Royal Commission on Environmental Pollution

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CONTENTS

GLOSSARY OF ACRONYMS USED

GLOSSARY OF UNITS USED

EXECUTIVE SUMMARY

1. INTRODUCTION TO THE ISSUES

2. THE GLOBAL CONTEXT

  2.1 The Drivers of World Energy Use

  2.2 The Composition of Energy Consumption

  2.3 Global Energy Scenarios

3. THE UK REFERENCE CASE

4. ENERGY USE AND ENVIRONMENTAL CONCERNS

  4.1 Local Environmental Concerns

  4.2 Transboundary Environmental Concerns

  4.3 Global Environmental Concerns

5. REDUCING GLOBAL CARBON EMISSIONS

6. REDUCING UK CARBON EMISSIONS

  6.1 Nuclear Power

  6.2 Switching to Low Carbon Fossil Fuels

  6.3 Increasing Energy Efficiency

    6.3.1 Industrial sector

    6.3.2 Domestic sector

    6.3.3 Transport sector

    6.3.4 Combined heat and power

  6.4 Developing Renewable Energy Sources

    6.4.1 Forms of renewable energy and their UK potential

      6.4.1.1 Onshore wind power

      6.4.1.2 Offshore wind power

      6.4.1.3 Hydropower

      6.4.1.4 Photovoltaics

      6.4.1.5 Oceanic resources

      6.4.1.6 Energy from waste

      6.4.1.7 Energy crops

    6.4.2 Environmental impacts of renewables

    6.4.3 Support for renewables

    6.4.4 Policy Issues and Conclusions on Renewables

  6.5 The 20% Carbon Reduction Target

  6.6 The Longer Term

7. THE COSTS OF CARBON REDUCTION

8. CONCLUSIONS

REFERENCES

GLOSSARY OF ACRONYMS USED

GLOSSARY OF UNITS USED

EXECUTIVE SUMMARY

The Global Context

All economic activity requires the use of energy, and industrial society in its present form would not be possible without an abundant and concentrated form of energy such as is provided by fossil fuels. Industrialisation remains the principal social and economic aspiration of those countries that have not yet industrialised. These countries also contain the great majority of the world's human population, which is expected at least to double over the next century. Achieving these countries' aspirations would seem to require an enormous increase in the global consumption of fossil fuels. Indeed, even with optimistic assumptions of increasing energy efficiency, the World Energy Council has estimated that global energy demand could nearly double to 17.2Gtoe by 2020, increasing further to 25Gtoe by 2050, from 1990's level of 8.8Gtoe. In each projection, as in 1990, about three quarters of the energy demand is met by fossil fuels.

Fossil fuels are currently plentiful, but still ultimately finite. Even allowing for major new discoveries, demand on this projected scale is likely to induce relative scarcity of gas and oil resources by 2020 and, just as importantly, greatly increase the geographical concentration of still available reserves. Both these developments will exert upward pressure on oil and gas prices, with the geographical concentration especially having the potential to cause abrupt and disruptive price increases.

Coal is far more abundant than oil and gas, and more evenly distributed. Other things being equal, it can be expected to become relatively more important as the next century progresses, with significant advances in technologies to convert it to liquid and gaseous forms and to burn it more efficiently and cleanly. A wide range of other new technologies is also under development, although at this stage it is difficult to predict which of them, if any, will break through in terms of both magnitude of supply and competitiveness.

The UK Energy Profile

The UK has produced substantial quantities of oil and natural gas since the 1970s, and is also well endowed with coal reserves, although much of this is uneconomic at current world prices. The reserves to production ratios (i.e. lifetimes at current rates of use) of both UK oil and gas are about 40 years, although production is expected to decline from current levels early in the new century. Fuel exports gave the UK a £4½ billion trade surplus in fuels in 1996 (DTI 1997a, pp.9, 110).

UK energy intensity (energy use per unit of GDP) has declined steadily since 1960, but at a rate lower than the rate of growth of GDP, with the result that the UK's absolute use of energy is on a rising trend. The only period since 1960 when this has not been so was 1970-1985, when oil prices were relatively high. In 1994 the UK prices of industrial and motor fuels were 10% lower than twenty years earlier, and the price of domestic fuels was 15% higher.

Since 1960 UK energy demand has undergone fundamental structural change, as shown in Table ES1, with electricity and, especially, natural gas, substituting for coal. Very much the same structural change, that is still ongoing, has occurred in UK electricity generation during the 1990s.

The structural shifts in final energy consumption and electricity generation offer potentially important lessons for the future. The shifts have fundamentally altered the way energy is delivered throughout the economy. Yet, occurring over three and a half decades and driven by a mixture of market forces, regulation and public investment, these shifts have not been associated with 'massive costs'. Rather structural change has occurred as a normal part of the development of energy supply in response to markets, technical change and changes in social priorities.

