HC 742 Electricity Market Reform

ELECTRICITY MARKET REFORM- ENERGY & CLIMATE CHANGE

EVIDENCE- JANUARY 2010.

Response from Ecolateral Ltd , written by Peter Jones OBE.

Synopsis

This response is submitted on the basis that thinking on this subject has been too narrowly defined by current and previous Administrations , particularly in relation to the potential contribution from carbon based waste material flows in the economy. As a consequence thinking in terms of supply and demand side financial instruments has tended to distort technology preferences ,inhibited innovation and created longer lead times than necessary due to the absence of more holistic approaches to renewable carbon feedstocks and their ability to displace fossil coal or gas. These current tendencies in energy threaten a repeat of the intellectual opportunities squandered over the last 10 years in relation to waste and the Committee needs to be mindful of those mistakes.

In part this is due to poor understanding of macroeconomic material and energy flows.UK energy demand consumes c60 million tonnes of coal ( 40 million tonnes of oil equivalent) ,plus an estimated 70 million tes. of LNG (93 mtoe) whilst the UK generates c60 million tes. of carbon based waste each year. This has a calorific value of 8-9 Gj per tonne, 60% of that of coal and 15% of that of LNG. Of 60 million tonnes of waste carbon from households, commerce and industry (this does not include ploughed in farm produce) around 55% is simply landfilled ( or piling up in the streets in the case of Birmingham and elsewhere as this response is written !). The balance is used for recycling, soil conditioning and energy ( 5 to 6 mtoe). Large tonnages to recycling are not a forward certainty in coming years, despite possible complacency in DEFRA. The Chinese are reported to be investing substantially ( up to £ 1 billion) in Material Recovery Facilities in central European Accession states. This is probably to reduce their dependence on increasingly cheap UK materials (due to the 25% devaluation of sterling in the last 4 years) that apparently represent the UK’s largest single export category to China by value. This movement in sterling has also firmed up dollar denominated oil linked energy costs for UK pulp and other material reprocessors with mixed impacts on recyclate values. The electricity market review is thus germane to the future of this 25m tonnes of material because of forward relative valuations of a tonne of (say) plastic as electrons, material feedstock, gas, heat or transport fuel joules. Indirectly this also impacts the rising costs/ income streams of the c12 million tonnes of Local Authority household arisings currently shunted overseas as recyclate to offset £100 per tonne landfill gate fees.

Credentials of the Respondent

I have over 20 years experience in the Waste sector , most as an Executive Director of a major PlC involved in all aspects of "scrap carbon" management. From 2000 this has involved energy conversion potential from all forms of waste to synthetic fuels, heat ,biogas and electricity involving investment of over £100 million in operational facilities. I Chaired a sub group of the SCP Taskforce looking at opportunities for Distributed Energy from waste sponsored by DEFRA and DECC in 2006-8 and am currently Chairing a "virtual" group of energy, waste and energy user companies examining the potential of Gas to Grid systems from large scale anaerobic digestion complexes facilitated by WRAP ( Waste and Resources Action Programme) . On behalf of Advantage West Midlands I have also facilitated the development of a consultative planning tool to evaluate critically the optimal location strategy for Distributed Energy from Advanced Waste facilities . This tool is currently shortlisted for an Award from the Royal Town Planning Institute .I am also the Mayor’s nominee on the London Waste and Recycling Board. My primary fields are Economics and Logistics.

General Comments

The current Consultations issued by DECC and HMRC on the Carbon floor price and EMR are, taken together , a significant step forward but the reality of their separateness – underpinned by arbitrary distinctions of roles within internal Government Departments- is reflective of the probability that holistic , one stop shop integrated Central Government policy development on energy is still some way off.

Economic reality confirms that Government has no cash to fund the £350 billion

Energy infrastructure gap over the next 15 years so why does it continue to carve up the policy goose between DECC, DCLG, Treasury and DEFRA ? In the case of the 50 million tonne waste carbon ( 3GwE minimum capacity equivalent) sector this policy carve up definitely delays private sector investment by increasing implementation uncertainty risks. This is most notable at local level as well with one committee agreeing technology solutions and another in the same Authority refusing planning ( Oxford, Worcester, most recently) . Such thinking is backward and not energy solutions oriented .

From a risk perspective if this investment is to come from private sector balance sheets, (as operators, banks, venture capitalists or pension funds ) then investors will demand certainty . Certainty in terms of economics , sound science ( in relation to carbon impact assessment ), consistency and longevity in terms of support or punitive policy instruments on fossil carbon fuel prices. ( in relation to Planning and Economics).

In reality the disjointed consultations suggest a continued wish to "divide and rule" the Carbon Dioxide challenge.

