Energy prices and bills – follow up on Thursday’s report

Our report on energy prices and bills has raised questions and caused some debate on Twitter about how we came up with possible bill impacts in an unabated gas-based power system. It is important to understand both the risks to energy prices in such a system, and the way we have illustrated these risks.

We showed in the report that investing in low-carbon technologies will involve a period of rising prices to 2020, creating an opportunity to avoid larger price rises after 2020 compared to a gas-based system.

The first thing to make clear is that the risks we identified relate largely to carbon costs of unabated gas, rather than future gas prices.

We provided an estimate of how energy bills would change over time in an unabated gas-based system under the Government’s central carbon price projections. Even in this world, we show there is a benefit from investing early in low-carbon technologies, rather than pursuing a dash for unabated gas. Although we didn’t set out present value calculations, this point holds when future benefits are discounted.

However, it is hard to imagine a world where the central case projection would ensue with a focus on unabated gas, while still meeting the carbon constraint – given the lack of alternatives to power sector decarbonisation, this would probably result in very high marginal abatement costs elsewhere in the economy and / or carbon prices.

Therefore we used a higher carbon price projection to illustrate the risks of carbon costs from unabated gas. We note that illustrations of high-end scenarios like these are inherently uncertain.

In addition to higher costs and prices, risks of dangerous climate change would be increased, because of the higher carbon emissions from unabated gas generation and limited scope for offsetting these in other sectors.

Other scenarios are conceivable. For example, an alternative strategy would be to focus on unabated gas for a transitional period, and then to build a low-carbon power system over a relatively short space of time, and not having developed a low-carbon technology portfolio.

This approach would entail relatively high costs as low-carbon technologies would not benefit from early stage deployment and related innovation. It would also increase risks of dangerous climate change.

Only if you were to believe that it were feasible to have a dash for gas, followed by rapid and low-cost power sector decarbonisation, would this be a sensible path to follow – there is no evidence and analysis to support this approach.

In short, our gas-based scenarios illustrate the fundamental point that unabated gas is carbon intense and can therefore have no longer-term role to play in a carbon-constrained world beyond providing back-up for intermittent generation.

It would be particularly unwise to invest in renewables to 2020 and then to have a dash for gas in the 2020s, as in the sensitivity in the Government’s recent Gas Generation Strategy.

Our calculations complement the extensive evidence base showing that the appropriate approach is to develop a portfolio of low-carbon technology options – renewables, CCS, nuclear – in order that we can achieve our longer-term objectives as set out under the Climate Change Act.

The energy prices and bills report is not our last word on the economics of power sector decarbonisation – we will be developing our analysis on this in the context of EMR implementation – and we are keen to discuss this with analysts out there.

Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone