House of Commons - Environmental Audit

Select Committee on Environmental Audit Written Evidence

Memorandum submitted by the Association for the Conservation of Energy

The Association for the Conservation of Energy welcomes the opportunity to respond to the Committee's inquiry. In particular we will examine the proposition stated in the opening paragraph: this considers whether investments in a "step change in energy efficiency" would be a more cost-effective means of obtaining the objectives set out in the Energy White Paper.

EXECUTIVE SUMMARY

1. Energy efficiency and energy saving are more cost-effective than the generation of electricity by nuclear power. They must therefore be undertaken first.

2. However, accepting that there will still be a need to generate some electricity, investment in microgeneration is more cost-effective than investment in new nuclear power stations.

3. Taken together, these two cost-effective sources for investment can eliminate the need for further investment in nuclear power stations—on cost grounds alone (ie without even considering such issues as waste, insurance, decommissioning, terrorism and other environmental considerations).

It follows therefore that investing in new nuclear power stations is not a cost-effective option.

PART 1—ENERGY EFFICIENCY AND ENERGY SAVING

The 2003 Energy White Paper began by emphasising that "Energy Efficiency is likely to be the cheapest and safest way of addressing all four [energy policy] objectives"[5] and went on to describe energy efficiency as the " cheapest, cleanest and safest way of addressing our energy policy objectives." [6]

This echoes what the Energy Select Committee said over twenty years ago: "It is our considered opinion that there are now many conservation measures which are so much more cost effective than most energy supply investment." [7]

This was also the view of the Royal Commission on Environmental Pollution in 2000: "There is a strong economic argument in favour of raising energy efficiency." [8]

Yet we are still having to make the same point.

In 1982 the House of Commons Select Committee on Energy stated that they were "dismayed" to find that the Government had "no clear idea whether investing around £1,300 million in a single nuclear plant is as cost effective as spending a similar sum to promote energy conservation." [9]

Subsequently a considerable amount of work has been undertaken to demonstrate that investment in such a plant would not be as cost-effective. Indeed this was the conclusion of the Energy White Paper—hence its description of energy efficiency as the "cheapest" option.

In addition, official sources (see below) demonstrate clearly that Government-backed programmes designed to deliver energy efficiency have done so at a lower cost per kilowatt hour saved than any putative nuclear power investment. There are considerable extra potential electricity savings which could readily be achieved by purposeful programmes, which have been estimated to be again at substantially lower costs than prospective nuclear power stations.

The most recent price given by the Government for the anticipated cost of a new nuclear power station assumes that new build current designs could achieve costs of 3.9p/kWh. [10]

This should be contrasted with the costs which the National Audit Office established as being achieved via the electricity-only saving scheme for residential customers, run by the 14 local electricity companies in Britain. In his report, the Comptroller and Auditor General concluded that the scheme in question (called the Electricity Efficiency Standards of Performance Scheme) was saving electricity—and hence customers' money—at a cost of 1.8p per kWh. [11]

The figures provided for energy efficiency programmes incorporate all relevant transaction costs. In contrast, the conventional means of stating the cost of a nuclear power station excludes many externalities, including land take, insurance, decommissioning and other civil nuclear liabilities. The Nuclear Decommissioning Agency put the total figure for decommissioning existing power stations as £56 billion—or £1,000 for each UK citizen already. [12]

As well as being considerably cheaper for the electricity companies than providing new sources of power, the NAO also noted that "customers benefit from warmer homes, reduced fuel bills, and assisting with the reduction of environmentally damaging emissions."

On 8 December 2003, the European Commission published its draft directive on "Energy End Use Efficiency and Energy Services".[13] Adoption of this directive during 2005—"to encourage good practice in energy efficiency"—is a "priority" of the present UK EU Presidency.

Para 1.1 of the directive states that "it is estimated today that the average cost in Member States of saving a unit of electricity in the domestic sector is around 2.6 euro cents/kWh, compared to the average off-peak price for delivered electricity of 3.9 euro cents/kWh and on-peak price of 10.2 euro cents/kWh."

The directive goes on to require energy suppliers to undertake direct investment comparisons between supply and demand options. Furthermore, by way of explicit acknowledgment of the key role that energy saving has to play, the directive also introduces mandatory energy saving targets.

Much of the evidence that will be presented to the Committee as part of its Inquiry will be restricted to considering exclusively the relative cost-effectiveness of different supply options. However, such an exclusive consideration of "energy supply" evinces a lamentable failure to understand the true nature of the marketplace. No consumer has ever sought to buy a kilowatt-hour of electricity or gas or a litre of oil. What they are seeking are the services that these fuels offer: light, heat, and motive power. The critical issue has to be to ensure that these services are delivered at the lowest ecological, social and economic cost.

A report entitled Renewable Energy, published in 2004 by the National Audit Office, analysed the cost of various policies to reduce carbon emissions. The Energy Efficiency Commitment (EEC) emerged as the most cost efficient mechanism, followed by the Climate Change Levy.

