that servicing existing turbines would continue to bring in important revenue.

But by the end of 2017, ancillary revenues were down almost as sharply as those for new large turbines. No-one had predicted this. Existing gas-fired power stations around the world are working for fewer hours each year as renewables ramp up. This is reducing the need for emergency repairs and increasing the interval between regular services. The owners of barely profitable power stations face harsher financial times as wind and solar offer ever-cheaper electricity. So upgrades to the performance of existing gas turbines have been delayed or abandoned.  GE had forecast sales of 36 turbine enhancements in the quarter ending in September 2017. Power stations actually bought 13.

Perhaps most surprisingly, the sale of smaller gas turbines, designed to respond quickly at those times when big power stations cannot cope with demand, also collapsed. Sales forecasts for 2017 were cut to half the number GE projected just a few months earlier. In the most recent quarter (ending December 2017), it shipped just 3 small turbines, down 90% on a year earlier. Peaks in demand are increasingly being met by ‘demand response’, or the managed reduction in electricity use at times of scarce supply. In times to come, large batteries will also help match electricity demand to the amount available. Electricity companies are aware of this and are reducing purchases of smaller turbines.

Performance across all parts of the turbine business fell well below predicted levels in all three companies. Share prices went lower compared to major indices. GE suffered the most, with its stock falling almost 30% in relation to the S+P 500 index between the first announcement of problems in late October and the end of 2017. GE has other troubled businesses, but the unexpectedly poor performance in the turbine segment is partly - perhaps largely - responsible for this decline of nearly $60bn in market value.

MHI saw a smaller fall of about 11% of its value against the main Japanese index between the announcement of declining profit expectations and the end of the year, costing shareholders around $1.4bn. Siemens’s share price fell by about 7% in the week after the initial presentation of the turbine division’s problems on 9th November, reducing its value by over $8bn. The share price has recovered somewhat since and the loss relative to the German index was only about $3bn by the end of the year. And, it should be said, problems in the wind turbine portion of its business may also have affected the share price.

It may be that the global gas turbine business will eventually recover.  But the head of the Siemens power generation division, Jurgen Brandes, spoke eloquently in a conference call with journalists on 16th November 2017 to suggest that his company has now accepted that many of its factories, skilled people and technical expertise will not be needed in the future. After expressing amazement at the recent decision of a country such as Saudi Arabia to switch decisively to renewables, he went on to say ‘There are global trends coming that really indicate that this is a structural shift, a paradigm shift’ away from fossil fuels.

The decline in the gas turbine market happened quite slowly for several years. The largest participants avoided most of the consequences by buying struggling competitors. But the contraction sharply accelerated in the second half of 2017, sliding at a pace that was shocking to some of the most sophisticated companies in the world. Which global industries are going to suffer next from the swing away from fossil fuels?

(Please contact me if you would like a copy of the full text of the detailed report I have written on the events of September-December 2017 in the gas turbine market).

Chris Goodall

Visiting Researcher, Imperial College Business School

chris@carboncommentary.com

+44 (0) 7767 386696

[i] https://www.siemens.com/investor/pool/en/investor_relations/financial_publications/speeches_and_presentations/q42017/171109_q4_presentation_en.pdf Page 9

Fuels from air and water

A future free of fossil fuels requires us to economically produce oil and gas substitutes from synthetic sources. This is because will continue to need oil and gas for activities that are difficult to electrify, such as aviation. As importantly, synthetic oil and gas can provide our electricity when sun and wind are in short supply without adding to the CO2 in the atmosphere. They will provide the main storage medium for high latitude countries, taking surplus electricity and holding the energy in the form of liquids for use on still winter nights.

Synthetic fuels will generally be made using renewable hydrogen combined with carbon-containing molecules not derived from fossil sources. Canadian business Carbon Engineering has just announced that it has made small quantities of fuel entirely from renewable sources using CO2 taken directly from the air.

I think this advance probably qualifies as the most important low-carbon innovation of 2017.

If the cost of this process can be driven down to levels comparable with $60/barrel oil, we have a realistic prospect of all world energy needs being served by renewables, either used directly for power, or employed to create zero-fossil fuels to complement intermittent sources of electricity.

Carbon Engineering (CE) generates its hydrogen from electrolysis. When electricity is abundant, electrolysis is used to split water into H2 and oxygen. Heat is a by-product. The hydrogen is then merged with the CO2 captured from the atmosphere to form useful fuels similar to petrol.

Carbon Engineering.jpg

 

There is no magic in this process. Electrolysis is simple, and increasingly efficient and cheap. Direct removal of CO2 from the air is usually thought of as expensive in energy terms but has been practiced, for example, on submarines for many decades. Reacting hydrogen with carbon dioxide, or its derivatives such as carbon monoxide, is uncomplicated and can be carried out using either chemical or biological routes to create liquid fuels. It is done in chemical plants around the world today. CE’s achievement is to do all these things in one place simultaneously. In effect it has shown a potentially viable route to decarbonisation of energy, not just electricity.

Why? The thesis of my book The Switch is that solar photovoltaics will become increasingly cheap. As a result, developers are prepared to offer electricity from PV at lower and lower prices. Auctions that result in costs of around 2-2.5 US cents per kilowatt hour are now common in the sunniest countries. It is not difficult to find forecasters writing that solar costs will decline to less than one cent per kWh within a decade or so.

The fall in the price of solar-derived power will have a much wider effect than simply on electricity prices. Put at its simplest, it means that solar PV becomes a far cheaper source of energy than fossil fuels. At a price of $60, the underlying energy in a barrel of oil costs around 4.4 US cents per kWh.[1] (For comparison, gas in the UK currently costs around 2.6 US cents per kWh at the wholesale level).

The implication of this disparity is clear. If we can use solar electricity to make petrol equivalents, we may be able to undercut oil, and ultimately replace fossil fuels entirely. Electrolysis to make hydrogen is about 80% efficient today using the newest technologies. This means that solar electricity costing 2 US cents per kWh is used to make hydrogen, the cost of this energy-carrying gas is about 2.5 cents per kWh, well below the cost of oil.

But CE very definitely doesn’t say that its synthetic fuels are competitive today with oil once the cost of carbon capture is included. Grabbing CO2 from the air is thermodynamically inefficient process and uses over 2,000 kilowatt hours per tonne captured, mostly in the form of low-grade heat at around 100 degrees. CE indicates that it has a target cost of around $1.00 a litre for its fuels. That’s probably about double the US wholesale price of petrol and the oil majors won’t be quaking as a result of this week’s announcement.

But two things should make them nervous. First, as renewables grow in the share of electricity markets around the world, they will push down the costs of electricity. As I have said before, the impact of very high winds on north European electricity markets is to force short-term prices down to zero or below. This means that the cost of hydrogen falls as well, as does the price of CO2 capture. (Energy dominates the cost of direct air capture of CO2). This brings down the price of synthetic fuels because they will be principally made at times when energy is cheap even if this means that the ‘refinery’ only works half the time.

In previous work I have seen, CE’s cost assumptions include energy prices that are broadly comparable to average wholesale costs of today. I think this is unduly conservative. Many of the hours over the course of a year will see surpluses of electricity and very low prices, this driving down the final cost of synthetic fuels, probably well below oil.

