energy security – Cabot Institute for the Environment blog

Tradable Energy Quotas: The future of energy use?

Posted on July 21, 2014April 14, 2023 by janet.crompton

The idea of Tradable Energy Quotas or TEQs has been floating around political circles since it was proposed by Dr. David Fleming in 1996. It’s been called the most influential scheme of its type, and has attracted cautious interest from both Labour and the Conservatives within the UK, as well as from EU bodies concerned with climate change.

TEQs are, in effect, a rationing scheme designed to curb the use of carbon-intensive energy sources. Each TEQ certificate would be a licence to emit a certain quantity of CO2, and would have to be surrendered by energy generators to the TEQ registrar at the end of each year. The TEQ certificates would begin in the hands of the end consumers of energy, and would travel up the production chain as TEQs would be used alongside cash as a parallel payment system for energy.

At the heart of the TEQ system is the idea that a country should be held to an annual ‘carbon budget’, and that each adult citizen should be entitled to an equal proportion of the domestic part of that budget. Businesses and industry would have to purchase rights to the remainder of that budget in order to power offices and machinery. TEQs would replace the more traditional method of emissions limitation, the carbon tax. The schematic below was reproduced from a report on TEQs by the All Party Parliamentary Group on Peak Oil.

In the TEQ scheme, 40% of the annual carbon budget would be distributed free to citizens, perhaps through an online account. The remaining 60% would be available to purchase from the TEQ registrar, and is mainly aimed at businesses. However, domestic users who exceed their free allowance of TEQs can also ‘top up’ by purchasing TEQs from this pool.

People who don’t use their full allowance of TEQs could sell their surplus on a market that is overseen by the registrar. This encourages domestic energy users to be frugal in their energy use in order to profit from the sale of TEQs. Businesses too would need to curb their energy use in order to avoid having to buy too many TEQs. Finally, the generators and importers of energy would have to gather all the TEQ certificates gained from sale of energy and return them to the registrar at the end of each year. If they are unable to provide enough TEQ certificates to cover the energy they have produced, they would face financial penalties.

The TEQ scheme is designed to produce a profit for the government through the sale of 60% of the TEQ certificates. This income would replace that of a more traditional carbon tax, and could hopefully be ploughed back into creating more low-carbon energy.

Now I’m going to put my cards on the table. I like this scheme. My instinct tells me that TEQs, or rationing of some form, is a sensible response to the problem of climate change. But as it stands, I don’t think this scheme would work.

Let’s start with the most pressing problem: Who is the registrar? In the proposed TEQ system, an astonishing amount of power and control is given to the ‘registrar’, without any firm idea of who or what the registrar is.

Perhaps it’s a public-sector organisation? With 60% of the TEQs initially allocated to the registrar for tender, the power it has over the price of each TEQ is practically insurmountable, allowing them to increase or decrease prices almost at will. With this kind of control, they will come under intense pressure from the treasury to raise TEQ prices to generate more revenue. At the same time they would be lambasted by the populace, who would demand an ever lower TEQ price. To offer control over the registrar to a government department would be akin to offering someone a grenade without the pin- it’s political suicide. To put it mildly, I suspect the creators of the TEQ scheme would have trouble finding someone to do the job.

So how about letting a private sector company have control of the registrar? Well, I’m certain you would have companies lining up for the job, but trusting any of them would be a fatal mistake. With such a remarkable monopolistic power, a private sector company would inevitably succumb to the temptation to appropriate a larger and larger proportion of the revenues. It wouldn’t be anything illegal of course, merely a creeping expansion in administration costs and a slow rise in wages- especially of the top executives. And how long would it be before the first accusations of insider trading surface? It wouldn’t be hard for a company in charge of the registrar to conceal its preference for certain other firms, offering them cheaper or earlier deals on TEQs. Handing control of the energy industry to a private firm also has energy security implications; how can we be certain that the company will work in the best interests of our country? In the worst case, it might even be persuaded to work in the interests of a foreign power. The final problem with private-sector control is transparency. Once the government loses control of the registrar, it will lose sight of the intricacies of running the TEQ scheme. At this point, it becomes very difficult to verify if the registrar is doing a good job, and even harder to justify reprimanding them.