Projections of UK energy use to 2020 by the Department of Trade and Industry (DTI) show primary energy demand increasing by at least 13% over 1990 levels to over 250mtoe. Over 90% of this demand is projected to be for fossil fuels, although the share of coal is expected to fall substantially, and that of gas to rise. The shift from coal to gas is markedly less, as would be expected, in those scenarios which show gas prices already starting to rise by 2020.

In none of the DTI forecasts is there any new building of nuclear power stations, so that by 2020 there is very little nuclear power. As the economics of nuclear power do not currently make it competitive with other means of electricity generation, as there are no signs of this situation changing and as present public policy in both the UK and the European Union is against the public subsidisation of nuclear power, there seems little basis to question these forecasts in this respect. Therefore, although nuclear power may have a future role elsewhere in the world, notably in those countries which give large state subsidies to energy, it is not here perceived to have one in the UK.

The DTI forecasts, then, suggest that, on the basis of current policy and historic growth rates and changes in energy intensity, the UK will have overwhelmingly a fossil-fuel energy system in 2020, albeit experiencing a shift away from coal towards gas in electricity generation.

The Environmental Dimension

Burning fossil fuels causes serious environmental problems, at the local, regional and global levels. At the local level the UK Government's National Air Quality Strategy envisages the realisation of substantial improvements in air quality by 2005. At the regional level the Second Sulphur Protocol of the United Nations Economic Commission for Europe (UNECE) envisages major reductions in SO₂ emissions by 2010 and a protocol on other air emissions is in preparation.

While it may well be that the emission abatement targets of these strategies are not sufficient, and further measures are required, it seems unlikely that these further measures will need to be such as to challenge severely a business-as-usual path of continuing fossil fuel use, much less call that use fundamentally into question. These emissions are amenable to abatement by technological changes to capture emissions or alter combustion processes, and new technologies to achieve this increasingly effectively at reasonable cost seem likely to be forthcoming.

The challenge at the global level, namely the threat of climate change, posed by emissions (most importantly of carbon dioxide) from burning fossil fuels is far less tractable. Reducing the incidence of solar radiation on the earth, sequestering more carbon emissions in forests or the oceans, or storing them underground are all subject to a wide range of technical, economic or political difficulties and uncertainties. As a result most attention in the literature on mitigating global warming has focused on the possibilities of reducing CO₂ emissions from the world's energy systems.

There are three major ways of achieving this: switching from more to less carbon-intensive fossil fuels; using energy more efficiently; developing and deploying non-carbon energy sources, of which renewable sources derived from solar energy have attracted the most interest. Table ES2 shows the projections for several dates of the Fossil Free Energy Scenario (FFES) of the Stockholm Environment Institute (SEI), which phases out the use of fossil fuels completely by 2100.

Clearly FFES differs dramatically from the World Energy Council (WEC) cases cited earlier in which global energy demand increased to 17.2Gtoe by 2020, and to 25Gtoe by 2050, with three quarters of the energy demand in each case being met by fossil fuels. Table ES3 shows that FFES also differs substantially in its assumptions and outcomes from the most ecologically driven of the WEC's cases, and is even more ambitious.

The FFES targets and outcomes, and the assumptions on which they are based, violate no fundamental law of science, but they assume a great deal about the availability of political will to tackle global warming, the possibility of international co-operation, the willingness to change consumer habits and lifestyles and the quality of governance and public policy. There can be no definitive answer as to whether, from this vantage point in time, the FFES assumptions are realistic or not. The time horizon is too long, the uncertainties too great.

UK Carbon Reduction Possibilities

At the UK level many of the same uncertainties are present but are less acute because of the more clearly defined institutional framework and the existence of extensive detailed study of many of the issues involved. Much fuel switching, mainly from coal to gas, has already been carried out, but there is still potential for more; there seems no doubt that substantial cost-effective opportunities for energy efficiency exist; and a number of renewables technologies show considerable long term potential. Table ES4 shows that, according to estimates from ETSU, renewables could supply more than 120% of the UK's 1996 electricity supply by 2025. Over half of this would be at a cost of 5p./kWh or less. After 2025 the renewables supply could rise to over 160% of 1996 UK electricity. The UK Government is supporting the development of renewables through the Non-Fossil Fuel Obligation (NFFO) and substantial price reductions in the supported technologies have already taken place.

¹ Electricity generated in 1996 was 344TWh

The UK Government has a target for CO₂ reduction of 20% of 1990 levels by 2010. Table ES5 shows one way in which the required 40mtC p.a. can be saved to achieve this.

