Royal Commission on Environmental Pollution

The views expressed in the paper are those of the authors and do not necessarily represent the thinking of the Royal Commission. Any queries about the paper should be directed to the author indicated * above.

Whilst every reasonable effort has been made to ensure accurate transposition of the written reports onto the website, the Royal Commission cannot be held responsible for any accidental errors which might have been introduced during the transcription.

Contents

1. Introduction
  1.1 Sustainable development
  1.2 Energy flows and their environmental impacts
  1.3 Past trends

2. Energy and Environmental Policy Concerns
  2.1 Today's problems
  2.2 Today's policy responses
  2.3 Will competitive markets be good or bad for the environment?
  2.4 Are consumers and companies receiving the correct signals about the full costs associated with their use of energy?
  2.5 What other policy responses are available to government in a market-led economy?
  2.6 Will markets make the right decisions about the depletion of primary fuels?

3. The Next UK Agenda
  3.1 What might happen to UK demand?
  3.2. What might happen to UK supply?
  3.3 The main UK energy and environment issues

4. The Medium-term Global Agenda
  4.1 What could global energy balances look like over the next 15-20 years?
  4.2 Trends in the demand for transport
  4.3 The implications of changes in energy balances for the environment
  4.4 The environmental effects of power generation and distribution
  4.5 The demand for transport

5. Long-term Energy Outlook - Can Sustainable Development be Achieved?
  5.1 What do projections of 'business-as-usual' look like?
  5.2 What efficiency gains are possible; what are the new energy demands?
  5.3 When, and if, real oil prices start to rise, will there be an energy crisis or will there be a smooth transition?
  5.4 How will governments respond to the need to meet existing and future climate-change commitments?

6. Conclusions

Appendix 1: Energy Flows in the UK Economy
  A1.1 Primary energy consumption
  A1.2 Energy consumption by final users
  A1.3 Supply
  A1.4 UK primary fuel reserves
  A1.5 Trends in energy emissions

Appendix 2: The DoE Report Indicators of Sustainable Development for the United Kingdom

Appendix 3: Energy Efficiency
  A3.1 The trend in the energy ratio
  A3.2 Domestic users' efficiency
  A3.3 Potential for future domestic savings
  A3.4 Industrial energy efficiency
  A3.5 Potential for future industrial improvements
  A3.6 Combined heat and power (CHP)
  A3.7 Energy production
  A3.8 Transmission of energy

Appendix 4: Renewables - The Current and Prospective Market-places
  A4.1 The current status of renewable energy technologies
  A4.2 The market-place
  A4.3 Prospects for renewables

Table A1.1: UK reserves of fossil fuels
Table A1.2: Environmental characteristics of existing and new fossil-fuel generation technologies
Table A4.1: Price of NFFO2 and NFFO3 contracts (£/MWh)
Table A4.2: Use of renewables under ETSU scenarios

Figure 1: World primary energy: fuel mix 1860-90
Figure 2: Oil prices since 1863 ($/bbl)
Figure 3: The energy ratio: tonnes of oil equivalent per £1m GDP (at 1990 prices)
Figure 4: Growth of final energy demands 1990-2010, by sector (% change)
Figure 5: Growth in final energy demand 1990-2010, by fuel (% change)
Figure 6a: Primary demand by fuel, 1990
Figure 6b: Primary demand by fuel, 2010
Figure 7: Change in emissions of CO₂ and SO₂, 1990-2020
Figure A1.1: Inland consumption of primary fuels and equivalents for energy use, 1960-95 (mtoe)
Figure A1.2. Energy consumption by final user, 1960-95 (mtoe)
Figure A1.3: UK primary energy consumption and production 1966-95 (mtoe)
Figure A1.4: Trends in emissions from power stations per unit of electricity generated
Figure A3.1: Tonnes of oil equivalent per £1m GDP
Figure A3.2: Index of energy consumption per household
Figure A3.3: Industrial energy ratio since 1970
Figure A3.4: Hypothesised trends in specific energy consumption
Figure A3.5: Fuel input per unit of electricity generation
Figure A4.1: Electricity generated from renewables, 1995 (Th.toe)

Endnotes

1. Introduction

This paper examines the links between the environment and the production and use of energy. It aims to provide a broad survey of the issues as a basis for subsequent discussion.

The environmental impacts of the energy industries and the use of energy are best analysed over different time periods - current concerns; the next agenda; and the long-term agenda. The longer the time-frame, the greater the uncertainty.

The focus of the work of the Royal Commission on Environmental Pollution is on the implications for UK energy and environment policy. However, this does not mean that only domestic impacts should be considered. The analysis must also consider the particular implications for the UK of worldwide approaches to global climate-change policy. As the time-frame for the analysis is lengthened, it becomes increasingly difficult to distinguish the implications for the UK from more general global implications.

1.1 Sustainable development

The paper takes sustainable development as the underlying objective of policy. There are a number of definitions. One, which is widely accepted for society as a whole, is that the present generation should leave to the next generation a stock of capital which is no less than that which is available now. Some people are unhappy with a definition which allows for a trade-off between natural and man-made capital, and would place some binding constraints on the use of some natural resources. This debate may not, however, be of great significance for this paper, since it deals with the more limited application of the concept to a single sector.

In the case of energy, the obvious definition of sustainable development is that the quality of energy services available to future generations must be comparable to that enjoyed today - while policies are also put in place to ensure that the wider environmental impacts of energy production and use are maintained at levels which are consistent with the preservation of essential environmental resources. In the very long term, a sustainable energy system cannot be dependent on non-renewable energy sources. However, the issue of immediate importance is to identify when the very long term starts.

1.2 Energy flows and their environmental impacts

Primary energy consumption - the energy inputs into the production of the final energy used by consumers and industry - is 1.4 times greater than final energy consumption (allowing for exports and non-energy use). This is an indication of production losses or 'inefficiencies' (see Appendix 1). These have been substantially reduced over the years, but there are physical limits to this. There are further losses between final energy consumption and useful energy services. It is the energy service delivered - in terms of given quantities of heat and power - which really matters to consumers, not the primary energy used.

There are environmental impacts at all stages of the process. The main effects are considered in Section 2.1.

1.3 Past trends

This paper is about the present and the future, and not about the past. Nevertheless, Figures 1 to 3 show substantial shifts in demand and supply over the last 100 years, and provide a salutary reminder of the difficulty of long-term analysis.

Figure 1 shows the marked shift towards an oil-based global energy economy with the introduction of the internal combustion engine. Could there be another sea change over the next 100 years?

Source: Shell.

Figure 2 shows the flat real price of oil through most of the century - the large real price increases of the 1970s and 1980s have, in large part, been reversed - although prices are still well above the pre-1973 level. More importantly, if oil is looked at as an input relative to the price of other inputs (notably labour), there has been a firm downward trend in the real price of oil ever since it was first widely used - see Section 6.3. What is the likelihood that the future will be one of rising real prices, both relative to other goods and services and, more importantly, relative to the price of labour?

Source: BP Statistical Review of World Energy, 1996.