Centralising power over the market and allocation of TEQs also has one other major problem. What happens if the registrar’s servers crash? It would paralyse the country’s energy network, ensuring nobody could buy or sell energy. We wouldn’t have to worry about energy security anymore; we could have all the fuel in the world stacked in warehouses around the UK, but if the TEQ exchange goes down it would all be effectively useless. My conclusion: having a single TEQ market overseen by a single registrar would make us incredibly vulnerable to hackers or hostile governments.

So is there a remedy for all these problems? I think there is.

Decentralise.

First, split the job of regulating TEQ markets away from the task of allocating and collecting TEQs. There is no strong reason why both jobs have to be done by the same organisation, and it’s far safer for it to be done by two separate ones. Second, open up the job of administering TEQ markets to private sector brokers, but make them liable for the exchanges they handle. This means that hackers would have to target several exchanges to bring down the country’s energy network, rather than just the one.

Finally, eliminate the job of administering the TEQ accounts of every citizen completely. Users could store their TEQs in digital wallets that reside on their own computers and mobile devices, and the value of their TEQs could be cryptographically protected using something akin to a blockchain.

Decentralisation might not solve every problem that TEQs currently pose, but it could go a long way towards making it a more secure and accountable system. Will TEQs be introduced anytime soon? I doubt it, but it’s possible that a smaller scheme may be trialled somewhere in the world over the next few years, as governments struggle with the problem of emissions reduction.

This blog is written by Cabot Institute member Neeraj Oak, the Chief Analyst and Energy Practice Lead at Shift Thought.

Neeraj Oak

A brighter future for India’s energy sector?

Posted on May 30, 2014April 14, 2023 by janet.crompton

In 2001, the Kutch District of Gujarat, India was struck by a magnitude 7.7 earthquake which killed around 20,000 people and destroyed nearly 400,000 homes. The total property damage was estimated at $5.5 billion and had a disastrous effect on what was already an ailing economy. In the aftermath of the earthquake, Narendra Modi, a member of the right-wing, Hindu nationalist Bharatiya Janata Party (BJP), became the Chief Minister of Gujarat and led the region out of darkness and into economic growth and prosperity. By 2007, Gujarat contained 5% of the total population yet accounted for 25% of total bank finance in India and continues to outpace growth in other states. Indeed, when I visited Kutch in January, it was clear that there was a growing and aspirational middle class population. Modi was recently elected Prime Minister of India, triumphing over Rhaul Ghandi, a member of the centre-left India National Congress (INC) Party, and with it became one of the most powerful players in the fight against climate change. So what does the future hold for the Indian energy sector?

Previous examples suggest that Modi wants to embrace the clean energy model. As Chief Minister of Gujarat, Modi bankrolled the largest single-location solar plant in Asia with an operating capacity of 55 megawatts and launched the first Asian governmental department dedicated to climate change. Before 2012, Gujarat had the highest share of renewable energy sources in India (~14%) and as Prime Minister, Modi plans to use solar power to supply energy to approximately 400 million people who still lack basic access to electricity. Yet some have accused Modi of losing interest in his solar revolution following his failure to submit an action plan for the Prime Ministers National Climate Change Action Plan in 2013.

Despite the solar revolution, India still generates 60-70% of its energy from non-renewable sources. The dominant non-renewable resource is coal which accounts for 40% of total energy production. Yet, output from Coal India Ltd, the largest coal producing company in India, has stagnated over the past few years and has consistently missed targets. If Modi is to revive coal production in India he has to address a number of issues including infrastructure, corruption and a lack of pricing power. Failure to meet last years target was also partly attributed to cyclone Phaline and monsoon flooding. This is also likely to affect future coal production; all IPCC models and scenarios predict an increase in both the mean and extreme precipitation of the Indian summer monsoon.

Although sitting on huge reserves of coal, India also has to import a staggering amount of coal. Last year, 152 million tons of coal were imported, an increase of 21% on last year, while only China and Japan imported more. In order to decrease their dependence on coal, India have began hunting for domestic oil reserves. Alternatively, Modi has spoke of strengthening ties with Russian President, Vladimer Putin, with the possibility of developing a Russian pipeline through the Altai region into northwest China and, eventually, to northern India. Although this would be a costly procedure, it may be easier to forge a relationship with Russia rather than China, who are India’s closest competitors in the energy market.