The second effect is more uncertain but I think is still powerful. As electric cars grow in number oil demand will eventually fall (my best guess is about 2025 for this crucial moment). A switch away from fossil sources towards synthetic oils will increase the speed of the decline from that point. Refinery utilisations will start to fall and upgrades will get increasingly difficult to justify. Staffing costs will tend to rise per unit of output. Existing assets including pipeline networks will get used less. In other words, the underlying economics of today’s oil producers and their refining and distribution operations will tend to deteriorate. Capital will become more difficult to attract into the industry.

This will be a slow process. The oil industry will not collapse overnight. But advances like this week’s CE announcement will eventually reduce the economic viability of the oil industry, speeding up the move from fossil fuels.

What will eventually happen will probably look like the current crisis (I think this is a fair use of the word) in the gas turbine industry. Until six months ago, the titans in the industry (GE, Siemens and Mitsubishi) assumed that the rise in renewables would be good for gas, because CCGT generation would still be needed to supplement intermittent sources of power. It hasn’t turned out that way – after falling in numbers for years, just 100 large turbines were ordered in the last year compared to 400 a few years ago. What is probably as important is that the existing gas plants around the world have been tending to work fewer hours a day. Maintenance needs, say both GE and Siemens, have fallen, reducing servicing revenues. This was completely unexpected. Last week GE said it would fire 13,000 people in the turbine division. A month or so ago, Siemens finally cut 7,000 jobs. The impact of GE’s failure to address the problems in its gas turbine business has been felt in a sharp fall in the company’s share price. This was a carbon bubble deflating very unpleasantly indeed. The same will eventually happen to fossil oil.

But the principal point I wanted to make here is that technologies like CE’s offer the prospect of being able to run the entire energy system, not just electricity, on renewables. It allows the world to invest hugely in wind and solar, with resulting over-supply for much of the days, months and years. Rather than being wasted, this excess will be used to make energy for aviation and other uses that are difficult or impossible to electrify and allow us to cope with periods of no sun or wind.

 

 

 

 

 

 

[1] $60 divided by 159 litres (a barrel) and by 8.8 kWh per litre. 

0.1% of 16-44 year olds 'strongly oppose' onshore wind

Every few months the UK government interviews 2000 people about their views on energy. These surveys show the gradually rising popularity of renewables, including onshore wind. I looked at the underlying data in the latest survey and found that just 1 person between 16 and 44 from the entire interview panel was ‘strongly opposed’ to wind. (Want to know more? She lives in a rural area, earns a high income and supports other renewables. She doesn't like fracking). By contrast, 235 respondents in this group ‘strongly supported’ the technology.

Across all age ranges, wind seems to be rising in popularity. The only group with more than a few opponents are those over 65. And yet the reduction in those opposing onshore wind has been fastest in this age range.

Media coverage shouldn’t start from the assumption that people don’t like turbines. Wind power is popular. Vastly more popular than fracking.

The need for an end to the block on cheap wind

Onshore wind turbines sited in windy coastal locations are the cheapest source of electricity for the UK. Even with the current restrictions on turbine size, developers would probably be able to offer electricity from large new farms at below £50 per megawatt hour. This is less than half the cost of the new nuclear power station at Hinkley Point.[1] It will also beat a new gas power plant. More wind means lower electricity bills for everybody.

Research unit ECIU recently wrote that ‘The effective ban on the cheapest form of new power generation looks increasingly perverse. For a Government committed to making energy cheaper, this risks not only locking people into higher bills, but also runs contrary to its aim of having the lowest energy costs in Europe’.[2]

Government blocked large scale onshore wind two years ago. It now acknowledges that this policy may need to change in light of the continuing reduction in the costs of getting electricity from turbines. Energy minister Richard Harrington said at this year’s Conservative Party conference that 'Provided that it goes through a reasonable local planning system, I see no reason why it should not be on the same level playing field as everything else’.

The easy assumption that onshore wind is unacceptable to voters is increasingly false. The latest edition of the regular government survey on attitudes to wind power and other renewables was issued last week. It showed that onshore wind was supported by 74% of the population and opposed by only 8%. That is a nearly ten to one ratio. (The remainder of the respondents were either indifferent or ‘don’t know’).

Among those against wind, those who are ‘strongly opposed’ to this form of renewable energy represent less than 2% of the UK population. Yet these people seem to be responsible for holding up the development of potential of wind to deliver cheap and low carbon energy.

The net balance of 66% supporting onshore wind is a new record in the five year history of the survey.[3] The average next balance until survey 15 in 2014 was less than 55%. But support has increased in each of the last four waves since then.[4]

Source:  Energy and Climate Change Public Attitudes Tracker,  BEIS

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Two important other conclusions come out of the survey.

1)    Age is by far the most important predictor of attitude towards wind. Young people are almost universally in favour. However, all age groups have increased approval of onshore turbines in the last few years.

2)    The people in rural areas – despite repeated assertions to the contrary – are typically more in favour of wind than urban dwellers. A much larger fraction are strongly supportive. However, more rural interviewees were also ‘strongly opposed’ although the numbers are  tiny.

The impact of age

Only 3% of all those interviewed and aged between 16 and 44 were opposed to onshore wind power. (This includes both people who ‘strongly opposed’ wind and those who simply ‘opposed’). Put another way, 28 people out of the 871 interviewed in that age range didn’t like turbines.

By contrast, 132 people out of 596 respondents who were over 65 disapproved of wind. This was 22% of those interviewed. But even in this age range, only 4% ‘strongly opposed’ onshore turbines.

Source:  Energy and Climate Change Public Attitudes Tracker,  BEIS

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Between survey 15 (in late 2014) and the latest round of interviews, every age group showed an increase in the percentage supporting onshore wind. (In the case of 35-44 year olds, the increase was only half of one percent).

Source:  Energy and Climate Change Public Attitudes Tracker,  BEIS

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Even among the 65+, the percentage approving of turbines rose from 53% to almost 65%. The number disapproving fell from 22% to 16%. This reduction was the largest of any group in absolute percentage terms. The numbers opposing wind amongst all age groups 16-44 is now almost insignificant.

Source:  Energy and Climate Change Public Attitudes Tracker,  BEIS

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Rural versus urban

Perhaps the rise in support for onshore wind is confined to those who live in large towns and cities? These people will generally not even be able to see a new generation of onshore wind turbines from their windows.

The reality is that rural dwellers as a whole are more likely to approve of onshore wind than people in towns. About one quarter of the UK population is defined as living in rural areas. These people include 32% who strongly support wind, compared to 21% for the population as a whole.

 On the other hand, more rural people than urban dwellers ‘strongly oppose’ wind but this is not enough to overturn the general conclusion that living in the country makes a person more likely to support the technology.

Source:  Energy and Climate Change Public Attitudes Tracker,  BEIS

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

What does this all mean? The large majority of British people support onshore wind and this support is increasing among all age groups. Tiny numbers strongly oppose turbines and these people are almost exclusively old. It’s time to start developing Britain’s extensive and inexpensive resources of wind again. Despite what you might read in the newspapers, there really isn’t much opposition.

DISCLOSURE: I own a stake in the makers of a new vertical axis wind turbine, shares in two co-operatively-owned farms and debentures in a privately-held turbine.  