Figure 3 shows the sustained fall in the UK energy ratio (over the last 45 years). This trend is a reflection of a number of influences - for example, changes in the efficiency with which primary energy is converted to final energy; changes in the energy efficiency of end-uses; and changes in the structure of the economy. Will the ratio continue to fall at broadly this rate?

Source: UK Digest of Energy Statistics (DUKES), HMSO, 1996.

2. Energy and Environmental Policy Concerns

2.1 Today's problems

Today's main energy and environment concerns are:

• the impacts of energy emissions on the quality of air, water and soil - resulting from both the production and the use of energy;
• the associated impacts on human health, other living targets and environmental amenity;
• the impacts of energy emissions on climate change;
• the impacts on landscape of the infrastructure needed to distribute energy;
• the impacts of energy production on landscape - for example, wind farms and coal mining;
• the problems concerning waste streams resulting from energy production - for example, nuclear energy and oil platforms;
• the indirect effects associated with the use of energy, such as the environmental impact of patterns of transport.

2.2 Today's policy responses

It is important to distinguish the effects of:

• policy interventions; and
• more general economic changes - for example, de-industrialisation and the 'dash for gas'.

Recent experience should be interpreted with the following background changes in mind.

2.2.1 Worldwide

• falling world fossil-fuel prices following the oil price hikes of the 1970s and 1980s;
• a huge increase in the demand for private transport and travel;
• increased freight flows with more world trade.

2.2.2 UK

• substantial industrial change;
• recognition of the full extent of UK Continental Shelf reserves;
• decline in support for coal;
• the coming to fruition of investment plans set in train after the oil price hikes of the 1970s and 1980s, as a means of reducing the use of fuel;
• more market-oriented decision-making;
• tighter environmental policies.

In the Department of the Environment (DoE) indicators of sustainable development¹,20 of the 118 indicators are energy-related. This illustrates the importance of energy use for the environment. Appendix 2 lists these indicators.

It is not possible to give an overall conclusion about the direction of the indicators, except that most of the indicators of efficiency - for example, units of energy per unit of GDP - are improving. However, the overall pressure of demand arising from higher overall levels of GDP means that totals are, in many cases, still rising - for example, total volatile organic compounds (VOC) emissions are rising, whereas VOC emissions per unit of industrial output or per passenger-mile are falling slightly. The dramatic declines in power station emissions of SO₂ and NO_x are widely recognised - see Appendix 1. In recent years, the increased use of natural gas for electricity generation has been of particular benefit.

2.2.3 Market-based decision-making

A central tenet of current approaches to energy policy is that most decisions about energy production should be taken by the private sector. Before privatisation, government involved itself in major decisions. This is still the case in many other countries - although the move towards market liberalisation is widely dispersed.

Market liberalisation has two positive effects. First, it tends to improve the efficiency with which energy is produced and distributed, and so pushes down the real price of energy. Second, it involves a much wider range of interests in decisions about energy use and production. However, it also raises the fear that public policy objectives - most obviously environmental objectives - will be jeopardised, since the governments will have significantly less control over the outcome.

2.3 Will competitive markets be good or bad for the environment?

2.3.1 Producer responses

There are good reasons to believe that more decentralised decision-making in energy markets will have beneficial effects on the environment, especially given the direct link between improvements in the efficiency with which energy is produced and reductions in environmental impacts. The potential gains in efficiency associated with the liberalisation of electricity markets are that:

• commercial pressures in energy markets will tend to produce greater production and conversion efficiency;
• there will be commercial incentives to provide more value-added services, including efficient energy management;
• more transparent costing of infrastructure could lead to more decentralised production and better matching of electricity generation and consumer demand, leading to fewer large transmission lines and a reduction in the losses inherent in long-distance transmission;
• innovation could lead to more efficient and less environmentally intrusive methods of generation;
• tariff structures which better reflect marginal costs are likely to improve the use of existing generation capacity by helping to trim demand peaks and reduce the need for additional 'peaking capacity', moving demand from low-efficiency coal-fired plants (now no longer part of baseload) to higher-efficiency gas-fired plants.²

Therefore, the case for energy market liberalisation is that it secures the improved use of economic resources, including environmental resources.

2.3.2 Consumer responses

UK liberalisation has been associated with a 25% reduction in industrial gas prices. However, some of this reduction reflects lower primary energy prices and would have come about in time, irrespective of whether liberalisation had taken place. The liberalisation of the domestic electricity market will, no doubt, be associated with some reduction in electricity prices, but the reduction will probably be less than 10%.

Since the environmental impacts of energy production and use are, in part, dependent on the volume of energy produced and consumed, any tendency for energy prices to be lower than they would otherwise be must have some detrimental effects. However, experience suggests that, in the short term at least, demand is not particularly responsive to price. The statistical relationship between changes in energy price and changes in demand is summarised in the concept of an elasticity - the proportionate change in demand produced by a proportionate change in price. An elasticity of -0.5 means that a 1% increase in price produces a 0.5% fall in demand. Short-run elasticities are very low. Medium-term price elasticities tend to be of the order of -0.2 to -0.4.

In the longer run, both domestic and industrial consumers have the opportunity to alter energy-using equipment, and so have much more scope for changing demand. It is generally accepted that long-run elasticities are, as a consequence, significantly larger than short-run elasticities. The experience of the oil price hikes of the 1970s and 1980s shows that, given time, consumers can alter their patterns of consumption to reduce demand, if they believe that higher prices will persist.

2.4 Are consumers and companies receiving the correct signals about the full costs associated with their use of energy?

To the extent that liberalisation can be shown to have detrimental effects on the environment - most obviously, the increase in CO₂ emissions associated with growing demand - the usual response is that these effects could be controlled by the use of appropriately targeted environmental policies. It is clear, however, that few, if any, countries have policies in place to control the detrimental effects of energy, especially those connected with the emission of greenhouse gases.

In much of the economy, consumers are led to recognise the value of the goods or services which they consume by a price signal. Only rarely are prices put on environmental resources. Regulation may prevent either domestic or industrial users from misusing the environment. However, not all uses of the environment are covered by regulation and, even where there is regulation, some residual emissions are allowed and, in general, no price is put on them.

Substantial work has been done to put a price on the environmental impacts of energy cycles, with the aim of providing a basis for judgements about the correct balance between the costs of controlling environmental emissions and the environmental benefits of reducing these impacts.³ Few countries have tried to put these valuations to practical effect. Again, this is particularly true of the potential costs attaching to the emission of greenhouse gases - although there have been widespread calls for carbon taxes to 'internalise these externalities'.

Supposing prices were increased to reflect the wider social and environmental costs of fuel cycles, how rapidly could consumers be expected to respond? Price elasticities are significantly higher in the long run. In general, industry, with investments which generally have expected lifetimes of not much more than 10 years, can make changes over this length of time. Similarly, many domestic appliances are changed over a period of approximately a decade.

However, changes in the housing stock or the stock of commercial buildings take far longer. Equally, while it is comparatively easy to change the stock of cars so that their environmental performance is improved - for example, by introducing catalytic converters - it is clearly far more difficult to produce radical changes in the pattern of private and public transport. Transport patterns are inherent in the organisation of society. Changes in the way people live and work, and in the associated infrastructures, take a very long time to come into effect.

