What is the Carbon Price Support supporting?

Transcription

1 2016 Aurora Energy Research Limited. All rights reserved. What is the Carbon Price Support supporting? An assessment of the impact of CPS removal post 2025 August 2016

2 Executive summary The intention to close the GB coal fleet by 2025 calls into question the rationale for maintaining the Carbon Price Support (CPS): The CPS was designed to reduce emissions by encouraging coal-to-gas switching. With coal mandated to close, that objective loses relevance. The CPS does cause economic distortions, however, by creating an uneven playing field between GB CCGT generation and imported European power Aurora have assessed what we believe the impact would be of removing the CPS post 2025 and find that: GB would generate an additional 21 TWh of electricity domestically from CCGT, with a corresponding decrease in continental generation from CCGT and coal Net interconnector inflows would decrease by around 39%, with France and Benelux seeing the biggest decreases An additional 1.4 GW of CCGT would be built in UK, in addition to increased generation from the existing fleet Carbon emissions would rise in GB, but decrease at the European level, given the net effect of switching from continental coal to GB gas generation While CPS removal would result in lower carbon emissions in the medium term, this effect needs to be weighed against the potential detrimental impact on long-term investment in renewables and other lowcarbon generation. Further research would be necessary to comprehensively assess the net impact.

3 Removing the CPS in 2025 would shift continental coaland gas-fired generation to GB gas-fired generation Change in electricity generation from removing CPS, average per year TWh Gas -14 Coal Other Removing the CPS reduces the cost of domestic generation in GB relative to the continent This causes a switch from generation on the European mainland, where coal is still on the margin in the late 2020s, to generation in GB, where gas is on the margin GB Rest of Europe The increase in GB generation of around 21 TWh per year (6% of total GB generation) 3

4 This shift towards domestic generation would see interconnector imports fall by more than a third Net electricity imports 1 to GB, average per year TWh % With higher domestic generation, the need for electricity imports falls This primarily affects mainland markets that still have coal on the margin (Benelux) or markets that are interconnected with such markets (France, with Germany) With CPS France Benelux Ireland Denmark Norway Without CPS We estimate total decrease in imports to be 21 TWh per year post 2025 (39%) 4

5 An additional 1.4 GW of new CCGT would supplement higher load factors for existing CCGT in GB Total CCGT new build from GW Removing the CPS improves profitability for domestic CCGT, encouraging an additional 1.4 GW of new build Further output would also come from existing CCGT running higher load factors, and life extensions Base case No CPS 5

6 The increase in GB emissions is more than offset by emissions reductions elsewhere Change in CO 2 emissions from removing CPS, average per year MtCO 2 With lower import demand from GB, low-merit gas and coal plant in Europe would run fewer hours 7.2 For marginal plant, this can be enough to undermine profitability and lead to ceased operations With entire plants shutting down, the result is a disproportionately large decrease in Europe s emissions GB Rest of Europe -3.9 Net This effect needs to be weighed against the potential detrimental impact on long-term investment in renewables and in other carbon-free options 6

7 Appendix 2016 Aurora Energy Research Limited. All rights reserved.

8 Scenario definitions and assumptions Assumption Base case 2 No CPS Carbon Price Support CPS decreases from 17.51/tonne in 2016 to 6.62/tonne in 2035 CPS removed post 2025 EU-ETS carbon price EU-ETS to increase from 3.98/tonne in 2016 to 28.47/tonne in 2035 Fuel prices Coal IED opt ins Forward curves blended into Aurora fundamentals forecast. Gas price rises from 28.7p/therm to 62.6p/therm and coal price from 30.2/tonne to 45.5/tonne in plants opting in to IED: Aberthaw, Cottam, Drax, Ratcliffe Wind Nuclear Offshore to rise gradually to 14GW by Onshore reaches 13.4GW by 2035 and flat thereafter Hinkley C delayed to 2027 and Wylfa s Newydd delayed to All other new builds delayed by 2 years from current plans. Existing plants to be decommissioned from 2024 to 2033 Solar Solar capacity to increase from 9.9GW to 23.9GW from Interconnectors Interconnectors flow Demand New interconnectors to Belgium, Norway and France to be built by the early 2020s with 1 year delays to ElecLink, Viking Link and NEMO. Total interconnector capacity at 10.8GW by 2024 and constant thereafter Assume endogenous flows; an alternative assumption to our central scenario 1 which assumes exogenous flows driven by policy outlook Relatively flat demand, with demand averaging 318Twh over the forecast period 1 Central scenario is from our quarterly GB power market forecast report 2 Note that the base case in this study differs from our central scenario due to the treatment of interconnectors flow Source: Aurora Energy Research 8

9 Carbon price trajectories Carbon price ( /tonne, 2014) Carbon Price Support EU ETS allowance Base case No CPS Source: Aurora Energy Research 9

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