Table ES5: CO₂ Savings by 2010 from Various Measures

The figures in Table ES5 are not the most ambitious suggestions for carbon reduction which have been proposed. Two Friends of the Earth (FOE) studies have put forward measures whereby it is claimed that the Government could achieve CO₂ emission reductions below 1990 levels of 32% by 2010 and 80% by 2050.

The Costs of Carbon Abatement

There is as little agreement about the costs of large scale carbon abatement as there is certainty about the other dimensions of climate change. Cost estimates range from trillions of dollars for the US alone to overall benefits for the world as a whole.

The two key assumptions which generate much of the difference in estimates is over the extent of cost-effective energy efficiency opportunities, and the speed with which renewables become competitive with fossil fuels, if at all. Other issues which significantly influence either the costs or the benefits of carbon abatement include, on the cost side, consideration of energy subsidies, unemployment, the possibilities for induced technical change, and how any revenues from carbon/energy taxes are recycled through the economy; and, on the benefit side, the level of the discount rate, the treatment of uncertainty, risk aversion and option values, and whether secondary benefits are taken into account. How costs and benefits are presented can also be important to the impression created: a cost of trillions of dollars over a long enough time frame may be the result of a very small difference in growth rate.

Conclusions

The only compelling reason for government intervention in energy markets, apart from over competition issues, is to address the threat of climate change from the emissions of carbon dioxide from burning fossil fuels. Issues of security and diversity of supply, or the desire to capture significant market share in emerging energy technologies are secondary reasons, but security of supply is only a concern in the medium to long term, while the development of new energy technologies is largely driven by the climate change concern.

There is little doubt that carbon emissions could be substantially reduced through public policy aimed at increasing the efficiency of energy use and the accelerated development of renewables. Whether the political will to implement such policy is forthcoming largely depends both on the perceived urgency of the climate change issue and on perceptions of the economic costs that are likely to be involved.

While the costs of long term, large scale reductions in carbon emissions are very uncertain, there is now convincing evidence that a reduction such as the UK Government's 20% cut in 1990 emissions by 2010 is both feasible and not costly. It is only by the vigorous implementation of measures to achieve such a target that the situation with regard to long term, large scale reductions is likely to be clarified. However, the overall conclusion of this report is that there are, and will continue to be, widespread opportunities for cost-effective increases in energy efficiency; that the well-established decline in the costs of harnessing renewable energy sources will continue; and that economic efficiency can be substantially enhanced by the removal of energy subsidies and the sensitive implementation of ecological tax reform. Under these circumstances there are no good grounds for thinking that the transition over the course of the next century to a low or no carbon energy system will be expensive, or even incur any costs at all, apart from those of proactive government policy. The transition is better perceived as a guided, fundamental structural change in a world where such change, guided or not, is occurring the whole time, through which a carbon-free energy system may emerge as a long-run result of technical change, consumer preference, government policy and fiscal reform, and be viewed as a major social benefit.

1. INTRODUCTION TO THE ISSUES

All economic activity requires the use of energy, the various different forms of which are listed in Figure 1. For most of its existence, the human species has relied on the use of humans' own energy (mental and physical), or the energy of other animals, on the biomass produced by photosynthesis, and on solar energy, either as wind energy or as solar radiation and the ambient environmental heat which is the result.

Industrialisation as it has occurred, and the industrial era that has so far lasted about 200 years, could not have taken place without the large-scale discovery and use of fossil fuels, or another form of energy with similar characteristics. The massive physical transformation of matter through industrial production, and the transportation of huge tonnages of materials and numbers of people, would not have been possible without a concentrated, highly flexible and versatile energy source such as are offered by coal, oil and natural gas.

Industrialisation is by no means a phenomenon of the past. Most of humanity does not yet live in industrial societies. With few exceptions, the evidence suggests that it wants to. Still industrialising societies in Asia, Africa and Latin America seem determined to gain for their fast growing populations the perceived benefits of industrial-country lifestyles.

This suggests, in line with the World Energy Council projections discussed below, that the global demand for fossil fuels will increase enormously over the next few decades. No other energy source seems likely to be available over the next thirty years to power the kind of growth rates of the kind of economic activities which have become the principal social objectives of the countries of the so-called developing world.

Burgeoning demand for fossil fuels raises three interacting issues that are important for all countries:

1. The physical availability of fossil fuels.
2. The political availability of fossil fuels.
3. The world prices of fossil fuels.
4. The environmental impacts of fossil fuel use.

Fossil fuels are non-renewable resources that seem likely, at current and projected rates of use, to be finite within long-term human planning horizons (unlike, for example, solar energy, which is also absolutely finite but is still projected to have a life of the order of billions of years). Forecasts of depletion-induced shortages have been wrong in the past, and the fossil fuel industries have shown their ability, given the right incentives, to discover huge new economically exploitable reserves. Even so, experts are generally agreed that world stocks of oil and gas, in particular, will come under pressure from depletion as the next century proceeds and, in the second half of that century at least, their supplies will be physically constrained. Coal, by contrast, is far more abundant and likely to remain in plentiful supply for at least the next 100 years.

Figure 1: World Primary Sources of Energy

Also unlike coal, oil and gas are distributed unevenly geographically. Table 1 shows the geographical distribution of oil and gas reserves in 1990. As smaller reserves become depleted, probably substantially before the middle of the next century, more and more countries will become net importers of fossil fuels, relying for these resources for the large stocks that remain in such areas as the Middle East and the former Soviet Union.

Both these factors - physical depletion and geographical concentration - have implications for the prices of fossil fuels, exerting upward pressure that is likely to be steadily increasing from the first cause, but that is potentially unexpected and unpredictable, and therefore destabilising, from the second cause. Upward pressure on prices will, of course, stimulate the development of substitute fuels and fuel-efficient technologies. However, because of the importance of being able to guarantee secure supplies of energy, and because of the political unpredictability over the medium and long term of the supply of fossil fuels, it is unlikely that governments that have a choice will leave the development of substitute fuels entirely to market forces. They are likely to want to intervene to develop new sources of supply that will reduce their own vulnerability to any volatility in the supply of fossil fuels, and to give them a potential source of exports to others who want to do the same.

Another reason for government intervention in energy markets is the environmental problems caused by the combustion of fossil fuels and, to a lesser extent, by their extraction and transport. Most of these problems escape the price mechanism that guides markets and are therefore what economists call negative externalities. Although they benefit the producers and consumers of fossil fuels, whose production and consumption is cheaper than it should be, these externalities result in excess costs being borne by society as a whole, and by future generations. Externalities are a source of economic inefficiency as well as being unfair.

Some of the environmental problems are local, such as poor air quality that can have serious implications for ecosystems and human health. Governments may be expected to intervene in the future, as they have in the past, to control poisonous emissions from the burning of fossil fuels, and to develop less polluting fuels and combustion processes, in order to protect human health and the environment. Some of the problems are transboundary, and require intergovernmental co-operation if they are to be effectively addressed. Some of the problems - most notably climate change caused by the anthropogenic greenhouse effect - are global and require a response at that level.

This report is primarily focused on the UK, and the trends and pressures that will shape its energy system in the next century. It takes for granted some elements of the UK's current energy scene, such as the decision not to give further public subsidy to the generation of nuclear power, which leads to nuclear power gradually phasing out over the first three decades of the 2000s. It focuses on the environmental problems which seem to have the potential to change the direction of the UK energy system. This means that some environmental issues, which may be important but do not seem to have this potential, are not discussed. Examples are the disposal of nuclear waste, the decommissioning of nuclear power stations, oil spillages at sea, the disposal of oil rigs or the landscape effects of open-cast coal mines.

However, thinking about what energy system would be desirable for the UK in the 21st century needs to be informed by the various interconnections between the UK and other countries, taking into account: the political interconnections, and possible tensions, related to fossil fuel supplies; the economic interconnections in today's increasingly global economy; and the environmental interconnections that can result in energy use in one country damaging the environment of another, or of the entire world.

This report seeks to locate its UK focus within, and take account of, the international context. Section 2 lays out this context in more detail, though still briefly, looking at the forces and realities that will tend to shape the global use of energy up to 2020 and beyond. Section 3 sets out the current energy situation in the UK within this context, and the projections that have been made for UK energy use in the first years of the next century, together with the assumptions on which these projections are based.

The projections do not take full account of the environmental constraints that may also serve to shape the UK's energy situation. Most obviously these include the reduction in CO₂ emissions that may be required under the Framework Convention on Climate Change, but also relevant are transboundary agreements on acidification and national policy on air quality. Section 4 will explore what demands may be put on the energy system of the UK (and implicitly of other industrial countries) by these environmental issues, placing these demands in the context of emerging commitments to environmental sustainability and sustainable development.

Section 4 concludes that the only environmental issue which seems really likely to deflect the development of the UK's energy system from a largely market-led, business-as-usual path is climate change, responses to which are therefore the principal focus of the rest of the report. Section 5 looks briefly at a possible global response to climate change, were the threat to be taken really seriously. Section 6 then assesses in much more detail the implications of the issue for UK energy use, both in physical and policy terms. The physical dimension relates to the potential and availability of other energy sources, the technologies to harness them, and the technologies to use them and fossil fuels more efficiently. Nuclear and renewable energy sources, energy efficiency and combined heat and power (CHP), are discussed in this section, as well as the various policy approaches through which the potential of these elements of the energy system to reduce its carbon intensity may be realised. The potential role of renewable energy sources is given particular attention, as the only source of energy in prospect that is both near commercial viability and sufficiently abundant to be able to substitute significantly for fossil fuels. Section 6 also explores the environmental implications of an energy strategy that involves the substantial promotion and use of renewables.