[1] The agreed price for Hinkley was lower but price inflation since the date of agreement has taken the cost of new nuclear electricity to well above £100 a megawatt hour.

[2] http://eciu.net/press-releases/2017/britain-in-1bn-block-on-cheapest-energy-technology

[3] The net balance is the percentage of those in the survey supporting onshore wind (‘support’ or ‘strongly support’) less the percentage that oppose (‘oppose’ or ‘strongly oppose’).

[4] Questions about the support for renewables technologies have not been included in all of the most recent waves of the survey.

An industrial revolution for agriculture

Summary

Depending on what is included in the calculation, agriculture accounts for up to a quarter of the world’s greenhouse gases. Emissions include methane arising from the livestock production process, nitrous oxide from the use of fertilisers and, third, the cutting down of forests. Deforestation, driven by the need to expand the land area devoted to the production of food for humans and for animals, adds to carbon dioxide to the atmosphere.

The world has the rough outline of a realistic plan for cutting fossil fuel use across the global economy. It will increase the amount of renewable electricity produced and switch transport to battery cars and lorries. No such scheme exists for agriculture, even in the vaguest outline. The issue is rarely discussed. But unless emissions from global farming are curtailed, all long-term targets for greenhouse gas reductions are unattainable. 

Take one example. The average Briton eats about 18 kilos of beef a year. The emissions from the production of this single food add about 4% to his or her carbon footprint. And nothing in the government’s plans proposes to reduce this, even though we are increasingly aware that net emissions may need to fall to zero within a few decades to meet a 2 degree temperature change target. It is simply politically impossible to push for a reduction in meat consumption. So the problem is ignored.

The livestock production chain is the most important cause of agricultural emissions. A move to a one hundred percent vegan diet would reduce emissions by 50% or more. Although veganism is growing sharply in some places around the world, the switch to conventional plant-based foods will almost certainly be too slow to provide the speed of reductions required.  And even vegan diets have high carbon footprints and land use requirements.

In this article, I suggest that the only way to achieve substantial greenhouse gas cuts is to move as much agriculture as possible out of fields and into factories. This will directly reduce emissions but also cut greenhouse gases by decreasing the pressure to switch forests to agricultural land.

More specifically, we first need to shift to artificial meat. The need to stop farming beef cattle is particularly urgent; Silicon Valley startup Impossible Foods is a highly plausible contender in the race to create acceptable meat substitutes.

A burger from Impossible Foods

A burger from Impossible Foods

My second suggestion is to grow many products in indoor hydroponic systems rather than soil. This saves land, fertiliser, pesticides and reduces greenhouse gas emissions. Hydroponic techniques for growing leafy crops and some berries are also advancing fast. Fellow Silicon Valley company Plenty Farms is showing how the world might get many of its micronutrients from indoor farming.

A wall of lettuce at Plenty Farms

A wall of lettuce at Plenty Farms

Root crops, such as potatoes and carrots, will stay outdoors for some time. The world’s main sources of human calories – wheat and rice – will also be difficult, but not impossible, to transfer to hydroponic systems. But, despite their importance to human nutrition, these high calorie crops do not occupy much of the world’s usable land area.

We need a new industrial agriculture to reduce emissions and to allow much of the world’s land area to return to forest. Unfortunately, organic agriculture, often seen as a crucial part of reducing emissions, seems unlikely to assist in rapid decarbonisation. It may even increase emissions. As someone who grows and buys organic produce, it saddens me to say this but It is a distraction from the difficult task of feeding up to 10 billion people with the lowest possible carbon footprint.

This is a long article, for which I apologise. I wanted to demonstrate both that we need an industrial revolution in agriculture and that the raw technologies for higher productivity with low carbon impacts are already in place.

The background

Global emissions of greenhouse gases are about 50 billion tonnes a year.[1] Although the figures are considerably more uncertain than for fossil fuel combustion, agriculture and changes in land use contribute about 10-12 billion tonnes of this. The IPCC’s 2014 assessment suggests that agricultural production accounts for slightly over half the total figure, with land use change slightly less.[2] (Land use change in this context is predominantly the conversion of wooded land or wet peatlands to arable or grazing land, a process which results in the emission of CO2 and methane back to the atmosphere).

Agriculture itself directly creates emissions in three main ways. First, some animals, particularly cows and sheep, emit methane from the digestive tract as they break down the complex molecules in the grassy diet. This alone may result in over 2 billion tonnes of equivalent CO2 emissions a year (about 4% of global emissions). Second, animal manure rots down, giving off methane and nitrous oxide. Third, artificial fertiliser applied to fields produces nitrous oxide emissions.

Of the nearly 6 billion tonnes of emissions coming directly from agriculture, perhaps half arises from livestock, or around 3 billion tonnes. Cows are by far the most important source, but the role of pork is increasing fast.

If we add in the impact of deforestation that occurs as a result of increasing meat production, the impact is far greater.

Of the decarbonisation challenges facing the world, this clearly ranks in the top division. In addition, agriculture is the dominant use of fresh water around the world, likely to be an increasingly scarce commodity, and fertilisers and other chemicals applied to fields are important sources of watercourse and coastal zone pollution.

The livestock problem is made worse by the central role livestock production plays in stretching the world’s land resources. About 50% of the world’s habitable land (not glaciated or completely barren) is given over to agriculture. Of this, over three quarters is devoted to livestock and to growing the crops that help feed that livestock. But this land only results in the production of about 17% of the food calorie that humans consume. Land growing crops is - on average – about fifteen times as productive in terms of calories as land given over the animals.

This isn’t an entirely fair comparison because animals are often kept on land that would produce very little grain or other planted crop. But, more realistically, a farmer putting crops instead of pigs into lowland and reasonably fertile field might get five times as many food calories as she did from the animals. Twenty calories of grain fed to a cow will result in about one calorie of usable meat when the cow is slaughtered.

This gross inefficiency is sometimes justified by saying that humans need the proteins provided by meat. This is incorrect; cows and other animals typically eat much more protein, often in foods made from beans, than they actually provide in meat. Mosa Meat, one of the pioneers of artificial meat, says that a cow or pig will transform only 15% of vegetable proteins into edible animal proteins. Animals therefore reduce the net amount of this important food constituent available to humans.

As the now famous Food and Agriculture Organisation (FAO) report said, livestock has a ‘long shadow’. Perhaps surprisingly, relatively few people know this, particularly compared to the increasing numbers aware of the climate impact of travel and energy use. In one survey less than 30% of respondents reported that they believed that meat and dairy production had a major impact on climate change. The figure for transport was twice this.

But not only is the global effect of agriculture as large as all transport emissions, it is far more difficult to reduce. Changes in cultivation practices may marginally reduce the climate-changing effect of cows and sheep. Keeping animals in intensive feed lots probably reduces emissions, but at a cost to welfare that many people regard as too high.

Reducing the land area given over to animals and for the growing of their food would enable arable crops to be grown, at least in some places. The total amount of available food would rise. The world’s extra calorie needs to cope with as many as 3 billion more people in 2050 could be accommodated without further deforestation.