The EEC scheme requires suppliers of gas and electricity services to achieve agreed terawatt hour (Twh) savings per year, via the installation of energy efficiency measures. Between 2002 and 2005, it saved 87 Twh, with the majority of the savings being of electricity (via installation of A rated appliances, compact fluorescent light bulbs, insulation in electrically heated homes). The Climate Change Levy increases fuel prices to non-domestic consumers, specifically to stimulate investments in energy efficiency measures.

The Government has calculated that the value of the benefit of reducing carbon dioxide emissions is worth between £10 and £40/tonne: Figure 1 demonstrates that installing energy efficiency measures via programmes like this is far more cost-effective than other carbon saving schemes.

The definitive work on such direct economic comparisons between alternative investment options was undertaken by the Rocky Mountain Institute of Colorado. There, two analysts, Bill Keepin and Greg Kats, published what remains the definitive comparative study. [14]Below is a summary of their work.

They start by postulating that the world's nations have come to an unprecedented agreement. Over 40 years, all present and future uses of coal will be replaced by nuclear power. They make optimistic assumptions about speed of construction of new plant (just six years, not the 15 of Sizewell B). They also price each power station based on French experience, where multiple construction (plus state subsidies) delivered costs 40% of those experienced elsewhere in the OECD.

They followed International Energy Agency forecasts of projected world demand growth to 2025. Accordingly, one new nuclear power station has to be built every 2.4 days, at a cost of $525 billion each year. Consequently, there would be 18 times as many nuclear stations than at present.

But even so, greenhouse gas levels would continue to rise, because nuclear only provides electricity, accounting for one-third of fossil-fuel use—and ignores other greenhouse gases like the direct use of oil and natural gas.

Of course, the scenario is completely unrealistic. Construction costs of nuclear power stations in the UK are always higher than projected. Even if the managerial capacity were available to construct so many plants so fast, the drain of that much capital into nuclear construction would slow, or even stop, the very economic growth that is assumed to require so much power in the first place. Debt levels in the Third World would double. And of course there would be an escalation of the established problems connected with nuclear power: intractable and dangerous wastes, evacuation planning, threats to public health, decommissioning, diversion of fissile materials into bombs, vulnerability to terrorism, and, not least, political unpopularity.

In contrast, Keepin and Kats argue there can be purposeful programmes, involving state-of-the art technologies designed to meet energy needs in the most efficient way possible. Changing every light bulb in America to cfls would close 40 large power plants, and save $10 billion a year. Building every office between now and 2050 following best practice would save the equivalent of 85 power plants and two Alaskan oil pipelines. Double the fleet efficiency of cars, and you cut carbon emissions proportionately. All of this can be done at minimally higher capital cost, but delivering far lower running costs.

Overall, Keepin and Kats conclude that a dollar (or a euro, or a £) spent on efficiency could displace nearly seven times as much carbon as a dollar spent on new nuclear stations.

Naturally electricity saving programmes concentrate upon realising the most cost-effective savings initially. Thus there might be concern that subsequent programmes might offer returns of diminishing cost-effectiveness. Such concerns would appear wholly unfounded, because they ignore both the potential for product improvements, and the economics of relative price effects. The real cost of, for instance, a compact fluorescent lightbulb is now several multiples lower than 15 years ago: this is due both to higher volumes providing economies of scale, and improved product performance. Such market transformation has occurred for many white and brown consumer goods, as well as with industrial motors and refrigeration.

The committee has received evidence previously from the Environmental Change Institute at Oxford University regarding their "40% house" concept. [15]We draw the committee's attention to this work amongst others, simply to demonstrate the enormous amount of untapped, yet cost-effective, electricity saving potential that remains in the residential sector alone.

The American academic who popularised the "negawatts" concept is Dr Amory Lovins. [16]In the context of this inquiry, the conclusion from his book "Natural Capitalism" is particularly worth revisiting:

"Nuclear advocates' last hope is that climate concerns will revitalise their option. Alas, they've overlooked opportunity cost—the impossibility of spending the same money on two different things at the same time.

If saving a kW-h costs (pessimistically) as much as three cents, and delivering a kW-h of new nuclear electricity costs (optimistically) as little as six cents, then the six cents spent for each new nuclear kW-h could instead have bought two kW-h worth of efficiency. The nuclear purchase therefore displaced one less KW-h of coalfired electricity than the same money could have done by buying the cheaper (efficiency) option instead.

That's why the order of economic priority must also be the order of environmental priority; why it's irrelevant whether nuclear power can beat coal power as long as any other option costs still less; and why nuclear power makes global warming worse." [17]

We believe that this shows conclusively that investing in energy efficiency and energy saving is the cheapest way of delivering both carbon dioxide reductions and maximising the use of energy supply. Thus, until all available energy saving and energy efficiency have been undertaken, we should not even consider investment in nuclear plant. Economically there is simply no case for it.

PART 2—GENERATION

But surely, it will be argued, even if this scenario is adopted as public policy, some electricity must be generated. Energy efficiency and saving cannot eliminate that need.