The various options for carbon reduction are then brought together to assess the feasibility of the present UK Government's aspiration to reduce carbon emissions to 20% below their 1990 level by 2010. Then the time frame is extended in order to consider what level of carbon reduction might be feasible by mid-century. Finally Section 7 explores the economic implications of carbon abatement and, especially, its possible impact on competitiveness. Section 8 concludes.

2. THE GLOBAL CONTEXT

2.1 The Drivers of World Energy Use

The demand for energy (E) is driven by three variables: the human population (P), the economic output and activity of that population (Y), and the energy intensity of the output and activity (i.e. the amount of energy used per unit of output). This can be expressed in the simple identity:

E = P x Y/P x E/Y

where Y/P is the output per head, and E/Y is the energy intensity. The past evolution of each of these variables is known and is presented below.

Population

In 1990 the global population was 5.3 billion people, a 2.3 billion increase over 1960. Median projections of the World Bank show continuing population growth throughout the next century, to 8.1 billion by 2020, 10.1 billion by 2050, and levelling off at around 12 billion by 2100. Of this growth 95% (6.6 billion people) is in countries currently classified as 'developing', while only 3% (230 million people) is in OECD countries (WEC 1993, p.47).

Economic Output and Income

From 1965 to 1990 world output per head grew at an average annual rate of 1.5% to an average of $4,200 (US$1990). This average conceals very great differences between countries and groups of countries. The average per capita income of OECD countries in 1990 was $20,170 and the growth rate of per capita income from 1965-90 was 2.4%; for low-income countries the growth rate was 2.9% but average per capita income was only $350 (World Bank 1992, p.218). Because of population growth, the per capita growth rates of income are substantially lower than total growth rates, which are shown for different periods and regions in Table 2.

In absolute terms from 1960 to 1990 real world output grew from $6.4 trillion (10¹²) to $21 trillion (US$1985), an increase of 226% (WEC 1993, Table C2A, p.275), an average per annum rate of growth of 4%.

Energy Intensity

As shown in Table 3, the 5-year average of energy intensity of output (energy use per unit of output) in the world as a whole has fallen since 1965. This is made up of increases or falls in different world regions at different times.

From 1990 to 1994 although global energy intensity has continued to improve, that in OECD countries has remained roughly the same, with all the improvement coming in developing countries. In the CEE/CIS region output fell even faster than energy use during the period, so that its energy intensity actually increased. The World Energy Council (WEC 1995, p.18) identifies a pattern of "decreasing energy intensities where economic growth is strong, stagnating energy intensities where growth is sluggish, and increasing energy intensities where growth is negative". Absolute energy use, of course, will increase unless the rate of decrease of energy intensity is equal to or greater than the rate of economic growth.

Primary Energy Consumption

With world output growing faster than the reduction in the energy intensity of that output, world energy demand has also been increasing. From 1960 to 1990 it grew from 3.3 to 8.8 Gtoe (Giga - 10⁹ - tonnes of oil equivalent), a 166% increase, or an average rate of growth of about 3.3% (WEC 1993, p.40). Data from the World Resources Institute (WRI) shows that commercial energy consumption in OECD countries in 1993 was more than 3.5 times that in developing countries (WRI 1996, p.274), for only about one fifth of the population. This means that average OECD energy use per head was about 18 times that in developing countries. On these figures the 230 million extra people projected for OECD countries by 2100 (see above) would use 63% as much extra energy as that used by the 6.57 billion extra people in developing countries by that date. Thus is energy use separately and jointly driven by high per capita consumption and human numbers.

In estimating future primary energy demand, assumptions have to be made about future population growth, economic growth and changes in energy intensity. In the projections to 2020 of the World Energy Council (WEC 1993), the figures for population growth given above were used. Table 4 gives the figures for three WEC projections: high growth in developing countries (A), medium growth, the Reference Case (B), and Ecologically Driven (C). Comparing Table 4 with Tables 1 and 2 it can be seen that the economic growth rates are broadly in line with historical experience, but the energy intensity reductions are greater. A smaller reduction in energy intensity would imply a higher energy use for a given output.