The problem is that as people get more prosperous, they tend to consume more meat. So growing wealth will result in more animals, more land devoted to growing food for those animals and not for humans. Inevitably, the threat to the world’s forests will increase although it is worth pointing out that global deforestation rates have probably been tending to decline for several years. Growing agricultural productivity has keep the land requirements for animal cultivation lower than they otherwise would have been. (One important piece of recent research questions whether forest loss has indeed declined).

Global beef consumption is up about 10% since the turn of the century. We might have expected the number to be higher but increased incomes have generally arisen in countries that do not consume much beef, such as China and India. But rich countries with high beef sales, including the US, might see further growth in consumption. Overall, the US Department of Agriculture sees the average American increasing the amount of meat eaten by 5% between 2015 and 2025, some portion of which will be greater beef purchases.

The second, and very welcome, impact of prosperity is often improved access to high quality foodstuffs that are expensive to produce. Green vegetables, herbs and leafy crops add variety, fibre and important micronutrients to a grain-based diet. Fruits such as berries are attractive to eat and probably good for health. The problem is that these products require far more land for each calorie of food value than the rice or wheat that forms the backbone of most people’s diet. A hectare of spinach, a valuable source of vitamins and metal ions, might produce 5 million calories of food. The same area given over to rice could give six or seven times as much. So as global population expands and people get better off, we can expect more pressure on land use for this reason as well.

What do we do?

1, Replace meat

The most important challenge is to reduce the amount of farmed meat that is consumed. Currently the world uses about 270 million tonnes a year, or just over 30 kilos a person. (These amounts vary enormously, and not necessarily in a way obviously tied to income; the people of Uruguay and Argentine - both middle income countries - eat about 50 kilos of beef alone).

Veganism, or the conscious avoidance of any form of animal product including, is growing strongly in many places around the world. The world leader is probably Israel, with perhaps one in twenty adults saying that they avoid all animal products. About 1% of UK adults now self-identify as vegans - up from not much more than a quarter of this a few years ago - and the percentage is probably double this level in parts of northern Europe. Vegetarianism, its milder alternative, might have gained the affiliation of 10% of Swedes and around 3% of French people, for example.

A rapid worldwide switch to a meat-free diet, preferably with no dairy products either, might be possible but seems very unlikely. Although young adults are restricting their meat intake in richer countries as a deliberate choice, their switch is generally not being matched by the middle-aged and older.

So the world needs to find an acceptable alternative to meat. Plant-based alternatives have historically been poor at copying the texture and full taste of meat. Most vegetarian burgers, for example, may be very acceptable foods to many people but they don’t really mimic minced beef.

We’re left with two main options: trying to improve meat substitutes or making meat in the laboratories. Both routes are being pursued by commercial enterprises, mostly in the US. For what it is worth, I think it is going to be easier and quicker to get good substitutes for meat down to a competitive price than growing similarly inexpensive meat in the lab.

Meat is approximately a trillion dollar industry (c.1% of world GDP) and global capital circles the companies in the artificial segment knowing that the successful businesses will become very valuable entities indeed. And the venture funds putting cash into these companies seem also to be very aware that climate change pressures will be likely to make farmed foods more expensive in decades to come, improving the economics of artificial alternatives.

Meat grown from cultures.

Memphis Meats is one of the leaders in lab-grown meat. Like other companies at the forefront of animal meat replacement, it has attracted investment from well-known investors. Bill Gates holds shares, as does the global agricultural commodity trading firm Cargill. (Gates is an investor in several of the best-known companies in the meat replacement market).

Memphis makes a beef and a chicken meat from animal stem cells cultured from an animal foetus. The company believes it will eventually rely on entirely self-reproducing cells and will not need to extract them from animals. These cells are fed with a cocktail of vitamins, sugars and minerals and over a period of weeks in a bioreactor become meat.

Southern Fried Chicken from Memphis Meats

Southern Fried Chicken from Memphis Meats

The cost is still thousands of dollars per kilo and the company won’t start commercial sales until 2021. Memphis Meats provides figures suggesting that the worldwide average price for meat is about $4 a kilo, and it knows it will have to compete with this figure. In fact, one recent survey I saw showed that consumers actually expect to buy artificial meat at a discount to the farm grown product.

Is it possible for Memphis Meats to get costs down to $4 a kilo? It seems a huge challenge to me, given the length of time it will take growing the meat and the expenditure on nutrients but the company points to the huge energy savings possible from lab-grown meat. It says that one calorie of its beef consumes about three calories of ‘food’ compared to the 20+ that a cow would need to make the same quantity of beef. Memphis Meats also stresses the savings in water and land, saying that its technology may cut 90% from the requirements of conventional agriculture. It puts greenhouse gas reductions at a similar level.

Professor Mark Post set up a lab-grown meat startup after creating the world’s first artificial burger in 2013. Mosa Meat is attempting the same task as Memphis Meats, using some cow cells and encouraging them to replicate in a bioreactor filled with nutrients. It has fallen behind and only says that commercial lab-grown meat might be available within ’10 to 20 years’, not the 2021 promised by Memphis Meats.

Other entrants into the race for artificial meat also lag the Californian company. SuperMeat, an Israeli venture trying to tap into the large vegan population in the country, has struggled to crowd-fund its activities. For the moment, Memphis Meats looks like the early winner. But even it has fallen well behind Winston Churchill’s 1931 prediction.[3]

Fifty years hence, we shall escape the absurdity of growing a whole chicken in order to eat the breast or wing by growing these parts separately under a suitable medium.

Better meat substitutes

The race is to make a burger that tastes like real meat. In other words, the customer can get the environmental advantages of plants with the desirable experience of eating beef. Two companies lead the field. Beyond Meat and Impossible Foods.

Beyond Meat has its products in stores across the US, having finally cracked the wary scepticism of the supermarket buyers early last year. The product is made from pea protein and soya and made to taste either like chicken and beef. The company proudly flags the fact that its products are now in the meat section of the conventional large supermarkets, not tucked away in a section of the store catering for vegetarians. And Beyond Meat sells its product as ‘clean’, ‘healthy’, ‘light’ but full of protein. It is attempting to capture the millennial wish for a food that has the supposed virtues of meat (protein) alongside the health-giving advantages of plant foods and their lower calorific content. (However the product does contain titanium dioxide, a chemical that some people think is potentially carcinogenic in the nano-scale form used by Beyond Meat).

Beyond Meat burger patties in a US store

Beyond Meat burger patties in a US store

The cost is not yet competitive with conventional meats; stores are selling the burgers at three or four times the price of minced beef. The price premium didn’t stop the US meat giant Tyson Foods investing in the company at the end of last year. And a few weeks ago Beyond Meat announced it had added Leo Di Caprio to its list of shareholders. To capture attention from both is an impressive achievement.

Opinions vary as to whether Beyond Meat does really taste like the products it is emulating. There appear to be few such concerns about the burgers made by Impossible Foods. Impossible also makes its products from the protein of plants including wheat and potato. Its key extra ingredient is ‘heme’, an iron compound richly present in meats (and also to a lesser extent in plants). Impossible Foods uses genetically modified yeasts, specially engineered by the addition of a gene from soya beans to express heme. The compound gives the burger a meat-like taste and texture. It also seems to be the reason that an Impossible Burger seems to bleed a red liquid when cooked.

