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Energy Analytics
Lecture 7: Long-term planning and decarbonisation
In this lecture:
CO2 emissions and carbon
pricing
Achieving decarbonization
of the energy sector
Using scenarios in planning
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UK greenhouse gas (GHG) emissions since 2000
Million tonnes carbon dioxide equivalent (MtCO2e)
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(p)
Other greenhouse gases
Industrial process
Agriculture
Residential
Public
Business
Transport
Energy supply
EU emissions trading scheme
• The EU ETS is the largest international system for trading greenhouse gas
emission allowances. It covers all 31 countries of the European Economic Area.
• It limits emissions from power plants, manufacturing installations and aircraft
operators flying between EEA airports (currently about 36% of the EU’s total
GHG emissions).
• The EU ETS operates on a “cap and trade” basis. Participants must monitor and
report their emissions and surrender sufficient emission allowances to cover
their reported emissions in each year. Penalties 100 Euro per tonne.
• Setting the level of allowances allows the EU to force down emissions. Emission
allowances are traded to enable abatement to occur where it is most cost
effective.
• The UK was part of the EU ETS till the end of 2020, when it was replaced with a
UK ETS scheme.
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How does the EU ETS work?
• Allowances are held in a Union Registry account (11000 separate accounts).
Company, or
generator Activities during year
Company, or
generator
Free allowances
issued
Allowance Auctions
(take place through
the year)
Trade allowances with
Brokers and Exchanges
Surrender
allowances for all
CO2 emitted
during the year
Carbon prices in EU
• EU ETS prices (in Euros per ton of CO2 emitted) have been rising since
2018 (partly in anticipation of a tightening of arrangements).
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Carbon prices in EU
• More recent data
Carbon prices in the UK
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Issues for the EU ETS
• Carbon leakage
 If companies have to pay (through purchasing allowances) to produce
CO2 when manufacturing within the EU, then there is an incentive to
manufacture outside the EU instead.
• Surplus allowances
 There is a reducing level of allowances over time. If the natural level is
higher than this, then shortage will push up the price.
 Initial targets were unambitious and 2008 financial crisis reduced overall
economic activity. This resulted in a surplus of allowances and a long
period of low prices.
 Allowance can be purchased when prices are cheap for use in the future.
• Many sectors are not covered: e.g. transport.
Carbon prices in the UK
• Its complicated!
• The details of the UK emissions trading scheme are roughly similar to the
EU ETS. This is the main mechanism to push net zero by 2050.
• The UK has an additional component, the Carbon Price Support (CPS) – an
additional rate levied on the power generation sector and currently set at
£18 per tonne.
• There is also a Climate Change Levy (CCL) which is a tax on energy
delivered to non-domestic users.
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Carbon capture and storage
• Take carbon dioxide out of the air, or out of the flue gas from a fossil fuel
generator (sometimes called scrubbing – often a chemical reaction
involving amines).
• Then compress the carbon dioxide and pump to a storage (sequestration)
facility.
• Either pump CO2 down into an exhausted oil/gas field where there is
already an impermeable cap (note that CO2 is already used to flush out oil
from oil fields).
• Or use mineral carbonation (reacting CO2 with naturally occurring minerals
containing Mg and Ca to form carbonates) – very safe but slow.
Current situation for CCS
• There is widespread agreement that it is needed.
• Large scale facilities have been slow in coming on-line. The Global CCS
Institute identifies 65 current projects in various stages of development.
• There are serious problems with the cost and
reliability of this technology. The only substantial
CCS operation in the US (Petra Nova in Texas) was
mothballed by its owner, NRG Energy in January
2021, having been temporarily shut down in May
2020.
• Estimated costs around $60 per metric ton to
capture CO2 at Petra Nova.
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What role for hydrogen?
• When fossil fuels are used directly for their energy (in transport and
heating) an option is to replace them with Hydrogen, a fuel which can be
produced without CO2 emissions and which doesn’t produce CO2 on
burning.
• Different options to produce hydrogen:
Green hydrogen Made by electrolysing water using clean electricity from
renewable energy technologies.
Blue hydrogen Produced using natural gas but with carbon emissions
being captured and stored.
Grey hydrogen The most common form of hydrogen production. It comes
from natural gas via steam methane reformation but without emissions
capture.
The hydrogen economy
• For heating we can mix 20% hydrogen with natural gas and use the existing
gas network without changing burners. Or replace gas completely after
changing the burners.
• For transport a fuel cell can be used to convert hydrogen to electricity to
power the vehicle (but note that there is a big inefficiency involved in
creating hydrogen from electricity and then turning it back into electricity).
• Industrial processes currently using gas or coal can be switched to
hydrogen, e.g. steel, cement.
• The hydrogen economy is backed by the oil majors BP, Total and Shell.
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Challenges from increasing renewables
• Uncertainty associated with wind power: will it be there when we need it?
• Both smaller wind farms and solar power are connected to the distribution
network, rather than the high voltage transmission network. This is called
embedded generation, which the National Grid sees as a reduction in load.
• The power system will become more distributed with many more places
where power is generated: is the system design right for this?
• There can be difficulties in building sufficient transmission capacity to get
power from large windfarms (e.g. Scotland, North of Germany) to where
there is demand (England, South of Germany).
• Solar power turns off at night: we get a sharp increase in power required
roughly at the evening peak.
The duck curve: Data from California ISO
Solar power creates
the need for
conventional
generation to be
able to ramp up and
down very large
amounts of power
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How do we plan?
• There are very long lead times for building generation and transmission
capacity.
• Requirements depend on what will happen in the future. The usual
approach is to use a selection of scenarios to plan against.
• In the UK there is an over-arching question: How do we get to net zero by
2050?
• So scenario planning is involved in setting policy direction (as well as
responding to uncertainty), in e.g. take up of electric vehicles.
• National Grid (see http://fes.nationalgrid.com/ ) have four scenarios across
gas and electricity for the UK.
The four National Grid scenarios
• Consumer Transformation (meets 2050 target)
Electrified heating. Consumers willing to change behaviour. High energy
efficiency. Demand side flexibility
• System Transformation (meets 2050 target)
Hydrogen for heating. Consumers less inclined to change behaviour. Lower
energy efficiency. Supply side flexibility.
• Leading the way (fastest credible decarbonisation)
Significant lifestyle change, mixture of hydrogen and electrification for heating
• Steady progression (does not meet 2050 target)
Slowest credible decarbonization. Minimal behaviour change. Decarbonisation
in power and transport but not heat
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Different approaches to domestic heating
• Annual
residential
energy
demand (for
heat and
appliances) in
2050
Planning with future uncertainty
• The ideal:
• We model the possible future scenarios with a probability distribution.
• We use Monte Carlo simulation and evaluate a policy choice for every
scenario to get a distribution of objective values.
• We compare the distributions of outcomes for different policy choices –
taking account of both expected value and risk.
(this could work for something like gas prices).
• In practice:
• Future scenarios have different possibilities without any way to assign
probabilities (e.g. EV take up)
How do we plan without using probabilities?
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Example: capacity for a new transmission line
• Look at the net present value for transmission line for different scenarios.
• How large should the new line be?
Capacity of transmission line
Value
High demand
scenario
Medium demand
scenario
Low demand
scenario
Expected
value
Choice maximizing
expected value
Regret – after the fact
• Suppose we worry about being blamed for a bad decision
Value
Choice
Regret under high
demand scenario
Regret under low
demand scenario
• The worst regret occurs under the low demand scenario
Capacity of transmission line
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A discrete set of possible choices
• Suppose we have scenarios and some different possible decisions (could
be possible investments) For each decision scenario/project pair we can
work out a Net Present Value. What should we do?
• If each scenario is equally likely Expected NPV is maximized by choosing
project B (see last column)
• If we are concerned about possible bad outcomes, better to choose project
A – with a guarantee of 17 for NPV
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Mean NPV
Project A 17 23 20 20 20
Project B 19 28 31 14 23
Project C 15 30 25 18 22
Project D 10 17 16 21 16
Least worst regret
• For any selected project the regret in a particular scenario is how much
worse we did than was possible in that scenario
• Regret shown in red below
• Least Worst Regret (LWR) choice is Project C (in every scenario we are no
more than 6 away from the best possible outcome)
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Project A 17 (2) 23 (7) 20 (11) 20 (1)
Project B 19 (0) 28 (2) 31 (0) 14 (7)
Project C 15 (4) 30 (0) 25 (6) 18 (3)
Project D 10 (9) 17 (13) 16 (15) 21 (0)
Worst regret
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Problems with least worst regret
• Need to be careful with selection of the scenarios – the choice will often be
determined by some extreme scenarios.
• In some examples adding a project changes the choice, even if it is not
chosen
Scenario 1 Scenario 2 Scenario 3
Project A 10 (5) 7 (3) 5.1 (0.1)
Project B 7 (8) 10 (0) 5 (0)
Project C 9 (6) 9 (1) 5 (0)
Project D 15 (0) 2 (8) 5 (0)
Worst regret
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• Here we switch from Project C to Project A when Project D is introduced.
Next time:
Expected surplus
calculations
01
Valuations with a
real option
02
Real options using
discounted cash
flow
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