Another success for community renewable energy: Osney raises its cash in ten days.

The community micro hydro scheme at Osney, near the centre of Oxford, has reached its target of £250,000 investment from local shareholders within ten days of starting its fund-raising. Work commences on a 49 kW Archimedes screw at a weir on the River Thames in a few weeks’ time. The target return offered to investors is only 4%. This is more proof that community renewable energy projects can raise money locally at rates well below the cost of bank finance. Many congratulations to the team that have been working on this complex project for several years. And praise to the Environment Agency for making it possible – here and around the country – to develop well-designed river micro hydro. The Osney weir is an expensive project for the electricity it hopes to generate. The full cost is around £600,000 for the 49 kW output with bank debt covering the £350,000 not raised in the share issue. The cost per kilowatt is therefore over £12,000, more than the £8-£10,000 that I estimate for the easiest locations. (Compare this to the price of about £500 a kilowatt for new large power stations using gas as their fuel). Based on five years flow data on the Thames, the output from the Archimedes screw is projected at around 159,000 kWh a year, a capacity factor of around 37%, which is a decent figure for a lowland site.

The Feed In Tariff for a hydro installation of this size is about 21p per kilowatt hour. Most of the electricity produced will be sold to the Environment Agency for local use. Total income from all sources is expected to be about £50,000 a year, or a return of about 8% in total. This will rise with inflation in Feed In Tariffs and in electricity prices.

Earlier this year, I tabulated the prospective rates of return on the community projects I could identify. Rather to my surprise, I found that genuinely community-based projects appeared to be able to finance themselves by offering rates of return as low as 4 or 5% to the investor (and the investment back in twenty years or so). Osney has confirmed this figure. The project is expecting to raise £350,000 in debt at a cost of around 6.5%.

This the strange part of community financing. It is possible to fund projects using shareholders money for less than the cost of bank debt. This is even though shareholders take more risk and have less rights to their capital. Quite sensibly, having raised the minimum sum they need in less than two weeks, the organisers are now asking whether they should raise more money in share capital and less in bank debt. I suspect that they could completely avoid having any bank money at all.

Why are people prepared to put their money into far from risk-free projects for a return that is quite small? The obvious answer is that other opportunities are so limited at the moment. But this doesn’t appear to be the complete reason. Other factors include

a)      The corporate structure chosen by the Osney project is an ‘Industrial and Provident Society for the benefit of the community’ or ‘bencom’. This means that investments in a renewable schemes using the Feed In Tariff can offer shareholders what is known as EIS relief, cutting the net cost by 30%. Put in £1,000 and it will only actually cost £700 if you are a UK taxpayer. (To be clear: all hydro projects and anaerobic digestion are always eligible for EIS relief. Wind and solar don’t qualify unless the scheme is an Industrial and Provident Society).

b)      The shareholders know and trust the dedicated team that has taken the project this far.

c)       The potential return to the wider community is large. Osney intends to return the share capital to investors after twenty years. The weir will continue to work for another twenty, and the cash will all go to community energy and efficiency projects. The total amount given to the community is estimated at over £2m over the whole lifetime of Osney hydro.

It has taken twelve years to bring the project to the current state. Community projects like this need huge (and unpaid) commitment from a team of volunteers battling planning regulations, slow-moving councils and landowners and even, in the Osney case, local environmentalists wanting to protect an individual tree from being lost during the construction of the hydro plant. Nevertheless, this complex scheme shows how scale of  the latent demand for genuinely community-based renewable energy.

 

UK greenhouse gas emissions are falling, not rising.

Whatever George Monbiot says, it simply isn’t true that UK greenhouse gas emissions are still growing rapidly. Monbiot is right to insist that we move from focusing just on UK-based emissions and include the impact of our imports. But even if you include the embedded greenhouse gases in goods brought into the country, domestic and imported emissions have fallen sharply since 2004. The latest data is as follows.

 

Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/85869/release-carbon-footprint-dec2012.pdf

Yes, the share of CO2 emissions represented by imports (the blue area in the chart) has grown sharply since 1993. And 2010 saw a clear uptick. However, even with the rise of ‘embodied’ CO2, the grand total has decreased significantly since 2004. Total emissions of CO2 were down from a peak of 852m tonnes to 722m tonnes in 2010, a fall of 15%. It’s important to note that the steep decline began four years before the economic contraction started.

The chart above just covers CO2. The same pattern applies if you look at all greenhouse gases.

The Monbiot theme worries me. He suggests that material consumption is rapidly increasing and, therefore, that our environmental problems will be mitigated by a reduction in the goods we buy. I suspect that nothing turns people away from environmentalism more than its consistent refrain that we are all guilty of destroying the planet by our increasingly profligate consumption.

He doesn’t say this directly, but he implies that UK imports from China are a particular issue, exemplifying why we need to change our ways. He might be startled by another chart.

 

Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/85869/release-carbon-footprint-dec2012.pdf

The emissions in China arising from production for the UK market are neither rising, nor particularly large. Emissions from ‘Rest of the World’ countries are over twice as great, partly driven by methane emissions in agriculture. Meat, I suggest, is more of a problem than iPads, even if you believe George’s story.

 

Your solar panels are probably working properly

Several householders have asked whether the performance of their PV system indicates problems with their solar panels. The recent electrical output from their roof has been well below expectations. If the output from my panels is any guide, the problem lies in the cloudiness of the last year, and not the system itself. I’ve recorded the output figures from my PV system each month for the last nine years and this annual period has been by far the worst on record.

In ten out of the last 12 months, my panels have produced less than average output for the month. March’s output was strikingly low: 68% of the average figure for the month.

The last year’s electricity production was 90% of the nine year average. Our (badly oriented) 2 kW system produced less than 1,300 kWh, compared to the norm of around 1,430 kWh. You’d expect some small degradation in performance as the panels age but the last twelve months have been unusually cloudy.

The graph records annual output from our PV system over the last nine years with kilowatt hours on the vertical axis.

 

 

No net savings from energy policies

The government says its policies are saving householders’ money on their energy bills. Although subsidies for lower carbon generation increase costs, DECC contends that its energy efficiency schemes have outweighed the impact. It says that gas bills have been held down by improvements in home insulation and better boilers. However the government ignored the evidence that homes are heated to lower temperatures than they were a decade ago. The apparent savings in gas bills are driven as much by lower thermostats as improved efficiency. As retail energy prices rise, policy makers are under increasing pressure to show that financial support for low carbon generation and other measures aren’t the driving force behind the cost increases faced by householders. Their case is that wholesale price changes, particularly of gas, are driving the inflation in home energy costs. They’re right: wholesale gas prices a decade ago were a third of what they were in 2004 while low-carbon support schemes have added less than 10% to retail energy costs.

Over the last few years, DECC has wanted to make a second, and much stronger, claim. It has repeatedly asserted that by 2013, the net impact of government policies would be to reduce average home energy costs.  The impact of costs imposed on the consumer would be less than the benefits of other policy interventions. On 27th March, the government duly announced that this aim had been achieved. (This is expressed schematically below).  Energy bills in 2013 will be 5% lower than they would have been without any form of government intervention. Simplified to the greatest possible extent, DECC says that this year’s bill additions will be outweighed by the benefit of past subsidised home insulation (about 50%), regulations that obliged central heating engineers to install better boilers (about 30%) and more energy efficient electrical appliances (20%).

 

Importantly, the calculations seem to assume that all gas bill reductions are due to better insulation of the home or improved boilers. Without this claim, the government’s assertions that policies have cut overall costs to householders are hollow.

In fact, rising gas prices have obliged many householders to run their heating at much lower temperatures than before. The following chart is drawn from information provided in another DECC document.[1] After wobbling around 18-18.5 degrees centigrade for the early years of the last decade, having previously consistently risen since 1970, internal home temperatures have declined every year since 2005, approximately the moment gas bills started to rise sharply. This is what we’d expect: homeowners are reacting to the increased cost of energy by reducing their use. (Very unfortunately, of course, this has also had the effect of causing cold-related illnesses and deaths).

The information in this chart isn’t measured directly but is estimated from other research. It may or may not be accurate but the point is that the numbers are DECC’s own figures, which it choose to exclude from its own analysis of bill savings. I’m saying that it should have incorporated the impact and reduced its estimate of savings from insulation and other programmes.

One recent academic study went so far as to suggest that all the observed recent reductions in gas use are entirely due to increasing prices. None are actually the result of government sponsorship of cavity wall insulation programmes, more efficient boilers or thicker levels of loft insulation.

This seems unlikely to me. Gas use in homes, adjusted to reflect annual variations in outside temperatures, has fallen about 20% since 2005. Household heating (expressed as the average difference between internal and external temperatures in homes) has only fallen by about 10%. So, by implication, efficiency measures have (very roughly) saved about 10% of all domestic gas use. A decent improvement but not enough for DECC to correctly claim that the net effect of policies has been to reduce energy costs to below where they would have been. My guess is that instead of saving 5% of costs, the net impact of policies has been to raise bills by between 1 and 2%. Consumer welfare has also seriously suffered as homeowners have run their houses at lower than desired temperatures.


[1] The United Kingdom housing energy fact file, 2012. DECC January 2013..

Time to stop promoting air source heat pumps and ask why they don't work in the UK

(24th October 2014. Some of the comments submitted here in recent days have been abusive and off-topic. I will remove all comments placed on this post until November 3rd 2014 in order to let things calm down. I know that many people find the expertise available from some of the regular correspondents here extremely useful so I will open things up again on November 4th 2014. Please completely avoid personal remarks, unpleasant accusations and off-topic comments on the quality of climate science).   

(24th July 2013. Several commenters have kindly provided detailed analysis of some of the reasons why air-to-water heat pumps may be costly to operate. Others state that the technology is not at fault and blame the poor quality of the installation. Thank you very much to all those who have given time and thought to this issue. May I strongly recommend reading the full range of comments below the text? Chris)

 

When temperatures in the British Isles drop to unexpectedly low levels, the pattern of traffic on this web site changes. One set of search terms dominates the inquiries. Readers are looking for information on why their air source heat pump is costing so much money to run. Sold to them as a way of saving cash, readers often seem to find that the price of heating their home has suddenly increased, sometimes quite dramatically. And, moreover, the pumps don’t heat the house properly.

Today (March 25th 2013) is unusually cold across Britain and the search term ‘problems with air source heat pump’ is the single most common inquiry. Colder countries that have been using heat pumps for decades seem to be able to install them in ways that mean that homes have inexpensive and reliable heating. In the UK, with its badly insulated houses, air source heat pumps seem to be a complete disaster for many unlucky purchasers.

Below, I copy a letter I’ve just received from a lady living in the Orkneys off the northern tip of Scotland giving her experiences. Readers may also be interested in the comments added at the end of a previous post on heat pumps, including the most recent one from Jane Smith, submitted today. Despite the increasing evidence of systematic problems with air source heat pumps, government bodies such as the Energy Savings Trust continue to say that they will save money for householders living off the gas grid. Heat pumps are also part of DECC’s ‘Renewable Heat Incentive’, a scheme that is intended to subsidise the installation of suitable and effective technologies for householders. The continuing official support for heat pumps in the face of repeated failure needs to be challenged.