An Impossible Burger with the centre still red from the heme

An Impossible Burger with the centre still red from the heme

At present the Impossible beef patty is sold only to upmarket restaurants. I looked at the menu of one chain and the burger sells for about twice the price of the lowest cost conventional equivalent.  But the difference between the Impossible product and the more expensive parts of the burger menu was not large. In two or three years the cost of the meat alternative will be the same as conventional ground beef, the company claims.

Impossible Foods recently opened a factory in Oakland, California. It’s a big establishment but the world would need over fifty thousand factories of the same size to produce all the meat the globe eats. However it claims that its understanding of the effect of heme on flavour and texture means that it can move from beef to other ersatz meats. And, by 2035 to ‘completely replace animals as a food production technology’, in the brave words of the CEO. You can say things in Silicon Valley, thank goodness, that would be dismissed as ludicrously optimistic in other parts of the world. 

As with Memphis Meats, Bill Gates is a shareholder in the company, which has raised about $200m so far. Its CEO and founder, an idealistic but firmly commercial former biochemistry professor at Stanford, is himself a vegan and says that he started the business explicitly for environmental reasons. Its beef replacement product has a tiny footprint of greenhouse gases, land, water and fertiliser pollution compared to conventional meat.

On the question of the eventual cost of the product, this is what CEO Pat Brown said about the product in an interview in August 2017.

..The economics are very tilted in our favor because the way we produce it is so much more resource efficient. We use a quarter of the water, 1/20th the land, 1/8th the greenhouse gas emissions, way less fertilizer and pesticides and stuff like that. That translates into cheaper production cost. When we look at the technology we have today and project it at scale, there’s a clear trajectory to being able to produce this product and basically all the meats that are in our pipeline at prices that are at or below the cost of the cheapest meats on the market.

How long will this take? ‘Maybe three years or so’. If he is right, then we have a potential way forward to eventually reduce the scale of meat’s impact on the global environment.

I was particularly struck by one of the many other comments the company makes about the effect of switching to meat-free meat. It says that eating just one of its burgers rather than a conventional equivalent will save 75 square feet of land (seven square metres), principally because of the reduced need to grow feed for cattle. This space could, for example, be used for reforestation that will capture carbon. If Impossible Foods is right that one burger saves seven square metres of land for reforestation, then the typical British person switching to their product for all his or her beef consumption would sequester almost a tonne of CO2 a year. This is over ten per cent of that individual’s current footprint. 

2, Grow as much as we can hydroponically and inside buildings or greenhouses

The other move I hope we see is away from field horticulture towards hydroponic techniques. This is particularly useful for leafy vegetables and some berries. Even cucumbers can be grown this way.

Hydroponics avoids the need for soil. Seeds or seedlings are placed with their roots in a channel of water. Plants grow by feeding off the nutrients in the rich broth of water flowing past. Or in some cases the roots of the plant grow directly into air through which a dense mist of nutrient-laden water passes. (This is usually called aeroponics, rather than hydroponics).

Hydroponic techniques can be used indoors or outdoors. If indoors, climate can be more easily controlled. But the ‘farm’ needs to use LED lights to provide the energy the plants need. As LEDs fall in price and gain in efficiency, this is becoming more financially feasible every month. But, it needs to be added, many of the initial hydroponic ventures  havfailed, in part because of high electricity costs for lighting and for cooling but also because they operated at a scale insufficient to cover high fixed costs.

Hydroponics can deliver huge increases in yield per square metre of space. If the plants are stacked vertically in trays, proponents claim a hundred-fold greater output of food. Water use is also dramatically reduced, by up to 99% according to Plenty Farms. Since about 70% of the world’s frash water is used for agricultural purposes, this matters.

Pesticides are either not needed or can be employed in tiny quantities. Weedkillers are unnecessary. Fertiliser consumption can be at least halved. As importantly, very little, if any, fertiliser pollution gets into watercourses. The third most important source of greenhouse gases from agriculture is from the breaking down of ammonia based fertilisers partly to nitrous oxide, a particularly virulent cause of global warming. Hydroponics reduces this source almost to nothing.

Not all plants can be successfully grown in hydroponic systems. But those crops that can be cultivated often have a relatively low yield of calories per hectare out in the field. So they occupy more space than would be needed for high yielding crops such as rice or potatoes of the same food value. More prosperous people not only eat more meat but also prefer to consume larger quantities of green vegetables. As the world’s population grows and average incomes increase, the need for indoor hydroponic cultivation becomes ever more obvious.

The best-funded hydroponic growers also tend to share an ambition to make the production of lettuces and other greens more local. That is, instead of shipping the product from a remote location, perhaps California or Spain, to the main urban markets of the US or Europe, they want to locate the hydroponic farms next to centres of population. The food is much fresher and thus its nutritional content is likely to be better. Incidentally, it also reduces the carbon footprint of the greens or berries because of reduced diesel emissions.

Does a lettuce grown hydroponically taste as good as a fresh lettuce from a local farmer’s market? The prevalent opinion is a confident ‘yes’. The companies trying to take hydroponics to a much larger scale in industrial countries employ scientists who focus exclusively on improving the mix of nutrients in the broth and the spectrum of light directed at the plants. (Most indoor hydroponic growers use a light that appears very pink to human eyes).

Two companies look as though they have solved most of the early problems with large-scale hydroponic growing and say they are ready to roll out their industrial farms to large cities around the world. Plenty Farms uses vertical hydroponic towers which face the light sources; AeroFarms uses an aquaponic technique combined with stacked trays of growing plants.

Plenty Farms

Recently funded with an additional $200m by investors including Jeff Bezos’s foundation and Eric Schmidt of Alphabet, Plenty Farms aims to develop farms on the edges of every major city in the world. The underlying technology it uses is the ZipGrow Tower, a 6 metre high moulded white plastic square tube into which a black plastic spongy material full of air slides. Lettuces and other plants are germinated and grow to small seedlings in a separate area and are then inserted into the black sponge.

A wall of basil with LED lights on the left

A wall of basil with LED lights on the left

After being filled with seedlings, the tower is moved to a vertical position alongside other units and water containing the right nutrients is dripped down through the sponge. The roots of the young plants capture the nutrients and the water itself. In the right conditions, plants will grow perhaps twice as fast as they do out in the fields.

At harvest time the plants such as lettuces are simply cut away from the matrix and transported to where they are to be sold.

Plenty’s first farm is in South San Francisco. It is about 0.4 hectares in size and claims to produce about 900 tonnes a year of lettuces, herbs (particularly basil) and other crops. The intention is to double the size for future urban farms. The average US resident apparently eats about 10 kilos of lettuce a year, meaning that one of Plenty’s new sites will cover the demand from nearly 200,000 people if focuses entirely on this crop. That means the London area might need 50 farms, totalling about 40 hectares, though they would logically be placed right next to the main supermarket distribution centres rather than in the city itself.

Can this new form of farming offer produce at prices that compete with conventionally produced greens? Most existing urban hydroponic farms offer lettuces and other greens that are priced at a multiple of grocery store prices. (Think $5 for a 30 gram box). But Plenty is convinced that parity is possible. Electricity costs may be high but labour and other operating expenses should be lower.

How much land will be saved by each Plenty indoor farm? My rough calculations suggest about 50 hectares. (By the way, this isn’t consistent with the claim that Plenty and Aerofarms increase land productivity by at least a hundred-fold. The company’s own figures suggest an actual figure of around sixty times). Each one is therefore not hugely significant, but many thousands of farms around the world will make a difference.

