Neeraj Oak – 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

Where does all the power go?

Posted on May 6, 2014April 14, 2023 by janet.crompton

Ever wondered how much of your electricity bill goes on charging your laptop, or whether your TV is a bigger drain on your wallet than your kettle? I have…

A good basis to use in answering that question is the Annual ‘Energy Consumption in the UK’ report by DECC. Using their data on household electricity consumption, I’ve plotted a short history of UK electricity use by appliance. I’ve tried to aggregate similar devices together to create 6 categories: lighting, refrigeration, washing & drying, consumer electronics (TVs, consoles, device chargers), computing (desktops, laptops, monitors, printers) and cooking. It’s also important to note that this data is a total for all households in the UK, and is not taken on a per device basis.

The biggest individual energy guzzling devices today are TVs, refrigerators, halogen bulbs and power supply units (including chargers).

Some of this information isn’t surprising- refrigeration is notoriously expensive in physical terms, as it involves reversing a thermodynamic heat engine, in effect using energy to ‘suck’ the heat out of the colder compartment. Halogen bulbs are also commonly known as a large energy drain, due to their ubiquity and relatively low efficiency. Energy efficiency of both refrigeration and lighting have seen significant advances in the past few decades, and the relative drain on household energy of such devices reflects this.

I am, however, puzzled to see TVs on the list. The new generation of LED TVs and the advances in energy efficiency in electronics gave me the impression that these devices were far greener than their predecessors. In fact, the electricity used by TVs doubled between 1970 and 2000, and has almost tripled by 2012. I imagine this means that far more households have TVs now and that an increasing number of households own several. Even so, it is difficult to see why efficiency technology has not slowed the rate of growth of the electricity needs of televisions.

Laptops form a surprisingly small part of household electricity use, and power supply units (PSUs) and chargers appear to constitute a much larger energy drain. Perhaps the proliferation of smartphones and tablet PCs has something to do with this; the sheer number of devices that need charging may be the reason for the large increase in PSU consumption over the last few decades.

What can we take away from these statistics? On the surface, they hold few new suggestions in terms of how we should behave in order to save energy. It is common knowledge that one should boil as little water as possible in electric kettles, switch off devices and lights when they aren’t being used and purchase energy-saving devices instead of more power-hungry alternatives. However, these numbers do identify a large potential saving in energy consumption by switching to more efficient lighting methods and a significant rise in energy consumption by TVs and PSUs. The bottom line? Unplugging those idle device chargers won’t save the world from climate change, but it certainly could help.

This blog is written by Neeraj Oak, Cabot Institute.

Neeraj Oak

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

Electricity Market Reform simplified

Posted on July 29, 2013April 20, 2023 by janet.crompton

Energy policy circles have been abuzz for months over proposed changes to the way renewable energy is to be supported, and the government’s overall plan to balance the supply and demand for energy in the years to come. The Department of Energy and Climate Change have recently released details of the draft ‘strike prices’ for the Contracts for Difference(CfD) scheme, marking an important step towards a radical change in the way renewable energy producers are aided by the government.

As a mathematician working in the field of energy policy, I’m keenly aware of the sheer number of complicated schemes, financial instruments and legislative hurdles electricity producers have to face. At the same time, the health of the UK’s energy generation and distribution system is vital to every member of the population, not just the select few who understand the intricacies of these new energy policy schemes.

I strongly believe that an intuitive understanding of how energy subsidy really works must be spread beyond the corridors of Westminster and Whitehall. A wider debate will result in more informed decisions from policymakers, who currently lack a strong mandate for helpful policies and accountability for poor ones.

In this blog post, I’m going to try to explain one half of the Electricity Market Reform bill, namely the Feed-in Tariff with Contracts for Difference (FiT with CfD) scheme. I’ll do this through diagrams and a maths-free description of the way the scheme works, and the consequences for customers like you and me.

Unfortunately, I can’t avoid making enormous oversimplifications, but it should provide a basic sketch, accessible to sustainability enthusiasts from all backgrounds.

Breaking even

Before we look at how the Feed-in Tariff with Contracts for Difference (FiT with CfD) scheme works, let’s think about what would happen without it (or some other equivalent subsidy scheme).

Renewable energy producers are for the most part private-sector, for-profit organisations. They need a financial incentive in order to invest in our energy sector; at the very least, they need to avoid making a loss in order to remain operating. I’ve drawn a very simple figure to represent the profits and losses they can expect to make over the next couple of decades.