(Published with permission from Ms Switsur)

Hi Chris,

I don't need a reply to this, I am just having a grouch which might interest you.

AIR SOURCE HEAT PUMPS are USELESS for anyone on a low income. I am 72. I have £130 a week total income (Pension and Pension Credit). My house had no central heating. The Energy Savings Trust conned me into having the Government Grant of £6800 and paying £2000 extra myself to have air source central heating.

It took 11 months to install because the plumber obviously didn't know what he was about.

The first winter my leccy bill was nearly £400, and I thought it was my fault for not using the system properly, and it took me a very long time to realise that the installer had left the hot water boost permanently on.

This winter I really, really tried to economise, turning rads down and only having it on in the cheap periods. Result? a bill of £420. As I also had unexpected vets bills and an insurance excess of £250 to pay because my car slid in the snow and did some damage, I could not pay the bill - there is only £90 left to pay but (the suppliers) are saying they will cut the leccy off if I don't sign up to their payment scheme. I can't afford their payment scheme anyway because it is double my weekly payment.

My electricity costs are now more than 20% of my total income even thought I was promised I would save money. I HAVE SWITCHED THE SYSTEM OFF and gone back to coal. 11 months of torture while the thing was installed, £2000 of debt to pay my share, and I am back exactly where I started.

Please do advise people on low incomes not to bother with it. It didn't heat the house adequately in cold weather anyway.

Thank goodness I have an open fire!

Regards, Julie

Julie Switsur Ardage Burray Orkney KW17 2SS 

We need to store surplus electricity as gas

(The comments underneath this article are particularly interesting. I recommend reading. Chris.) Whatever renewable energy advocates say, the intermittent nature of solar, wind and marine energy production represents a difficult problem. Although we can adjust electricity demand to match supply to a far greater extent than we do today, the huge expected growth in UK offshore wind power is going to give the electricity grid major problems. When the gales blow, we’ll be dumping power but running short of electricity on cold, still days.

That’s why the recent contract win by ITM Power, the Sheffield hydrogen electrolysis company, is so interesting. ITM is supplying some of its units to a 360 kW hydrogen production plant in Germany that take surplus electricity, convert it into hydrogen and feed the gas into the national gas grid. (Please read the comments for discussion of some of the problems this might cause). In a second stage, hydrogen can be converted to methane, the main constituent of natural gas, and injected into the grid or into storage caverns. The Germans have been quicker to recognise than other countries that the gas network can store far more energy than any other media. Forget batteries, compressed air storage or pumped water: the national gas grid has a capacity several orders of magnitude greater. And the network and its storage sites already exist. No need to spend billions on new facilities. Complete reliability.

The problem

We can see the issue already. When the wind is strong the UK grid sometimes cannot cope with the electricity produced. Wind farms are paid to disconnect. We mustn't exaggerate the current problem: the amounts are small and paying generators to shut down has long been a feature of all electricity grids. But as the capacity of working wind farms rises from 7 gigawatts now (providing – at peak – about 20- 25% of UK summer night demand) to thirty gigawatts and beyond we know the problem is going to get more and more severe. Electricity is wasted, increasing the long run cost.

And, of course, the reverse situation is also a problem. Cold December weather is often correlated with low wind speeds. Those thirty gigawatts of turbines might be only producing 1 or 2 gigawatts of power at times when electricity is really needed. Fossil fuel power stations will have to work instead. Most of the time these plants will stand ideal, and creating the right incentives to build them is proving one of DECC's many challenging problems.

Most analysis of renewable energy deployment suggest that the UK and other countries need to invest heavily in energy storage and/or massive increases in the capacity to ship electricity around Europe. At the moment, we have very little storage of any form. The two large ‘pumped hydro’ plants provide a few gigawatts for a few hours. In Germany, the total amount of non-fossil energy that can be quickly converted into electric power is about one twenty fifth of one percent of annual electricity demand.

Some expansion of pumped hydro is possible; I’m told Japanese companies are pumping water up sea cliffs ready to be released when power demand rises. A few more large reservoirs are possible in the UK. But getting to the energy equivalent of more than a day’s supply of electricity is almost impossible to envisage. We could use a 100% electric car fleet to provide power but one German study suggested that this would provide, in total, only about a third of a day’s power. Other battery sources would be astronomically expensive.

Unfortunately, those periods of calm in mid-winter can last weeks or more in the UK, and longer elsewhere. The main potential sources of energy storage are insufficient.

The answer

This is why we need to consider the possible role of the gas grid. In the UK, total gas demand is very approximately 3 times total electricity use. (I’m using rounded figures only here).

Total demand Power source
Electricity 400 TWh
Gas 1100 TWh
   Of which, used for electricity c. 300 TWh

 

Most countries, but not the UK, have maintained substantial gas storage. Gas is bought when cheap, usually in the summer, and put into depleted hydrocarbon reservoirs and other storage reservoirs for use in winter and to meet unexpected needs. German has storage capacity of about 200 TWh. A gas power station is about 60% efficient, meaning that German gas storage could provide the energy to meet about 100 days of continuous UK electricity demand.

In the UK, the malfunctioning energy markets have held back investment in storage and we can only store about 18 days continuous gas use. But sites have been found, and planning permission often granted, to multiply this fourfold.[2] This is enough to overcome all the problems of intermittent renewables.

This, of course, is similar to what the government already intends. New gas-fired capacity will be given payments just for being ready to fire up when the wind stops blowing. The real innovation that the Germans are beginning to explore is to use the gas grid both as a back-up to wind in calm condition AND as storage for energy when the wind is too strong.

This is why the ITM Power contract is so intriguing. Its units will be employed to turn surplus electricity into hydrogen through simple electrolysis, the splitting of water into its components, hydrogen and oxygen. The intention is then to put the hydrogen into the gas grid, mixing it with the methane already there. (I didn’t know this, but it seems that 1 or 2 percent concentrations are safe). This means we’ve potentially got energy storage from surplus wind in the gas grid. At times when wind is over-abundant, and usually this means wholesale electricity is cheap, the wind farm output can be diverted to electrolysis in a process that is about 80% efficient. (This means that 100 kilowatt hours of electricity can be converted into hydrogen that when combusted produces 80 kilowatt hours of heat). We've got some storage, and energy that would otherwise have been dumped or sold for less than nothing.

But, you might say, adding 1 or 2 percent hydrogen into the gas grid doesn’t provide enough storage for more than a few days. The logical next step is even more interesting, and just beginning to be explored in the Germany and Austria. Hydrogen can easily be converted to methane using a well-understood process. Find a source of CO2 (not scarce) and hydrogen be turned into conventional natural gas. Except that, in effect, it is 'renewable' because it is sourced from water and CO2.

2H2 + CO2 = CH4+O2

Very roughly, this methanation process is also 80% efficient . That is, 100 units of chemical energy in the hydrogen turn into 80 units of chemical energy in methane. Conceivably the lost heat could be reused, possibly in a simple Organic Rankine Cycle (ORC) plant to produce electricity. More about all this here.

The storage process is complete. When the wind is blowing, the surplus electricity gets converted into hydrogen and then methane. The total efficiency is about 64% (80% times 80%).This isn’t great, but the wind farms’ power might otherwise be wasted. And it is not much worse than other conceivable large scale energy storage mechanism.

If the UK wants thirty gigawatts of wind (equal to total UK demand on a summer night), we have to find a way to enable electricity to gas conversion to happen at a very large scale. It seems to me that there is no alternative if we want to use renewables, decarbonise the power supply and keep the lights on as well. Electricity-to-gas hugely increases the capacity of the electricity grid to cope with intermittent renewables and provides ‘zero-carbon’ gas to power stations in times of low wind. Perhaps critically, it also helps stabilise the price of gas and reduces the UK’s increasing dependency on imports. We can engineer the market so that gas-fired power stations can work most of the time on ‘zero-carbon’ methane, reducing the overall cost of renewable power.

Electrolysis and methanation are relatively cheap. I can’t see a good reason not to go down this route. Am I missing something?

 

 

 

 

 

 

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/08/NG-54.pdf

UK storage estimates

http://www.uni-kassel.de/upress/online/frei/978-3-89958-798-2.volltext.frei.pdf

 

 


[1] http://www.itm-power.com/news-item/first-sale-of-power-to-gas-plant-in-germany/

 

When talking to investors and to customers, British Gas tells very different stories

(Published on Left Foot Forward, 1.03.13)  

Home energy prices went up sharply in late 2012. The excuses used by the Big 6 suppliers focused on the adverse implications of the need to pay for the government’s environmental policies, such as the support for renewable energy and better home insulation.

British Gas told its customers of a 6% rise in prices in November 2012, giving a long explanation of the reasons why prices had to rise. Unfortunately for company, we can now check some aspects of its story against what its parent, Centrica, has just told its shareholders about its financial performance in the UK during 2012. As we might wearily expect, the disparities between the two accounts are striking. Below are six statements extracted from the press release that announced the price rise, followed by a summary of Centrica’s comments today (28.02.13).

1)     Even after this increase, our margins after tax in 2012 will only be 5p in the pound

The actual figure for 2012 was 6.6%, over 30% greater than British Gas said. In cash terms, operating profit was up 11% to £606m for the UK domestic energy supply business.

2)     Prices in the wholesale market for gas this winter are around 13% higher than those paid to secure gas for last winter

According to Centrica, the average price of gas was 58 pence per therm in 2012, unchanged on 2011’s figure.

3)     The cost of the Government’s policies, including: CERT, CESP, ECO, FIT, the Renewables Obligation and the Warm Home Discount have added around £25 to the cost of supplying the average household in 2012

The figure quoted by Centrica is actually £19, just under a quarter less than the figure used in the price announcement. The error was compounded by the failure to acknowledge that ECO (the Energy Company Obligation) didn’t actually exist at the time of the price rise. British Gas, along with several other suppliers, used forecasts of higher future environmental costs as pre-emptive justification for its cost hikes. Government denies that the new policies coming into force in 2013 will be any more costly than the old schemes.

4)     On average, the cost of delivering energy to the home has increased by around £25 in 2012

Actually, the figure was £34 a home, 35% more than British Gas said. The point is not the amount of the increase, which is relatively trivial as a fraction of the typical domestic bill, but the wish to play down the part played by necessary capital investment in forcing up prices. British Gas exaggerated the cost of environmental and low-carbon measures while underplaying the importance of the improvements in the electricity and gas grids.

5)     The company is making every effort to reduce its own operating costs, which are falling.

Centrica says that the operating costs per British Gas domestic customer rose from £102 to £104 a year during 2012.

6)     Despite the increase in prices announced today, assuming seasonally normal weather conditions, British Gas Residential profits in the second half of 2012 are expected to be around 15% lower than for the same period of 2011

Second half year profits from serving UK residential customers fell not by 15% but by 0.8%. The fall was from £263million to £261m.

