Wind 2030

Is it possible to predict the future of UK energy?

A couple of weeks ago, the Guardian reported National
Grid forecasting energy prices will
double
by the end of the decade. Other media reported the
grid operator found that UK shale gas could supply
much of our future needs
, the UK’s gas supply could be
held to ransom
by Russia, solar power will
fail to take off
, and the UK
can afford
to
meet green energy goals
.

It all sounds quite colourful. So does National Grid
really expect to see such wildly different events unfolding in the
near future?

Well, no. The media reports were based on a series of
scenarios prepared by the grid operator. To understand the
difference between scenarios and forecasts – it goes beyond mere
semantics – we take a look at why it’s so difficult to predict the
energy future, and why such a range of possibilities are thrown up
when we try.

Future planning

National Grid runs the UK’s core electricity and
gas transmission networks. It is also responsible for balancing
supply and demand in order to keep the lights on. That means it
needs to plan ahead.

Every year it produces a set of
Future Energy Scenarios
that attempt to look
into the future. This is a pretty mammoth task and National Grid
analysts aren’t experts across the whole energy sector, so much of
the work is based on what other people tell them. Experts,
campaigners and even members of the public are invited to
contribute their knowledge to the scenarios’
development.

The approach doesn’t keep everyone happy. For
example, the solar industry
says
the range for solar capacity in the
scenarios – between 8 and 17 gigawatts in 2030 – is way too low.
WWF also thinks National Grid has got it wrong, but in a different
way. It
says
National Grid is wrong to assume that
all coal-fired power stations will close by 2023. Such are the
perils of mapping the future.

There are four scenarios, and they’re
quite different. We’ll let the grid describe them in its own words,
in the table below:


Source:
National Grid Future Energy Scenarios 2014

So which scenario is most likely? National Grid
can’t say, and that’s the point, market outlook manager Gary
Dolphin says:

“We would need psychic
powers to decide between the different scenarios. For us, that
would be really useful information. The bad news is we’re not
psychic.”

Dolphin says:

“We do not apply
probabilities to any of our scenarios. We like to believe each
scenario is equally plausible and that they collectively define an
envelope within which the true future lies.”

Can’t we get a better answer?

If that sounds a bit wishy-washy, maybe someone
else has a more definitive answer?

A bunch of other institutions including

BP
,
Shell
, the International
Energy Agency
(IEA), the
Department of Energy and Climate Change

(DECC), Bloomberg
New Energy Finance
(BNEF) and the
UK Energy Research Centre
(UKERC) have come
up with their visions of what the future of energy might look
like. Here’s a great webpage
with a long list of different international
efforts.

Trying to decide which scenario is most
plausible is nightmarishly difficult. Some don’t have UK-specific
analysis, for starters. Another issue with making comparisons is
the differences in approach.

Some scenarios are based on detailed economic
models, which brings a whole new set of complications. Modellers
like to say ‘garbage in, garbage out’ because the results can only
be as good as the information fed into the model.

Typically you will need to tell the model about
the future cost of energy, the relative price of coal versus gas,
the cost of building wind turbines or solar panels and the price of
carbon – among many, many other variables.

These are all assumptions made by the modellers.
Just because they’re using a complicated model doesn’t make the
assumptions correct.

Last year UKERC ran a
comparison
of several model runs to see why
they were giving such different answers.

What UKERC found is that “quite small changes in
assumptions can produce quite large changes in outcomes.” So
conclusions about which electricity-generating technologies will be
most cost-effectiveness in future are “unlikely to be robust”,
UKERC says.

Future wind capacity

To illustrate this point let’s look at some
different visions for the future of UK wind power.

Depending who you ask there will be anything between
20 and 51 gigawatts of wind capacity in 2030, as the chart below
shows. That’s between two and six times the current level.

Source: Carbon Brief comparison of
DECC
,
National Grid
and BNEF
data

If you want to know what the future of UK energy
looks like, an answer that varies so much isn’t very helpful. UKERC
argues that it’s only worth relying on consistent results that pop
out of different visions of the future, even when assumptions are
varied.

It says two examples of consistent results are
that energy efficiency always comes out cheaper in energy models
than building an equivalent amount of new generating capacity, and
that the most cost-effective path to the UK’s 2050 climate goals
includes a decarbonised electricity mix in 2030.

Future power prices

Another key assumption in energy futures models
is the price of energy. The National Grid scenarios use a range of
future wholesale electricity prices. The range includes prices
doubling to around £100 per megawatt hour in 2030, but also a low
price case where prices stick at the roughly £50 per megawatt hour
level we have today.

DECC’s central policy projection
assumes prices will rise
in future,
continuing the
trend
of recent years of rising demand and
tightening supplies. Others, like prominent economist
Professor
Dieter Helm
and ratings agency
Moody’s
, believe prices will stay
low.

Who is right has huge knock-on effects on DECC’s
plans to subsidise renewable electricity supplies, because it is
offering a top-up on wholesale prices up to a fixed level known as
the ‘strike price’.

This amounts to a bet on high wholesale prices.
If prices remain low – as Moody’s and Helm suggest – the top-up
bill will be much higher. That means DECC’s subsidy budget, which
has a cap of £7.6 billion in 2020, could
run out
.

One analyst that takes this danger seriously is
Jon Ferris, head of risk management for energy consultancy EIC. He
says there are a range of factors that will tend to drive future
wholesale prices down in the UK. For instance, rising renewables
capacity drives prices down because the marginal cost of a unit of
electricity from a windfarm is close to zero.

Ferris says:

“DECC’s expectation of
rising prices is contradicted by recent German experience, where
wholesale prices are at nine-year lows and have gone down as more
renewable capacity has been added.”

Adrian Gault, head of the Committee on Climate
Change tells Carbon Brief that DECC has allowed for a 20 per cent
buffer in its 2020 budget. This is a sufficient buffer to cover the
subsidies necessary to meet renewable energy targets even if prices
stay low, he says.

Ferris argues things will be tight even if you
include the buffer. He also points out that it would be a big
political risk to stretch the already large £7.6 billion budget up
to £9.1 billion.

So what will the future look
like?

Everyone wants to know what the future of UK
energy will actually look like. Our ability to deliver energy
security, keep energy bills affordable and meet climate targets is
riding on the answer. Yet National Grid and multiple other sources
have given us a huge range of plausible outcomes instead of the
simplicity of a single answer.

Richard Smith, National Grid head of energy strategy
and policy says it’s a question of being unable to do predict the
future with any confidence. He tells Carbon Brief: “If we could,
we’d be presenting forecasts not scenarios.”

Smith has compared National Grid’s scenarios
with those from other analysts. Some lean one way, like those from
oil firms BP and Shell. Others, like BNEF, have a different take.
As should now be clear, these differences are more a reflection of
the assumptions and biases of those that produced them. It should
be no surprise that oil firms favour fossil fuel-heavy futures
while analysts with ‘new energy’ in their name favour things like
wind and solar.

Smith says he’s 80 to 90 per cent confident the
future will lie within the range of outcomes described by National
Grid’s scenarios. He’s not willing to stick his neck out any
further.

One of National Grid’s analysts puts it like
this:

“We used to do
forecasts. The only thing you can say about them is that they’re
going to be wrong.”

You’ve got to hand it to National Grid and the
others who have made huge, time-consuming attempts to gaze into the
crystal ball. They’re bound to be wrong – the best they can hope
for is to have been useful too.

Via: http://www.carbonbrief.org/blog/2014/07/a-detailed-look-at-why-the-future-of-uk-energy-is-so-hard-to-predict/