Aerofarms

At the other side of the country in New Jersey, Aerofarms does things a bit differently. But the aims are the same: very dense production of leafy vegetables in unused buildings. Aerofarms sprays a mist of nutrients rounds the roots of plants, stacked in trays between which sit LED lights.

The trays in an Aerofarm indoor growing farm

The trays in an Aerofarm indoor growing farm

It makes similar claims to Plenty about the reduction in water use, fertilisers and pesticides. It says that it avoids 98% of transport emissions from shipping greens across the country. Aerofarms has also dipped heavily into the pools of venture capital looking at agriculture and has raised more than $100m. It has now put farms into other countries, including in the Middle East, and wants 25 within five years. Like Plenty, it recognises the importance of producing its crops at a price no higher than ordinary greens. (Though this still looks very high compared to European prices).

Both technologies use the power of the Internet of things to gather data from cameras and sensors to achieve the best yields and product quality. These are true factory farms.

A final thought

Many people in Europe romanticise farming, particularly if it is of the small-scale family kind. We think that the more agriculture resembles the farming of half a century ago, the more environmentally benign it is. This is wholly wrong. The damage that livestock production and intensive field agriculture is doing to the soil, to watercourses and to the climate is huge, but almost entirely unseen.

As much as possible of our food production needs must be fully industrialised as soon as possible. That means food creation needs to go indoors and agricultural land returned to the wild and to forest. Without this change, the battle against climate change is unwinnable. We already have the outlines of the technologies to make the shift.

 

[1] This includes carbon dioxide and the other greenhouse gases weighted according to their global warming potential.

[2] IPPC Fifth Assessment report, 2014, p811 et seq.

[3] I saw this quotation on the website of an organisation that funds research into artificial food – www.new-harvest.org

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UK renewables are now fully cost-competitive with fossil sources

The offshore wind auction produced a price of £57.50 per megawatt hour for two projects. The first phases of Hornsea2 and Moray offshore wind farms will be completed before April 2023 and will receive this guaranteed return.

In November 2016, the UK government produced an assessment of future electricity generating costs. Its central estimate of the likely price needed to attract developers to build offshore wind for projects completing in 2025 was £100. In other words, today’s announcement (11th September 2017) shows that offshore wind costs in five years’ time are not far off half what the government projected for 2025.

The 2016 official projections updated figures from 2013. In the earlier 2013 assessment, the cost of offshore wind installations in 2030 was put at £120, over twice the realised price for 2023.

Where does offshore wind now stand in comparison to other generating technologies? In the 2016 projections, the government suggested the following estimates for 2025. Figures are per megawatt hour.

 

Gas £82, including assumed carbon cost

Gas £53, without any carbon cost

 

PV £63

Onshore wind £61

 

Auction result for offshore wind, 2023, £57.50.

 

These numbers show that gas is projected still to be slightly cheaper - if carbon pollution costs are ignored - in 2025. But the differences between gas and renewables are, at most, £10 per megawatt hour. And most people in the industry now say that onshore wind and PV costs in 2025 will actually be substantially lower than the figures offered by BEIS in November 2016.

 

In addition, the assumed costs of power production from gas are flattered by a highly optimistic forecast of the percentage of time that a new power station will be actively producing electricity. The government estimates a CCGT plant will work 85% of the hours of a year. As more and more wind comes onto the British grid, this assumption will look increasingly wrong. A more realistic figure would push up the effective price of power produced by gas because the capital costs will be spread over a smaller total output.

 

Today’s wind auction shows that the main sources of renewable electricity (wind and solar) are now fully cost competitive will all types of fossil fuel power and require no subsidy. Commentators still saying that renewables are ‘expensive’ need to be corrected.

 

Bankruptcy in two ways - 'gradually and then suddenly'

Humankind has many psychological flaws. One of the least recognised is an almost complete inability to understand the impact of compound interest. Our minds can deal with linear change well; if a new wall is half finished after ten days, all of us can predict that completion is likely within a further couple of weeks. But give us a problem involving percentage growth rates and almost all of us fail miserably.

This deep psychological flaw makes us underestimate the speed of changes in technology. The consequences of this for business, as it deals with the inevitable transition from fossil fuels to carbon-free energy, are profound. Most low carbon technologies, from electric vehicles to offshore wind power, are at early stages of development with market shares that scarcely register. But their growth rates are high, often reaching 40% or more. Largely unnoticed by the giants in their industries, they will take over markets far faster than most of us psychologically inadequate humans think possible.

In my presentations I often use an illustration to show how we all struggle to understand the speed of change. Imagine a market in which a new technology has fought for decades to obtain a 1% market share. (Think of solar photovoltaics or electric vehicles, which have approximately this share of global electricity production and new car sales today). If the innovation is now growing at 40% a year and this rate continues, how long will it be before it has captured 10% of sales? Most people answer with figures of many decades. The right answer is about seven years.

Exponential PPT.jpg

Moreover, even at 10% market share it is all too easy for us to think that the innovation can be ignored. It is still a small fraction of the available market and another human weakness - complacency - allows entrenched competitors ignore the pace at which their market is being undercut. The old technology may still be growing in absolute terms even as the upstart gains 10% share, encouraging a comforting sense that all is normal.

But if growth continues at the same rate it will take only a further seven years for the market to be wholly taken over by the new technology. So the upstart will have taken only 14 years to get from one per cent market share to complete dominance.

To make the point a different way, if an existing business waits until an insurgent technology has hit a 10% market share before it wakes up to the threat, it is probably doomed. The typical large company cannot change fast enough. Its sales will start falling soon, it will then typically haemorrhage cash and its credit rating will slump as lenders recognise the inevitability of decline. By then it is too late to counter the threat from the insurgent new product. Capital will have dried up, distribution channels defect to the new technology and the best employees will have left.

The novelist Ernest Hemingway has one of his characters ask another ‘How did you go bankrupt? ‘Two ways’, was the response “gradually and then suddenly.’ The competitors in the old energy economy, dominated by fossil fuels and internal combustion engines, are still mostly in the ‘gradual’ phase of their bankruptcy. The ‘sudden’ phase may arrive much sooner than they imagine.

The best known example of the how explosive growth transforms an entire industry is, of course, the arrival of the digital camera and its impact on conventional photography. Kodak, the dominant global producer of photographic film, can lay claim to having invented the digital camera in 1975. The company doesn’t appear to have actively commercialised the product and it was Sony that bought out the first consumer device in 1981, although this was an electronic, but not fully digital, camera.

The first true digital cameras were put on sale in the late 1980s. It took until about 1998 for the product to reach 10% or so of total camera sales. Film-based camera sales continued to grow at least until this date and industry participants could be forgiven for not realising that the ‘sudden’ phase of their destruction was well under way. Even by 2000, the threat from digital cameras to conventional film was far from understood. Here’s what the marketing material for one independent market research study said at the time:

‘While digital camera sales have not begun to erode film camera sales or film usage on a worldwide basis, steady market growth will inevitably begin to replace film camera adoption’.