Nevertheless, the price mechanism, perhaps accompanied by other policies, could be used to produce radical changes in energy consumption - particularly if it was accepted as being permanent. Ideally, the increase should be signalled well in advance, so that consumers could make plans.

The UK experience suggests that the political costs of increasing energy prices can be high - as in the case of the imposition of VAT on fuel. Some people believe that the price increases which seem to be needed to produce substantial shifts in energy use could not be carried through by the political process - for example, increases of up to 100% in the retail price of industrial gas are implied by the carbon tax needed to achieve a 20% cut in carbon emissions. However, the increases in the retail price of electricity would be substantially less, given that the cost of the primary fuel input is a smaller proportion of the final price.

2.5 What other policy responses are available to government in a market-led economy?

While not dismissing a role for the price mechanism, it is important to review the scope for other policy responses which give greater weight to environmental concerns, including the roles of the various regulators. However, since OXERA understands that this topic is under review in other forums, it is touched on only briefly

Some of the possibilities are as follows.

2.5.1 Encouraging energy efficiency

Appendix 3 deals with some of the current potential for improving energy efficiency, both in industry and commerce and at home. There will always be some dispute about why people do not invest in energy-saving measures. In some cases, the reason is that the costs of change have been underestimated in the engineers' calculations. Nevertheless, there is clearly considerable potential, and increases in the price of energy seem unable to produce all the necessary changes.

The traditional instruments used to encourage people to improve energy efficiency are subsidies and information campaigns. However, there are interesting new possibilities for using the systems of economic and environmental regulation to encourage energy efficiency. These include the Energy Efficiency Standards of Performance (EESOPs), currently imposed on the regional electricity companies and run by the Energy Saving Trust, and the powers of the Environment Agency to regulate the energy efficiency of industrial plant. The EESOPs have been very successful in involving the electricity suppliers in the promotion of energy efficiency - the companies are on course to meet the targets and at a significantly lower cost than originally envisaged. However, a key issue for the future is how the EESOP scheme can be amended to fit in with a competitive market.

2.5.2 Encouraging new renewable technologies

Government interest in promoting the development and take-up of renewable energy sources can be seen as an important contribution to sustainable development. The constant capital rule requires that the depletion of exhaustible resources should be accompanied by the smooth development of substitute resources, to ensure that consumption remains constant over time.

This might be used as a justification for investing in renewable energy, to ensure that an adequate back-stop emerges as natural resources are depleted. In the UK, the main means by which renewables are encouraged is by the Non-fossil Fuel Obligation (NFFO) and the Fossil-fuel Levy. Appendix 4 deals with some of the issues.

2.6 Will markets make the right decisions about the depletion of primary fuels?

A central issue for policy is whether a competitive market is likely to deliver an extraction path for scarce resources, such as oil and gas, which properly reflects the interests of future generations. Market-based prices reflect market judgements about future demand and supplies. Owners of energy resources must decide whether to sell their stocks in today's market or to wait to sell in future markets. Since fossil-fuel resources are finite, it might be thought that the chances that future real prices would be significantly above those of today were so good that a policy of holding stocks in the ground was worthwhile.

Experience with the trend in oil prices is shown in Figure 2. Oil prices were very stable between 1880 and 1970. The oil price shocks of the 1970s and 1980s led to a real increase in price, although, in recent years, prices have broadly been falling in real terms. The importance of OPEC - in effect, Saudi Arabia - in setting the oil price is obvious. However, OPEC's policies have changed over time, so that explanations of the determinants of the oil price which held over the 1970s and 1980s may not apply today. Given OPEC's current willingness to supply - which reflects its judgement about the right rate at which to deplete a large, yet finite, resource - a key role is now being played by non - OPEC supplies. These have been boosted by developments in extraction and managerial technologies. These developments have both counteracted any tendency for costs to increase as production has become more difficult, and served to increase the stock of economically exploitable reserves. The result has been to push oil prices down.

This demonstrates something of the risk of holding supplies off the market in the expectation of higher prices in the future. Even so, non-OPEC supplies will run down long before those of OPEC and, at that point, further real increases can be expected with, as theory would suggest, a continuing rate of real increase until full depletion has been reached.

Therefore, putting the ever-present possibility of short-term shocks aside, there is little doubt that, eventually, there will be a sustained increase in the real price of oil. There is no reason to suppose, however, that the increase will be sufficiently large, or sufficiently early, to make a policy of holding oil in the ground a particularly good investment, compared with the other investments which could be made if oil resources were 'freed' today. The possibility that the demand for fossil fuels could, in non-transport areas at least, be substantially reduced by technological advances must also be considered. This would further delay the point of increase.

One view arising from this is that, given the uncertainties, the private rather than the public sector is best placed to make judgements about future market prospects, largely because it is generally better at making investment choices. This view is not universally held - public-sector intervention might be justified on the grounds that, whatever the merits of the private sector in anticipating, or at least dealing with, future uncertainties, private-sector decisions will inevitably be biased against long-run policy concerns.

The two reasons put forward are:

• the absence of a full set of futures markets (so that private-sector decisions are insufficiently hedged); and
• the likely discrepancy between private and social time-preference rates for consumption.

Ceteris paribus, these imply that if decisions are left to the private sector, the exploitation of any given resource will be too rapid and that the interests of future generations will be under-represented.

This is the case for public intervention. The case against is that the public sector may be a poor judge of future demands and supplies - consider, for example, the substantial over-investment in electricity capacity by the Central Electricity Generating Board, and the wholesale failure of the public sector to recognise the potential contribution of gas-fired generation.

3. The Next UK Agenda

This section looks at the medium-term issues, most of which are more or less apparent at present and many of which are already the subject of some policy intervention.

3.1 What might happen to UK demand?

This section looks beyond the immediate impact of liberalisation and considers the medium-term prospects in the UK. It is based on the energy projections of the Department of Trade and Industry (DTI).⁴

Figure 4 looks at the possible growth in final energy demand. The very rapid growth in transport demand is apparent. Industrial demand grows more slowly than GDP. Service demand grows with the shift towards the service industries. An important issue for the future is the extent to which service industries' use of electricity - for example, heating, air conditioning, computers - will be held in check by increases in efficiency owing to technological progress. The DTI figures assume an increase in technical progress, in line with recent developments.

Source: EP65.

3.2 What might happen to UK supply?

Figure 5 again takes the DTI figures and looks at the way in which the forecast demands might be met. The best way of doing this is to examine first the increase in the demand for electricity, gas and transport fuel and then the demand for primary energy.

Source: EP65.

Figures 6a and 6b examine the resulting increases in primary energy demand. Significant increases in efficiency are forecast and the growth in total primary energy demand is well below the increase in final energy demand. A marked shift between coal and natural gas is apparent - indeed this shift is already under way.

Note: ¹ also includes imports.

Source: EP65.

The substantial increase in the demand for natural gas is apparent. By 2020, a large part of these supplies will be imported, since the UK's reserves will have been run down by then. The UK-Continent interconnector will be in operation by the end of this decade, but, by 2020, further means of accessing Continental supplies are likely to be needed.