More generally, Centrica paints a picture of growing profitability in its stable UK business supplying homes and businesses. Cash flows are healthy and the future secure. There’s not a word about the any of the problems used in the press release to justify hiking prices. If the energy companies want us to trust them, they shouldn’t be telling one story to their investors and a completely different one to their customers.

 

If we want nuclear, we need EdF to get at least £100 a megawatt hour. Painful but necessary.

The UK government appears to have given up on nuclear power. Although simple arithmetic shows that EdF cannot afford to build the proposed new power station at Hinkley in Somerset without a guaranteed price of at least £100 per megawatt hour, the Treasury is refusing to move from a figure of £80. (Since this post was written on 17.02.13, the Guardian has reported that the UK government has moved part-way towards Edf's position) If it persists, the effect of the government’s policy will be to ensure that new nuclear power stations will never be built in Great Britain. Nuclear power requires subsidy. The huge cost overruns at the stations currently being built at Olkiluoto in Finland and Flamanville in France mean that the UK government has had to guarantee a high and permanent price for the electricity from nuclear. Without such a commitment the French power company EdF will not be able to find the capital to finance the €14bn required to build the two proposed reactors in Somerset. These power stations might produce about 6% of the UK’s requirements so the current stalemate has disastrous implications for plans to decarbonise electricity production.

The economics of nuclear power

A nuclear power station costs relatively little to run. The cost around the world’s existing plants is about £10 per megawatt hour (1p per kilowatt hour). Similarly, the price of uranium fuel is well known and averages about £5/MWh (0.5p per kilowatt hour).  Waste disposal and the cost of dismantling the power station in fifty years’ time are less certain but are insignificant in the context of the total bill. The overwhelmingly important element in the production of nuclear power is the price for initially building the plant.

At present, the evidence is that the first new single nuclear power station will cost about £7bn. This is the UK currency equivalent of today’s estimates for completing the two nuclear power stations in development, one by EdF, in France and Finland. Future UK nuclear power stations might be less expensive but a reasonably conservative assumption is that the budget for Hinkley will be at least as great as at Flamanville in France.

These assumptions are all we need to make a simple financial model of EdF’s position. Put as baldly as possible, the company will invest £7bn over a construction period of about 7 years and then get back an annuity from the operating profit of the power station. EdF will be quite confident that the plant will operate 8,000 hours a year or about 90% of the time. Multiply the price of electricity by the power generating capacity of the power station (1,600 megawatts or 1.6 gigawatts) and by the number of operating hours a year and we can calculate the number of megawatt hours the new plant will produce each year.  Deduct the costs of operating the plant and we have an estimate of the operating profit it produces.  This is the profit that EdF needs to create each year to pay its shareholders and banks for the capital it has used to build the power station.

The cost of capital

In the language of finance, EdF need to earn the ‘cost of capital’ for the money used to build Hinkley. The part of EdF’s business that buys electricity (in France and other countries such as the UK) and then sells on homeowners and businesses  is a simple and reliable business whose profitability doesn’t change much each year. This activity has a low cost of capital, perhaps not much more than 7% at the moment.

Building a new nuclear power station at a huge cost is a different matter entirely. EdF faces a range of potential events that will disrupt the flow of cash from the new plant. These include the possibility of cost overrun, major maintenance issues or enforced shut-down of the power station or even a change in corporate tax arrangements. The cost of capital for EdF’s UK nuclear business will be well over 10% and perhaps as high as 15%.

A simple spreadsheet enables us to estimate the return on the capital that EdF will generate at various levels of guaranteed price for its nuclear electricity. In the table below, I have estimated the return on capital averaged over the 50 years of the power station’s life.[1]

Guaranteed price for electricity per megawatt hour Average return on capital
£80 8.0%
£90 9.0%
£100 9.9%
£110 10.7%

 

If my figures are even approximately correct, EdF simply cannot afford to build Hinkley if the UK Treasury only allows a price guarantee of £80 a megawatt hour. Even £100 generates a return of less than 10%. The analysts at the Treasury will know these numbers, of course.

The implication is surely this: the Treasury doesn’t want the UK to have new nuclear power stations, or certainly not the EPR type offered by EdF. Its belief appears to be that electricity generated from gas will be cheaper (and without a high carbon tax this is almost certainly right).  As a result it is putting impossible demands on EdF. The negotiations will break down, and the UK will probably fail to achieve even weak targets for decarbonisation of the electricity supply by 2030.

 

(19.02.13. Since this piece was written there have been some indications that the Treasury will move towards EdF’s position. Nevertheless, my guess is that the Hinkley Power stations will never get built because the capital markets will not support the investment required by EdF.

 

 

 

 

 

 

 


[1] This is the ‘internal rate of return’ of the EdF Hinkley Point project at various levels of guaranteed electricity price.

How much proof do we need that biochar can double food production on some tropical soils?

Experiments around the world are examining the impact of biochar on food production. On poor tropical soils the effect of adding organic matter that has been intensely heated in the absence of air (making biochar) continues to startle researchers. The latest surprise comes from trials in East Africa administered by the US biochar company Re:Char. In Kenya local farmers are showing that soils treated with biochar in year 1 had substantial further yield increases in year 2. An acre of land treated with biochar produced nearly 150% more grain than a similar area using conventional artificial fertiliser. On the biochar-laden soil the only fertility supplement used in both years  was sanitised human urine, which contains copious amounts of phosphorus, potassium and nitrogen.

Biochar isn’t itself a fertiliser. It is a highly stable form of almost pure carbon and can have no direct effect on agricultural productivity. But it does seem to assist soils retain nutrients, and make these nutrients more easily available to crops. The evidence that biochar has profoundly important effects is growing by the week. In addition, it sequesters carbon permanently. Done at large scale across the tropics, biochar may be the lowest cost form of carbon capture and storage.

Biochar

Wood and agricultural wastes, including dung, can be turned into biochar using very simple kilns. These stoves are cheap and easy to use. Re:Char sells subsidised stoves in Kenya which 1,000 local farmers use to make the biochar for their fields.

Heating organic matter in the absence of air drives off gases and liquids. (This is how charcoal is made). This process is called ‘pyrolysis’ and it leaves just the carbon behind (with traces of minerals). Biochar is sponge-like with a huge surface area. One study suggested that one gram of the substance could contain eight hundred square metres of surface. This is probably the source of its success: it can store nutrients and water better than almost any other material. Microscopic fungi living in the biochar can live off material stuck to the biochar surfaces and then themselves provide food to growing plants. By contrast, many tropical soils struggle to retain nutrients and don’t provide a conducive habitat for beneficial fungus growth.

Re:Char’s work

Re:Char’s business formula, which is increasingly  followed by other social ventures, is to sell biochar kilns at full price in the first world, particularly in the US. (I have one on my allotment garden. I have to admit it cost a fortune in transport costs and import duties). A share of the revenue from each sale is given to its Kenyan partner to subsidise the sale of kilns to small farmers. Researchers work with the agriculturalists to measure the results of biochar application and to help spread the word about successes and failures.

The aim of the company is to help improve tropical soils, and thus food production, by the use of biochar. In addition, if successful, biochar will reduce the need to use very expensive artificial fertiliser. Biochar seems to stay in tropical soils for a very long time, thus permanently storing carbon. By reducing the need to use man-made fertiliser, the use of biochar also cuts the emissions of CO2 in fertiliser manufacturing. It also seems to assist in water retention in dry seasons.

The company has just released summary results from the second year of Kenyan farming operations. Some details are available here. The most important finding is that biochar works best at heavy dosage (about 6 tonnes/acre or 15t/ha) and when supplemented by sanitised urine. Second year yields on land with high concentrations of crushed biochar in the topsoil and a second application of urine were higher than the first year. The clear possible implication – which needs to be tested further – is that some of the good stuff in the first year’s urine was retained in the soil for second year use. Biochar may be functioning as an absorbent sponge that holds useful fertilisers in the soil and stops them being leached by intense rains. (By the way, my own personal observation is that similar techniques work on central England allotment soils).

The measured yield increases are staggering. Jason Aramburu from Re:Char writes

Biochar was applied in season 1 and then not reapplied in season 2. In season 1, our urine + biochar plots outperformed chemical fertilizers by 27%. In season 2, urine+biochar outperformed chemical fertilizers by 144%, without adding any additional biochar.

Putting six tonnes of biochar into an acre of soil is not a trivial task. It needs three units of raw material going into the kiln to make one unit of biochar. To get optimum dosages of biochar, the farmer therefore needs to process eighteen tonnes of agricultural wastes or wood. This is the average yearly production of several hectares of land. Opponents have focused on the risk that the increasingly clear yield advances offered by biochar might encourage rapid deforestation as farmers cut down trees to obtain raw materials. At worst, this is a temporary problem because the increased production of food in biochar-rich soils is accompanied by a several fold increase in plant stalks, leaves and grain husks. These wastes can provide the raw material for future biochar kilns.

There is no shortage of urine. One person’s typical production of 500 litres a year provides enough potassium, phosphorus and nitrogen to feed an acre.

The world needs hundreds more experiments like Re:Char’s. The benefits of higher food production, lower fertiliser use and huge amounts of carbon storage should be too obvious to ignore. Unfortunately, the lack of clear commercial incentive means that experimental work is proceeding too slowly and the benefits to subsistence farmers are not being harvested as quickly as they should be.

I’ve argued elsewhere that biochar may be the world’s lowest cost, lowest risk form of carbon capture and storage. Results like those from Kenya show the potential advantages to third world nutrition. Let’s have one hundredth of the proposed UK industrial CCS subsidy to be awarded in the next few weeks devoted instead to biochar in the tropics. I guess that the benefits to humanity just might be a hundred times greater.

 

 

A model community energy project

(Update: 25th March 2013. South Brent successfully completed its fund raising on 22nd March and the turbine will be installed over the next few weeks. Many congratulations to all involved. The outlines of the community ownership scheme should be widely copied elsewhere).

 

A small South Devon community is half way to successfully raising the £420,000 necessary to build a 225 kilowatt wind turbine on farmland at the edge of the parish.  Investors are promised a 5% return on their money. The bulk of the income from the turbine over the next twenty years is going to fund future renewable projects in the area, such as micro-hydro installation in another part of the parish as well as much needed home insulation improvements.

South Brent Community Energy Society (SBCES) obtained permission for its turbine almost three years ago. After long negotiations with the suppliers of turbines and agreement with the landowners and power distribution companies, fund raising started in the autumn of last year. To meet the planning conditions, it has until early April to raise the rest of the cash. If you’re interested in the project, please follow the link to the prospectus here. I’m not qualified to recommend the investment, but it does seem to me to be a model of how community energy should work.

South Brent is a few miles from Totnes in Devon, currently the scene of one of the most unpleasant battles between pro- and anti- wind campaigners that the UK has yet seen. The South Brent turbine, by contrast, is broadly supported. [1]  There were no objections to the planning permission. It’s to be positioned at a site where the dominant noise will be the A38 trunk road and the nearest house is barely within view. Although not all local residents are happy with the turbine, most seem to be strongly in favour.