(https://www.dpreview.com/articles/2326873238/digicamsales)

Just five short years later, the conventional camera was all but finished. Agfa, the leading European photographic film manufacturer, went under in 2005. The delusions of those backing this company persisted well after others knew that the death knell for film had sounded. Just nine months before the final closure, its owners said that ‘Agfa Photo will continue to play a leading role in the photographic industry’. It had descended ‘gradually and then suddenly’ into bankruptcy after ignoring the threat from digital. Konica stopped producing film in about 2006. Kodak struggled on until 2012, kept alive by a wider range of products.

Fuji was the only one of the four biggest global manufacturers of photographic film to prosper in the digital world. In the words of The Economist it survived because ‘It developed a three-pronged strategy: to squeeze as much money out of the film business as possible, to prepare for the switch to digital and to develop new business lines’. It had recognised the inevitable victory of digital cameras in the 1980s, long before digital had a significant market share and ran its business to engineer a successful transition. The lesson is that companies threatened by the global transition to low-carbon energy need to prepare well before the need becomes obvious.

Think of some of the key building blocks in the process of transition to a low-carbon economy: offshore wind, solar PV, electric vehicles and storage batteries. All of these technologies are still only insignificant fractions of much larger markets. Many people therefore believe they will still be immaterial for decades to come. Unlike Fuji, all the major oil companies - possibly with the exception of Total - are in denial about the possible speed of transition away from fossil fuels.

Even those who have closely followed the rapid growth of renewables, energy storage and EVs tend to assume that future progress will be quiet and undisruptive. One recent report from a very well-regarded fossil fuels investment analyst that suggested that the move away from oil, for example, would be a ‘slow, balanced transition’ which left the large international companies still in control of the energy business.  The older technologies, he indicated, will fade very gently from view as the fossil fuel companies gradually ramp up their investment in low-carbon alternatives. The low-carbon revolution can be easily managed by the incumbents, he told us. If this isn’t unduly complacent, I don’t know what is.

Nevertheless, almost everybody seems now to recognise that the era of fossil fuels is drawing to a close. For example, the CEO of Shell says that solar power will eventually be the dominant source of electricity. And even the most cautious of car component manufacturers are now predicting an eventual end to the internal combustion engine. This is new; even three months ago many still saw an indefinite future for the petrol car. But none of us can know exactly how fast the switch to alternatives will take.

The crucial thing for us to understand is that at fast growth of a new technology undermines the old companies in an industry more quickly than human psychology allows us to believe. The story of how the major competitors failed to predict the advance of digital cameras will be repeated across many industries in the next two decades.

 

 

 

 

Free electricity - sort of

At some stage in the future, electricity will be free. Of course nothing is truly costless and what I actually mean is that instead of paying for each unit of power we will buy a package of a certain number of kilowatt hours a month. Included in the bundle will be a payment for having a grid connection, and perhaps a restriction or a higher charge on the flow of electricity at points of peak demand.

Here’s what the advertisement for this service might look like. (Although they’ll probably phrase it a little more snappily).

£50 a month buys you our mega-bundle.

Up to 500 kilowatt hours outside our peak charge period

Charges inside the peak hours of 4pm to 7pm – only 20 pence per kilowatt hour

Maximum draw of 5 kilowatts at any time – enough for the tumble dryer and kettle (just)

What do we need from you? You let us switch your appliances off for half an hour or stop your EV charging when electricity is in short supply

Why will the future look like this? Because electricity is going to get cheaper and cheaper to generate while other costs will rise. More specifically, each extra unit of power coming from PV or wind costs absolutely nothing to make. The corollary is that suppliers will be prepared to supply the power at a very low price, pushing power costs down. But, on the other hand, paying for the distribution of electricity won't get any less expensive.

Although the ‘marginal’ cost of an extra unit of electricity is close to zero, the owners of solar and wind farms still need to be paid. What they want is a guaranteed payment for each month of operation. That will enable the owners to recoup the capital they invested in the initial construction of the farm. 

If I commit to buy the mega-bundle advertised above for twelve months, my retailer can make a secure payment to an electricity generator to cover my maximum use over each period. (As with mobile phone bundles, if I use more than I have paid for, I’ll get a large extra bill). The retailer will also get enough to pay its own business costs.

Peak times are excluded from the bundle. That is when the wind farm operators (or battery farms working with PV) will be able to get the highest prices for any power they haven’t sold because demand is high. So bundles will be constructed to severely discourage electricity use in peak periods. (If this policy is successful, of course, then peak time demand will probably fall sharply and it may no longer be the maximum).

The retailer that supplies me will also need to transport the electricity to me. Much of this cost is fixed. The pylons and the distribution cables don’t cost more when they are humming at times of peak use. Nor do they cost less when barely used in the dead of night. Logically, we should be paying for the connection to our homes, not necessarily the amount of electricity we use. This is essentially analogous to mobile phones; the base station’s costs are not related to the amount of data flowing through it.

You may think this all very bizarre and a very long way from what is happening now. That would be a mistake, I suggest. In fact, the obvious creakings of the UK retail electricity business today are a symptom of the market trying to move in this direction, obstructed by outdated regulation and entrenched pricing patterns.


Part of the problem is that the UK pricing system is tending to subsidise smaller electricity consumers to the detriment of those using large amounts. We cannot change this overnight, and nor should we, because consumers of small amounts of electricity tend to be households that are less well off. Rebalancing pricing to introduce lower charges for each unit of electricity and introducing a monthly fixed price will hurt poorer households.

Nevertheless, the long-run pressure is clear. The variable element of our electricity bill – essentially a payment for kilowatt hours – will fall sharply and the fixed portion – an amount we pay however much power we use within limits – will rise. This force is already at work.

Let me go into a little more detail.[1]

1)    In the six years to 2016 the percentage of household electricity charges going to pay for the power purchased by the retailer has fallen from about 55% of the bill to around 38%. 2017 will probably see a continuation of the decline. This means that only just over a third of your bill is being spent on buying the electricity to supply you.

Source: Consolidated Segment Statements for Big Six electricity retailers

Source: Consolidated Segment Statements for Big Six electricity retailers

2)    The portion of your bill going on charges for transporting your electricity and covering the subsidies for energy efficiency and paying for renewables has risen from about 30% in 2010 to over 46% in 2016. In the final year, these charges totalled more than the direct cost of electricity purchases for the first time.

Source: Consolidated Segment Statements for Big Six electricity retailers

Source: Consolidated Segment Statements for Big Six electricity retailers

3)    A split between transport costs (‘distribution’) and subsidy costs has only been available for the last year four years. Analysis shows that the costs of power distribution, paid to the National Grid and, more importantly, to the local network operators or ‘DNOs’ rose by over 4% to 29% of the electricity bill while subsidy costs increased by over 2% to almost 16% of the average domestic payment, or about £80 per household. Distribution costs are therefore now almost one third of the bill and the percentage is likely to rise further. Much of the distribution costs of the electricity system is not directly related to the amount of power carried over the wires. Some subsidies that are paid for by electricity customers, such as the ECO obligation to fund energy efficiency, are also not tied in any way to the amount of power consumed by a household. However, most subsidies - such as the cost of paying Feed In Tariffs - are directly tied to the amount of electricity produced.

