Examination of Witnesses (Questions 378
- 399)
TUESDAY 1 JULY 2008
Mr Neil Hirst
Q378 Chairman:
Mr Hirst, can I thank you very much for coming. I ought to explain
that one member of our Committee may have to go very shortly for
other reasons; it is nothing to do with any answers that you give!
Could I also remind you that this is being broadcast so if you
could speak loudly and not too quickly that would be helpful for
the stenographers. I would like to start by asking you a very
general question: how large a role does renewable energy play
in the IEA member countries? How much do you expect this to change
in the future? How do you see the contribution in electricity
generation and even in transport fuels? Have you any comments
about how those might change? It is a very wide question, I am
afraid.
Mr Hirst: At the moment renewable energy
accounts for about six per cent of total OECD energy supplies
(membership of the IEA is approximately the same as the OECD)
and more than half of that is biomass. If you just look at electricity,
hydro accounts for 12 per cent of OECD electricity generation.
We have recently published a major study called Energy Technology
Perspectives with a range of scenarios for the future energy
markets, including a business as usual scenario; a scenario where
carbon dioxide emissions would come back to current levels in
2050 (that is still a big reduction from the business as usual
case) and also for the first time a scenario in which global CO2
emissions in 2050 would be 50 per less than current levels. We
chose that scenario partly because the Intergovernmental Panel
on Climate Change have said that we need cuts at least that deep
in order to contain global warming within the range of two to
three degrees Celsius. These models are based on in-depth least-cost
analysis of energy technologies. If I may focus on the 50 per
cent reduction case, what we see there is that by 2050 almost
50 per cent of global electric power generation comes from renewable
sources. That is chiefly from wind, from the different varieties
of solar power and from hydro. Those each account for about a
quarter of the renewables in the share, with all other renewables
making up the remaining quarter of renewables. To look at it in
another way, if you look at the carbon savings that are required
from the business as usual case down to 50 per cent lower than
at present, renewables accounts for about 21 per cent of the total
savings. For comparison, energy efficiency is the most important
area and accounts for 36 per cent. 19 per comes from carbon capture
and storage, not just for power generation, and nuclear power
and advanced vehicle fuels also play important roles. I have given
you the overall figure for renewables today in OECD countries.
Of course, this varies greatly between individual countries. If
you look at wind power, Germany, the US, Spain, India, China and
Denmark are all leading countries in the area, and for photovoltaics
it is Germany, Japan, the USA and Spain, which tend to be sunny
countries as you would expect. If you look at marine power sources,
tidal and wave sources, these are very much at the research and
development and early demonstration phase and there the United
Kingdom is amongst the most important technology developers. If
you look at biofuels you have Brazil, the United States, and Germany
becoming increasingly important.
Q379 Lord Lawson of Blaby:
I was very interested that you referred to your recent Energy
Technology Perspectives, which is a very interesting paper
indeed. If I recall in that paper you suggested that if you are
going to reach this target which you mentioned a moment ago of
a 50 per cent reduction in emissions from 1990 levels by 2050,
then on optimistic assumptions about the progress of the relevant
technologies—renewable technologies and so on—this
would involve a cost of $200 per tonne of carbon dioxide.
Mr Hirst: Marginal cost. The cost of
the most costly option. The average is a lot less.
Q380 Lord Lawson of Blaby:
What is the average?
Mr Hirst: I think it is more like 35
to 50.
Q381 Lord Lawson of Blaby:
So 35 to 50 rising to 200 at the margin, and if this optimistic
assumption about the progress of technologies does not happen
then it will be up to $500 per tonne of carbon dioxide. I think
people have some difficulty in understanding what cost per tonne
of carbon dioxide means in the real world. Can you say in simple
terms what this would add, say, to the cost of electricity?
Mr Hirst: Yes, the examples we give are
$200 per tonne of CO2 which to the motorist would add about $80
per barrel to the price of oil, if you look at it from the point
of view of the oil consumer paying that.
Q382 Lord Lawson of Blaby:
Okay so $80 extra?
Mr Hirst: But you asked me the other
question about electricity. I can describe it a little bit more.
What this is made up of is a large tranche of savings that are
very cost-efficient for energy efficiency, a range of costs to
decarbonise power which come in at around $50 per tonne of CO2,
and the reason I want to dwell on that is that is about enough
to double approximately the wholesale cost of generating power
from a conventional, reasonably low-cost power station—three
or four cents per kilowatt hour—but if you want to get to
a 50 per cent reduction you have then got to go for some more
difficult technologies, things like carbon capture and storage
for industry and advanced energy for vehicles, which is getting
into territory of hydrogen vehicles or electric vehicles, and
that is why the marginal cost is so much higher. That, as I said,
is about $80 a barrel.