Wind speeds were checked on the hilltop site over a period of several years. The average velocity isn’t exceptional for Devon but at 6.0- 6.1 metres per second  it’s enough for SBCES to expect to generate at least 320 megawatt hours a year. The local people driving the project - many with an engineering background  - seem have been conservative in their projections and their central forecast is based on what is generally called P90, the level of wind output that will be exceeded ninety years out of a hundred.

SBCES is organised as a ‘bencom’, a corporate body that has to have the ‘benefit of the community’ as its core objective. Many similar renewables ventures around the country use this legal structure. A Bencom’s assets cannot be stripped by shareholders and it can only pay a rate of return that is sufficient to stop investors withdrawing their cash. The current directors think that 5% - perhaps rising if inflation continues its apparent upward course – is enough to do this. Any investment now is eligible for the Enterprise Investment Scheme , meaning that UK taxpayers can get 30% of their capital back in tax relief.[2] This raises the implied financial return to over 7%

So far, about 75 people have invested in the scheme. Over 80% are from the parish itself. The average investment is not far short of £3,000, higher than similar fund-raising drives for community projects in other places. For local people, the most important incentive to invest is probably the strong commitment by SBCES to fund energy efficiency improvements to community buildings and reduce fuel poverty. They may also invest some of their profits in other renewable projects, such as a micro-hydro power scheme to run a heat pump for heating the parish church. If the wind turbine achieves the expected average ‘P50’ output, the directors of SBCES anticipate a total of over £700,000 to flow back into the community over the turbine’s life.

Another £200,000 is needed before the 22ndof March if construction is to start before planning permission expires. Please take a look at the prospectus. It seems to me that SBCES, a genuine community project with expert volunteer directors and supporters, is an extremely good model for future small scale energy generation projects.  

(Disclosure: I intend to apply for a small number of shares in this project).

[1] I attended a well-attended village public meeting. No voice was raised against the turbine plans.
[2] Shareholders in conventional companies (‘plc’ or ‘ltd’) cannot claim EIS relief on renewables projects that claim FiTs. Bencoms can.

'Peak Stuff' updated

Have the UK, and perhaps other mature economies, reached a peak in their consumption of natural resources?  In ‘Peak Stuff’ I put forward evidence that the total use of material resources rose to a maximum a decade or so ago in the UK and has probably declined since. I added to this work in ‘Sustainability: All That Matters’, suggesting that once an economy had acquired a large enough stock of the main industrial metals and minerals, its need for raw materials would fall, possibly sharply. In the case of copper, for example, I looked at the evidence assembled by Tom Graedel and others that showed that 200 kilogrammes of the metal per person appears to give us all we need. In the eighteen months since I did the work on ‘Peak Stuff’ new data has become available. These updated numbers strongly support the theses in the paper and in my ‘Sustainability’ book. The conventional assumption that human wants are infinite, and therefore that economic growth is incompatible with ecological stability, seems to me to be wrong. I think a strong case can be made that growth in mature economies is profoundly good for the environment, partly because it speeds up 'dematerialisation'.

The new data

In this article, I look at six (very disparate) indices of material use in the UK, or OECD, economies. Some are updates of numbers provided in ‘Peak Stuff’ while others are new data series of which I wasn’t previously aware. It isn't comprehensive, or in a particularly logical order, but it does show trends across different parts of the UK economy.

a)      The material flow account

b)      Weights of goods transported

c)       Flows of material into waste

d)      Energy use forecasts from BP

e)      Personal transport trends

f)       Indices for wood product use

 

a)      The material flow account (MFA)

The MFA is a measure of the weight of materials used in an economy. It sums the number of tonnes of fossil fuels, biomass and minerals used by the UK, both in goods produced locally and in imports. (‘Peak Stuff’ has a discussion of why the MFA is one of the best available measure of the impact of the economy on the natural environment.)

The decline in UK materials use that I noted in that earlier paper has continued. The 2010 estimate for what is called the ‘Total Material Requirement’ (TMR) of the UK economy fell by 5.4% in the year to around 1,615 million tonnes. The peak was 2,138 million tonnes in 2001. Although the UK economy grew little, if at all, in 2010, the 5.4% reduction in TMR shows a continued rapid rate of ‘dematerialisation’. It requires fewer and fewer tonnes of input to create £1 of GDP.

 

b)      The weight of goods transported

I don’t know that this measure existed when I did the work for ‘Peak Stuff’. It shows Department for Transport estimates of how much is carried in road, rail, air and water transport in the UK. The number for 2010 is down 16% on its recent high of 2007. But the striking thing to me is that this measure is now lower than it was 20 years. In fact, the weight of material goods moved has barely changed since the mid-1960s. It may not be obvious why this data is relevant: if the economy  needs more material inputs as it grows then we’d expect  to see more goods being shipped around the UK. The data suggests otherwise.

 

c)       Flows of material into waste

In ‘Sustainability’ I pointed out that every manufactured thing (food, metals, minerals) eventually  becomes waste. Although some objects, such as cathedrals, last for ever the weight  of waste being processed is a good proxy for the volume of material being used by an economy. We’re well aware that household waste volumes are falling, but the total waste from industry, construction and sewage processing sites is also sharply reducing. Household waste declined 3% in 2011/12 and latest available statistics (for 2008) show a continuing cut in total waste processed. The fall is over 10% between 2004 and 2008, even though the UK economy grew strongly  during this period.

d)      Energy use forecasts from BP

Most of the charts in ‘Sustainability’ record past data. It’s also powerful to record what industry experts expect to happen in the future. In mid-January 2013 BP released its annually updated energy use forecasts for 2030. The document doesn’t provide estimates specifically for the UK but does predict how much energy the OECD countries as a whole will use in 2030. Although economic growth is expected to resume, consumption of fuels and energy from renewable sources will increase only a very small amount and will actually fall in per capita terms. The cut will be particularly sharp in the 2020-2030 period. Energy efficiency gains, estimated by BP as averaging 2% per year worldwide, and dematerialisation will outweigh any impact of economic growth.

Total consumption of energy in the UK was broadly flat from the mid-seventies to the middle of the last decade. (Not a fact well-enough understood). It’s fallen sharply since 2008 and the reduction continues.

e)      Personal travel trends

The total distance travelled has been flat or declining in most developed countries for some years. (If you are sceptica about this, please read the original paper by Adam Millard Ball on this phenomenon at http://web.mit.edu/vig/Public/peaktravel.pdf)

UK personal trave mileage rose slightly in 2011 according to the latest National Travel Survey but it is still well down on a decade earlier. The number of trips taken per person fell and is now no more than in 1973. Walking and cycling fell until recently but have now stabilised while car trips are down more than 10% since the peak.

 

f)       Indices for wood use

This is data that I wasn’t aware of when I wrote ‘Sustainability’. It shows that wood products and paper use (including imports) is down almost 25% since the middle of the last decade. The chart for paper consumption is below.

 

The reaction to ‘Peak Stuff’ was largely to suggest that the evidence I presented was highly selected to show a pattern on falling use of materials. Obstinately, I continue to think that the developed world may well be near to a peak - and probably past it in the UK – of the extraction and processing of fuels, minerals and biomass.

This is the good news. The bad news is that the decline in fossil fuel use in Britain and elsewhere is nowhere near fast enough to cancel out the increase in the developing economies. Although the evidence is increasingly clear that China is generating a unit GDP with lower and lower energy use, the overall world position, at least as forecast by BP, is for a 36% increase in overall energy use by 2030. Renewables and other low-carbon sources take only a 25% share of this much larger total. This looks like locking in a 5 degree temperature rise.

 

The interest rate on Green Deal loans is so high that home improvements will not save householders cash

The Green Deal  -  announced today -  is dishonest and utterly misleading. The interest rate to be applied on loans to finance eco-improvements is so high that homeowners cannot possibly hope to recoup their costs. On a loan of £5,000 the victim will pay interest on a ten year loan of just under £400 in the first year. (7.96%) Capital repayments are in addition.

The price of gas today is about 4.16 pence per kilowatt hour. (Source British Gas, standard rates for southern England). The average amount of gas needed for house heating in the UK is 14,000 kilowatt hours a year. No insulation measures costing under £5,000 and allowed under the Green Deal will reduce heating need by more than 5,000 kilowatt hours a year, saving a maximum of £208. (5,000 kWh times 4.16 pence). The typical householder will therefore lose several hundred pounds a year from participating in this wicked scheme.

…..

There is one exception to this. Cavity wall insulation may provide a net financial benefit to householders even if they use the usurious Green Deal finance. (The interest rate on a small loan for cavity wall insulation will cost over 10% a year). But they would be far better taking out a personal loan and repaying it as quickly as possible. The Green Deal has early repayment penalties in addition to its other iniquities.

…..

More analysis can be found in an earlier post on this site.

What rate of return does it take to attract money into community renewable energy?

Scores of towns and villages around the UK are working on community energy projects. Micro-hydro is planned in Sheffield, more wind turbines are promised in the Forest of Dean and PV in Newport is in the middle of fund raising. To get local people to invest, the schemes need to offer a return on the capital employed. Rates offered to investors vary from about 3% to over 10%. What is the right level to pitch the projected returns on your project? I’ve put together a table of many of the successfully financed projects over the last couple of years to help deliberations. Most UK community renewables projects use an unusual form of corporate organisation for their schemes. Quaintly called an ‘Industrial And Provident Society’ or ‘IPS’, this structure has offers several advantages to communities

  • It is quick and cheap to set up and run.
  • One variant - usually  called a ‘BenCom’ because it must be conducted for the ‘benefit of the community’ - restricts the owners from benefiting from the sale of assets. This means the community can be sure that the assets of the company, such as a wind turbine, cannot be sold for a profit and the company dissolved to the benefit of investors.
  • It does not need FSA authorisation to issue a prospectus
  • Perhaps most importantly, it can offer investors in renewable energy the chance to claim Enterprise Investment Allowance (EIS) relief of 30% of sums invested.
  • Both variants, the Bencom and the Cooperative form of IPS, are able to devote some of their resources to pursuing aims that are not simply to return profits to shareholders.

Against these advantages, there is one crucial restriction placed on IPS companies. They are obliged to offer ‘interest on capital (that) will not exceed a rate necessary to obtain and retain sufficient capital to carry out the society's objects’. In other words, an IPS cannot propose to pay – or indeed actually pay - a very high return because to do so would exceed the percentage return required to attract investment.

As far as I can see, neither case law nor regulators have ever defined what an excess rate might be. Perhaps the best judge is the marketplace: if a renewable energy venture struggles to raise money despite a clear and promising business plan, then it is probably not offering a high enough return. This may be because the project isn’t fundamentally very profitable or it may be that  too much is being devoted to the worthwhile altruism. If the IPS is planning to divert a substantial part of its free cash flow to community benefit, then perhaps some of this money will need to be promised as shareholder return instead.

Bluntly put, most potential investors want to see a reasonable return. If the IPS is being too altruistic to the local community, the project may never get financed because funders aren’t happy with the interest rate that is promised.