Source: Consolidated Segment Statements for Big Six electricity retailers

Source: Consolidated Segment Statements for Big Six electricity retailers

4)    The last category of covers the cost of running the business. This fell from about 15% in 2010 to around 13% three years later but has since risen sharply to almost 17%. This is probably a function of two things: rising expenditure on the smart meter programme and a fall in the total amount of electricity supplied. The second reason may need some additional explanation; if the amount of electricity bought by customers falls, but head office expenditure stays constant, then the percentage of the bill represented by overheads will rise. This appears to have happened recently. Very little of the costs of running the electricity retailing business will directly depend on how much individual consumers buy. If I double my purchases because I have installed air conditioning, the number of staff in the head office will not change.

Source: Consolidated Segment Statements for Big Six electricity retailers

Source: Consolidated Segment Statements for Big Six electricity retailers

Across these four principal categories (power purchases, distribution, subsidies and business costs) the clear trend is for the cost of electricity itself to form a much smaller element. But fixed costs that are unrelated, either partly or completely, to the volume of electricity that a customer buys, are tending to rise.

Increasingly what the customer is buying is therefore not electricity itself but rather a package of services that is more and more dominated by distribution costs and other indirect items. In an entirely free and unregulated market, this package would probably be charged for by a fixed monthly fee.

At the moment, most domestic customers pay a daily standing charge of around 25 pence, or around £90 a year. In 2016, the average domestic customer (including those who use electricity for heating, which pushes up the figure) spent around £1.43 a day in total, almost six times as much. The daily standing charge does not even cover the cost of running the office activities of the Big Six retailers and their smart meter programmes. Whether or not the UK does eventually move to selling monthly electricity in packages like mobile phones, the daily fixed charge will have to rise.

The increase will pay for the business operations of the retailers and, more importantly, for the cost of distributing electricity to the point of use. At the moment, the local distribution companies charge a fee for each kilowatt hour they supply to domestic consumers. But as households decrease their consumption, now an established trend in the UK and elsewhere, the largely fixed costs of moving electricity round are spread across smaller and smaller volumes of power. The per kilowatt hour charges may rise.

Or, and I think this is more likely in the long run, the distribution operators will move to charging per connection, rather than per kilowatt hour supplied to a house. Consider, for example, a house with a 4 kilowatts of PV on the roof. Its draw from the distribution system is quite small, and its use is focused on evenings. Not only is the household not paying a fair share of distribution costs, but is also benefiting from being able to import power at precisely the times when the local network is most overloaded and so it should be paying a higher price per kilowatt. (Much of the cost of running a distribution company arises from having to upgrade or reinforce power lines to meet maximum demands). The UK and other countries could discourage domestic PV to avoid this problem or it could simply oblige all customers to pay a fixed monthly fee for distribution costs.

The increase in the proportion of power costs that are fixed, combined with decreasing costs to generate electricity, will have inevitable effects. It will take a long time, but electricity will eventually be sold as monthly contract that combines a bundle of kilowatt hours, higher costs for peak demand periods and, probably, fees for exceeding a maximum draw on the distribution system. And, as a corollary, the householder will get paid for handing control of the charging of the domestic EV to the electricity company so that it can manage supply and demand better.

Does this still sound like fiction? It shouldn’t do. All the individual elements are already in place around the globe. Sonnen, the battery company, runs a scheme in Australia and Germany that gives households a fixed allowance of kilowatt hours per month if they install a battery and allow Sonnen to charge and discharge remotely. Many places, including Hawai’i and other US states, use time of tariffs to hold down peak demand. Other countries, such as Italy, impose maximum usage limits in kilowatts. Some areas, including parts of California, incentivise EV owners to allow the electricity network to manage the charging of the battery. Other places have raised fixed charges sharply in relation to per kilowatt hour costs.

The move to pricing electricity similarly to mobile phones has social consequences. It may have severe impacts on less prosperous households and, in time, also on those that are unable to install batteries for electricity storage. (Such households will be less able to adjust their draw from the grid to minimise their use of electricity at peak times). The issues will need to be discussed and regulation needs to be thoughtful.

But the need to move to lower charges per unit of electricity sold combined with higher charges for the privilege of being connected to the grid and freely drawing power is clear and should not be ignored. The current review of the UK domestic electricity market by Professor Dieter Helm is a good place to start discussing how we manage to create a transition to fair pricing that also encourages low-carbon sources. It’s in no-one’s long term interests that pricing patterns that diverge strongly from the underlying economic reality remain unquestioned.

 

[1] The numbers in this article are largely derived from data submitted to the UK regulator, Ofgem, by the largest six electricity and gas retailers in the annual Consolidated Segmental Statements. These can be found here. https://www.ofgem.gov.uk/system/files/docs/2017/06/links_to_consolidated_segmental_statements_0.pdf . The figures for 2016 exclude Scottish and Southern because it has not yet filed its segment accounts with Ofgem because its financial year ends later than other companies.

100% EVs can be easily accommodated on the UK grid.

The UK government says it wants all new cars and taxis to be electric by 2040 and the doom-mongers have come out in force. They say that 100% EVs this will strain the UK capacity to produce electricity.

This is not correct. 

Let’s put a few numbers around the question of how and when electric cars will take over from petrol and diesel and what the impact will be.

How much annual demand will 100% EVs add to UK electricity demand?

1, A 2017 electric car will typically get 4 miles from a kilowatt hour of energy. The average car in the UK travels about 8,000 miles a year. That means that a typical electric car will use about 2,000 kWh a year.

2, In 2016 there were 36.7 million cars on the road in the UK. The total amount of energy required to power these cars if they were all electric would be about 75 TWh a year. (A terawatt hour is a billion kilowatt hours).

3, The total consumption of electricity in the UK last year was  about 300 TWh. So if all car and taxi transport was by electric vehicles, the total amount of electricity needed would rise by approximately 20%.

Can the UK accommodate this?

4, If all the vehicle charging in the UK was done in the hour of electricity demand from 6 to 7pm each night, then the total electricity demand in that hour would rise by just over 200 GW, or four times today’s highest power demand. This would not be possible.

5, Instead, the charging will be largely done at night. This will be encouraged by the measures the government will put in place to encourage off-peak charging. If 60% of charging occurred at night, when electricity demand falls and wholesale energy prices tend to be lower, then the increment to electricity demand will be about 15 GW (120 GWh over 8 hours). On average, winter nighttime electricity demand runs at at about 16 GW below the daily 16.00-19.00 peak. In other words, if users are incentivised to charge their vehicles overnight, demand will be essentially flat between 22.00 and 06.00. This is good outcome.

6, Between now and 2030, the UK will add about 25 GW of offshore wind. Typically, these turbines will produce at about 50% capacity factor. (This is higher than 40%+ experienced at the moment as turbines get taller, more efficient and sited in higher wind locations). These turbines will thus produce about 110 TWh a year of electricity. (25 GW *50% * 8760 hours). Offshore wind load factors tend to be highest in winter, when power demand is also high. The annual electricity demand from 100% electric cars (75 TWh) will be just under about 2/3 of the amount of power produced by the offshore wind installed from now until 2030.

7, Digital technology is proceeding fast. Within a few years, the rate of EV charging at any moment across the country will be automatically adjusted to help match overall supply and demand. Not only can EV electricity needs be easily met, properly engineered control systems will mean that charging will help stabilise the electricity system, not the reverse.