Q383 Lord Lawson of Blaby:
So for the 200 it is about $80 a barrel extra on the cost of—
Mr Hirst: --- what it would otherwise
have been, yes.
Q384 Lord Lawson of Blaby:
And for the $500 per tonne?
Mr Hirst: $50.
Q385 Lord Lawson of Blaby:
That is $50?
Mr Hirst: No, the 500 I see what you
mean.
Q386 Lord Lawson of Blaby:
For the upper one it is therefore presumably two and a half times
that so on top of the 140 we have now it is an extra 200?
Mr Hirst: It is not on top of the 140.
When we did this study we used oil price projections which were
made a little bit more than a year ago of about $65 a barrel.
Q387 Lord Lawson of Blaby:
So it goes from 65 to 265?
Mr Hirst: It would in that case. In the
optimistic case it would go from 60 to 140.
Q388 Lord Lawson of Blaby:
An extra 140?
Mr Hirst: In the optimistic case $200
per tonne of CO2 saved, $80 per barrel of oil, it would have increased
the price to the user from $65 per barrel of oil, which was the
price we were using, to 145.
Q389 Lord Lawson of Blaby:
Yes, quite, and therefore for the $500, the less optimistic view
of technological advancement, it would then be $265?
Mr Hirst: If I have followed your arithmetic,
yes I think so.
Q390 Lord Lawson of Blaby:
I think 265 is right if you multiply by five over two and then
add 65. Those are interesting orders of magnitude but I think
it is difficult when you just talk about carbon dioxide to understand
in ordinary terms what that is, and obviously there will be a
corresponding increase in the price of electricity presumably
by the same kind of factor?
Mr Hirst: Not quite. For domestic consumers,
the wholesale price of generating electricity is typically somewhat
less than half of what they pay. For domestic users if the price
of generation doubled, the price for them would go up by about
a quarter but for big industrial users most of what they pay is
the wholesale cost of generation.
Q391 Lord Lawson of Blaby:
Staying with electricity for a moment but going on to a different
aspect of it, you have obviously looked at both the generation
of electricity through wind power and also the generation of electricity
through nuclear. How do they square up against each other? I realise
that some people have particular problems with nuclear but putting
that to one side, as far as the simple cost of generating electricity
is concerned, how do wind power and nuclear stack up (we are talking
about on a large scale obviously)?
Mr Hirst: If you look at current costs,
I should give a health warning on this because there are all sorts
of factors which will vary in particular cases, but the range
that we are using for current costs is for nuclear—and,
sorry, I am doing this from inspection of our charts—something
like three cents per kilowatt hour up to seven or eight cents
a kilowatt hour and for wind from about seven cents per kilowatt
hour to about 14 cents per kilowatt hour. What I must add to that
is the costs of wind, we believe, are on a long-term downward
trajectory because this is a technology that is at an early stage
in its development, so we expect that wind costs will come down
over time, assuming there is widespread mass deployment, to a
situation where they are broadly competitive with nuclear costs.
I have got to make one very important proviso in saying that.
The costs of almost all these technologies have risen sharply
over the last year because there has been a bottleneck in supplies
of both skilled people and materials from energy generation plant
so we have not seen in the last year a decline; in fact, I think
in most areas probably the cost of living has gone up, but we
do not see that as a permanent state of affairs; we see that as
something that will change when we pass this period.
Q392 Lord Lawson of Blaby:
If I can just go back to what you say is the immediate prospect
or short-term prospect, whatever may happen in the longer term
future on your figures, the cost of generating electricity through
wind power is roughly twice that of generating it through nuclear,
according to your figures?
Mr Hirst: My figures range from the upper
end of the nuclear range to almost twice the nuclear range, yes,
that is true.
Q393 Lord Lawson of Blaby:
The lower end is about twice the lower end and the upper end is
about twice the upper end, so it is twice in simple terms. In
the case of wind does that include the extra cost of being an
intermittent source of energy and therefore having the back-up
requirement whereas of course with nuclear it does not need an
alternative source of energy?
Mr Hirst: The upper end does include
the costs of back up. Let me just say a little bit about that
because this is something that we have done a study on that we
are going to publish in the autumn. Estimating the costs of back
up for wind, or indeed other variable renewables, is very far
from being simple. It depends enormously on what the flexibility
of your network is, what the alternative is, what the rest of
the balance of your energy supply is and, very importantly, how
much inter-connectivity you have with other systems, so many of
our member country systems can go up to somewhere in the range
of 15 to 20 per cent of wind without high back-up costs, but you
eventually cross the threshold at which you do have to put them
back up and there you may have significant additional costs, but
there is a certain amount you can do in the design and development
of your generating network (many of the things that are desirable
to do anyway in the modernisation of the network) that will limit
the cost of providing the variable increment. You cannot express
it as a standard increment on cost.