The table below summarises the prospective returns offered on recent projects run by communities in the field of renewable energy. One major caveat: the prospective returns mentioned in the prospectuses of these companies often cannot easily be reduced to single number. When I write ‘4%’, this number may only be offered (always in a forecast, of course) after year 3 or it may qualified in some another way. Second reservation: some ventures are also buying back shares over the life of the project. But the return offered may be on the full original investment. The buyback of shares in later years will increase what financiers call the ‘internal rate of return’ or 'IRR' of the project. I’ve tried to adjust for this but may have done so inappropriately. (Any corrections, or additions, please email at chris@carboncommentary.com)

 

Year Project Tech Amount Rate of Note
an IPS? type raised or return
to be raised offered
Westmill Solar (Swindon) 2012 Yes PV £4m 11% (IRR)
Abundance Generation/REGD (Gloucs) 2012/13 No Wind £1.15m 6.75-8% Debt, not equity
Gen Community (Newport, S Wales) 2012/13 Yes PV £1m 11.2% (IRR) Not fully funded yet
Bath and West Community Energy 2011 Yes PV £0.72m 7%
Ovesco (Lewes) 2011 Yes PV £0.3m 4%
Jordan Dam (Sheffield) 2013 Yes Hydro £0.21m 3%
Brighton Energy Coop 2012 Yes PV £0.2m 4% Increasing with RPI
Leominster Community Solar 2011 Yes PV £0.15m 6%
Oncore (Oxford) 2012 Yes PV £0.15m 4.20% Lower return withdrawable shares
Community Power Cornwall 2011 Yes Wind £0.14m 7% Lower returns pre year 5
Eden Solarfair (Cornwall) 2011 No PV £0.14m 10% (IRR)
WOCR (Oxford) not final Yes Hydro/

wind/PV

 not known <5% Only after year 5

How do I interpret this table? (Your views may very well be different)

  • Large projects seem to think that returns of 7% + are needed to attract capital. These schemes will usually need investors well outside the band of committed local activists behind the project.
  • Smaller schemes (perhaps sub £200k or so) may be able to raise money at 4% or so. Is the difference that investors will tend to be very local, value the community benefits highly and personally trust the individuals driving the project?

Comments on this post will be very gratefully received.

 

 

 

'Peak Farmland' in 2012? Unfortunately not.

In Sustainability: All That Matters I write that the world faces two particularly difficult challenges; the urgent requirement to reduce fossil fuel use and the need to stop global deforestation.  Land use changes, including the loss of wooded lands to agriculture, are responsible for almost 20% of carbon emissions to the atmosphere. A recent paper, entitled Peak Farmland and the Prospect for Land Sparing, suggests that my concern over the conversion of forest to agricultural land is misplaced. The distinguished authors of this new paper assert that the global acreage given over to cropland has reached a peak and will now fall steadily, implying that carbon emissions from deforestation may now fall sharply. Is their optimism justified? In my opinion, no.

I believe that their paper substantially overstates likely future growth in agricultural yields, meaning that world population growth between now and 2050 will require a continued substantial expansion in global farmland, not the reduction that they project. This may seem a technical or abstruse issue. It is not: humanity needs to stabilise the percentage of the earth given over to farming – already 12% of land area - in order that the rest of the surface can perform the vital functions of carbon sequestration and biodiversity maintenance. 

The forces that determine the amount of land required for farming

The amount of land needed to feed the world is driven by five separate forces. These are

  1. The size of the global population. As the number of people rises, the land needed to feed them increases.
  2. The average calorific intake of the population. More food per person requires more land to grow it on.
  3. The percentage of all agricultural output that finds its way into human diet. Crops grown for biofuels are turned into motor and aviation fuel. These crops use agricultural land but do not feed people (although the residues of maize and wheat that remain after the starch in the grain has been converted to ethanol provide nutritious animal feed). More important than biofuels, a large portion of all agricultural land grows food that is used for the diet of meat animals. The conversion process is inefficient: it requires at least seven calories of grain to create one calorie of beef. The greater percentage of meat in the global diet, the more agricultural land that is needed.
  4. The mix of foods grown. A hectare of productive land growing wheat will produce more calories than acre of strawberries.
  5. Lastly, and most importantly, the yield of individual crops, expressed in tonnes per hectare.

Today’s typical global citizen has access to over 2,700 calories a day. (The actual amount produced is over 5,300 calories a day per head, but much of this food is fed to animals). The number of calories per head available as food has increased reasonably steadily over recent decades because the rate of population growth, compounded by the increase in average meat intake and the switch to more varied diet, has been more than counterbalanced by the forces adding to food production. These have been the robust and remarkably consistent growth in average yields per hectare and, less happily, the substantial increase in the land area given over to cropland. The destruction of the Amazon rainforest and the rapid loss of equally important forests in Indonesia and other Asian countries has been primarily been caused by the demand for more agricultural land on which to grow such crops as soya for cattle feed and palm oil for biofuels.

The task taken on by the authors of ‘Peak Farming’.

Jesse Ausubel and his colleagues produce an estimate of the likely evolution of each of the five forces listed in the previous section and the net impact on the demand for cropland. In summary, they conclude as follows.

  1. Population. Their central estimate is that the world’s population will grow at 0.9% per year to 2050.
  2. Average calorific intake. They assume an increase of 0.2% per year. This growth is concentrated in developing countries of course. The richest states will see a flattening or reduction. (I argued in Peak Stuff that average UK calorific intake has been falling for a generation and shows no signs of changing direction).
  3. Their paper merges the forces 3 and 4 into one. It proposes a figure of 0.4% p.a. as the yearly increment to food production necessary just to provide for increased biofuels output, greater diversion of food to meat animals and increased production of low nutritional value foods, including such crops such as coffee and other stimulants.
  4. (Combined with 3 above)
  5. Yield per hectare. Ausubel and his colleagues suggest that the average yield per hectare will continue to grow rapidly for the next forty or so years. They look for average increases of 1.7% a year across the period.
Source of reduced global demand for farmland as proposed by Ausubel et al
(Percentage increase per year 2007/2050)

 

Source: Jesse H Ausubel et al, Peak Farmland and the Prospects for Land Sparing, 2012

Taken together, these five forces suggest that world nutrition will be provided by the output of fewer and fewer hectares of farmland. The authors’ central estimate is that the cropped area will consistently decline by about 0.2% a year. This implies that farmland hectares will decrease by almost 10% from today’s levels down to about 1,400 million hectares in 2050, almost completely reversing the increase since 1960.

This conclusion was greeted enthusiastically by free-market proponents such as Matt Ridley in the Wall Street Journal and by the Freakonomics blog. To these commentators no doubt the results of the research seemed another welcome instance of environmental problems being cured, rather than worsened, by the progress of humanity.

Ausubel and colleagues alos provided some sensitivities to their central forecast.  One optimistic projection suggest a further decrease of more than 250 million hectares as a result of less rapid population growth than expected or the abandonment of the use of food for biofuels. Since the world currently uses about 1,600 million hectares of land for agriculture, these changes are very substantial.

The problems with ‘Peak Farming’

At some point in the future, the need for farmland will indeed probably peak. Population growth will fall to about zero, perhaps as early as mid-century. Almost all humankind will have access to sufficient calories for satiation, the diversion of increasing volumes into grain into animal feed will cease as the amount of meat in diets ceases to grow and agricultural yields will continue to edge upwards. (However, even if these forces operate favourably, Peak Farmland will still be dependent on a reversal of the almost universally condemned policy of turning large quantities of food into vehicle fuels.)

But the decline in the area of farmland needed to provide human nutrition is probably still some way off, perhaps half a century in the future. The central reason is that Ausubel and colleagues probably substantially overestimate the likely evolution of crop yields over the next decades. Instead of the 1.7% annual increase that they project every year to 2050, a figure of about 0.8% is a much more reasonable central estimate.

What is the source for the figure of 1.7% yearly yield increase as forecast by Ausubel et al? The paper refers to a joint OECD/FAO note from 2011 that provides some forecasts for global agriculture and suggests an annual increase of total production of 1.7% until 2021. It does not deal with years beyond this date.

Unfortunately I think Ausubel et al make two errors in using this figure as the basis for their forecast to 2050. First, the OECD/FAO projection covers the nine year period between 2012 and 2021 and makes no forecasts whatsoever for 2050. The rate of increase in global agricultural yields has been dropping rapidly in recent decades and there is no reason for this deceleration to come to an end. Any estimates of yield increases out to 2050 should therefore be very much lower than figures intended only to cover the period to 2021. Second, I believe that the OECD/FAO figure of 1.7% is an estimate of the expected increase in total agricultural production not the increase in average yield per hectare. The estimate of gain in total production includes an element arising from additional agricultural land. This apparent mistake is less important than the first error because the OECD/FAO is only expecting agricultural land to increase by about 0.1% per year during the decade from 2011 to 2020.

What estimate of yield increase should Ausubel et al have used? In my opinion, the most complete and up-to-date forecasts are provided by Alexandratos and Bruinsma (AB) in a FAO document produced in the middle of 2012. Unlike the OECD/FAO study, AB examine the prospects for yield for each individual major crop in each type of agricultural region. They conclude that the best estimate for the growth rate of yields to 2050 across all crops and geographic areas is 0.8% per year. Very surprisingly, the Ausubel paper make reference to their document but does not discuss – even cursorily -  the reasons why their figure of 1.7% annual increase in yields is so different to the much lower forecast from the larger and very much more detailed study of Alexandratos and Bruinsma. [1]

A chart taken from Alexandratos and Bruinsma makes the reason for relative pessimism about long term yield growth clear. The rate of increase in tonnage per hectare for the major cereal crops is shown below.

Twenty five year rolling estimates of annual yield increases

 

Source: Nikos Alexandratos and Jelle Bruinsma, World Agriculture Towards 2030/2050, 2012

The average growth in yields of cereals in the twenty five years to 1985 was about 2.5% per year, falling to about 1.8% in 1995 and 1.5% in 2005. (Cereals provide almost 50% of global calories – yield increases in these crops have provided a large part of worldwide nutrition gains over the past two generations).The paper projects wheat yield increases falling to 0.86% annually over the period to 2050, rice increasing 0.63% and maize 0.83% per annum. These numbers combine to make Ausubel’s figure of 1.7% yield growth look extremely optimistic indeed:  their  forecast for 2007-2050 wasn’t even achieved for cereals in the 25 year period to 2007.

The AB paper also provides estimates (sometimes indirectly) for the other four forces that combine to drive the degree of expansion or contraction in agricultural land between now and 2050.

  1. Population growth is expected to be lower than Ausubel expects. The latest forecast from the UN is for annual increases of about 0.7% compared to the 0.9% figure he and his co-authors use.
  2. Average calorific intake per person is expected to rise by about 0.2% in both papers.
  3. (and 4). The switch in food production towards meat and toward biofuel use, as well as the change in mix of foods grown is expected to add less than 0.1% to agricultural production needs, compared to 0.4% per annum in the Ausubel paper.