WEC 1995 gives a reworking of the WEC 1993 projections, taking them out to 2050 and then to 2100. Table 5 gives the WEC 1995 assumptions on world GDP growth rates and reductions in energy intensities. Both are lower than for 1993, with the lower GDP growth producing slower technological change and therefore a slower turnover of the capital stock. However, WEC 1995 warns against direct comparisons of the energy intensities in the two studies, because those in the earlier study are computed using purchasing power parity GDP figures (GDP figures converted to take account of the different purchasing power of money in different countries), while the later ones use GDP at market exchange rates. (This does not seem adequately to explain the anomaly in Table 5, that for each Case A,B,C the global rate of change of energy intensity is lower than that for any region. This seeming error is in the original source.

¹ For OECD areas, 1.4-1.7%
² For OECD areas, 0.8-1.1%

2.2 The Composition of Energy Consumption

While total energy consumption can be broadly analysed in terms of population, economic output and energy intensity, the composition of that consumption in terms of different fuel sources depends on a range of other factors, including reserves, prices, technical change, institutional and political realities, and environmental constraints. Some of these issues are discussed below.

Table 6 shows that the growth in energy use between 1960 and 1990 has been overwhelmingly supplied by fossil fuels. Of the 5.5 Gtoe increase, 73% has come from burning more coal, oil and gas. The reasons for this growth are not hard to find: plentiful reserves, low prices (at least from 1960-73 and 1985-90), well-established technologies and distribution systems, and the characteristics of fossil fuels themselves as concentrated, versatile energy sources, with time-independent availability of their power (unlike, for example, solar energy, which is not immediately available during the night). This section investigates whether and how these factors are likely to change.

¹ Mainly fuelwood.
² Column does not sum in source.

Reserves

Despite growing fossil fuel use, proven reserves of fossil fuels are higher now than they have ever been: over 1 trillion barrels of oil, compared to about 650 million in 1971; 140 trillion cubic metres of natural gas, compared to 50 in 1971; and 1 trillion tonnes of coal (1971 figure not given). The 1996 R/P ratios (where R is reserves, P is production), the 'lifetime' of the reserves at current rates of use, is 41 (31), 62 (41) and 224 for oil, natural gas and coal respectively (BP 1997, pp.8,24,30). The figures in brackets are the 'lifetimes' of the fuels that were forecast in Limits to Growth (Meadows et al. 1973) back in 1973. There is no reason to think that ultimately recoverable reserves will not be much higher than today's estimates. For example, for oil some estimates put this figure at over 2 trillion barrels (WRI 1996, p.277).

However, notwithstanding these favourable trends, fossil fuels are ultimately finite. As was seen in Table 1, oil and natural gas reserves are also unevenly distributed geographically. 76% of known 1996 oil reserves are located in OPEC countries (currently comprising Algeria, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela). 73% of known 1996 natural gas reserves are located in the Middle East and former Soviet Union (BP 1997, pp.4,20). Practically all countries outside these areas will become net importers of oil and natural gas before the middle of the next century. The World Energy Council's view of the implications of this is emphatic: "There is a very high likelihood that some time between 2030 and 2080 supplies of oil and natural gas will be severely constrained, with the remaining reserves allocated to privileged users and top premium uses. Perceptions of impending supply shortfalls will cast a shadow forward well into the period between now and 2020." (WEC 1993, p.104). That shadow, if markets are doing their job, will be expressed as price increases.

Prices

From 1930 to 1972 oil prices stayed at around $10 per barrel (US$1996). The OPEC price increases of 1973 and 1979 took prices to $55 per barrel (bbl), but they fell back to $20 per bbl in 1985, and fell further to $18 per bbl by 1994. In 1996 they stood at $20 per bbl (BP 1997, p.14). The prices of natural gas and coal were also lower than they were 10 years before.

The World Energy Council, at least, considers that the years of low prices in the 1980s and 1990s have been something of an aberration: "There will be growing awareness that the price of energy has in general terms been too cheap, and that the years since 1985 have been a period of remission since the period of warning 1973-80." (WEC 1993, p.153). The 'warning' that prices are ignoring is that oil and gas resources are ultimately finite and unevenly distributed. The reason, of course, is that the scarcity of these resources is still too far away in time for markets to register it.

Some WEC experts believe that oil prices could return to 1980 levels by 2020, but there is no consensus over the timing or trajectory that might be involved. For an orderly adaptation to an era of greater scarcity of oil and gas, a gradually rising price would be desirable, but political considerations, and past experience, suggest that this is unlikely to happen by itself.

The way oil prices develop also has crucial implications for future energy intensity and the development of substitute fuels and new energy technologies. With low prices, market-based investments in energy efficiency and new renewables, for example, are likely to be limited. Government action to phase in price increases gradually from now might be prudent to ensure that the economy begins to adapt to future scarcity of supplies of oil and gas, and is energy efficient and has diversity of supply when constraints on fossil fuels begin to bite, but, in the absence of intergovernmental agreement, such action is likely to be constrained by considerations of competitiveness.