The horizontal axis in the figure represents time; we begin on the left-hand side of the diagram, and time continues as you travel to the right, with the right hand side being around 20 years from now. At the moment, the cost of producing most types of renewable energy (the blue line) exceeds the price electricity producers would get for selling it on the open market (red line). The red shaded area represents a financial loss for the producer of the electricity, whereas the green shaded area is the profit they can expect.

As time goes on, current projections are for the cost of production to fall, and electricity prices to rise. At some point, the cost of producing renewable energy and the money producers get for selling it will be equal. This is the so-called break-even point, and is where the red and blue lines meet.

The point of break-even is extremely important to policy makers. So long as electricity producers think they are going to make a loss, they have no financial incentive to expand the UK’s renewable energy generation capacity. Once the break-even point is passed the industry should grow, as potential investors see that the industry is profitable. In order to meet the steep legislative carbon-reduction targets of the UK, the government will want to reach this break-even point as quickly as possible, as it promises a growing renewable energy sector for the years to come.

So how do we get to the break-even point more quickly? Well, that’s a question of how much money we’re willing to spend, and the mechanism through which we support renewable electricity producers.

Contracts for difference

A contract for difference, or CfD, is a financial instrument that’s been around for many years. Until recently, CfDs were predominantly used in commodities and stock trading. However, the last few years have seen CfDs adopted as an instrument of energy policy, used by major renewable energy producing nations like the Netherlands and Denmark http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/742/74208.htm. The UK will soon be adopting a form of CfD scheme too, known officially as the Feed-in Tariff with Contracts for Difference (FiT with CfD) scheme. Let’s take a look at how it works.

In the FiT with CfD scheme, the government enters into contracts with electricity producers in an individual, case-by-case basis. They agree a ‘strike price’, at which electricity generated by the producer is to be valued for the duration of the contract. When revenues from selling electricity at market prices (red line) are below the strike price (brown line), the producer can ask the government to make up the difference (orange shaded area). This effectively takes the place of subsidy in more orthodox schemes, and brings forward the break-even point to where the blue line meets the brown line, making the industry profitable sooner and attracting new investors.

When the market price of electricity exceeds the strike price, the deal is reversed. Electricity producers must pay the government the difference, shown on the diagram as the dark green shaded area. This allows the government to recoup some of the money it spent on keeping the industry afloat earlier. Producing renewable electricity still remains profitable though, as shown by the light green shaded area.

What does this actually mean to you and me, the consumers of electricity? Well, whatever the government spends on supporting renewable energy will be added on to our tax bills, regardless of how much electricity we might individually use. On the other hand, we will reach our carbon-reduction targets quicker. It’s possible to balance the pros and cons of the scheme by changing the strike price, but it’s not an easy problem given the politics surrounding renewable energy.

As I’ve hinted before, things are much more complicated than the explanation I’ve given here, and while I’ve tried to describe the scheme as it is intended to work, we can’t be sure that it will behave as expected; we haven’t reached the break-even point yet, so there’s little evidence to go on!

What’s next for the Electricity Market Reform (EMR) bill? Well, it’s currently under review by the House of Lords and is expected to be given Royal Assent before 2014. EMR, for good or for ill, is coming soon.

This blog is written by Neeraj Oak, from the department of Complexity Sciences at the University of Bristol.

Neeraj Oak

All Party Parliamentary Climate Change Group – decarbonisation targets

Posted on March 5, 2013April 20, 2023 by janet.crompton

This month’s All Party Parliamentary Climate Change Group (APPCCG) meeting centred on the age old problem of setting decarbonisation targets; the question being, are they useful milestones, or millstones around the necks of the energy industry.

David Kennedy, CCC

Joining the discussion at the meeting were several senior figures in the field, including David Kennedy, chief executive of the Committee on Climate Change (CCC), and until recently a frontrunner for the top civil service job at the Department of Energy and Climate Change (DECC). Mr. Kennedy’s appearance at this meeting comes on the heels of an open letter presented by his organisation to Ed Davey, the minister at DECC, urging swifter action on establishing carbon intensity targets. Mr. Kennedy explained his concern that lingering doubt over whether legislative targets will be set dissuades investors in renewable energy technologies, and ultimately hampers efforts to decarbonise the electricity market.