This is clearly true—but we consider that the emerging microgeneration industry has the potential to offer a more competitive alternative than new nuclear build. Some of this is directly observable even at today's, pre mass-production prices, but there are other, less tangible effects likely to be experienced which are explained below.

1. Cost Comparisons

British Energy has estimated the cost of building a further 11GW of nuclear capacity at £10 billion, or £833-£1,000 per kW—rather ambitious given that the last station to be built in the UK cost £3,000/kW, over three times as much. By comparison, microgeneration technologies start at around £500/kW of installed capacity.

A recent Green Alliance report[18] gives the cost of nuclear power delivered to grid as anything between 1 and 6p/kWh. Costs associated with transmission and distribution, metering and losses need to be added to this. These typically make up just under 40% of today's retail price of electricity, or around a further 3.5p/kWh. This places the cost of nuclear power, at the point of delivery to the customer, at anything up to 9p/kWh.

According to the Performance and Innovation Unit Energy Review, some forms of microgeneration are as cheap at today's manufacturing prices as 4p/kWh, falling to 2.5p/kWh once in mass production. The bulk of cost associated with transmission and distribution is avoided for microgeneration, because it generates at the point of demand.

2. The Capital and Energy Markets

Given the waste processing and decommissioning liabilities associated with nuclear plant, it is widely accepted that the private equity markets will not provide the capital needed for a programme of new build.

Given this, there would appear to be little choice other than for the taxpayer to fund a new build programme directly, or at least to act as a guarantor.

Acknowledging that around £10 billion would be required up-front for a new nuclear build programme, the Green Alliance report examines possible alternative uses for this money in the microgeneration sector:

— micro-CHP—The price differential between a conventional boiler and a mCHP boiler is £500. If half of the 1.3 million boilers replaced every year were mCHP, 650,000 units could be installed per year at an additional cost of £325 million a year, or £6.5 billion for 13 million units over 20 years. Assuming a capacity of 1kW per unit, this would result in 13GW of capacity. In other words the same capacity would cost half as much, and this is before any cost reductions are factored in for mass production.

— micro-wind—Once mass production is reached, micro-wind's capital costs would be similar to the £800-£1,000 per kW from nuclear, but it is important to remember that a substantial amount of grid-based investment would be avoided, as well as marginal costs associated with transmission and distribution losses.

A recent Mott MacDonald report for the DTI[19] estimated that 17GW of microgeneration capacity would result in £1.2 billion per annum of avoided costs elsewhere on the network. Scaling this to the 11GW of nuclear under review would suggest annual savings of £800 million per year if microgeneration were deployed instead of nuclear.

3. Cultural effects

There is a further, less tangible dimension to microgeneration as an alternative to nuclear. This is the cultural change likely to result from the widespread uptake of microgeneration.

Microgeneration can act as a catalyst for cultural change in the way consumers view their use of energy. A consumer who installs, for example, a micro-wind turbine experiences a daily reminder that they are "doing their bit", and sends a clear and visible signal to neighbours. The microCHP whose prominent display panel in a kitchen or hallway consistently informs the customer that they are generating their own power (and how much) will create interest with house visitors and within a family. Moreover, consumers who take up microgeneration are subsequently likely to alter their behaviour in other ways—and begin to realise just how efficient and effective the other energy efficiency measures referred to above are. They become more likely to insulate their home properly, turn off unwanted lights, perhaps even cut down on car journeys, and so on.

Although the committee's questions primarily relate to hard-and-fast cost comparisons, we believe that the committee should take these secondary effects into qualitative consideration. They might be difficult to quantify, but a cultural change of this nature is likely to prove critical in transforming the public's attitude to climate change and energy issues. This is certainly not the case for nuclear power.

20 September 2005

5 DTI (2003) Energy White Paper: Our Energy Future Page 11, paragraph 1.19. Back

6 DTI (2003) Energy White Paper: Our Energy Future Page 32, paragraph 3.2. Back

7 House of Commons Select Committee on Energy (1982), 5th Report, Energy Conservation in Buildings, (HC401-1) Page xxxvii, paragraph 66. Back

8 Royal Commission on Environmental Pollution, 22nd report 2000, page 86, para 6.9. Back

9 House of Commons Select Committee on Energy (1982), 5th Report, Energy Conservation in Buildings, (HC401-1) Page xxxvi, paragraph 66. Back

10 Cabinet Office Performance and Innovation Unit (2001), Working Paper on Energy Systems in 2050. Back

11 National Audit Office (31 July 1998). Back

12 Nuclear Decommissioning Agency (August 2005) draft strategy. Back

13 European Commission (2003) Proposal for a Directive on the promotion of End-use efficiency and Energy Services (COM(2003)739). Back

14 B Keepin & G Kats (1988) Greenhouse Warning. Comparative Analysis of Nuclear and Efficient Abatement Strategies, Energy Policy, Vol 15, No 6. Back

15 University of Oxford Environmental Change Institute (2005) Research Report 31: 40% House. Back