Combine all these forecasts and the world still appears to need to add to the land area given over to arable agriculture. The net increment is only 0.1% per year but this means that another 69 million hectares will be needed by 2050, adding over 4% to the total area under some form of cultivation.

Implied change in global area devoted to cropland from Alexandratos and Bruinsma FAO study, 2012

(Percentage increase per year 2007 to 2050)

 

Source: Nikos Alexandratos and Jelle Bruinsma, World Agriculture Towards 2030/2050, 2012

All these extra hectares will be in developing countries. As has been the case since the 1980s, the developed world will continue to slowly reduce the land area given over to agriculture. Most developing countries are in the tropical regions and a hectare lost to forest in the tropics is far more important for carbon sequestration than a hectare gained in regions where trees grow slowly.

Finally, it is worth pointing one of the crucial expectations underlying the Alexandratos and Bruinsma forecast. Their predictions are based on an assumption that the number of agricultural hectares used for biofuel production rises to 2020 but then remains unchanged. This may be a correct view but the world’s political systems are surprisingly unimpressed by the growing chorus across the ideological spectrum that making biofuels from food is a thoroughly bad idea. The reality of the 2020s and beyond may be a continued conversion of forest to farmland as food-based biofuels continue to grow in importance.

‘Peak Farmland’ will happen sometime. The worry is that it will take another half century, and by then the climate change consequences of decreasing forest size will have resulted in increased drought, flood and excess temperatures. Ausubel and his colleagues praise the sustained increase in US maize (corn) yields in the past half century up to 2011. Perhaps they should also have mentioned the impact of the drought in 2012? Who knows whether the strikingly unusual scarcity of rainfall across most of the US is a consequence of climate change. But what we do know is that 2012 corn yields were the lowest in almost a decade. If productivity around the world is consistently affected by similar disasters in the future we can be unhappily confident that all Ausubel’s predictions about land sparing are going to be mistaken.

 

[1] A increase of 1.7% between 2011 and 2050 would add 96% to the initial figure, almost doubling initial yields . A growth rate of 0.8% between these years would add less than 38% to output per hectare. The difference between the two figures is thus of extremely high significance.

Alarmism from the Climate Change Committee must stop

There is a shockingly alarmist comment in today’s press release from the normally restrained Committee on Climate Change. ‘continued reliance on unabated gas-fired generation carries the risk of electricity bills for the typical household being up to £600 higher than under a low-carbon power system over the next decades.’

We need the CCC to be an objective and thoughtful analyst of energy and climate change. Its (entirely correct) opposition to extensive unabated gas-fired power generation must not cause it to get as careless with the truth as its political masters. Today’s statement risks severely diminishing its standing.

(There's a response from the CCC to the points made on Carbon Brief, and other web sites such as this one, here.)

The rationale for the Committee’s £600 figure is as follows:

a)     If we use use gas to provide nearly 100% of our electricity, the UK is vulnerable to gas price rises raising the cost to generate power.

b)    Similarly, a  carbon tax of £500 per tonne of CO2 would add to the cost of generating 100% of our electricity with fossil fuels such as natural gas.

c)     Add these two factors together and the CCC sees a wholesale cost of electricity of about 26.4p per kilowatt hour in 2050, compared to about 8.3p for low carbon technologies. Since the average household consumes about 3,300 kilowatt hours of electricity a year the additional cost is the difference between 26.4p and 8.3p (18.1p) multiplied by 3,300 kilowatt hours. This arithmetic produces an incremental cost for gas-generated electricity of about £600.

The problems with its analysis.

a)     It doesn’t make clear that its arithmetic refers to the year 2050 and not ‘over the next decades’ as specified in its press release. Price differences are much, much smaller before 2040.

b)    Gas fired power stations last about 20 years. If we (wholly mistakenly, I believe) dash for unabated gas today, all the plants will be demolished by 2050. Today’s decisions, or even those of 2025, won’t affect electricity prices in 2050

c)     None of the main low-carbon technologies will anywhere near as expensive as 26.4p per kilowatt hour in 2050. Today, farm-sized PV farms are being built to provide power at about 12p per kWh. Onshore wind is about 9p. Biomass is similar. Even the most expensive mainstream renewable source – offshore wind – is no more than 14p per kWh. The Severn Barrage will cost less. And all renewables will get cheaper over the next forty years. As a result, if it did cost 26.4p/kWh to generate electricity using gas in 2050, no gas power stations would be built. They would be hopelessly uncommercial against renewable competitors.

d) No-one is suggesting that the 30% of UK power that will be generated by renewables in 2020 will disappear. The assumption that nearly all generation is gas powered in 2050 is strikingly unreasonable.

d)    The main ingredient in the CCC’s high electricity price is a carbon tax of £500 per tonne, approximately 60 times current levels. But the Department of Energy’s ‘central’ carbon price estimate is £200 per tonne in 2050. It’s close to propaganda to use the £500 figure without explaining why is reasonable to employ a figure so far from standard estimates.

e)     In addition, the CCC uses a projected gas price of 102p a therm in 2050 but only publishes the sources of its estimates out to 2035. These show ‘central’ costs of about 70p in the period 2020 to the end of the period.

The profoundly wrong government decision to incentivise more exploration and encourage the construction of unabated CCGT power stations is frightening the CCC into taking a more aggressive stance against gas. This is understandable because its world-leading work is being largely ignored. Nevertheless it must remain an impartial and evidence-based research institute and resist the understandable temptation to overstate its case.

 

 

 

Fracking for geothermal energy as important as fracking for gas

The UK government has moved towards active support for shale gas, indicating its intent to support exploration with tax incentives. Meanwhile another energy source that also uses hydraulic stimulation ('fracking') but which doesn’t have any carbon emissions, has minimal landscape impact and will not pollute local water supplies struggles to get established. Deep geothermal energy is available in abundant amounts in several parts of the UK but is almost ignored by policy-makers even though a recent report suggested that geothermal sources could provide a third of the country's electricity and much of its heat. It languishes unloved at the bottom of the energy department’s list of low-carbon technologies while shale gas is seen as the salvation of the UK economy. Is the disparity in treatment between the two sources of energy justified? Should the 'shovel ready' plan for a geothermal electricity plant at the Eden Project get more support?

(Eden Project photo by Tamsyn Williams)

Deep geothermal

Four kilometres and a half kilometres beneath the Eden Project in south Cornwall the temperature is about 180 degrees centigrade. Eden and its engineering partner EGS Energy have planning permission to drill down to the heat. One well will pump water down to the hot rocks while a second will collect the now superheated water and return it to the surface. At 200 degrees, the water will turn to steam at the surface and drive a turbine, producing about 3 megawatts of electricity. Free flow of the water from the downward well to the upward well will require hydraulic fracturing (fracking) of the hot granite, very similar to gas drilling.

The water used in deep geothermal requires no additives. It circulates in loop, and thus doesn’t deplete local supplies. Once the drilling is completed, the steam-powered generating station occupies small low rise buildings. In theory, the energy from four kilometres down will provide steam for ever: heat will gradually seep back into the well area from the almost unquantifiably huge amounts in surrounding rocks.

The problems are are similar those that face pioneer Cuadrilla in its proposed shale gas drilling operations in Lancashire. The geological conditions more than four kilometres down - deeper than Cuadrilla’s 3 km deep wells – are unknown. Will it be possible to push enough water through the fractured granite? Will enough liquid reach the upward well? Will the geology mean that drilling is even more expensive than expected?  A major R+D programme in the 1980’s at Rosemanowes, not far from the Eden Project, spent almost £40m of government money without  proving that energy could be extracted at a realistic cost. Cuadrilla knows this problem well: it has so far spent $100m in Lancashire without any certainty yet that it will ever be able to extract gas in significant quantities.

The Eden geothermal project

The two wells at Eden will be hugely expensive. One estimate is that each will cost over £10m with the generating plant and other works costing another £15m or so. For £35m the owners will get a plant that generates a net 3.2 megawatts of electricity almost constantly throughout the year with very low operating costs. At today’s retail prices, 3.2 MW of electricity is worth about £3m a year. In addition, the plant produces heat which could be used in the Eden domes but this isn’t as financially important as the electric power.

There is some subsidy under the Renewables Obligation and Renewable Heat Incentive but these are unlikely to add more than another £3m to the value of the annual output of the project. After operating costs, the annual cash flow might be about £5m. On a capital cost of £35m, these returns aren’t enough to excite most investors and the project has struggled to get fully financed.

Perhaps more important to potential investors than the limited returns, the Eden geothermal project may fail ever to produce the full 3.2 MW. The conditions 4 kilometres down may be utterly unsuitable. No one can know until the £10m first well has been sunk. Some of Cuadrilla’s early wells have also failed. But in the case of shale gas, the potential is so vast that commercial investors continue to risk their cash. At Eden, the cash flows aren’t rich enough to incite the gamblers seeking to exploit shale across the UK. More generous levels of support in Germany have just produced the second fully operational deep geothermal electricity plant at Insheim.

Should the UK provide more support to deep geothermal?

At £35m for 3.2 megawatts of electricity, deep geothermal is very expensive. However the experience of fracking companies in the US can give confidence that costs will come down. The Economist reported that wells drilled 2.5 km into the Marcellus shale in Pennsylvania cost $6-7m each, less than half the figure at Eden. Shale gas exploitation in the UK should eventually help pull down the costs of geothermal wells. If the Eden plant cost £20m rather than £35m, geothermal would be close to competitive with fossil fuelled power stations. (However if a shale gas boom reduces gas prices in the UK by two thirds to the current level of the US, the prospect of cost parity would recede).

The UK has a stuttering plan for electricity for electricity decarbonisation but its proposals for replacing gas as a source of heat are remarkably thin. Geothermal energy provides realistic potential for replacing gas for domestic and industrial heating. Of course heat is difficult to move around and geothermal sources don’t exist across the whole of the UK. The limitations are clear. Nevertheless deep geothermal offers large amounts of genuinely reliable and low carbon heat with no problems of potential pollution.

A recent analysis by leading engineering consultancy SKM suggested that deep geothermal could provide about 25% of the UK’s electricity and a significant fraction of its heat need. Some estimates of the potential from shale suggest much larger figures but more sober commentators have offered estimates not  much different from SKM’s calculations for geothermal. Energy from geothermal will be available for ever – unlike gas – and doesn’t cause CO2 emissions. It justifies far more support in its initial stages than it is currently getting.

 


[1] http://www.economist.com/node/21558462

[2] http://www.egs-energy.com/images/stories/Symposium_2012/3_Geothermal_Potential_in_Great_Britain_and_Northern_Ireland_ver_12.pdf

Goodbye to a tight decarbonisation target? It looks like 200 grams a kilowatt hour

Today’s Energy Bill contains no pound signs. [1] Although it has been broadly welcomed for the changes it proposes to the electricity market, in itself it neither strengthens nor weakens the move to a lower carbon economy. However in the small truckload of documents published alongside the Bill, more financial detail is provided. Deep in that documentation is a quietly voiced suggestion of a high 200 gram per kilowatt hour decarbonisation target for electricity supply in 2030. This should worry us. Such a limit allows unabated gas to provide up to 60% of all electricity supplied. And under current rules, gas turbines operating in 2030 are permitted to carry on until at least 2045. A 200 gram rule means the pathway to the legally binding 2050 UK carbon budget is unattainable. Until recently campaigners hoped the Energy Bill would set a target for the carbon emissions of the electricity sector in 2030. The prolonged debate within government seems to have resulted in a compromise that provided sufficient support for renewables up to 2020 but has left the 2030 emissions limit to be decided in 2016.