New Technologies

There are numerous new energy technologies under research and development, with greatly differing timeframes by the end of which they are expected to be technically ready for commercial exploitation. Some of these technologies and time frames are listed in Table 7. Whether the technologies are actually deployed or not will depend on their competitiveness and public policy at the time they become technically available.

The recent and possible future price development of some of the technologies is discussed below (Section 6). The essential unpredictability of research and development and technical change is shown by the fact that, since 1991, fast reactors have largely been discontinued, largely on the grounds of cost and a continuing failure to exhibit technical feasibility and possible future commercial viability. Only Japan now has a demonstration fast reactor, the future of which is being reviewed.

2.3 Global Energy Scenarios

It was seen in Section 2.1 that, by making assumptions on population and economic growth, and on trends in energy intensity, it is possible to predict future energy demand. With further assumptions on prices, technical change and environmental constraints (see Section 4) it is possible to project how that demand might be constituted in terms of different energy sources.

WEC 1993 develops four different cases of possible global energy use out to 2020, some of the assumptions of which have already been presented in Table 4. These cases probably cover the range of mainstream thinking on this issue Table 8 gives some of the results of three of these cases (the fourth, an intermediate case, is here omitted).

Achieving the energy supply in WEC 1993's Reference Case (B) could require a cumulative investment of $30 trillion by 2020 (world GDP in 1989 was about $20 trillion). To achieve the renewables capacity of Case C could require cumulative investment in renewable sources of $2.4 trillion. A major issue is whether the world's markets and institutions will be in a position to mobilise such flows of finance.

¹ Column does not sum in source

In its 1995 projections WEC generated three high growth (A) and two ecologically driven (C) scenarios. Table 9 shows the (A1) scenario which assumes continuing abundance of oil and gas resources at that time (the other (A) scenarios are more abundant in coal or nuclear/renewables), and the (C1) scenario which is largely nuclear-free.

An issue which emerges from these projections is the variation in the nuclear contribution to the scenarios. There is as much uncertainty about this as there is about many other issues in the energy field. No new nuclear power stations are currently being ordered in Western Europe or North America, where most current capacity is located, largely because of the continuing failure of the technology to achieve competitiveness with fossil fuels and the withdrawal of public subsidies. Even France is re-assessing whether it should proceed to a new generation of nuclear power stations. What seems certain is that for the foreseeable future the only countries that will build nuclear power stations will be those that have power generation industries, which are either subsidised or do not have to engage in market competition or both. China, S. Korea, Taiwan and Japan, which account for the only seven orders for nuclear power stations placed in the three years 1994-96, fall into this category. Perhaps some countries will seek to acquire nuclear technology for covert military purposes. Such issues are important, but seem unlikely to influence the UK's energy path, and so will not be further discussed here.

3. THE UK REFERENCE CASE

The global context for energy use will heavily influence the evolution of the energy system of a relatively open economy like the UK, but the UK will also have some freedom to influence this evolution itself, through public policy that takes account if the UK's resource endowments and industrial structure. One of the most important issues for the UK is the lifetime of its own fossil fuel reserves.

UK Fossil Fuel Reserves

There were estimated to be approximately 1 billion tonnes of economically viable coal reserves at existing UK mines at the end of 1994 (DTI 1997c, p.159). However, the UK coal industry has been in decline since 1970, with production falling from 147 million tonnes at that date to 50 million tonnes in 1996 (DTI 1997c, Table A2.6, p.236). There is no sign of the decline ending: coal faces intense competitive pressure in its main market, power generation, from gas fired plant; UK prices for power station coal in 1997 were around 30% higher than world prices and fixed contracts with the power generators expire in June 1998; and coal is the most environmentally intensive fossil fuel, emitting more carbon than either oil or gas and more of other pollutants as well, unless subject to expensive abatement technologies. The shrinking market for UK coal will become further apparent in some other statistics presented later in this study.

UK production of oil, mainly from offshore fields in the North Sea, began on a substantial scale in 1975. That of natural gas had started in 1968. By 1996 just over 2 billion tonnes of oil, and 1.1 trillion cubic metres of natural gas, had been produced (DTI 1997a, Tables 49, 57, pp.110, 128). 1996 production of the two fuels was 130 million tonnes and 90 billion cubic metres respectively (DTI 1997b, Appendix 6,7, pp.153, 155).

Estimated maximum discovered recoverable reserves of oil on the UK Continental Shelf in 1996 were a little over 2 billion tonnes, a level which has not changed much, despite continuing production, since 1983, because of new discoveries. For gas estimated maximum discovered recoverable reserves in 1996 were nearly 2 trillion cubic metres (DTI 1997b, Tables 5.1, 5.2, pp.43, 45). Including estimates of as yet undiscovered reserves it is thought that total remaining reserves could be as much as 5 billion tonnes of oil and nearly 4 trillion cubic metres of gas (DTI 1997b, p.49). At 1996 rates of production this gives a lifetime (reserve/production ratio) of UK oil of 38 years and of UK gas 44 years. Production of both oil and gas are estimated to remain at approximately current levels until at least 2001, when it will probably decline slowly. 1996 oil exports of 81 million tonnes were the main contributor to a £4½ billion trade surplus in fuels (DTI 1997a, pp.9, 110).

UK Energy Consumption

UK inland consumption of primary energy in 1996 was 230 mtoe (million tonnes of oil equivalent), the composition of which is given in Table 10, as is the composition by fuel and by sector of final energy consumption in that year.

¹ Mainly commerce, services and public administration

Table 11 shows real UK GDP and its average periodic rate of growth, UK energy intensity and its average periodic rate of decline and, the difference, the average periodic change in primary energy consumption.

It can be clearly seen from Table 11 that energy intensity declined throughout 1960-1996, in line with the tendency of markets to make more efficient use of purchased inputs over time, but the decline was greatest from 1970-1985, the period of high oil prices following the OPEC price rises, as shown in Figure 2.

Furthermore it was only during this period that the decline in energy intensity was greater than the rate of GDP growth, so that primary energy consumption also declined. In other periods GDP growth was greater than the fall in energy intensity, causing energy consumption to rise. Overall the GDP growth effect predominated, so that primary energy consumption grew by 35% from 1960-96. Comparison of Table 11 with Tables 1 and 2 shows that UK GDP growth was consistently below that of OECD countries as a whole. By 1990 UK GDP per head, at $16,100, was 20% below the OECD average (World Bank 1992, Table 1, p.219). Apart from 1985-90, UK energy intensity declined consistently faster than the OECD average. The slower than average GDP growth and faster than average decline in energy intensity meant that by 1990 UK per capita energy consumption, at 3.6 toe, was well below the OECD average of 5.2 toe (World Bank 1992, Table 5, p.227).

Table 12 shows the changes in the composition of UK final energy consumption from 1960-96. It shows the fundamental structural change in final energy consumption that has occurred since 1960, as electricity and, especially, natural gas, have substituted for coal. Very much the same structural change, that is still ongoing, has occurred in UK electricity generation during this decade, as shown in Table 13. Both substitutions have been driven by economics, with consumer convenience being a subsidiary factor in the domestic sector, and the desire for diversification a subsidiary factor in electricity generation, rather than environmental considerations.

The structural shifts in final energy consumption and electricity generation shown in Tables 10 and 11 offer potentially important lessons for the future. The shifts have fundamentally altered the way energy is delivered throughout the economy. Yet, occurring over three and a half decades and driven by a mixture of market forces, regulation and public investment, these shifts have not been associated with 'massive costs'. The Tables show that structural change is a normal part of the development of energy supply in response to markets, technical change and changes in social priorities.

Projections of UK Energy Consumption

As with global energy consumption, UK energy use in the future will be driven by changes in the number of households (capturing both population growth and changes in household structure), GDP and energy intensity, while the composition of the fuel mix will depend on relative prices, technical change and possible environmental constraints (see Section 4).

Recent forecasts for the development of the UK energy system to 2020 have been provided by the Department of Trade and Industry Energy Paper 65 (EP65, DTI 1995a) and, to 2010, by Cambridge Econometrics (CE 1997).

EP65 projects that the number of households in the UK will increase from 25 to 28 million between 1990 and 2020 (DTI 1995a, Chart 3.7, p.45). Eight scenarios are constructed, combining different assumptions of high (2.85%), central (2.35%) and low (1.75%) GDP growth, and high and low fuel prices, with low growth/very high prices and high grow/very low prices providing outer bounds. Different assumptions about changes in GDP structure are made for the high and low growth scenarios. In the high-price scenarios, prices increase steadily over the projection period. In the low-price scenarios they change little from 1990 levels. In the following Tables the low growth/high price (LH) and high growth/low price (HL) scenarios are quoted as the bounds of the main projections.

Table 15 shows little in the way of projected structural change among final energy users. However, Table 14 of primary energy demand, and especially Table 16 of fuel use in the electricity supply industry, projects a substantial switch from coal to gas in electricity generation, coal use falling from 68% to about 11% of power generation in HL, while gas increases from 0 to 54%. In LH the higher pri