In terms of ECONOMICS this administration has admittedly inherited yet continued a regime whereby weaknesses in evaluation and risk assessment have created appallingly poor value for money in relation to subsidy/transfer payment support for low output wind turbines which seem to be costing £8 million per Mw capacity or substantially more in terms of on line delivered MwH. Online availability in December of 1.3 % suggests that the thinking that went into shaping the support mechanisms was lacking in sound science, intellectual rigour or cross technology market testing. Whilst waste to renewable energy systems (not just thermal but biological and thermo-chemical as well ) have investment ratios of £5 to 6 million per Mw E capacity they also convert 15 to 20,000 tonnes of scrap carbon per Mw at an economic income value of at least £1.5 million per MwE . Regrettably this message has been clouded by the waste sector when arguing their case from a narrowly based , low efficiency ,incineration platform rather than a more broad based approach to Energy substitution. That position is now shifting as more advanced technologies gain credibility and the majors provide investment in more advanced technologies such as plastics to synthetic fuels.

In terms of sound science the profusion of ROCs, FITs, EUTs, and CRCs developed in the absence of an overarching framework of carbon footprinting of the enlarging options on technology has meant that ,lemming like, investment has poured into solutions which are economically rather than technologically appropriate.

Turning to your specific questions…..

i) Main objective

Put simply – " the displacement of fossil carbon fuels by available "scrap" carbon (in the form of waste), wind, wave, renewable gas or heat) at minimum financial cost per avoided tonne of carbon dioxide .

ii) Capacity Mechanisms

Given that demand side management is unlikely to deliver the whole rebalancing required at the peak the shift in emphasis to distributed generation is to be welcomed. In the case of waste a forward capacity auction will be a welcome development given that outputs tend to be consistent and regular , albeit with a potential to meet little more than 6 or 8 % of mean electrical demand ( plus a similar amount for heat depending on technology selection). These advantages are dependent on the qualifications associated with the carbon floor price development (q.v.). Rather than include or exclude specific generation technologies it would be simpler to set a baseline current

emissions level ( which seems to be around 0.75 m tonnes of carbon equivalent per MwE based on electricity at 30% of total UK emissions for 80 Gw Capacity or 700- 750 kt/TwH ) . There is a need to regulate a new wave of generators in the current way ( in terms of operating standards) of course.As to simplification of the support regime all should be charged a carbon tax on total emissions with a rebate on the avoided emissions ( 700 tonnes per MwE less their audited performance emissions subject to the tax.)

Rebates at carbon rates of £70 or more per tonne on the gap between actual and target average emissions nationally across the energy mix ( a reducing cap) would operate as with other traded pollution permit regimes.

Such an approach also obviates the current spurious distinction between "bad" fossil CO2 and "good" renewable CO2 , one which has always been a practical nonsense. All emitted CO2 is bad.

The tax may be as per the Treasury CRC linked floor price whilst the rebate could be much higher , (regardless of technology) and recovered from the proceeds of the tax .In the early stages of the mechanism the tax to rebates ratio will be 25 to 1 ,reflecting the renewables content in total supply ( at 4%). This will act as a far stronger carrot to private sector investment in a simple format and will drive the 2 simple pre-requisites for maximising added value………

a) – a low overall net carbon footprint for new conversion process systems and

b) - the greatest thermal conversion efficiency from a given tonnage of feedstock input from the selected technology( which is often the major share of the overall footprint)

These points are particularly relevant to waste because , whilst they are mechanically reliable and safe, large scale thermal incineration without CHP is barely more energetically efficient compared to clean coal without CCS.

CHP is an essential precursor to lowered carbon footprint of course. The difficulty is that heat (which comprises 50% of national energy load with over 70% of that in business and the public sector) is generally only needed in 3 to 5 MwH loads at single points for non household applications.

In the absence of heat pipeline networks therefore distributed energy CHP plants powered by waste represent a formidable opportunity in the 1 to 5 Mw load range ( 20,000 to 100,000 tonne of feedstock).

Large scale waste to hydrogen plasma systems sit at the upper end of this efficiency scale and offer storage capability for energy too. Equally direct conversion to transport fuel feed stocks is another option . The higher Capital investment per process tonne coupled to (UK) absence of proven track records is an issue for the Green Investment Bank /Fund to consider in relation to Performance Guarantees from Government- despite firm track records in more advanced economies for these low carbon packages.

ii) Feed In Tariffs

The suggestion above emphasises energy neutrality. Technological evolution is rapid and continuous and defies bureaucratic attempts to shoehorn credit/subsidy based frameworks into chosen exit routes. Such incentives should be based solely on carbon dioxide emissions compared to current overall averages. The rush to anaerobic digestion of waste is appropriate example given that it is without doubt better than the equivalent impacts from landfills. However the financial framework is far more advantageous than the corresponding CO2 reduction impact of the technology from that suggested in the academic literature. Such plants may thus, in the longer term, prove less competitive due to their greater exposure to CO2 emissions taxes compared to more advanced technologies with the possible exception of direct feed of their gas to the gas grid rather than to the electricity grid via IC Engines. (q.v.)

iii) Speed of Implementation

Operationally there is a need to protect Grandfathering of the current jumble of half ROCs,full ROCs , double and 1.5 ROCs plus all other incentives but setting a start date for a single compliance framework is essential. The option for Grandfathered rights to be switched (if based on the DEFRA cost of living indexed £70 per tonne carbon price rebate value as outlined above ) might achieve such a streamlining.