Why is electricity decarbonisation important? As the Climate Change Committee (CCC) has repeatedly pointed out, we can more easily reduce CO2 from generating electricity than we can from any other source of emissions. If we slacken the focus on electricity how can we expect to sharply reduce CO2 from, say, cement manufacture or aircraft travel? In its 2010 recommendations (now put into law) on the emissions budget for the period 2022-27 the CCC said

To meet the indicative 2030 target, putting the UK on the path to 2050, it is essential radically to decarbonise power generation, cutting emissions intensity  from today’s level of around 500 gCO2/kWh to around 50 gCO2/kWh in 2030.

 

No bureaucratic hedging or tentative assertions. The CCC says a 50 gram limit is ‘essential’. But here’s what today’s material from DECC says: [2]

 

To reflect the decision to take a power to set a decarbonisation target range (and the decision on the levy control framework) and show the wider range of costs and benefits of EMR, the Impact Assessment will be updated early in the New Year to include analysis of decarbonising the power sector to an average emissions level of 200gCO2/kWh in 2030.

 

To be clear, the Impact Assessment does also mention looking at a 50g limit. However, as far as I know, the repeated mentions of a possible 200g target in 2030 is the first time government has indicated the possibility of such a lax figure.

 

This week’s press coverage has repeatedly stated that the carbon targets for 2030 have not yet been set by the CCC. However the Committee has extensively trailed what it expects the figure to be for that year. Its indicative carbon budget for 2030 is 310 million tonnes. [3] (This is about half current levels, including non CO2 gases). The approximate composition is indicated below:

The main sources of UK greenhouse gases in 2030: indicative budget from the CCC

The figure for power generation is about 20 million tonnes a year in 2030. This assumes a power sector emissions ratio of less than 50 grams for each kilowatt hour generated, or about 10% of today’s level. A 200 gram target would raise emissions to about 80m tonnes in 2030, assuming electricity demand is roughly the same as it is today. So moving from less than 50 grams to 200 grams adds 60 million tonnes of carbon emissions and uses up almost 20% of the 2030 indicative budget.

 

The first question is: can the UK achieve lower levels of CO2 emissions in other sectors to compensate for this? In all probability, no.  In the case of transport emissions, for example, the 2030 budget assumes 10% of all cars on the road are fully electric and 20% are hybrid. But to get to that level, the new cars sold in 2030 will have to be 60% electric and the emissions from the average conventional new car will have to be about half today’s best levels.

 

Alternatively, take emissions from domestic heating. A new boiler installed tomorrow may still be working in 2030. The poor quality of UK housing stock will take many decades to improve. The CCC’s 2030 existing targets are already stretching. Even looking through optimistic lenses, I cannot see how non electricity emissions can be compressed by an additional 60 million tonnes by 2030.

 

The second question is: what will a 200 gram target mean for the structure of electricity supply?  If electricity needs remain constant, this means that gas turbines can generate about 60% of all supply in 2030, rather than 15% or less envisaged by the CCC.( A new gas plant puts out about 330 gram of CO2 for each kilowatt hour generated).  In other words, we will continue to rely principally on fossil fuels.  In simple terms, we will have replaced coal with gas and achieved little else.

 

Optimists will say that it will be more profitable to operate wind turbines or nuclear by 2030 and investors will happily finance the ten thousand offshore turbines and fifteen nukes that the government wants built. On the other hand investors may say that the possible 200 gram 2030 limit allows complete freedom to increase the rate of construction of gas plants. I’m on the side of the pessimists.

 

 

 


[1] This isn’t strictly true. There are 16 £ signs in the report, almost all referring to levels of fines for offences under the Act

[2] http://www.decc.gov.uk/assets/decc/11/policy-legislation/Energy%20Bill%202012/7105-contracts-for-difference-impacts-assessment-emr.pdf

[3] See http://downloads.theccc.org.uk.s3.amazonaws.com/4th%20Budget/CCC-4th-Budget-Book_plain_singles.pdf

Is the cap on subsidy for renewables compatible with the target of 30% renewable electricity in 2020?

The government has announced today (22/11/12) a £7.6bn cap on the subsidy payments under the Renewables Obligation (RO) and Feed-in Tariffs (FiT) in 2020. At the same time, it has reiterated its commitment to providing 30% of all electricity generation from renewables in the same year. Are these two aims both achievable? Probably yes – using an assumption about the mix of generating technologies, each benefiting from different RO rates, £7.6bn of support will get the UK close to 30% renewables by 2020 at a total cost of about £90 per domestic customer. In 2011, the government published an outline of how it expected to get to 30% renewables. It provided a range of estimates of the installed capacity of the main technologies for achieving the target.

Technology Range of likely capacity in 2020
Offshore wind 11-18 gigawatts
Onshore wind 10-13 gigawatts
Biomass electricity  generation 4-6 gigawatts

 

For simplicity, I use a single number  for each type; offshore 14 gw, onshore 12 gw and biomass 5 gw. How much electricity will this produce in a typical year? This requires us to estimate the output of each technology as a percentage of what would be achieved if the generator worked flat out all the hours of the year (the ‘capacity factor’)

Technology Assumed capacity  factor
Offshore 38%
Onshore 31%
Biomass 80%

 

This mix would produce about 111 terawatt hours a year which is just over 30% of current electricity demand. Demand by 2020 may be higher than it is today, or it might be lower. (Over the last few years, electricity demand has fallen quite sharply – partly as a result of recession, partly because of efficiency gains).

 

Technology Assumed production
Offshore 46 terawatt hours
Onshore 30 terawatt hours
Biomass 35 terawatt hours
Total 111 terawatt hours
Total 2011 production 368 terawatt hours

 

So, if the 2011 predictions are accurate, the UK will get 30% electricity from the 3 main renewable technologies though personally I doubt that biomass will grow much. Solar PV, hydro and marine renewables are additional to these forecasts but together their contribution is unlikely to be more than 5%, probably about balancing the shortfall I think is likely in biomass generation.

Will the proposed cap on support in 2020 provide enough cash to incentivise the increased installation? New offshore wind earns about £90 a megawatt hour from ROCs, onshore about £40 and biomass averages about £60. So the question to ask is: what will the estimated levels of electricity output from these new installations, multiplied by the RO subsidy per megawatt hour, actually cost?

To get the answer, we need to know the current RO cost (about £2.1bn this year) which pays for existing installations. This leaves about £5.5bn to fund the new installations. (The RO itself stops accepting new sites in 2017 but I’ve assumed the level of support remains at the same level in any scheme replacing it).

What will the levels of operating generation be at the end of this financial year? These are my rough estimates.

Technology End 2012/13 operational generation
Offshore wind 3 gigawatts
Onshore wind* 5 gigawatts
Biomass 3 gigawatts

 

£2.1bn pays for the subsidies for these technologies. Will the remaining £5.5bn pay for the new capacity due to come on stream by 2020?

Technology Capacity installed between 2012/13 and 2020
Offshore wind 11 gigawatts
Onshore wind 7 gigawatts
Biomass 2 gigawatts

 

Applying the RO to these new installations yields a cost of about £5.0bn per year, less than the available £5.5bn. The subsidy cap announced today, 23rd November 2012, will therefore pay for enough new capacity to fulfil the UK’s promises to get 30% of its electricity from renewable sources.

In addition, smaller installations, such as PV developments, will take subsidies from the separate FiT scheme. The cost of FiTs will probably rise to almost £400m this year and will increase in future years as new PV roofs and farms are put in place. The FiT rates in place will encourage large schemes but the cost is unlikely to rise very much from today’s levels. Probably correctly, the government has decided to prioritise large scale RO developments rather than hundreds of thousands of more expensive household FiT installations.

In summary, the FiT cost is likely to rise much more slowly than in recent years. This will mean that it will use up all the remaining £500m in 2020 but will not massively exceed this figure. The £7.6bn promised in subsidy for 2020 is enough to buy the renewable energy necessary in 2020 to meet the government’s 30% target.

 

 

UK energy companies get their retaliation in first

  Energy companies are blaming government policies for increasing the price of domestic energy and gas. They say that the regulations that force them to buy renewable electricity and alleviate fuel poverty are having a huge effect on home energy costs. But I show in this article that the full impact of these policies is no more than 6% of average household bills in 2012 and this number will probably only rise marginally in 2013. The published justifications for recent price rise imposed by the Big Six UK energy companies on domestic users substantially exaggerate the effect of government regulations to reduce carbon emissions and improve household heat loss.

This article asserts that the scale of the price rises imposed increase seems to be driven not by the likely level of costs in 2013 but rather by two decisions made by the energy companies. First, their choice to load the costs of government policy on to domestic – rather than commercial – users and, second, to recoup their unexpectedly high expenditures on home insulation in 2012 by levying increased prices on homeowners in 2013. These are highly contentious points and I approached three of the Big Six to discuss them in detail. None returned my calls or emails to the press offices. I’m nevertheless providing the incomplete analysis in this article because I believe that the energy companies are – consciously or unconsciously - stoking up unjustified public resentment about the impact of carbon saving measures. This threatens public support for continued action to reduce greenhouse gas emissions.

The background

The big utilities – bar E.ON – have now announced price rises coming into force for November 2012 onwards. The typical percentage change for homeowners is said to average about 9%, although no outsider is able to check this figure because of the complexity of the charging structures used by the companies.[1]

The justifications used in the companies’ press releases are superficially similar: higher costs to implement government schemes, increased wholesale energy costs and more money spent on distributing the energy to the home.

The suppliers all agree on the increase in distribution costs. They say this element of a customer’s bill has risen by about 10%. It now  represents about a quarter of the bill. Estimates of the increase in wholesale energy charges, which are about half the bill, vary dramatically. Scottish and Southern (SSE) says they have gone up 14% while npower suggests the figure is 5%. Scottish Power is in the middle at 8%. EdF says gas costs have risen by 5% but electricity is much more expensive than last year.

These are big differences but the real surprise lies in the third explanation for the need to increase the bill. The costs of what are usually called something like ‘environmental and social charges’ are, on average, said to be about 10% of the total bill, although this varies from 20% (British Gas’ stated figure for electricity) to 4% (EdF’s estimate for gas). These costs include the following elements.[2]

Scheme Purpose of the scheme
Renewable Obligation Certificates for Electricity To encourage the production of large scale renewables
Feed In Tariffs To encourage the production of small scale renewables
CERT To improve the insulation of houses and reduce energy consumption in this and other ways
CESP To improve the insulation of houses in the most deprived parts of the UK
Warm Home discount To reduce the bills of the most vulnerable households

 

Scottish Power and SSE say that costs they have to bear that are imposed by government have risen by about 30% while npower claims that costs in 2013 will ‘be approximately double’ the figures for 2011. The company places this explanation first in the list of why prices have to go up. There is no consistency about any of these figures, even though the companies are all under exactly the same obligations.

The companies’ press releases about their price rises reflect their apparent irritation with the government schemes, particularly the CESP and CERT.

Why are the companies complaining that ‘environmental and social charges’ are increasing sharply?

The costs of providing each of the five programmes in the table above are published by government bodies, at least in estimated form. The following table gives the estimated costs for the years 2012 and 2013. (I have adjusted the cost of the Feed In Tariffs upwards because I believe latest figures show the published estimate to be significantly too low).

Scheme Approximate 2012 cost

Approximate 2013 cost
Renewable Obligation Certificates for Electricity £2,055m[3] £2,456m
Feed In Tariffs £300m[4] £450m
CERT (‘ECO’ in 2013) £1,300m[5] £1,300m
CESP £100m[6] 0
Warm Home discount £250m[7] £265m
TOTAL £4,005m £4,471m

 

The expected rise in 2013/14 is about 12% above the figure for the financial year finishing in April 2012. Not the 30% or 100% quoted in energy company press releases.

Let’s also calculate what should be the impact on the average domestic bill of these five different schemes.

  • Assume that the £4.5bn ‘social and environmental’ costs borne by the utility companies in 2013 is recouped equally all units of energy supplied by gas and electricity companies. (This, broadly speaking, is the assumption made by the government when it calculates the cost of carbon cutting and insulation schemes).
  • About 38% of electricity sold in the UK is supplied to domestic users. About 65% of gas that is supplied to final users (ie excluding sales to power stations to be used to convert into electricity) is sold to households.[8] (Combine these two figures and just less than 50% of all units of gas and electricity sold in the UK are supplied to homes.)
  • ROCs and Feed In Tariffs only relate to electricity. So the cost of these schemes should probably be ‘smeared’ (the technical term for spreading a cost across users) according to the share of electricity consumption
  • Other costs relate principally to gas use. The cost should be allocated according to the share of gas supply.
  • Multiply these numbers together and the 2013 ‘social and environmental costs’ borne by domestic users should be about £80 per household, up from £75 in 2012.

 

Scheme Share borne by households Cost per household in 2013
ROCs 38% £35
Feed In Tariffs 38% £6
ECO 65% £32
Warm Home Discount 65% £6
Total £80

 

To put this figure in context, £80 is approximately 6% of the average 2013 bill of a domestic customer, assuming the current prices remain for the entire year. This compares with the 10% figure proposed by SSE and the 16% or so estimated by British Gas. (I suspect that BG has lumped VAT into its ‘governmental charges’ and the real figure it wishes to use is 11%. My call to the BG press office about this was not responded to).

British Gas also provides an estimate that in 2013 the cost of Government social and carbon policies will add £40 to the average domestic bill. (Please see the last paragraph of note 6 in its price rise press release of 12th October 2012. http://www.centrica.com/index.asp?pageid=1041&newsid=2588). This is an inexplicable exaggeration and cannot be justified by any prospective costs. Nor can Scottish Power’s figure of a 34% increase or npower’s 30% estimate. EdF is the only supplier of the five companies that have increased prices that doesn’t exaggerate these costs.

It therefore seems to me that the utility suppliers are doing two things. First, they are loading far more of the cost of their obligations on to domestic suppliers than can be justified. In the case of British Gas it appears that the company has pushed all these charges onto domestic users. This means that industrial and commercial suppliers are paying relatively less. Second, they are justifying high levels of increase in domestic prices by reference to very high levels of prospective increase in carbon and fuel poverty mitigation costs. These increases will not in fact occur.

Why are the energy companies acting in this way? The loading of the cost of government policies entirely on to domestic users has two possible rationales. The utilities know that large users find it easy to switch suppliers and so their prices to these customers have to be keen. Few, and decreasing, numbers of domestic customers switch and it is therefore easier to offload the costs of government policies onto them. Competition for large commercial customers pushes the prices for large users down and smaller customers are paying the price.

The second possible rationale is that the energy companies are seeking to avoid public criticism of their pricing increases. By blaming government for 10% or more of the domestic bill (and giving this group of costs far greater prominence than the much larger portion of the bill represented by distribution expenses for example) they are seeking to distract consumer groups from focusing on the energy companies themselves.

It’s also a possibility that the energy companies seek to exaggerate the financial implications of government policies because they are unhappy with the drive towards renewable energy. Permission to engage in a ‘dash for gas’ power, rather than building wind farms, biomass plants or nuclear power stations, would give them a much easier life, at least for a few years.

These are the possible explanations for why they exaggerate the absolute size of the charges the government forces them to bear. But why have they separately overestimated the rate of increase in these costs in 2013? Here I think we have to look at the problems the energy companies have had over the past couple of years in meeting the government’s requirements for home insulation under the CERT and CESP rules. Both schemes demand that the electricity companies use their cash to reduce carbon emissions from homes, initially mainly by filling cavity walls and now by solid wall insulation.[9] Each successful home insulation is awarded a certain number of tonnes of CO2 and the companies have to provide evidence of meeting a target CO2 reduction over the course of the scheme.

The cost of achieving these targets has risen sharply over the course of the last year. CESP, in particular, requires that most savings are achieved in areas of high levels of financial hardship. The companies complain that identifying and persuading homeowners to take insulation is increasingly costly. The schemes are burdened with expensive bureaucratic requirements, they say, making it difficult even to get initial approval for proposals to work in specific geographic areas. These are reasonable concerns. They haven’t provided the data for outsiders to assess their assertions but the massive flurry of marketing spend (incidentally including three spam calls to my  office in the last 48 hours) to try to meet the 2012 deadlines for carbon saving must be breaking the government’s £1.3bn 2012 budget for the CERT scheme.

SSE says that the cost of insulation measures have ‘more than doubled’ in the last year and ‘are continuing to increase’. ‘Energy suppliers (are) compet(ing) for the limited number of opportunities that will enable them to meet their targets ahead of the December 2012 deadline’. The problems of cost inflation in the provision of domestic insulation in 2012 were probably not predicted by the energy companies and this year’s profits will have been knocked, perhaps badly.

But will this inflation continue in the way that the energy companies are asking us to believe? January 2013 will see the complete replacement of the CERT and CESP schemes by the ‘Green Deal’ and the ECO. The Green Deal will involve no net cost to the energy companies, or to their customers. The budget for ECO, which will cost the utilities and thus their customers’, is set at the same level as this year’s CERT cost – around £1.3bn. From the energy companies’ point of view the crucial change is that next year’s money is required to achieve far lower carbon savings than CERT. Next year, the figures I have seen suggest the number will be less than a quarter of the 2012 saving.

ECO is focused on insulation of homes without cavity walls and the companies will concentrate on finding older homes with brick or masonry walls and no cavity between the external and internal surfaces. The UK has about 7 million of these – any home built before about 1925 has solid walls. Under the new ECO scheme, the utility industry has to reach a couple of hundred thousand of these houses each year and install internal or external insulation. External insulation is very expensive, costing over £10,000 in some cases compared to a few hundred for filling a cavity wall. The carbon savings are larger but only by a factor of perhaps two or three.

The energy companies have accepted the principles behind the new scheme but, scarred by the cost inflation of the last six months in cavity wall insulation, they have sought to increase domestic energy prices by a sufficient amount to meet any conceivable unbudgeted increase in solid wall work. In the language of city centre Saturday nights, this is called ‘getting your retaliation in first’.

Perhaps we should see this as properly conservative financial management. But I’m tempted to suggest that the companies are also trying to recoup from customers this year’s unbudgeted costs by exaggerating the likely costs of next year’s schemes. Second, I suspect that by engaging in apocalyptic talk about the costs of ECO they are seeking to give ammunition to those politicians who want DECC and Ofgem to reduce the emphasis on carbon reduction targets. CERT and other schemes have been nothing but trouble for the Big Six, and by  publishing estimates of cost inflation such as npower’s forecast that costs will be ‘approximately double’ in 2013 what it was in 2011 they may hope to get some aid from sceptical politicians. And several newspapers are only too willing to swallow the line that carbon reduction is adding many hundreds to householder bills.

To summarise: the costs of ‘social and environmental’ programmes are a small fraction of the customer’s bill, nothing like the level estimated by most of the Big Six. (In particular, the subsidies for renewable electricity are no more than 3% of an individual bill). The companies appear to be loading almost all the government-mandated costs on to domestic customers, rather than spreading them among all users. Supporting more renewable generation will mean that ‘environmental’ costs will rise in the future, but at a far lower level than suggested by the suppliers. The shrill warnings of cost inflation in the future in the provision of home insulation are a response to unbudgeted losses in 2012 rather than carefully constructed forecasts of the costs of implementing ECO in 2013. If the costs of ECO turn out to be in line with what the government and other third parties currently believe, we are all due a substantial rebate in 2014. We are unlikely to get it, of course.

 


[1] In fact, even the companies cannot work out what the percentage price rise is, or what the average customer bill is likely to be. Prior to its September 2011 price rise SSE (Scottish and Southern) said the industry standard calculation meant that average dual fuel customer would pay £1,265 a year in 2012. It reduced its average gas bills by £28 in early 2012, implying an average cost of £1,237. But in its most recent pricing press release it wrote that the calculation showed its customers paying £1,172. These figures are all on the basis of the standard assumption of 16,500 kWh of gas and 3,300 kWh of electricity used in the average household.

[2] I have not included emissions trading certificates under the EU ETS as they should be part of the wholesale cost of the wholesale electricity purchased by the supplier.

[3] August 2012 Parliamentary Briefing Paper by Dr Elena Ares at http://www.parliament.uk/briefing-papers/SN05870. I have calculated the figures for the calendar year by  assigning 2011/12 one quarter to 2012 and three quarters to 2011.

[4] This is my estimate based on the Ofgem figure for the cost of FIT payments in the latest published quarter (April-June 2012). Dr Ares uses a much lower figure for 2012/13 and onwards that I believe does not fully reflect the likely payments.

[5] CERT will cease on 31st December 2012 to be replaced by the Energy Company Obligation (ECO). Government estimates that the cost of CERT will be about £1.3bn in 2012. The press release at http://www.decc.gov.uk/en/content/cms/news/pn10_075/pn10_075.aspx suggests a figure of £2.4bn for the period March 2011 to December 2012. The energy supply industry organises the installation of insulation or improved heating measures and is allowed to reclaim the cost from all its customers.

[6] CESP is a much criticised scheme that targets homes in the poorest areas. Like CERT its aim is to improve insulation and energy consumption. The costs are borne by the energy companies. It will cease on 31st December 2012 and not be directly replaced, though ECO is partly also directed at the poorest households.

[8] Figures from http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/total/total.aspx. Converted from Thousands of Tonnes of Oil equivalent.

[9] Emissions reductions caused by replacing old and inefficient boilers are also allowed.