So what does this mean for India’s energy sector? Ultimately, coal will likely remain the backbone of India’s energy sector. This is problematic because coal generates nearly twice as much carbon dioxide for every megawatt-hour generated when compared to a natural gas-fired electric plant. In his rush for economic prosperity, will Modi forget about his solar revolution? On Monday, President Obama will unveil a plan to cut carbon emissions from power plants by as much as 25%, with an emphasis on reducing emissions from coal. If this is achieved, the US will have greater leverage over India and other heavy polluters such as China. Will this encourage Modi to reduce India’s reliance on coal? For now, I remain somewhat optimistic.

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This blog was written by Gordon Inglis, a 3rd year palaeoclimatology PhD student working in the Organic Geochemistry Unit within the School of Chemistry. This post was originally published on his own blog http://climategordon.wordpress.com/. You can also follow him on twitter @climategordon

Crisis in Ukraine: The energy implications

Posted on March 21, 2014April 19, 2023 by janet.crompton

Energy security- a primarily theoretical concept in recent years that has been made startlingly real by the recent developments in Ukraine. But what could the possible repercussions of this crisis be on European energy policies and our fuel bills?

I had a chance to ask this question during a recent event at the House of Commons, hosted by the APPCCG and Sandbag. The answer surprised me.

According to Baroness Worthington, director of Sandbag and member of the House of Lords, two outcomes are broadly possible.

Figure 1: Map of Ukraine

The first scenario is of a stabilisation of the diplomatic situation and the emergence of a westward-leaning Ukraine. In this situation, it is likely that Ukraine might choose to exploit its own natural gas reserves, estimated to be in the region of 1.1 trillion cubic metres. Ukraine possesses the 26^th largest natural gas reserve in the world, which is estimated to be more than half the size of the combined reserves of the EU.

If Ukraine `turns on the taps’, this would solve their immediate energy dependence on Russia and produce a revenue stream to support their economy. However, exploiting natural resources on the scale required would require significant investment, and Ukrainians would have to accept the change in land use and economic transformations that come with becoming a major energy exporter.

This optimistic outcome seems open to several criticisms. It’s unclear at this moment where investment would come from, and whether Russia would oppose competition in the European energy market. Moreover, can Ukraine ever completely replace Russia as an energy supplier? For instance, Russia’s natural gas reserves are around 40 times the size of Ukraine’s.

The second scenario is of a destabilised Ukraine, whose policies are influenced to a significant degree by Moscow. In this situation, European nations would need to purchase natural gas in the short-to-medium term from Russia and Ukraine, and tamely accept price rises and the uncertainty and energy insecurity that comes with dependence on a foreign nation for energy supplies.

This second possibility may also be criticised; Russia may not have further demands after the annexation of Crimea is completed. It may be the case that Russia wish to return to business as usual as quickly as possible, and may choose to offer energy supplies on favourable terms to Europe in order to encourage the resumption of trade and renewed trust.

In my view, both scenarios will result in one predominant outcome: the loss of trust. It seems unlikely that Russia can regain the trust of the West quickly; by it’s very nature, trust takes years to accrue and moments to lose. Energy security will become a much larger talking point in the next few years if relations with Russia continue to remain cool. Nations that previously were willing to base their energy supply on foreign gas purchases will choose instead to pay a price or environmental premium to source those supplies from more trusted sources.

The nations most likely to make changes to their energy mix as a result of this crisis are Germany and Poland. Germany’s choice to abandon nuclear fission after the Fukushima crisis leaves them slightly more vulnerable to a loss of fuel supplies from abroad, and they may choose to shift further towards renewables, or attempt the politically difficult U-turn of returning to nuclear power. Poland uses natural gas and coal to power much of its economy, a significant portion of which is purchased from Russia. Since the fall of the Soviet Union, Poland has been consistently suspicious of Russia, and may decide that now is the time to reduce or remove their dependence on Russian supplies.

Figure 2: DECC figure for natural gas supplies by source, 2010-2013

As for the fuel bills of UK consumers, it’s unlikely that we will see any immediate effects. If sanctions on Russia are imposed, this may raise gas prices worldwide, but the UK does not directly obtain its supplies from Russia. The most likely change to the UK’s energy mix will be one that was on the cards already- an expansion in the exploitation of shale gas. Using energy security as a primary argument, supporters of shale gas may now find it easier to convince others that fracking and onshore gas exploitation should continue or be accelerated.

Perhaps the Ukraine crisis will be the public relations coup the shale gas industry has been looking for.

This blog is written by Neeraj Oak, Cabot Institute.

Neeraj Oak