In the case of waste as more energy intensive users of energy add up the cost of CRC equivalent charges they become interested in medium sized, low carbon co- located waste to energy CHP plants to supply energy via ESCO type Special Purpose companies rather than be reliant on a (probable) near capacity grid. The proposals in relation to so called negawatts are particularly to be welcomed as a stimulus to this process which will presumably apply to large energy "sinks" such as data centres, docks, airports, hospitals, industrial complexes, food processing centres and the like.

iv) Political Risk

Reform is needed but political risk is exacerbated when the Treasury want to control money flows, DECC wish to control energy flows , DEFRA seek to manage carbon dioxide flows and DCLG seek to control geographic /siting and locational flows.

v) Package and Deliverabilty

No. A more comprehensive market approach is called for based on a single

measure of CO2 emissions per MwH compared to the national average "cap".

The selected outcomes are far from certain for 2020 in the case of waste

because the delivery cycle for much of this infrastructure is at least 30 months

or more. Suggestions from the CCC that by 2030 reductions of

CO2 need to be of the order of 60% make deliverability even more challenging.

vi) Synergies and Conflicts

The new proposalsfrom the old. On the one hand the old is complex

,distorting and scientifically questionable and the other simple ,easy to

administer and technologically neutral .An option to sacrifice grandfathering

on an optional basis could overcome resistance to change.(qv)

vii) Carbon floor Price and EMR

At 4% renewables to energy the exposure to transfer payments being

onerous for fossil based generators in the early stages is slight ( although

the implications in terms of fuel poverty policies may be significant). As a

consequence this suggests a bullish stance on the rebated carbon price

which ,at levels of £70 per tonne or more, would act as a strong accelerant

to investment. Using the Treasury proposals of a £1 per tonne supplement

to the current c£13 per tonne price from 2013 and rising to 2020 in annual

increments suggest a " refund pool" of almost £1.6bn for the current

achieved/claimed avoided emissions of around 60 million tonnes for early

stage movers. As the .renewables switch gathers pace the trend to lowered

ratios of actual to avoided CO2 emissions falls and thus will the incentive price as well.

viii) Energy Storage

Reference has already been made to the pace of innovation and technology

change. Nowhere is this more graphically identified than in the case for very

large scale (400,000 tonnes per annum) anaerobic digester complexes

possibly utilising organic municipal, food chain, commercial and agricultural

produce waste to feed gas to grid systems where network losses are a

fifth of those on centralised electricity energy grids . "Low carbon" molecules

of energy can also be delivered to the home heating network via a store in

the form of the gas grid without extensive trench digging.

Similarly there is a plant in Planning in the North East for Air Products which

Is designed to take waste to hydrogen ( as a hydrogen/ carbon monoxide rich

syngas) for use in a combined cycle gas turbine and ( in the future once the

system is proven) as a road fuel or industrial gas capable of storage at

systems efficiency levels of 65% or more.

At a sunk cost of 300 million dollars these are more than mere pipedreams

and any future reforms need to be sufficiently holistic to take account of their impact and potential – presumably involving the Treasury and the Green Investment (non) Bank. These storage options are almost certain to achieve lower carbon footprints than pumped water or thermal storage systems. Equally the EMR promises little for interconnector flexibility. Also, as your December report on the Emissions Performance Standard indicated, the design of the EPS needs to be scientifically and critically peer reviewed . Failure will result in a trader’s

paradise and unintended technology outcomes. This will be beneficial on a wider platform- there are alledged to be over 50 UK methodologies for carbon footprinting and Corporates are known to cherry pick different ones for different parts of their activity when producing CSR Reports.

ecolateraljones@btinternet.com

Sources-(i) Ernst & Young

Moody’s

DIMES

Mass Balance Material Flow Studies- UK Electricity sector

UKERC studies

Decentralised Energy-Opportunity in Resource and Carbon Efficiency- Business Taskforce on SCP 2008, DEFRA & BERR.

Peter T Jones

Ecolateral Ltd

Ivy House

North Kilworth

Leics. LE17 6 HG

01858 880262