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Five reflections on Dieter Helm’s Cost of Energy Review

At over 200 pages, Professor Dieter Helm’s review of the cost of energy to UK businesses and households is wide-ranging. It covers many issues that fall firmly within our remit here at the Committee on Climate Change (such as the costs of decarbonising the UK’s electricity supply) and others that don’t (such as electricity network regulation and energy retail tariffs). The review makes a number of recommendations, some specifically for the CCC.

There’s a lot which chimes with previous CCC recommendations; from greater emphasis on letting the various technologies compete, including wind and solar; to the benefits of simplifying the system of regulation and incentives; to moving towards wider application of a carbon price. In other areas such as the call for a ‘unified capacity auction’ more consideration of the potential costs and risks, as well as the benefits, is required.

Assessing the full review will take time. For now, here are five early reflections:

1. One of Helm’s key conclusions is that energy bills are much higher than they need to be – gas prices and renewable costs have fallen yet bills have risen. In fact, this is a high level summary of a complicated picture (we unpacked this in detail in our 2017 report on Energy Prices and Bills). At least three distinctions are important:

  • Whilst energy prices have risen, energy bills are actually down since the Climate Change Act was passed in 2008. That reflects improved energy efficiency which is reducing the amount of energy we use.
  • The relationship between renewable costs and energy prices goes in both directions. The more complete story here is that there has been a period of investment (in the UK and across Europe and the world) in renewables at a time of high costs, which has led on the one hand to higher energy prices and on the other to (much) lower renewable costs. It is generally recognised that without this expensive deployment, costs could not have fallen as they have, although the benefits of that will only appear in future bills.
  • Timescales matter. Whilst wholesale gas prices fell quickly from 2013 to 2016, that followed rises since 2009. Overall we are roughly back where we were in 2009 and above levels from the late-1990s and early-2000s.

2. In terms of the strategy for cutting greenhouse gas emissions overall, the CCC approach aligns with Professor Helm’s conclusion that this must be a cross-economy strategy that goes well beyond the power sector. That is why power is just one of seven chapters in our report on the Sectoral scenarios for the Fifth Carbon Budget and makes up only 5 of the 30 recommendations in our progress report to Parliament this year. CCC scenarios are carefully constructed to identify the lowest-cost path to meeting the UK carbon targets right across the economy. Effective action must cover all sectors, including agriculture, where the Committee commissioned one of the first assessments of opportunities to reduce emissions from this sector and has consistently emphasised the need for a stronger set of policies to deliver these much needed reductions. Far from ignoring potential for reducing emissions from transport, the Committee has been consistently ambitious, with electric vehicles accounting for 60% of new car and van sales in 2030 in our ‘central scenario’, a figure that has remained unchanged since our Fourth Carbon Budget advice in 2010 (when electric cars made up less than 0.01% of UK sales). Current sales (2%) are right on track with this trajectory and it is great that others’ assessments of potential are now catching up.

3. We use scenarios to monitor progress and to satisfy ourselves that carbon budgets are achievable while meeting the requirements of the Climate Change Act. They are not intended to be prescriptive paths. Building scenarios for emissions reduction requires assumptions about the costs of technologies (both high-carbon and low-carbon) and the realistic rates of deployment that can be achieved. We have always been clear that there is considerable uncertainty around such assumptions, and our scenarios have been designed to be robust across these uncertainties. Some things have progressed more quickly than we assumed, some more slowly. For example:

  • The costs of renewable power generation have fallen far more quickly than the Committee assumed. In our 2011 Renewable Energy Review we projected costs for offshore wind of £52-124/MWh for 2040, but recently offshore wind projects have signed contracts at £57.50/MWh for delivery from 2022. At the same time, projected costs for new nuclear power have increased, while the deployment of carbon capture and storage (CCS) has not yet begun in the UK.
  • Battery costs have also fallen more quickly than we assumed, although the speed of electrification of transport has to date been slightly slower. The speed of electrification of heating has also been slower than in our scenarios.
  • Wholesale gas prices for 2016 were below the projections we have used, though on average over 2008-2015 they were marginally above the central projection we used in 2008. We will continue to use the full range of scenarios published by the Government when building our scenarios.

In the face of these changes, we review and update our scenarios on a regular basis.

4. Successfully deploying new technologies at scale requires that these first undergo stages of R&D, demonstration and deployment. All of these stages are important on the way to commercialisation and cost reduction. Furthermore, many energy technologies have long ‘asset lives’ and require supporting infrastructure and extensive supply chains to deploy at scale even once fully commercialised. Given the limited time to 2050, this implies that options likely to have a major impact on meeting the UK’s 2050 target are likely to need some deployment before 2030.

Research by the UK Energy Research Centre (UKERC) in 2015 supported our advice on the Fifth Carbon Budget. The research found that for a set of new technologies (both energy and non-energy) the average time for invention, development and demonstration was 19 years, with a further 20 years on average for market deployment and commercialisation. Many technologies (e.g. solar photovoltaics) that have recently deployed very quickly have benefited from a long history of earlier development first.

5. It is increasingly apparent that renewables do or will offer the lowest cost of electricity over their lifetime of all generating options. With suitable long-term contracts they can be deployed without subsidy beyond the application of a carbon price to fossil fuel generation. That points to growing challenges around managing intermittency, whilst breakthroughs in smart technologies and storage offer new opportunities for flexibility. The Committee has previously emphasised the need for markets to fully reflect the system value of flexibility without unnecessary complexity in the rules. Professor Helm puts forward some interesting ideas in this area, which we will consider in due course.

The principles of competition, inclusion of all available low-carbon technologies and simplification all make good sense. For now, the priorities are to develop flexibility markets and to continue with competitive allocation of long-term contracts open to as wide a range of technologies as possible.

Mike Thompson is the CCC’s Head of Carbon Budgets.