Current projections suggest that, by 2020, the contribution of nuclear energy to the UK energy balance will have started to decline, particularly with the closure of the Magnox stations which will have started soon into the next decade.

The DTI projections suggest that if the real price of natural gas rises, there could again be a role for (clean) coal. Thus, there is a possible role for integrated gasification combined-cycle (IGCC) generation, if natural gas prices rise above 40p per therm (the current price is about 15p per therm). (This is not shown in Figures 6a and 6b, the data for which are drawn from the DTI's central case.)

The net impact of these projections on the environment can be summarised in the DTI projections of SO₂ and CO₂ emissions - as shown in Figure 7.

Source: EP65.

Note: The CO₂ figures are for all users, the SO₂ figures are for large combustion plants.

These projections are highly dependent on the increased use of natural gas. If the supply of natural gas was not forthcoming, then a very different picture would emerge. For example, the implications of changing the share of gas in the DTI projections were studied in the National Academies Policy Advisory Group (NAPAG) report.⁵

3.3 The main UK energy and environment issues

The medium-term energy and environment agenda is:

• the need to take precautionary action to reduce greenhouse gas emissions - ie, the need to buy greenhouse gas insurance;
• the barriers to cost-effective energy efficiency and how these might be overcome;
• ways to ensure that renewables receive a fair assessment by investors in energy markets;
• the prospects for clean-coal technology;
• problems of dealing with new fuels, such as the dirtier oils and shales.

4. The Medium-term Global Agenda

4.1 What could global energy balances look like over the next 15-20 years?

The problems associated with the huge increases in energy use forecast outside the OECD and, in particular, in the major developing economies, over the next 15-20 years have been discussed in a number of reports.⁶ The latest International Energy Agency (IEA) projections suggest that primary energy consumption in the non-OECD countries, the former Soviet Union and central and eastern Europe - ie, the rest of the world - is expected to more than double by 2010. The share of the rest of the world in global primary energy demand is expected to increase from the current 28% to almost 40% by 2010, as a result of rapid economic growth and industrial expansion, high population growth and urbanisation, and the substitution of traditional or non-commercial fuels by commercial energy. OECD energy consumption could represent less than half of world energy consumption in 2010.

The supplies of fuel to meet these needs are almost certainly forthcoming over the next 25 years or so, with substantial increases in oil supply coming from outside the OPEC countries (although OPEC is still expected to supply about half of the world's oil needs in 2010). In all unconstrained projections, the share of solid fuels (mainly coal) in total primary energy supply is projected to remain very high. For example, in one IEA case, the share in China is projected to be 70% in 2010, compared to 76% in 1993. All projections suggest that the reserves of coal which can be exploited economically remain high.⁷

Globalisation and the growth of the world economy will lead to further integration of world energy markets. In the IEA projections, world oil demand is projected to increase from around 70m barrels a day in 1995 to 92-97m barrels a day in 2010. Gas and electricity networks will be extended in all parts of the world. The rapid growth in demand will call for substantial investment in energy infrastructures.

4.2 Trends in the demand for transport

The growing integration of dispersed world manufacturing output calls for closer transport links, since visible trade requires the physical transfer of either commodities or finished or semi-finished goods.

Just as increased specialisation among component makers within one country adds to transport flows, so increased international specialisation, as a result of new patterns of international trade and investment, is likely to increase the importance of transport. The growing tendency to reduce stock-holding and to rely on enhanced communications links as a means of meeting demand may also increase the use of transport.

Extra use of transport is in many cases a wholly rational response to current factor prices. The relative price of goods transport (per tonne-mile) has been falling in recent years - a reflection of low oil and diesel prices; enhanced technical progress in aircraft design; and better scheduling, partly owing to the possibilities which increased trade allows for back-filling goods flights in both directions.

There is a wider issue of whether 'dematerialisation' is likely to have a significant impact on transport flows. The impact of the substitution of synthetic materials for natural ones has already been felt. Synthetic materials are produced nearer to the point of manufacture. Equally, the substitution of IT and electronic inputs for physical resources may tend to reduce the demand for transport.

There is a wider proposition that goods are becoming lighter and/or smaller so that, ceteris paribus, transport costs will fall - ie, both component parts and finished goods will be less costly to transport. This is a controversial proposition.⁸ The growing use of micro-processors as a means of control is likely to reduce the weight of many goods, and plastics are generally lighter than metals or woods. Nevertheless, it is hard to be sure that such tendencies are ineluctable. The latest IEA World Energy Outlook quantifies the related phenomenon of 'demetalisation' - ie, the reduced importance of iron and steel in OECD output.⁹

Transport flows will also increase as a result of the growing demand for private motoring. Again, there are many studies showing how demand is likely to escalate from a currently low base - for example, the latest IEA scenarios show South Asia as having the highest growth rate for total transport-sector energy demand over the period to 2010, at 6% annually. These problems are, of course, already fully developed in nearly all OECD countries, but the experience of countries such as Korea already demonstrates the challenge which this increase in demand presents to policy-makers worldwide. Nevertheless, in 2010, North American per capita transport energy demand could still be 25 times that of South Asia.

4.3 The implications of changes in energy balances for the environment

This section looks at possible environmental implications of the changes outlined above. While the impacts are concentrated elsewhere in the world, they are of central concern to the UK, since they provide the setting within which UK policy must be developed.

The implications of the projected growth in energy demand for environmentally damaging emissions are obvious. For example, the IEA suggests that the dynamic Asian regions might be responsible for 31% of world CO₂ emissions in 2010, compared to 22% in 1993 and only 10% in 1973. The increase in emissions in China alone could be of a similar order to the increase in the OECD as a whole.

There are two main focuses of attention - the pollution associated with the power industry, and that resulting from increased transport.

4.4 The environmental effects of power generation and distribution

The greatest international concern has focused on the regional effects of acid rain - for example, in both Europe and Asia - and emissions of greenhouse gases, notably CO₂. However, energy use, and the associated construction of energy infrastructures, also has local environmental implications, in particular on demands for water and on the creation of waste streams (particularly from power stations). These impacts are generally more damaging in the case of solid fuels.

The net environmental impact of the growth in energy production and use can be substantially reduced if, when new investment is made, the latest generation of power equipment can be used. Substantial improvements in conversion efficiency are possible and overall emissions of pollutants can be reduced. This points to the importance of technology-transfer. To date, advances in coal-fired power generation equipment have spread only slowly in Chinese and Indian markets.

The increased use of natural gas, both as a source of primary fuel for electricity generation and as a direct source of domestic and industrial heat, is potentially a major benefit to the environment, given its lower carbon emissions. Similarly, in many parts of the world, electrification can be viewed as a major solution to the high level of pollution in the townships. These changes in energy balances can, in part, be attributed to the wider reforms associated with trade liberalisation.

The possibilities for liberalising trade in electricity are only now becoming fully apparent. Extensions to existing electricity grids and the interconnections between systems provide the physical basis for trade, so that electricity can be sold across borders. If supplies are then obtained from the cheapest source, this can provide the basis for greater production and conversion efficiency. However, as elsewhere, overall global efficiency will only be improved if markets are responding to prices which correctly reflect the value of environmental resources. If prices remain inadequate as indicators of these costs, electricity produced from a relatively clean source might be replaced by electricity produced from a less clean source.

4.5 The demand for transport

The huge increase in the demand for transport forecast in almost all parts of the world, but particularly in the major developing economies, has implications for the local, regional and global environments. Direct associated environmental effects are those concerning local air and water quality. It would seem to be very likely that the problem of air pollution in cities will grow and become more prevalent. The increase in demand will also impose huge requirements for the release of land, and other resources, to meet the growing demand for roads and other transport infrastructures.

There are some self-correcting forces at work. In the end, both industry and consumers will, to some extent, respond to the loss of welfare associated with traffic congestion by reducing their demands. However, private responses will fail to take all the broader social costs and benefits into account, and so cannot be relied upon to provide the answer to the problem. Despite a general recognition of the need for a solution, neither the OECD countries nor the major developing economies have yet developed an adequate response, other than the objective of improving price signals.

The increase in demand for petrol will give rise to further demands for new refinery capacity. Substantial commitment of natural resources is needed to support such developments. Further increases in the flow of oil, and oil products, carry implications for the environment: much has been done, and will continue to be done, to reduce the impact of oil production on the environment and to increase tanker safety, but risks remain.

5. Long-term Energy Outlook - Can Sustainable Development be Achieved?

This section focuses on whether the energy industry and government have a sufficiently long-term outlook to achieve a path to sustainable development?

5.1 What do projections of 'business-as-usual' look like?

Any analysis over a very long time period must be predicated on assumptions about the energy demand which is, in turn, dependent on the development of the world economy. However, the overall importance of energy supply to both economic development and the environment means that this analysis is, to some extent, circular. Thus, it is possible to imagine that a growing shortage of primary energy could impose a drag on world economic growth (just as it is generally acknowledged that the oil price hikes of the 1970s and 1980s reduced the productive potential of the world economy).

Equally, if the worst predictions of global climate change are shown to be correct, this may be of sufficient magnitude to reduce economic growth. However, the experience of the last 200 years is that the forces of technological change and improvement are very strong, so that a continuing increase in world output and world energy demand is to be expected.

It is inevitable that the need for economic development will be pressing, given the huge increase in the world population which is now inevitable. The Royal Commission's study will need to pay particular attention to the likely resolution of these pressures and the possible impact on UK energy and environment policies. Growing population and growing economies will tend to increase energy demand substantially.

Industrial and domestic demand alike, in all parts of the world, will increasingly be for electricity - there are many important choices about the primary fuels.

Transport demand will be for oil products, until such time as there is either a substantial shift to public transport (in which case electricity would become more important) or a new way of powering private vehicles which does not need oil.

Long-term projections using different underlying assumptions have been made by a number of bodies - notably by the International Panel on Climate Change (IPCC) and the WEC.¹⁰ The different scenarios are useful as a means of exploring the main issues which are likely to determine the future links between energy and the environment. Clearly, however, the uncertainties multiply, the longer the time-frame. The IPCC and WEC scenarios are not reproduced here, but WEC usefully summarises the position by saying that:

'credible figures for global energy demand in 2100 range between 20 gtoe and over 40 gtoe - and if coal and nuclear power were to be accessed without constraint perhaps even higher . . . much of the incremental energy demanded as a result of population growth between now and 2020 will occur post-2020, to be added to the energy demands of the further 2 billion or so additional people expected to inhabit the world by 2050. By the year 2100 world population could well have reached 12 billion (about 87% of this total living in the present developing countries)'.¹¹

5.2 What efficiency gains are possible; what are the new energy demands?

A central uncertainty is the potential for present and continuing increases in energy efficiency (primary energy input per unit of output). Energy efficiency can be improved in four main ways:

• by increasing the efficiency with which a given primary fuel is converted to a secondary fuel;
• by switching between primary fuels;
• by increasing the efficiency with which final energy is used;
• by substituting more energy-intensive outputs with less energy-intensive outputs.

Environmental efficiency (unit of environmental damage per unit of output) can be influenced in three ways:

• by increasing energy efficiency in all the ways outlined above;
• by switching to production and consumption processes which are less polluting;
• by cleaning up the processes of production and consumption.

Technological progress will continue to suppress the growth in demand well below the rate of growth in GDP. The WEC suggests that its estimates for the overall growth in demand 'could still be consistent with reductions in world average energy intensity of anything from 50% to (much more speculatively) 80% from 1990 levels'. In other words, even with substantial increases in efficiency, the demand pressures seem to be enormous.

5.3 When, and if, real oil prices start to rise, will there be an energy crisis or will there be a smooth transition?

There is a good probability that the real price of primary energy will rise, driven by oil prices - although it is by no means certain. This means that a unit of primary energy will become more expensive relative to other goods and services. However, it is not clear that primary energy will become more expensive relative to other inputs - in particular labour. Indeed, the history of oil prices is that there has been a continuing trend reduction in the real input price of energy resources (a US study shows a 1.6% annual decline over the last century).¹² The downward trend might be checked, but the result could simply be that increases in primary energy prices broadly match the overall increase in labour costs.

Another way of looking at this is to consider, if and when oil prices start to rise, what kind of increase in the ratio of energy expenditure to world GDP is implied. This depends on the rate of growth in GDP; the rate of growth of demand for energy in physical terms; and movements in the cost of other energy inputs relative to the cost of primary energy inputs.

Analysis for the UK suggests that the overall impact of an increase in primary energy prices is likely to be muted. Expenditure on energy makes up about 5% of GDP, but primary energy costs less than half of this. A doubling of the cost of primary energy would create difficulties if it happened quickly, and would adversely affect the UK's competitiveness relative to countries which are less dependent on fossil fuels. However, it would be bearable, and, if the increase were spread over some years, it could be more easily accommodated. The way in which the world economy accommodated the oil price hikes gives some indication of the mechanisms.

The position in parts of the developing world might be much more difficult. If there are significant increases in primary energy prices, it is easy to envisage the possibility of some developing countries finding it difficult either to buy all the energy they need or to make all the investment needed to provide energy services. However, given the likely growth of the major developing countries over the next 20-30 years, a sizeable proportion of the developing world is likely to have escaped from this position.

5.4 How will governments respond to the need to meet existing and future climate-change commitments?

The widely agreed projections of 'business-as-usual' are hard, if not impossible, to reconcile with sustainable development, particularly given the associated projections of greenhouse gas emissions. The analysis of the implications for energy and environment policy is both complex and controversial. This paper can only summarise the possibilities.

In broad terms, the possibilities for the future (some of which are more plausible than others) are:

1. economic development will continue as hypothesised and the associated environmental implications will be very damaging;
2. economic development will continue as hypothesised and the associated environmental implications will be accommodated (at least as far ahead as can be foreseen);
3. a successful, and relatively painless, attempt will be made to reduce greenhouse gas emissions and, at the same time, a means will be found to achieve a fair and efficient allocation of the burden of adjustment across the world as a whole;
4. a successful attempt will be made to reduce greenhouse gas emissions and, to distribute the burden fairly, but this will prove costly in terms of conventional measures of economic welfare;
5. the projections are wrong and there will be a radical change - both in energy use and energy supply technology - arising naturally from normal market pressures.

It is possible to find supporters for all these positions:

• Proposition 1 is a plausible, if pessimistic, IPCC case.
• Proposition 2 is put forward by people who might be termed 'economic optimists' (particularly in the USA).
• Proposition 3 is supported by many economists who believe that relatively cheap ways of reducing CO₂ are available.
• Proposition 4 is, in some ways, the position underlying one of the first serious attempts to reduce CO₂ emissions - the Danish energy plan. Niels Meyer one of the architects of the Danish approach to sustainable energy development describes his scenario of 50% of Danish energy supply coming from renewables by 2020 (somewhat more than the government's current target) as based on the assumption that 'material growth in Denmark is approaching saturation within the next three decades'.¹³ The proposition is perhaps also consistent with the position taken by Richard Egan who says that:
  

  'with targeted growth [ie, a sustained attempt to reduce CO₂ emissions], it is difficult to see how a plausible world energy balance can be derived without the use of nuclear power. If nuclear power continues to be viewed in many countries as unacceptable as a future option, the need for new renewable energy sources . . . will become more urgent and improved efficiencies for energy use are essential.'¹⁴

• Proposition 5 is put forward by technological optimists - for example, Nicholas Lenssen and Christopher Flavin, who suggest that
  

  'the world energy economy is poised for a sweeping shift away from imported oil and environmentally-damaging coal . . . Pushed by the need to stabilise the earth's climate and pulled by the investment opportunities that beckon, the world economies are beginning to move rapidly towards more efficient, decentralised and cleaner energy systems'.¹⁵

  
  A similarly optimistic scenario has been put forward within Shell's Group Planning section.¹⁶ The Shell planners make particular play of Figure 1 above, showing how radical changes in energy balances have been achieved in the past.

This paper will not make a judgement on the relative merits of the above propositions. However, three comments on the constraints are worth making:

• The general inertia in the use of energy has been observed. Radical changes in demand generally require the construction of very different infrastructures. However, this is a slow and arduous process. As shown above, this provides a good reason why the necessary signals should be given as early as possible. To use a very appropriate metaphor, the 'energy ship' takes a very long time to turn round, so radical change must be anticipated.
• The extent to which it is reasonable to expect radical change to be achieved by prices has been examined briefly. The price mechanism can, without doubt, be used to support environmental objectives. The increase in prices - via a carbon tax - which would be needed to reduce demand to, say, the Toronto target levels¹⁷ would be large. However, the increase could be signalled in advance. Moreover, a large carbon tax does not always translate into a large increase in final prices - when prices already contain a substantial element of tax, as is the case with transport fuels. The addition of a further tax will not necessarily raise retail prices by unrealistically large amounts.
• Radical changes in the world economy, and in the distribution of economic well-being, cannot be achieved without new institutions. New global institutions seem to be required, first, to support the income and technology transfers needed to produce a rapid penetration for new technologies, and, second, to deliver the most efficient and equitable distribution of the burden of the effort required to meet agreed targets for reducing the emission of greenhouse gases.

6. Conclusions

The main issues arising are:

• the future supply of fossil fuels, and the impact of scarcity on price and demand as the resources are depleted;
• the scope for a radical change in technology (and the price at which this technology will be forthcoming);
• the scope for a substantial shift in energy efficiency or, more to the point, the extent to which, as economic development proceeds in the developing world, it can be accompanied by a significantly more efficient use of energy than has accompanied economic growth in today's developed world;
• the likelihood of a radical change in energy-using technologies;
• the likelihood of a substantial shift in the current pattern of change in the transport sector, and the social and political constraints which may prevent change;
• the possibilities for achieving global penetration for the new technologies and the role for technology transfer;
• radical changes in the world economy, and in the distribution of economic well-being, cannot be achieved without new institutions.

Appendix 1: Energy Flows in the UK Economy

A1.1 Primary energy consumption

Figure A1.1 shows the trends in inland consumption of primary fuels. Overall energy consumption has increased by 30% since 1960. Energy use has increased steadily at an average rate of 0.7% per annum.

Source: DUKES, 1996

A1.2 Energy consumption by final users

Figure A1.2 shows total energy use broken down into final-user groups.

Source: DUKES, 1996.

The above figures show that the flow of energy from primary production, through the conversion industries, to final users, entails a loss of energy during the production and distribution of electricity. Primary energy consumption is currently 1.4 times that of final energy consumption, giving losses of 30%.

A1.3 Supply

The UK is self-sufficient in energy. Figure A1.3 shows the UK's primary energy production and consumption, and illustrates how the UK economy was dependent on imports before the discovery of North Sea oil and gas. In the early 1970s energy imports accounted for around 52% of total consumption. By 1995 the UK's net exports of energy were around 17% of inland consumption.

Source: DUKES, 1996.

A1.4 UK primary fuel reserves

The following table shows UK reserves, as at the end of December 1995.

Note: Proved reserves, as at the end of 1995

Source: BP Statistical Review of World Energy, 1996.

These figures show the proved reserves as at end of 1995. At current rates of production, these give reserve/production (R/P) ratios of 4.4 for oil, 9.2 for gas and 48 for coal. However, these figures are misleading. There will be continued technological and economic advances, so that estimates of the total amount of energy ultimately available will inevitably increase. The US R/P ratio has remained at about 10 for many years. UK statistics distinguish between 'proven', 'probable' and 'possible' reserves. Proven reserves of oil have risen since 1970, by nearly 60%. Proven reserves of natural gas have risen by approximately 33% .

A1.5 Trends in energy emissions

Source: DTI, OXERA calculations.

The generation sector is the largest single source of CO₂ and SO₂ emissions and the second-largest source of NO_x emissions, behind the transport sector. As Figure A1.4 shows, emissions of all three have fallen significantly since 1970, although electricity generated has risen by nearly 33% since 1970. CO₂, SO₂ and NO_x emissions per unit of electricity generated have fallen by 42%, 55%, 50% respectively. The main reasons for these strong downward trends are the improved efficiencies of power stations, the switch from coal-based to gas generation, and the increasing contribution of nuclear energy. See figures below.

The characteristics of the different technologies are shown in Table A1.2.

Notes: ¹ open-cycle gas turbine; ² includes fuel used in starting up and shutting down the stations; ³ advanced gas-cooled reactor; ⁴ pressurised-water reactor; ⁵ new combined-cycle gas-turbine (CCGT) plant would have efficiencies of around 55%. Over the next few years, this is expected to rise to 60%; ⁶ IGCC could reach an efficiency of 50-52% using the advanced gas turbines mentioned in Note 5.

Source: Energy Technology Support Unit (ETSU) 1994, An Appraisal of UK Energy Research Development, Demonstration and Dissemination, HMSO.

Table A1.2 shows that gas generation, and in particular CCGTs, is a relatively 'clean' technology in terms of emissions. Existing OCGT stations, which run on distillate oil, have the highest emissions of CO₂, followed by coal-fired generation and existing oil plants. CCGT stations have the lowest CO₂ emissions. CCGT and new OCGT, which run on natural gas, have no sulphur emissions and very low NO_x emissions. IGCC plant has very low SO₂ and NO_x emissions and can also be fired by all kinds of fossil fuel. CO₂ emissions will also be reduced at the higher efficiencies mentioned in Note 6 to Table A1.2.

Appendix 2: The DoE Report Indicators of Sustainable Development for the United Kingdom

The energy-related indicators are:

• e1 - depletion of fossil fuels;
• e2 - capacity of nuclear and renewable fuels;
• e3 - primary and final energy consumption;
• e4 - energy consumption and output;
• e5 - industrial and commercial sector energy consumption;
• e6 - road transport energy use;
• e7 - residential energy use;
• e8 - fuel prices in real terms;
• k3 - emissions of greenhouse gases;
• k4 - power station emissions of CO₂;
• m2 - power station emissions of SO₂ and NO_x;
• m3 - road transport emissions of NO_x;
• n4 - VOC emissions;
• n5 - carbon monoxide emissions;
• n6 - black-smoke emissions;
• n7 - lead emissions;
• q6 - oil spills and operational discharges;
• v6 - energy from waste;
• w2 - discharges from nuclear installations and nuclear power generation;
• w3 - radioactive waste arisings and disposal.

Appendix 3: Energy Efficiency

A3.1 The trend in the energy ratio

Figure A3.1 shows the energy ratio-energy consumption per £1m GDP (at 1990 prices). The ratio has fallen to 55% of its 1950 level. This is an average reduction of energy use per £m GDP of 1.3% per annum. This trend can be explained by:

• improvements in energy efficiency;
• a shift away from energy-intensive industries.

Source: DUKES, 1996.

A3.2 Domestic users' efficiency

At present, 28% of energy consumption in the UK comes from the domestic sector. Households demand energy for space heating, hot water, lighting, appliances and cooking. The long life of the housing stock and inertia are a major barrier to improvements in energy efficiency.

Source: DUKES, 1996.

Domestic energy consumption has increased by 16%, driven by a 27% increase in the number of households. Per household use has fallen by 9%, partly because of a fall in average household size. The dominant factor affecting domestic energy use is space and water heating, which accounts for around 85% of total demand.

A3.3 Potential for future domestic savings

The Energy Efficiency Office has estimated that energy consumption in existing buildings could be reduced by 20% if current technologies, such as better insulation, different forms of lighting and glazing, and use of modern appliances for space heating and refrigeration, are implemented. Whether and when these investments will be forthcoming will depend on the price of energy, and the extent to which the barriers which now seem to stand in the way of investments in energy efficiency can be removed.

A3.4 Industrial energy efficiency

Energy consumption by the industrial sector accounts for 24% of total energy consumption in the UK. It has fallen quite dramatically since 1960. Industrial production rose by 44% and energy use fell by 42%. Figure A3.3 shows the trends in energy use and industrial output since 1970.

Source: DUKES, 1996.

The downward trend in energy use in the industrial sector can be attributed to changes in the structure of industry, with declining outputs from energy-intensive sectors; fuel switching; and an increase in efficiency. The index of the amount of energy used in the industrial sector per unit of output (1970 = 100) shows that the energy ratio fell to 70% of its 1970 level by 1985 and to 60% by 1995. This represents an average decrease of 1.5% per annum.

A3.5 Potential for future industrial improvements

A study by ETSU has shown that there is scope for considerable improvements in energy efficiency over the next 20 years. Figure A3.4 gives the potential trends in the specific energy consumption - the energy consumed per tonne (or unit, £ value) of product - a measure of the energy efficiency of a process. The three scenarios are 'business as usual' (BAU), 'all cost-effective' (ACE) and 'all technically possible' (ATP).

Source: ETSU, Industrial Sector Carbon Dioxide Emissions: Database and Model for the UK, October 1996.

A3.6 Combined heat and power (CHP)

At the end of 1995 there were a total of 1,277 CHP installations in the UK, with a combined capacity of 3,487 MW of electricity and 15,833 MW heat. The amount of electricity generated in 1995 by CHP plants accounted for 5% of total electricity used in the UK. The government has a target to reach 5 GW of installed electricity capacity by the year 2000. In the last four years, 1.2 GW of CHP capacity has been installed. One feature of CHP development has been the increased use of gas turbines - half of electrical CHP capacity uses gas as its fuel input.

There is considerable potential for the expansion in the use of CHP, particularly in the sectors which have a large steam or low-grade heat demand, such as the chemical, food and drink and the paper-manufacturing industry.

CHP output is currently 14.5% of total industrial electricity consumption. ETSU believes that this could increase to about 25%, if all cost-effective possibilities were to be implemented.

A3.7 Energy production

Figure A3.5 shows that the fuel input for each GWh of electricity generation (1966 = 100) had fallen to around 80% of its 1966 level by 1995. This is a result of greater efficiencies in generating units.

Source: DUKES, 1996.

Improvements in the efficiency of energy production have been driven by technological improvements in plant efficiencies. By the 1990s, commercial CCGT plant had an efficiency of around 55%, but new stations are commercially available at an efficiency of 60%. Industry experts and academics have suggested that combined-cycle efficiency could reach 65% with the simple refinement of existing techniques. These efficiencies should be compared to efficiencies of the typical steam-cycle plant of around 35%.

The competitiveness of new CCGT plants will depend on a comparison of the avoidable costs on existing stations with the total costs of new stations. One major determinant of this is the changing price of fuel. OXERA has estimated the change in fuel prices which would induce CCGT stations to replace existing conventional coal stations. Coal prices would have to rise to around £40 per tonne (£36 per tonne is the current cost for the major power producers) for existing stations to be replaced by new CCGT stations, given a current price of 16p per therm for gas.

Other options which may become competitive in the long term are the retro-fitting of CCGT systems.

• Retro-fitting of CCGT systems - it is possible to fit gas turbines to CCGT stations so that they can then run on synthesised gas. If the price of natural gas were to rise substantially in the future, the conversion of coal, oil or Orimulsion into a gas for use in electricity generation might become economic. A major advantage of synthesised gas is the low level of the resultant emissions - output would be virtually free of sulphur and particulates and there would be about 60 mg/m³ of NO_x.

A3.8 Transmission of energy

Electricity is distributed via the national grid. The resistance of the transmission lines leads to power losses - on average around 8% of the electricity supplied onto the grid is lost. No major technological advancements have occurred over the last 30 years. Possible increases in the use of local generation could reduce the utilisation of the transmission system and save energy. Equally, the development of super-conductors could result in the elimination of transmission losses through the grid. This could have the effect of centralising electricity production.

Appendix 4: Renewables - The Current and Prospective Market-places

A4.1 The current status of renewable energy technologies

Interest in renewables has grown steadily over the last 20 years, and renewable energy is likely to make an increasing contribution to UK energy production over the next 20 years. Currently renewable energy production accounts for only 2.4% of the total electricity generated in the UK. This can be compared with other European countries, such as France, where 13% of electricity is generated from renewables. Of the amount generated by renewables in the UK, 69% is from large-scale hydroelectric capacity, 26% from biofuels, and the remaining 5% from on-shore wind schemes.

Source: DUKES, 1996.

The above figure shows electricity generated from renewables since 1991, excluding large-scale hydroelectric capacity. If large-scale hydroelectric capacity (but not pump storage) is included, this increases the total amount of electricity generated from renewable sources to 7,649 GWh (in 1995).

A4.2 The market-place

At present, new renewables cannot, in general, compete unaided with conventional generation technologies. Although there are a few niche markets, such as landfill gas schemes, where renewables are competitive, this is because only part of the project costs are attributed to the renewable energy scheme.

The renewable energy market has been given a stimulus by the introduction of the government's Non-fossil Fuel Order (NFFO). There have been three NFFO rounds. A fourth, NFFO4, is currently under way. Table A4.1 shows the price of projects contracted under the second NFFO (NFFO2) and third NFFOs (NFFO3).

Notes: ¹ Includes energy crops and agricultural, food processing and forestry waste.

Source: DTI.

There are proposals for a NFFO5 in 1998. Average bid prices for NFFO4 projects are approximately 3.9 p/kWh (£39/MWh), which is a reduction of 13% on NFFO3 prices. While the price of electricity contracted through the NFFOs has fallen over time, it is still some way off the average for the Electricity Pool of England and Wales - which stood at £25/MWh at the time of NFFO3.

Table A4.1 illustrates the following points:

• Landfill gas is the cheapest renewable technology, but it is still well above CCGT costs.
• Costs have come down by 33% since NFFO2. The fall in the price of renewable electricity is due to improvements in technology and efficiency. However, the length of the contract period has increased to a 15-year period in NFFO3. This has allowed the capital costs to be spread over a longer period than the seven years of the first two NFFOs.
• The rate of progress may slow down as the technologies mature, but a further narrowing of the gap between renewable and fossil-fuel costs may be possible for some technologies in the future.

A4.3 Prospects for renewables

A study by ETSU in the early 1990s modelled the potential growth for renewable generation, according to various price, discount rate and energy policy scenarios.¹⁸ One of its key findings was that the choice between renewable schemes and conventional generation is sensitive to the choice of discount rate and time-profile of the costs.

ETSU showed the 'maximum practicable resource', taking into account predictions of regulatory, social and environmental constraints. At prices of 3 p/kWh with an 8% discount rate, it estimates that renewables generation could reach around 40 TWh by 2005 and 100 TWh by 2025. At 5 p/kWh, it could reach around 140 TWh by 2005 and 250 TWh by 2025 (all in 1992 terms). Each 50 TWh of renewables generation would reduce CO₂ emissions by about 10mt. To put these figures in context, the current amount of electricity supplied from renewables other than hydro is less than 2.5 TWh. This suggests to some that the ETSU figures are very optimistic.

Energy crops have the largest potential - they would make up around 75% of total renewables generation in all scenarios where the price is above 2 p/kWh. On-shore wind capacity would provide most of the remainder. The theoretical maximum, assuming only resource constraints and a price of 10 p/kWh, is about three times the current level of generation.

ETSU then combined these supply curves with a model of the whole energy market under a number of scenarios and discount-rate assumptions. It concluded that, without intervention in the energy market, renewables would make up only around 4% of total generation by 2025. Under a heightened environmental concern (HEC) scenario, which includes a carbon tax, renewables would account for 27% of total generation by 2005, and either 68% or 46% by 2025, depending on the future of nuclear power. Table A4.2 shows the contribution of various renewable schemes under two scenarios, HEC and a scenario with no specific intervention.

Notes: Tidal, wave and geothermal had no contribution under either scenario. Total generation is predicted to remain fairly constant.

Source: The Assessment of Renewable Energy for the UK, 1994, DTI, HMSO.

The ETSU study highlights the following constraints and opportunities for the use of renewables:

• For wind power, the high cost and the fact that the windiest parts of the UK are also the most environmentally sensitive will limit expansion.
• For hydroelectric power, most suitable sites have already been exploited. The high capital cost and the concentration of potential sites in Scotland means that generation is not expected to increase substantially.
• For tidal and wave power, the high cost and uncertainty will prohibit any exploitation.
• For photovoltaics, exploitation will depend on the cost of this relatively expensive source falling. Current prospects are limited to sites without grid connections.
• For municipal and industrial waste, ETSU finds that uptake is highly dependent on the discount rate and environmental concerns.
• For landfill gas, the high cost will prohibit its use post-NFFO without more intervention, and its use is limited by the amount of landfill sites.
• For agricultural and forestry wastes, uptake is limited by cost and environmental concerns.
• For energy crops, ETSU envisages very few constraints. Energy crops are a sustainable, reliable, environmentally friendly and relatively cheap method of production. The only constraints may be lack of enthusiasm by farmers and the speed at which new conversion technologies can be developed.

Endnotes

¹ Indicators of Sustainable Development for the United Kingdom, DoE, HMSO, 1996.

² 1995 Energy Report, Volume 1, Competition, Competitiveness and Sustainability, p. 54.

³ See, for example, The Social Costs of Fuel Cycles, CSERGE, HMSO, 1992.

⁴ DTI, Energy Paper Number 65 (EP65), HMSO, 1995.

⁵ Energy and the Environment in the 21st Century, NAPAG, 1995.

⁶ See, for example, Energy for Tomorrow's World, World Energy Council (WEC), St Martin's Press, 1993; and World Energy Outlook, IEA, 1994, 1995 and 1996 editions.

⁷ BP Statistical Review of World Energy, 1996.

⁸ Wallace, David (1996), Sustainable Industrialization, The Royal Institution of International Affairs and Earthscan, contains a useful summary on p. 24.

⁹ World Energy Outlook, IEA, 1996 edition, pp. 217-220.

¹⁰ IPCC Second Assessment: Climate Change 1995, A Report of the Intergovernmental Panel on Climate Change.

¹¹ Energy for Tomorrow's World, WEC, St Martin's Press, 1993, p. 245.

¹² William D. Nordhaus (1992), 'Lethal Model 2: The Limits to Growth Revisited', Brookings Papers on Economic Activity, 2.

¹³ Neils I. Meyer, (1993), 'Sustainable Energy Development: The Case of Denmark', International Journal of Global Energy Issues, 5:1.

¹⁴ Richard J. Eden (1993), 'World Energy to 2050: Outline Scenarios for Energy and Electricity'. Energy Policy, March.

¹⁵ Nicholas Lenssen and Christopher Flavin (1996), 'Sustainable Energy for Tomorrow's World: The Case for an Optimistic View of the Future', Energy Policy, 24:9.

¹⁶ Georges Dupont-Roc (1994), 'The Evolution of the World's Energy System, 1860-2060', unpublished presentation.

¹⁷ 20% below 1988 levels by 2005.

¹⁸ The Assessment of Renewable Energy for the UK, 1994, DTI, HMSO.