It’s worth noting that the UK already has binding targets for reducing carbon emissions; indeed, it was the very first country to enact such legislation. However, these targets will ultimately be assessed only in 2050, which on the political timescale is several lifetimes away. Further, the 2008 Energy Act that carries this legislation allows successive governments to exceed carbon emission budgets in the short run, so long as they reduce future budgets accordingly. Without intervening milestones between now and 2050, one can certainly see an incentive for incumbent governments to neglect decarbonisation- procrastination on a national scale.

Opposing this view was David Hone, the climate change advisor for Shell. Mr. Hone explained that UK energy policy should not be viewed as a closed system- indeed, our policy is linked directly to those of our European partners though EU-ETS, the European Union Emissions Trading Scheme. His view was that by enacting further legislation, the government would be unfairly constricting energy producers in the UK. Further, any emissions savings made in the UK could be offset by additional emissions in Europe, as the EU-ETS would simply sell emissions rights elsewhere.

Guy Newey, Policy Exchange

Another significant contribution was made by Guy Newey, Head of Environment and Energy at the think tank Policy Exchange. While Mr. Newey agreed in principle with the idea of bringing forward decisions on decarbonisation targets to 2014, he also made the point that uncertainty on this topic was a significant disincentive to investors, and that a quick and firm resolution to this question was essential; to that end, he could live with an imperfect answer.

This blog is written by Neeraj Oak, University of Bristol

Neeraj Oak

Neeraj Oak reports on the APPCCG meeting on the UK Energy Bill

Posted on February 5, 2013April 20, 2023 by janet.crompton

Ever since the birth of commercial nuclear power at Calder Hall, Cumbria in 1954, fission-based reactors have been an important part of the UK energy mix. Today, policy makers stand at a crossroads. Increasing demand for electricity and the constraints of carbon reduction treaties are forcing the government to consider renewal and expansion of our existing nuclear power generation capacity. At the same time, the old spectres of safety, cost and nuclear waste still haunt the industry.

I was recently lucky enough to attend a meeting hosted by the APPCCG and NCG on the current UK Energy Bill and its relation to new nuclear generation capacity. Among the large number of attendees were Hergen Haye (head of new nuclear, DECC), Dr. Nigel Knee (head of nuclear policy, EDF energy), former Green Party leader Caroline Lucas MP as well as representatives of academia, trade unions and environmental organisations. The meeting was chaired by Joan Walley MP (Labour). Interestingly, the only major party not represented at this meeting were the conservatives, which left the burden of defending government policy to the DECC.

Points of contention at the moment are numerous, but a few do stand out. The government appears not to be upholding its commitment not to subsidise nuclear energy, at least in the eyes of the Green Party and present academics. The current energy bill details a change in the subsidy mechanism for low-carbon energy sources, known as the contract-for-difference feed-in tariff (CfD). While CfD is openly referred to as a subsidy in the renewable energy industry, the fact that the nuclear energy industry is also eligible for its benefits has raised significant criticism.

The time and cost of constructing nuclear power stations was also in the spotlight, with special ire reserved for EDF’s ongoing EPR reactor project at Flamanville in France, which is currently 4 years behind schedule and is projected to cost more that €8.5 billion despite initial estimated cost of €3.3 billion. Further, such time and cost overruns have been alarmingly common in Europe in recent years. The preferred configuration for new nuclear in the UK is similar to that of Flamanville, an EPR reactor administered by EDF. There were calls, especially from academics, for other options to be tabled.

Finally, in the wake of the Fukushima crisis, safety and disposal of nuclear waste are also raising considerable concern. With the commitment of Germany to a nuclear-free energy sector, the possibility of the UK following suit is slightly more likely. However, this will depend on how this change affects Germany’s progress towards carbon-reduction targets. It’s too early to say, but for now it appears as though the government will look to retain the status quo, renewing nuclear generation capacity without necessarily expanding it. This leaves environmentalists opposed to nuclear energy in somewhat of a dilemma, as they must choose between supporting new nuclear energy, or siding with more carbon-intensive alternatives until renewable energy technologies mature.

Neeraj Oak

———————-
Blog entry by Neeraj Oak
Bristol Centre for Complexity Science (BCCS)
Neeraj.Oak@bristol.ac.uk
———————-