Q394 Lord Lamont of Lerwick:
What information has the IEA got on the experience of some of
its member countries like Denmark, Germany, Spain which have higher
levels of renewable generation? What information have you got
of the costs from that experience of incorporating it within an
electricity system and how far would this be relevant if the levels
of renewable energy were even higher for countries like the UK
which are not strongly interconnected on the overall European
electricity system?
Mr Hirst: We have a fair amount of information
on the costs of renewables in different countries and in many
cases you will find the costs are actually lower where the deployment
is highest, simply because there is an industrial infrastructure
for manufacturing and there is a learning by deploying elements
which tends to bring costs down. For instance, the costs of Danish
wind power are amongst the lowest in the countries that we have
looked at. I think you are right to point out that it is very
relevant to the Danish experience that they are linked particularly
to the German electricity market and actually the Norwegian market
is important because of hydro. We may not have as much flexibility
as Denmark has to introduce high levels of renewables without
back-up penalties.
Q395 Lord Lamont of Lerwick:
If I could just ask then on something that I think is related
to that which you have just touched on. How far do the costs of
renewable energy vary from country to country and how much is
this because of natural environment factors and how far is it
because of expertise in technology? Obviously some countries have
a better landscape for wind and hydro is obviously easier in some
country than in others.
Mr Hirst: They vary considerably and
it is a mixture of those factors. Some of them are extremely obvious
it is solar or wind but in others there is a big difference. For
instance, I am not sure it counts as renewable but it is linked
to renewables, heat pumps, installing a heat pump in your home
in the UK is a lot more expensive than it is in Sweden and the
reason is that there is a huge industry with a very widespread
deployment of heat pumps in Sweden and we have not developed our
industry to the same degree, so that is undoubtedly one of the
big factors.
Q396 Chairman:
You have said in answer to Lord Lamont's first question that you
have got a great deal of information on these relative costs.
This is something that interests the Committee very much so if
you were able to let us have a note.
Mr Hirst: We can send you the information.
Chairman: That would be very helpful.
Thank you very much.
Q397 Lord Moonie:
What is the specific reason for the Danish cost advantages?
Mr Hirst: Denmark has a long history
of developing wind energy. They took a strategic decision on it
at least 20 years ago, I think.
Q398 Lord Moonie:
It is a time factor.
Mr Hirst: And in many respects this has
turned out to be a big success for their economy, not only the
fact that they have relatively competitive power but that their
wind turbine manufacturing industry is now a world leader.
Q399 Lord Moonie:
What evidence do you have about the cost effectiveness of different
policies for supporting renewables like feed-in tariffs between
ROCs, things like that, and any other alternatives you can think
of?
Mr Hirst: We have done quite a detailed
study on this which we will publish in the autumn. We did not
find that there was a simple correlation where feed-in tariffs
work and tradable certificates do not work. We found quite a varying
pattern, although I must say feed-in tariffs on the Continent
had been quite effective in promoting wind power particularly,
but the differences are more subtle than that. It is in the details
of the design of the system. The main conclusions that we came
to as regard to what makes renewable deployment strategies effective
are first of all focusing on removal of the non-economic barriers
to the deployment of the renewables. A lot of schemes have been
relatively ineffective because there are other barriers not to
do with the scheme itself—planning barriers, barriers to
do with integration into electric grids and so on. You need to
have policies that are predictable and transparent so that industry
can invest. The costs need to be predictable but also predictably
transitional over time so that progressively the technology is
required to become competitive in the market. We have found that
mechanisms tend to be more effective if they do differentiate
between technologies at different stages of development. It is
a problem with single incentives that they will not tend to bring
forward any but the technologies which are most cost effective
and available today. The technology also needs to take into account
the point that we have just discussed, the implications of larger
scale penetration of grids. Those are the main messages; there
is not a simple message. There is one other message that I think
is important. There is actually some international convergence
between these mechanisms. On the one hand, countries that have
capital/capped quota systems have tended—and I think the
UK is amongst those—to introduce differentiated elements
within that for different technologies. On the other hand countries
with feed-in tariffs in some cases are moving from feed-in tariffs
which are the gross sum received by the supplier of electricity
to feed-in tariffs which are increments on the market price, and
effectively those are somewhat bringing together these different
technologies.
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